Michelin Cie Gen Unsp/Adr

Ladies and gentlemen, welcome to the Michelin 2022 first half results conference call. I now hand over to Mr. Florent Ménégo, CEO and Yves Chapeau, General Manager and Group CFO. Gentlemen, please go ahead.

Good evening and good morning to all of you. Thank you for joining us for this semester results. Let me first start by just reminding us about our Michelin strategy and reminding everyone that our equity story is that Michelin's value will be driven by its growth in a time of shifting . I'm sure all of you have noticed that our environment is much more challenging than it was 18 months ago. So if we recap what you see on the screen, If we recap what our strategy, our growth strategy is to expand the size of our business and the size of the value created for our shareholders in three areas of business. Of course, with tires, like we've done for the past decades. around the tires it's mainly on service and solutions and beyond tires is mainly leveraging our strong capabilities and know-how in high-tech materials all of that the around tires and beyond tires will extend the reach of our know-how and our capabilities in fast growing markets and with good ebit generation and with lower capital intensity, therefore enhancing our value creation overall. And what you see on the right of your screen is that the paradigms have shifted. Now we operate in a high inflation environment. The global GDP is under stress after a deep dive during the COVID period. with a very sharp recovery and now with a lot of uncertainties in front of us. Plus many issues in the transportation, logistics and the overall upstream supply chain and also the energy transition we have to also accommodate. So the paradigm shifts are now impacting our activities and we are adapting to them. while we are confident that our strategy, we think, is the right one for Michna. So if we now move to our results for the semester, we are staying the course in a very turbulent environment with sales up almost 19% and with an operating income of 1.5 billion euro. We maintain our guidance for the year. And if we move into some more details, the market environment in which we operate has overall deteriorated with a new systemic impact affecting our business. Of course, we have the rippling effect of the conflict in Ukraine and the health crisis, the COVID health crisis that is still in front of us in some part of the world. Despite that, our sales have been up almost 90%, despite also the supply chain disruptions and the fast rising inflation that is dragging down the tire markets. Our tire volumes were down 2.2%, but stable if we exclude the sales in Eastern Europe and in China. Eastern Europe is our activities around Russia. We have a strong momentum in non-tire sales that are up 18% at constant exchange rates. We have a very positive price mix effect of 14% that is reflecting our pricing policy and our determination to offset every cost inflator. And we have experienced a 5.2 positive currency effect led by the US dollar. Our operating income of 1.5 billion euro or 11.5% of sales is made of basically is due to our pricing management that has maintained our unit margin integrity. And this operating income is up on every reporting segment. And our operating margin reflects a 1.2 dilutive effect from the price increases introduced to offset inflation. Our free cash flow has come back to a more normal frame and is negative in the first semester of 1 billion, 14 million euro before acquisition. The EBITDA has improved to 2.4 billion euro, but the working capital requirements have been hit by inventory replenishment and also by price element in inventory. So it's been overall hit by inflation. We also have an unusual seasonal pattern. Our cash flow for the year will be generated by the business in the second half of the year. That's for all these reasons we have decided to maintain our 2022 guidance with an operating income in excess of 3.2 billion euro at constant exchange rates. and with a structural free cash flow in excess of €1.2 billion for the year. I now leave the mic to Yves Chapeau, who is going to give you some more details about our results.

