Michelin Cie Gen Unsp/Adr

Good afternoon to everyone. Thank you for joining us, Yves Chapeau and myself, for our yearly presentation of our 2021 results. To start with, I would like to share with you my pride on behalf of our associates that have delivered in this very challenging environment of 2021 what I consider as being solid and resilient numbers. Our Michelin Group delivered an operating income of almost 3 billion Euro, 2.97, and a margin back in line with 2019 level at 12.5%, knowing that if you take out the exchange rate, that margin has been sharply enhanced. So in the midst of the persistent health crisis with disrupted supply chains and sharply rising costs, our group continued to focus on protecting its employees and once again demonstrated the strength and the resilience of its business model. The sales are up 16.3% to almost 24 billion Euro with a segment operating income of almost 3 billion Euro or 12.5% of sales. If we zoom in to that revenue increase, we can see that the tire volumes were up almost 12% and the non-tire sales almost 8%. We had a favorable OE replacement mix in the automotive segment with market share gains in 18-inch and above, confirming the group's technological leadership in that domain. We had dynamic price management all year long in the non-indexed businesses, leveraging our brand pricing power and offsetting all cost inflation factors. The specialty business was hit harder by labor shortages, supply chain disruptions, and cost inflation, hence the performance of segment three. We've been able to generate a 1.5 billion Euro in free cash flow before acquisition, or 1.8 billion in structural free cash flow terms, adjusted for higher raw material costs. Our group performance in 2021 was in line with our Michelin motion strategy plan with the objective set for 2030 for each of its three pillars, people, profit, planet. We had the percentage of women in management positions increased to almost 29%, 28.9% exactly. We had an ongoing integration of acquired companies going very smoothly and very well, generating an additional 41 million synergies, Euro synergies, and bringing the annualized total to 122 million Euro synergies. We had the sustained deployment of the simplification and the competitiveness plans. And we generated a 10.3 solid return on capital employed. Our environmental commitments have strengthened with the signing of the Race to Zero Agreement, wrapping up into a net income of 1.8845 million Euro for the year. with the proposed dividend of 4.5 euro per share. I think I misread the net income. The net income was 1,845,000,000 for the year and with the proposed dividend that would be proposed at the Charleroi meeting at 4.5 euro per share. If we zoom in to 2021, we need to recognize that the business environment has been and remains very disrupted. And 2022, we anticipate, will be probably as disrupted as 2021. On the left of your screen, you can see the challenges we've been facing. And on the right, our response. We had in front of the unstable health situation, we deployed a very strict health protocol that reduced, unfortunately, the productivity by 1%. We vaccinated ourselves more than 35,000 people within Michelin and their families, especially in Asia, excluding China. We faced a very strong transportation crisis with maritime shipping, shortages of truck drivers, shortages of containers, many issues. Out of that, we had four days of production lost in total, group-wide, due to delayed deliveries. We had 15 simultaneous emergency operation centres on average, where normally we have 2.3 per quarter. There, we had almost 15 per day, with peaks up to 50. We had sharp increase in cost, raw materials, logistics, energy, et cetera. And they're resulting in 1.2 additional costs in our panel that has been more than offset by the three price increases and the positive mix effect in 2021. We had very acute labor shortages in different parts of the world, especially in mature countries. There we had the workforce attrition and hiring difficulties, and we have adjusted our work practices and reinforced our attractiveness. As I said, all of you, 2022, will most certainly be very disrupted as well, but Michelin is very solid and I'm sure and I'm convinced we will steer through those disruption in the same manner as 2021. Now I leave the floor to Yves who will tell you our results.

Good evening, good afternoon everyone. So, as we did already for one year, I will start by a global picture of our performance. As you remember, we measure our performance according to our three pillars, and we deliver overall a strong performance in the three pillars. First, regarding people, we have now, as Florent mentioned, close to 29% of managerial position occupied by women, which is an improvement of 0.7 points versus last year. We have a management rate of 80%, slightly decreasing versus 2020, but still at a pretty high level. And we have a slight deterioration of our TCRR, our labor incidence ratio, by 0.1. I remind you that our long-term target is to reach a TCRR below 0.50. It's mostly due to supply chain disruptions and the fact that our operations in the factory were probably in 2021 less smooth than in previous years. Regarding profit, Florent already commented the operating margin and the free cash flow. I will mention the ROCI, the return on capital employed, which is at 10.3%, an improvement of 30 basic points versus 2019, and very close to our long-term target for 2023 and beyond. Regarding planet, zooming the CO2 emission for scope one and two. our own operations emissions, they have decreased versus the previous years, and we are at minus 29% versus 2010, which is the basis that we are using for the science-based initiative. And in 2019, which was the last comparable year, we were at minus 26%, so we have improved during 2021. Our IMAP, which is a The composite index of our overall environmental performance in the factories, including not only CO2 emission, but also water consumption, solvents consumption or waste, has improved by seven, close to eight points versus 2019, which is the last comparable year in terms of activity. Just as an example, our water withdrawal has been reduced by 7% during 2021. And last, you know that one of our key challenge is to improve the sustainable material rate, which is the percentage of the raw materials that are either coming from renewable or recycled sources. We have improved by one point between 2020 and 2021, reaching 29% and on our road to our target, which is 40% by 2030. Coming now back to the business and the operations, let's speak about the market. So of course, in 2021, we face a sharp rebound versus 2020, led by the upturn in the economic activity, the mobility, and also the needs of the different players to rebuild their inventories. Passenger car and light truck businesses tires volume grew by 9% overall global market, but which is still 4% below 2019. And if you look more precisely, in fact, the replacement market was mostly at 2019 level where the original equipment market is still 15% below 2019. All the regions have, of course, contributed to this growth. North America, Europe were more buoyant than China because the market in China has already recovered during the second last of 2020. The truck market is up by 4%. Here also with a very contrasted picture, but still below 2019 by 3%. So contrasted picture between Europe and North America who are posting sharp growth. when China, because of the implementation of norms, new norms for vehicles, have seen the original equipment market dropping sharply from April 21. And all the specialities markets, all in one, grew by 10%, with a very dynamic market in construction, agriculture, material handling, led by the rebound of activity. The aircraft market is also rebounding. And mining and the two wheels are showing, let's say, more moderate growth. Having all these figures in mind, let's look at our revenue growth. So overall, our revenue grew by 16.3%, including currency exchange rate, which was negative mostly during the first half or most nine months of the year. The 18.2% growth at ISO currency rate was mostly due, of course, to the Vaughan effect, plus 11.8%. Price mix grew by 6.1%, with price itself growing by 4.5%. And not tire business were growing by 7.7%, contributed by 0.4% to the overall group revenue growth. Our operating income, as Florent mentioned, landed at €2,966,000,000, which is very close to the €3 billion we reached in 2019. But in the meantime, of course, currency has moved. Prices have been increased. So our operating margin, which is 12.5%, will have been 13.6% at ISO currency and at ISO price than in 2019. When you look at the bridge, of course, the volume is considerable, nearly 1.4 billion. The most important is that we were able to face very strong inflators. mostly balanced between raw material on one side and other factors such as logistics, energy, shipping costs on the other half. And all together, we were able to cover all these costs thanks to our price and mixed effect by €55 million at the end of the year. SG&A grew by €181 million but it's an improvement of 70 million versus 2019. Looking at the performance by sectors, of course, you see very clearly that the passenger car and light trucks of the rs1 segment is posting a very strong performance reflected first in the growth of revenue nearly 19 percent and of course the growth of operating margin which is now at 13.7 percent that was mostly due of course to the growth in volume but also to the mix effect very strong mix effect between of course premium tires 18 inch and above and of course, the favorable original equipment replacement mix in most of the region, but particularly in Europe and North America. The second segment grew also pretty well, 16%, and is showing a four-point improvement in this operating margin, which is now, let's say, closing the gap to the 10% target assigned to this segment, thanks to the robust demand, both in Europe and North America, and a specific focus on targeted high-value segment. The third segment has been growing less, 11.4%, due mostly to disturbance in the supply chain, and I will come back on that. And the operating margin has probably suffered the most, posting 13%, which is a decrease versus 2020. This segment was probably the most impacted by, of course, operation distributions, labor shortage in our factory, particularly in our North American factory. but also inbound and outbound shipping and logistics operations. These segments use a lot of natural rubber coming from Asia. Most of our factories are based in Europe and North America. We have also a strong base in Sri Lanka for the beyond road activities. And in both ways, our operations were strongly disrupted. In terms of overall financial, We are at the end of 2021, we are posting 18.6% gearing ratio. which showed the ability of the group within two years. We have basically cut the debt, the net debt by half since December 19. And within two years, the group has been able to weather the crisis, reduce its debt and absorb the company that we have acquired. So we have been able to digest financially our 4 billion euro acquisition that we made in 2018 and 2019. And this performance has been confirmed by the rating agencies who have confirmed our A- status for long-term debt and A-2 for short-term debt. Of course, this performance has been achieved thanks to the 1.4 billion in free cash flow after M&A. mostly supported by EBITDA, which is now at 19.7%. Of course, an increase in working capital by 824 million, of which 320 million is coming from the price effect, so that is reflected in the cost of the raw material in inventory and the finished product, but also the account receivable. And, of course, most of this networking capital increase has been coming from inventory. And then you will see that the group has, of course, seen an increase in the tax and interest paid. Capital expenditure cash-wise is now at $1.4 billion, but we have been able to invest around $1.7 billion during the year, and we have less acquisition in 2020. than in the previous years. So at the end of, if we look before acquisition, we post