Good evening, everyone. So before zooming on the business and financial performance, let's share the overall, let's say, holistic group performance, looking at our profit, but also the people and planet dimensions. We have selected a certain number of KPIs extracted from our strategic scorecard. On the people side, we have progressed in the share of non-French nationals within our top management, which means the top 100 senior executives within the group. It's a progress of seven points over 2020, so we are now at 37.5% of non-French population within this population. Our TCIR, which is Frequency Incident Rate, Labor Incident Rate, has improved by 0.21 basic point over the first half of 2021. demonstrating here also the progress we are making in that domain. Sales and operating income has been already commented by Florent, and I will come back to more detail on it. We are also improving on the planet side. Our CO2 emissions, scope 1 and 2, has reached 2.6 million tons over the last 12 rolling months. which is an improvement over the figure that we reached at the end of December last year by 0.1 million tons. And we are on line with our target to decrease it by 50% by 2030. And our IMAP, which is a composite indicator of our manufacturing impact, including CO2, water, COV and waste has also improved. It was at 92.6 at the end of December and it reached 89.7 at the end of June 2022. The business environment was already pretty perturbed at the beginning of the year. Of course, the invasion of Ukraine by Russia has exacerbated the situation. But we should not forget that the health situation has not stabilized. China has seen some of its cities or provinces locked down during several weeks. during the second quarter, particularly. And as I said, all the perturbation linked to supply chain has been intensified because of the war in Ukraine. Just a few examples, transportation, shortage of truck drivers has been spread over Europe because a lot of fleets were relying on Ukrainian truck drivers. The increase of cost has spread through energy to a lot of value chain, including some raw materials that are using a lot of energy to be produced. And the labor shortage is pervasive in North America, but also in a lot of areas where we can consider that we are really entering into a period of talent war. If we look at our markets, the global passenger car and light truck tire market has been, on the first quarter, was, let's say, in average in the range we have initially forecasted. On the second quarter, except in June, where there was some rebound of the regional equipment market, particularly in China and the U.S., the market has trended below our expectations. Global truck tire market, including China, has traded more on the upper side of the range we have forecasted at the beginning of the year. Our sales, so 13.3 billion euros plus 18.7%. The main driver is of course the price mix, 13.9%, of which 12.8%. are coming from pure price increase. We have implemented the free price increase over the semester, 1st of Jan, 1st of April, and in a lot of areas, 1st of May or 1st of June. The scope effect is mostly due to the Allopneu integration, and the volume effect is primarily due to the sales loss, committed both in Eastern Europe and in China. So if we exclude China and Eastern Europe from our figures, we are recording flat sales in volumes versus the first half of 2021. Non-tire business growing by 18%, so without currency exchange rates, which shows, let's say, the fact that we invested in areas around and beyond tires that are intrinsically generating a higher growth rate and the currency effect is mostly due to the dollar but basically all currencies except japanese yen and turkish lira has improved over euro during the semester regarding the segment operating income It has increased by 109 million euros despite 2.2% volume less than the first half of 2021. And it's primarily due to the price mix, raw material and manufacturing logistic cost effect. We have been able, just with the price effect, to hedge all the inflators in our cost of goods sales by nearly 140 million euros. There was also some inflators in SG&A, and you observe that the currency effect is only 10% of what was the currency effect on the sales. It's due to the fact that we have a large revenue base in US dollar, but we have also a large cost base in US dollar. On contrary, for example, in the Turkish Lira, which has devaluated by 47% versus the Euro on average over the semester. We have mostly revenue in Turkish Lira and practically no cost in this currency. By segment, so you see first that all segments are contributing positively to the improvement in segment operating income. SR1 by €52 million, SR2 by €28 million, and SR3 by 29 million. And I just would like to highlight the progress, the recovery of the SR3 segment, which was generating 11.3% operating margin on the second half of 2021, which is now at 13.5% during the first half of 2022. And when we look internally quarter by quarter, we are clearly seeing very strong signs of recovery. Regarding the cash, we have, as Florent already mentioned, a negative cash pattern, which is looking more, let's say, what was a traditional cash pattern before 2021. We have highlighted that last year, but maybe it's difficult to remind that In 2021, we have a really abnormal year. We started December 2020 with a very low level of inventory, and we have been generating a positive cash flow during the first half, which has never been the case for the group over the past 20 years. So, EBITDA improved by 161 million euros. but we have an increase in working capital by 1.7 billion. 