a 1.5 billion, nearly 1.5 billion free cash flow And if you have to add that to the 2020 free cash flow, the group has generated 3.5 billion euros of free cash flow for a four-year program of 6.3, if you include the 2022 and 2023 targets that have been shared during our capital market days. Return on capital employed, that is now including all the elements of our capital employed, all the assets, including the assets due to the company consolidated by equity. but also the result of these companies has improved from 6% in 2020 to 10.3% and now is nearly at the level we want to constantly deliver over 2023 to 2030 period. As far as CAPEX is concerned, You see very clearly that the group is investing nearly 1.8 billion euro per year. That's a trend we have between 2016 and 2019. And that was what we have communicated repeatedly in 2019 during Capital Market Day and again in last year. in April last year. So you see very clearly that in 2020 and 2021, we are not able to reach the level of CapEx that we want to achieve in order to sustain our growth in the targeted segment, but also to make sure that our factories are working with the good level of services and a very good level of operation. So we will probably have to increase our capex in 2022 and 2023 in order to compensate the capex that we have not engaged in the two recent years, which means that we will probably have a capex of around 2.1, 2.2 billion euro in 2022 and 2023. But that's only a catch up effect of the previous years. So now looking to, I would like to do before moving to the guidance, we want to focus on the three ZOOM. The first one is electric vehicle that we are seeing as a strong opportunity for the group, including for not only for our hydrogen venture, but also for a core tire business. because Michelin offers the best trade-off in terms of performance for an EV vehicle, taking into account vehicle range, tread life of the tires, but also the noise and the load performance, because electric vehicles tend to be heavier than ICE vehicles. And that's why we have a strong leadership in the different geography with OEMs in the United States, with a lot of newcomers in this industry, but also in China and in Europe. So we partner with a lot of OEMs involved in electrification. And our OE BEV, so battery electrified vehicle market share, will sustainably be twice as high as our total original equipment market share. Now moving to a second topic, which is the tyre road wear particle. Michelin has a considerable competitive advantage without compromising safety and other performance. And you have here on the left of this slide the result of a study that has been published by ADAC, which is the German Automotive Association, which has more than 20 million members in Germany and some neighboring countries. And they did a study with a lot of different organizations. tire sizes to compare the abrasion and the particle emission per 1,000 of kilometer and per tire. And this study show very clearly that Michelin has a strong competitive edge over its premium competitors. If you look at the numbers for 1,000 kilometer, the tire is emitting per vehicle, 90 gram of particles, when the average of our premium competitor is at 125 grams, which is a huge difference, which is translating in a number of quantity of emission for the same service level, which is very different if you look at the entire vehicle park. Of course, this performance is not delivered at the expense of safety or rolling resistance, which are extremely important for the drivers. And if you look at our offers, and particularly our three different range that has been launched in 2021 and one which is coming in 2022, At each new generation of tyre range, so the E-Primacy, for example, we reduce the abrasion, the particle emission by 20%. The Cross Climate 2 is 13% generating emission less than its predecessor. And the Michelin Pilot Sport 5 is also improving by 20% its performance. Last, I would like to come back on the communication that we did during our capital market day, which consists to valorize our externalities. And we have decided to mostly focus on negative externalities and mostly CO2 emission, water consumption, and COV consumption. We have first decided to increase the CO2 cost per ton that we retain a figure of 58 euro per tons in April last year. In the meantime, the European market for CO2 quota have reached nearly 80, sometimes well above 80 euro per tons. And in order to to have coherent data internally because we use 100 euro per tonne as a way to measure the performance of our capital expenditure. So when we are doing project, we include CO2 emission in the calculation of the the profitability of the investments, we retain €100, which is a way to make sure that internally our teams will see the same figures. So it has, of course, this increase in euro per tonne, increase the overall value of our externalities to €506 million. And if you look at the different area, CO2 scope one and two, the scope three, excluding the suppression descriptions, the water, the volatile organic components were able to reduce according to our target, were able to reduce our externality. But that has been hedged by the impact of supply chain disruption in 2021, which at the end of the day will end at a similar level of externality at the end of 2021. But it doesn't change our 2023 target, which is still to decrease these externalities to 467 million euros. Thanks to the CAPEX and we are engaging every year close to 125 million Euro of CAPEX just to reduce our CO2 emission in the factories and in the supply chain. Moving now to 2022 guidance, let's look at the market evolution. So, of course, after the very sharp rebound of 2021, markets will probably come back to a more normal growth rate. We expect the passenger car and electric market to grow between 0% to 4% in 2022, betting on the fact that We think that original equipment market will probably gradually improve from the beginning of the second semester, and we'll see a sharp growth in the last part of the year. The replacement market will, let's say, grow at a normal level, knowing that in almost every regions, dealers have rebuilt their inventories. The truck market should grow between 3% to 7% if we exclude China, between 1% and 5% if we include China. The demand is very strong. A lot of OEMs have completed already their 2022 order books, and replacement will remain strong due to the activities, the general activity. The speciality should grow between 6% to 10%. We believe that mining tire will remain robust, but the operation will still be impacted by the sanitary crisis and the supply chain disruptions, at least during the first half of the year. Off-road will continue to grow as well as two wheels, and we expect aircraft to continue to grow, but with still very weak comparison. As far as the economics are concerned, we are expecting to grow in line with these market assumptions. We also expect the cost of raw material, custom duties, transportation and energy to be strongly negative. Strongly negative means probably in the same range of the inflation that we have faced in 2021, which was, I remind you, 1.2 billion euros. And our target is to offset this effect with our price and mix impact. So with this, taking account these assumptions, our segment operating income at let's say December 2020 exchange rate should be at least 3.2 billion euros. So that's our guidance for 2022. And we expect to generate a structural free cash flow above 1.2 billion euros, taking into account the fact that we have to increase our capital expenditures in order to catch up the investments that we have not been able to realize in the two previous years. Thank you for your attention. And now I will hand over to Florent to coordinate the Q&A session.

Thank you, Yves. So now the question and answer session is open. I think we have already people on the list for questions. So let's start with the first question from RBC.

Yes. First question from Thomas Narayan from RBC. Sir, please go ahead.

Yes, Thomas Narayan, RBC. Thanks for taking the questions. The first one is on the free cash flow guidance for 2022. Yeah, you generated $1.5 billion in 2021. The guidance is calling for above $1.2 billion, so despite higher volumes, higher operating income guidance in 22 versus 21. Is all of this lower free cash flow year over year coming from the higher CapEx that you called out? And what specifically is this CapEx for? Is it for, like, the non-tire businesses? And then my next question is on SR3 margins. You know, for H2, I believe they came in at 1% in 2021, well below the H1 level of, I think, was 15%. I know you guys called out labor shortages, supply chain disruptions, and RAS. Could you comment maybe on why this was felt worse at SR3 versus the other two segments and maybe how we should think about SR3 margins in H-122? Thanks.

Thank you. So free cash flow, if you will answer, and I will take the south front.

Yes, so the free cash flow is taking into account an increase of roughly 400 to 500 million of capex to go from 1.7 to 2.1 or 2.2. which is basically the impact of the capex that we are not able to spend in 2020 and 2021. So it reminds you that we have nearly 700 million under capex in 2020 and 2021. And this is mostly for our entire business, but also for our non-tire business. We have a lot of factories in the world that we need to maintain in good shape. And we have also some productivity, a lot of productivity, digital manufacturing and also marginally some capacity increase in Mexico, in Thailand to operate. The second factor regarding the free cash flow is that we are expecting further growth, as you see, of raw material, but also we're expecting our inventory to grow. At the end of 2021, we have nearly one tyre among four which were in transit. It means in a boat or in a container waiting in a port or in a truck. This figure was less than one-fifth in 2020. So we need also to rebuild our inventory and there will be the impact of the raw material prices in our working capital.

Yes, as far as the margin on SR3, yes, you've noticed that the second semester was rougher on this segment. Now you have to remember that the segment three is more indexed towards contract business and with indexed businesses. And on transportation, we have closures that have a yearly anniversary. And we have seen in the second semester a very sharp increase in raw materials and logistics and especially energy if we take Europe. So that explains one portion of that. Now, if we look at the commitment and our capacity and our projection in that segment, we should come back to the commitment we have made for 2023 for the segment three within the next two years. It takes a while because we have a delay. So basically, if you take the what we have landed to for the year at 13 percent and you bridge the gap to 17 percent half is due to the delay and half is due to the disruptions we have had and as we have for example if i take the We have a big supply base out of Sri Lanka and the Colombo port has been closed for many weeks. So it has disrupted a lot of our supply chain. We had some labor issues. We have less plants, for example, in mining tires. So labor shortages, absenteeism have a stronger impact in that business. But nothing that we cannot... master in the long run so for us this is not structural it is due to the exceptional circumstances we have been facing okay thank you i'll turn it over thank you next question from thomas from kepler so please go ahead thank you very much i'd like to come back a bit on both sr1 and sr3 to get some more granularity

both on what you achieved in 2021 and where we should expect things to go in 2022. I mean, as mentioned earlier, your SR3 H2 was the worst since the second half of 2009, and so I understand it's going to be a progressive rebound, but can you maybe give us more details on the segments that have affected you most effectively in mining, where profitability was crushed by the elements you mentioned, and on the SR1, where you had your second best semester in history. Can you talk about the sustainability of margins at this level? So that's the first topic. The second one would be on whether you could give us or not any more granularity on what kind of businesses may be required to reinforce your non-tar activities. There's been a lot of press reports around your involvement in recycling in particular i would like to know if this is something that could eventually become bigger and one of your substantial businesses later and final question you talk about the bevs involvement and connection with michelin's business is it fair to assume that the impact of bvs on your margins is more 23 24 or is it already visible in your SR1 margins now?