1.2 is coming from inventories, and on which the 1.2, there is nearly one third that is coming from the pure price effect of raw material in the value of inventories. And looking over the past five years, you will observe that there is always a structural gap between, let's say, the high tide and low tide cash position, between 1.5 to 2.6 billion euros, if you look at the pattern of the previous year. So it makes us confident that we are able to reach our second half cash targets. The debt, of course, has increased along with the free cash flow and the dividend payment. And the gearing is at 29.9 versus 18.6 at the end of last year and 26% at the end of the first half of 2021. Our capital expenditure, so you remember in end of 2019, we have announced that we should spend around 1.9 billion over the coming year, so basically 2020 and 2021. Due to the COVID crisis first and then our ability to recover in 2021, we underspend over these past two years nearly €0.9 billion. And as we have announced during the first 2021 yearly presentation, we're expecting to catch up this €0.9 billion over the next three years. So in 2022, we should reach around €2.2 billion of CapEx recognized the capex cash out is slightly below because we have a seasonality of capex which is very strong in the second half of the year. Before moving to the full year guidance, I would like to draw your attention on two observations. The first one is looking at the way the group has been able to hold its cap through the different cycles. So in green you have the market, the volumes effect over the past 14 years. We can draw two conclusions from this slide. The first one is that the group has, let's say, improved its ability to resist to the crisis. We face nearly the same volume effect in 29 versus 2020. In one case, our operating margin dropped to 6%. In 2020, it dropped only to 9%. And if you look at the cash generation since basically 2017, the group has constantly generated 1.2 or 1.3 billion more or more euro of free cash flow over the period despite different, let's say, volume and market situation. The second observation I would like also to share with you is the ability of the group to successfully integrate its strategic acquisition and deliver the expected synergies. And that's true both, of course, in tires, with tires, with integration of Multistrada and CAMSO. Multistrada, which was a loss-making company when we acquired it in 2019, is now generating very strong profit thanks to the move and our ability to move the production capacity toward our Tier 2 brands, which are now accounting for 70% of our total output. On the other hand, if I look around tyres, we have now created a Michelin-connected fleet brand which is the umbrella brand around all our services and solutions activities. And Masternode, which has been acquired at mid-2019, now is spreading over Europe, in Germany, in Spain, but also outside Europe, in South Africa, Australia. And Fener, which is the core of our flexible composite activities, is developing its activities both with organic and bolt-on M&A around its different activities, either conveyor belts but also ceiling and power transmission belts. Regarding the synergies, in the past three years we have been always on track and even ahead of track if you look at the overall synergies coming from these acquisitions. Moving now to the guidance, I would like to come back on the market scenario on which we are basing our, which are the assumptions of our full year and second half guidance. So the markets are far more uncertain and the environment is far more uncertain than six months ago. And we consider that overall, with, let's say, the global risks linked to the supply chain, potential energy crisis in Europe, the fact that the original equipment market for passenger car buyers has not yet recovered, we have decided to lower our assumptions regarding market scenario. For passenger car and light truck tires, we are now considering the market should be between minus two and plus two. With probably a third quarter, which would be very favorable because in 2021, the third quarter has been very bad, particularly for the original equipment market. And the fourth quarter, that will be more challenging because the fourth quarter was very strong. particularly in the winterized market in 2021. The truck market should be resilient, positively growing, of course, outside China, with a growth rate in the range of 2 to 6%. OEM's order books are complete for the year, and the replacement market should benefit from stronger freight demands, although Comparative data on the last quarter were very high, so here also we expect a market more favorable on the Q3 and less favorable on the Q4. On the specialty side, the mining demand is still very robust, and we believe that shipping difficulties should ease in the second half. uh i i must insist on the fact that it's a real challenge today to ship products from from europe and north america to our mining sites our mining customer sites on the beyond road tires we expect also a strong demand despite lingering of oem production difficulties and sometimes of some market cooling down in some areas. With this scenario, we believe that, of course, our sales should be in line, growth in volumes should be in line with the market. We expect the cost impact of raw material prices, transportation, and energy costs to be strongly negative, but we expect on the other hand to be able to hedge and to do better than hedge these inflators thanks to our price and mix. So having taken account all these elements, we have decided to maintain our guidance for the full year with a segment operating income at constant exchange rates at above €3.2 billion, and the structural free cash flow, which would be above €1.2 billion. Thank you for listening to this presentation, and I think now we can open the Q&A session.