So I will take acquisitions and BEVs, SR1, and I will leave SR3 to Yves. So acquisitions, and you've read many articles on our activities there. Of course, you understand that I cannot comment on our... acquisitions. However, you've seen we have taken participation in different corporations that are involved in that, Carbios, Pyrowave, Enviro, that are developing technology that could be interesting to recycle differently or create new raw materials out of recycled materials. So we are exploring various avenues. It's a little bit early to talk to you a little bit more about those acquisitions and unfortunately we cannot for understandable reasons um give you more details but yes we we as we have said in the capital market day acquisitions are part of our strategy and our growth strategy so we will see acquisitions in the in the future at this stage it is too early as far as the sr1 is concerned and the sustainability of our results we have enjoyed in 2021 very favorable replacement and versus OE mix and of course as OE recaptures this should rebalance slightly however we have been less than optimal in our production capacities and capabilities and productivity etc in the SR1 segment which is somewhat has been compensated by a more favorable replacement anoe mix. As far as the seed diameter mix is concerned we don't see any reasons why we should not pursue this so Product mix will continue in SR1. OE replacement mix will probably shuffle differently as soon as OE catch up, but it is not clear whether OE will catch up in 2022 or 2023. It's not clear. We have no real signal that the situation is strongly improving. but that will be offset by a better productivity and more stable situation in into our plants so we are confident that in SR1 we will have we will still enjoy strong margins for the future as far as SR3

Yes, so first for SR3, we maintain our long-term ambition, which is to have SR3 generating at least 17% segment operating margin. You have to know that the SR3 was, as I said, the most impacted by the inbound and outbound supply disruptions because that's less local-to-local business. We have, for example, two factories to produce mining tires in the world. And because it's a specialty business, the other business lines also have less premises and their production location is more concentrated. So this is the first reason why this business has suffered the most from the supply chain disruptions in both inbound and outbound. Second point, it has been mentioned by Florent, if you look at mining business, more than 80% of these sales are indexed. So they are made of long-term or mid-term contract. with the raw material indexation clause that are playing with a lag of a few months. And sometimes, for example, transportation costs or shipping costs are included in the clause, but they are updated only once a year. So we also believe that the lag has been penalizing a lot these activities. Don't forget that for construction and agriculture, the market is such that you have a global balance 50 50 between original equipment and replacement so here also this is a business segment where you have a large part of the business that is indexed the last portion of your question about bevs i think this stage is this business is too small so that we can really see a strong impact however when you look at

the analytics of that business, we are still very positive in terms of the future for Michelin in that segment, because really we have a very, very clear advantage with our competition, especially because we have been working for that for the past 20 years. We have already made most of the investment to manufacture this kind of tyres.

Thank you. Next question from Gabriel Edler from Citigroup. Sir, please go ahead.

Hi, thanks for taking my questions. I've got two. My first is on CapEx. I just wanted to come back to trying to understand how much of the increase that you mentioned is really catch-up effect and how much of it is actually because of the diversification of the business. So if we were to look beyond 2023, do you see that 1.8 billion reference in the slide as a normalized level for CapEx or Do you think investment in non-tire business actually means that CapEx will be structurally higher for longer? And then my second question is just on dealer inventories. Maybe you could comment on what impact pre-buying from dealers had on volumes in the fourth quarter ahead of price increases coming through and what level of dealer inventories are at currently? Thank you.

Yves. So regarding the CAPEX, I'm not sure I fully capture your question, but of course, as I said, we have underspend roughly 700 million euros of CAPEX in 2020 and 2021. In 2020, it was deliberate. We freeze CAPEX during the three last quarter of the year in order to safeguard our liquidity. And in 2021, we, of course, resume our CapEx, but we are not able to completely catch up because also of supply chain challenges. Having said that, so the catch up that is going to happen in 2022 and 2023 is really to catch up over the project that has not been delivered in the past two years. And absolutely not due to the increase of PECs in non-tire business. Non-tire businesses, and particularly the flexible composite part of it, are generally less capital intensive than the tire business. So it's really primarily due to the core activity of the group, which is the tire business.

And we may see on top of that some raw material increase affecting the investment, but that will be marginal.

There might be a slight price component in the capex, in some capex. It's mainly ketchup. For example, all the equipment that needs... microchips are impacted by the crisis that is affecting OEMs and it translates either in shortage, either in price increase for capital expenditure. Inventories, as I said, have grown in 2021. And if you look at the growth of inventory, you have close to 500 million euros, which is due to the price effect, which is the increase of the raw material, which is translated in both raw material, semi-finished and finished product stored at the end of the year. And as we believe that inflation will continue, at least during the first half of 2022, We can bet on the fact that we will have also an increase in inventory, which will be both due to the need to rebuild our inventory. We are not yet at the satisfactory service level in terms of supply chain, in terms of service to our customers. At the same time, we might have this inflation effect in the value of our inventories.

Okay, maybe I could just clarify. My second question is more around the dealer network and the inventory at the dealer level, given there seems to be some pre-buying by dealers ahead of the latest round of price increases. Are you seeing normal inventory level at your dealers, or inventory level is a bit high at the moment in the SR1 business?

For SR1 and SR2, where we are monitoring very closely the inventory level, they are mostly at the normative level. We even observe a shortage of inventory for some, particularly the premium or high-end segments, for some dealers, both in Europe and North America. Mostly inventories, dealers have rebuilt their inventories, but still with some shortage on some business segments.

And the strong winter we have had in Europe has flushed the excess inventory in winter. So we are back to normal level everywhere.

Okay, great. Thank you very much.

Thank you. Next question from Giulio Pescatori from BNP Paribas. Exam. Sir, please go ahead.

Hi, thanks for taking my question. So the first one, going back to your slide on electric vehicles, so you're willing to share how much is your market share today in this market? And in the past, I think you mentioned that loyalty rates in this segment are very high. Is that still the case? I know it's still in its infancy, but what are you seeing? Are you seeing any trends there? Then the second question, sorry to go back on the CapEx, I know we talked about it a lot, but I'm just trying to understand Can you remind us of what caused the delays in 2021? Because it just feels like a lot of those factors that might have caused the delays in 2021 are still present in 2022. So what gives you confidence that this year you're going to be able to spend 400 to 500 million euros more? And then the last question on the high-value market. You mentioned you're gaining market share. Are the market share more limited to the 18-inch segment or also 19-inch and other segments? Thank you.

So as far as EV vehicles are concerned, yes, we have two times more market share than traditionally. As far as the loyalty rate, at this stage, it depends on, it varies from geographies to geographies. But yes, generally, we see better loyalty on this type of vehicle, especially Mark tires because sometimes we have special markings on the tires that have been set for specific electric vehicles and for this we have Normally a higher loyalty now also it is known in the market that Michelin tire is very performing on Electric vehicles. So not only the loyalty on the vehicle is higher, but the Michigan loyalty is higher as well. So So that's why we are confident that the electrification of the vehicle park will be beneficial to Michelin. As far as the CAPEX and the... I did not catch up the CAPEX. Okay. Could you repeat the question on the CAPEX, please?

Yeah. So my point was, what were the delays, what caused the delays last year? And... Because it feels to me that a lot of what caused the delays last year, a lot of those factors are still present in 2022. So what gives you confidence that this year you're going to be able to spend $400 million to $500 million more than last year?

So the delay, there was almost no delay in 2021. We've reached what we wanted to reach in 2021. The delay is more for 2020 because in 2020, we had to slow down sharply as we were moving to unknown territories by, we took the decision to slow down slightly our investments and the catch up is more towards 2020 than towards 2021.

Okay, that makes sense. Thank you. And then, sorry, the last one on the high-value market.

Yes, so the market share that we are gaining market share both in 18-inch and above and 19-inch and above.

Okay, thank you. Thank you. And next question from Michael from OdoBHF. Sir, please go ahead.

Yes, good evening. Two questions on my side. First one, do you already see or expect to see this year any trading down from Tier 1 to Tier 2 in those passenger and track segments following the significant price increase you're implementing, and how should we see this for Michelin? And second question, maybe coming back on your previous comments on indexation clauses, could you confirm that they still mostly only cover raw materials, or you are able to increasingly or maybe more rapidly And if not the case, are you able to have separate discussions with your clients? And if so, what should we expect from these discussions and when? Thank you.

So I'll take the second part of the question, and Yves, I didn't understand the thing. So please, when you ask the question, if you could speak slowly and not too close to the mic, because it's very difficult for us to understand what you say. So if I understood correctly the last part of your question, But no, I forgot it.

So we'll start with the first part. So due to the price increase, we have not observed any shift from Tier 1 to Tier 2 or Tier 2 to Tier 3. We have, don't forget that for Tier 3 and Tier 2 that are imported, for example, in North America and Europe, from Asia to Europe and North America from Asia. They have been even more impacted by both the supply chain issues and the impact of the raw material and shipping cost. So in this context, we have rather observed a resilient premium Tier 1 segment, both for passenger car tyre and track tyre, and even a slight transfer from Tier 3 to Tier 2. So we have rather seen the market enriching from that standpoint rather than commoditizing. And in front of, let's say, higher tire prices, consumers also look for the value of what they purchase, particularly because the price hike for Tier 1, Tier 2, and Tier 3 has been even at least in percentage, even sometimes higher than for Tier 1.

Okay, so if I understood correctly, the second part of your question, I think it relates to whether we are able to cover all costs or not. So our commitment is to offset all the rising inflationary factors on our costs to the market because we, of course, we have every year yearly productivity programs that can only offset inflationary a small portion of it. Now, we are confident also in the index business that it's just a question of time before we are able to offset all these costs.

Okay, and maybe just could you clarify the time? I mean, should you expect that more in H2 than in H1?

It will take, it depends. If the inflation continues to rise, we will still be six months. It depends on the anniversary. So it can be three months, sometimes six months. And as I told you, in terms of transportation, it's a yearly discussion. So, and it's in the contract, but it's a yearly discussion. So as inflation, when the inflation slows down, I will be able to answer your question more precisely.

Okay, thank you.

Thank you. Next question from Jose Asumendi from J.P. Morgan. Sir, please go ahead.

Thank you. It's Jose from J.P. Morgan. A few questions, please. The first one on your 23 targets, you mentioned in the release that the liver savings will not be enough to offset rising costs. So I'd be interested to learn a little bit more. What are you doing within the business to improve earnings and still be able to hit those margin targets? That would be the first question. And then a few housekeeping questions, please. Can you comment on the expected operating leverage overall for the business in 2022? What can improve this operating leverage? Second, what is the share of 18-inch within replacement within SR1 currently? And final one, very simple one. Overall, the business for 2022, as we think about the first half and the second half, how do you expect decisionality between the first half and the second half? Do you expect a stronger second half versus the first half? Thank you.

So I will take the first part of your question and if you can take the last part. So as far as labour savings, yes, you notice that our productivity achievements cannot offset strong inflationary prayers so the main leverage we are using to offset this is basically keeping all the mix to us basically and not releasing into our prices basically in normal times. Sometimes we would do that, but we have put a freeze to this for as long as we have this kind of market conditions. Now, of course, we continue all the time to look at competitivity measures, structural and that can happen from time to time. So competitivity is still on top of our agenda. And of course, I cannot disclose too much, but we are pursuing that. And in a commitment 2023, I think all of that can be managed. The last portion is a lot of the productivity yet is not shown in our industrial performance because we are suboptimal due to the absenteeism, the COVID cases, etc. And our plants are not able to run totally at full speed. So that will be very beneficial as soon as we are out of the sanitary crisis and that we have been able to master the labor shortages. So that's why we are confident that 2023 we can achieve that. The operating leverage in 2022 is again very close to what we did in 2021, being very reactive. We have said that every quarter we re-look at our pricing position. We look also at our logistics, our supply chain all the time to make sure that we are operational excellencies at the top. So that's the main operational leverage we will be using in 2022 like we did in 2021. We operate in almost daily crisis sale mode and it paid dividend in 2021 and I'm sure 2022 our associates will do wonders.

To complete on Florent's answer on the operating leverage, in 2021, we have €117 million per point of growth rate. You can expect a similar €115 million per point of growth rate in 2022. Our market share, so we don't disclose market share by market, but overall, if you look at the Michelin brand, original equipment plus replacement, the share of 18 inch and above sales reach 51% in 2021, which is a 4% improvement, four point improvement versus the previous year. Your last question was a short one, and I will give you a short answer. We don't give guidance per semester. You have overall guidance for the year. Of course, inflation is due to be, let's say, probably sharper in the first half than in the second half. But as I had already the opportunity to mention, we have asked our business units to steer their price position per quarter. So to start the quarter with the right level of pricing in order to hedge their inflators for the quarter which is coming. and that's because basically I think nobody is able to say what will be the price of Brent or the price of natural rubber or the butadiene in October or even in August. But for sure, at the end of the quarter, we know pretty well what will be our cost of goods sold for the coming quarter.

Thank you very much. Thank you.

Thank you. Next question from Martino De Ambrogi from Equita. Sir, please go ahead.

Thank you. Good evening, everybody. Quick question on prices. Based on the current visibility, what is the amount of price increases factor in your guidance and how much was already implemented so far? And the second question is just a double check on a previous question on the profitability by division. Am I right in assuming that 14% return on sales for the car business is roughly sustainable also for this year? And the same question is also for trucks, the 9 plus percent. Thank you.

Okay, so if I take the guidance for the pricing, we anticipate, as Yves mentioned in the presentation, that we anticipate that the inflation and cost for 2022 will be roughly the same magnitude of 2021, seen from today. Again, we operate in a very volatile and changing environment, but our commitment stays, we will have set everything in 2021, in 2022. So that's why we have said in terms of price, mix, raw material, industrial costs, et cetera, to be neutral. That's our target for 2022. And of course, it requires a lot of steering. As far as the profitability per segment, again, what you've seen in 2021 is you've seen a slightly different mix in terms of segment one versus segment three. It will vary slightly. That's also why Michelin is very solid, because we constantly have offsetting businesses, but overall progressing. that's why we don't project too much about segment by segment we look at the overall profitability but i am sure that segment 3 will progress in 2022 okay thank you thank you next question from vip cunning from gunman sachs sir please go ahead yeah thank you for taking my question um i just want to come back on the price mix against all the inflators um

You obviously mentioned that you want to have a neutral effect this year. But if we look at the second half, it was a slight negative. So just coming back, does that imply further round of price increases later this year in any of your segments? Then my second question is you spoke about M&A investments earlier. On the other hand, is there anything on divestments and is there any part of your business that you're no longer viewing as a quality of strategy or is not profitable enough in comparison to the rest of the segments which you may or may not divest? And then my last question is just quickly, what's your view on Forex for 2022? Thank you.

Okay. Yves, maybe? Yeah, so you are right. The second half was probably 2021 was more challenging because we have seen an unpredicted price hike, particularly in Europe, of energy in the last two months of the year. But again, you have this, so it has, let's say, a wider lag effect that we are generally facing during the other years. And if you look at the curve of our raw material cost evolution semester by semester, you see it very clearly. So that's why we are pretty confident that we will recuperate part of that through the close that are going to play for the index business. And as far as our pricing policy, we have already increased price 1st of January 2022. And our North American regions have already announced another price increase, 1st of April. So we are going to, as I said, we manage our price positioning quarter by quarter in order to hedge inflators. Regarding investments or M&A, I will not add about what Florent said. These investments, it might happen from time to time. But let's say the group has an organization based on this free business segment. We are building high-tech material activities. which will probably need to grow through M&A as well as our services and solution businesses. And in the past, it has happened from time to time that we were disinvesting in assets that we consider less strategic, both in terms of economical contribution, but in terms of impact in our overall value chain. So that's why we have, at this stage, no, let's say, major disinvestments plan. As far as Forex is concerned, our policy is, we publish the impact of the Forex on our activity. You know, basically, that's one cent of variation between USD and Euro is impacting by around 30 million Euro our P&L. But we build our budget with the last known forex. So basically, 2021 budget has been built with 2021 December forex. And we update it month after year, month after month during the year.

Maybe an additional comment on the pricing dynamics. Again, the price increase we had in the first of January, we decided on it with our businesses around late October because of the situation we were foreseeing. And as you mentioned, we have seen a steep increase in Europe in energy costs, especially in December. So, of course, we are re-evaluating constantly. And as we told you, every quarter is a new quarter for us.

Thank you.

Thank you. Next question from Eduardo Spina from HSBC. Sir, please go ahead.

Good evening. Thanks for taking my two questions. The first one is on the pace of CapEx spending in 2022. If you could share whether you already started to spend at this higher rate in the first quarter or you are waiting for the next few months. And the second question is on the net debt levels and what plans you have for the next 12 months as part of the use of cash. I was wondering if M&A in the non-tire business is the only option you have on the table or if you're considering M&A in tires activities or even higher dividend or share by max, which you did before. Thank you.

So regarding the CAPEX spending, let's say it's a yearly program. The CAPEX we are engaging, so of course there is a small CAPEX that can be mobilized within weeks or months, but the most important ones are projects that are sometimes multi-year projects. and that you cannot engage within a few days or a few weeks. It deserves engineering studies, implementation studies, and then purchase order and, let's say, a very rigorous process. So basically, generally the capex are ramping up pretty smoothly. We have a seasonality with more capex during the second half and the first half, but because generally the factories tend to immobilize new assets during the second half, but that's, I mean, this seasonality should be the same in 2022 than in the previous years. As far as a net debt level, with the proposed dividend mentioned by Florent during his introduction at 4.5 euro per share, it means nearly 800 million dividends. Plus, we have nearly 900 million of bonds repayment Most of them have been already repaid in January, and the second part is coming in May. So that's basically the way we are going to handle our cash. And as we say in the past, we prefer to keep some margin of another for potential M&A. And don't forget that within a year, between the highest month and the lowest month, we can see working capital variation up to 1.2, 1.3 billion euro. So that's why we need to have, that's why we have three components in our cash management in order to access to commercial papers and finance the group along with the variation of his working capital.

And on top of the dividend, we also have a small portion of share buyback to avoid the dilution. But our intention is to stay close to what we have said during our capital market day. We are on our journey to distribute more dividends, and that's what we're doing in 2022 for 2021 results. Thank you very much.

If I may follow up with a third question very quickly. You may have seen what happened to one of your key competitors in the U.S., And my question is more about the competitive environment, considering that the share price was under severe pressure. Do you think that any risk that some new entrants or other competitors will jump to the opportunity, maybe to help them, let's say financially, and therefore create a bigger group? Or do you have that option at all?

First, we do not comment on our competitors. The second thing is we drive our business based on what we think is right. We don't pay too much attention to what is happening. on our side, basically. So really, we price what we think is fair to the market, to our customers, and so far, it's been okay. We don't look too much about the competitive environment. Actually, if you looked at what has happened over the past years, the price gap between Michelin and the competition has widened, especially the premium competitors, and the Michelin share is still strong. So thank you, I think it was the last question. So thank you all for the interest you have in Michelin and we will see you at our quarter revenue announcements and then in the first half of 2022. Thank you very much, good evening and good afternoon.

Thank you very much.