Michelin Cie Gen Unsp/Adr

Good evening to everyone, or good afternoon. Thank you for joining us for our annual results presentation. I'm with Yves Chapeau, the co-partner, and we'll spend an hour with you. Let me start first with our sales, that we're up 20.2% in 2022. And Michelin, in a very, I would say, hectic environment, has delivered an operating income of 3.4 billion euros, which is in line with our guidance. So amid market turbulence and a highly inflationary context, Michelin's sales increased to 28.6 billion euros. and the segment operating income, as I just said, has reached 3.4 billion euros. The pre-cash flow was punctually impacted by inflation and the year-end trade timing, and we will have ample explanation later on. Over the 2019 to 2022 period, the Group has demonstrated the resilience of its business model. Coming back to Last year events, the sales were up 20.2%, lifted by the firm pricing discipline and the fast-growing non-tire sales. The tire markets were up slightly in 2022, supported mainly by OE from a low comparison basis and sustained demand in truck and mining markets. The tire sales volume were down, mainly impacted by the conflict in Ukraine, the COVID consequences in China, and reflecting as well the group priority to maintain the margin per unit. The price mix effect came to 13.7%, demonstrating the group's determination to offset all cost inflators. Non-tire sales grew by 22% at constant exchange rate, confirming their strong momentum. And finally, we had a 6.2% positive currency effect, led mainly by the US dollar. Our segment operating income totaled 3.4 billion euros, or 11.9% of our sales, driven by the dynamic pricing management and mixed effects. The pricing maintained unique margin integrity, offsetting a record $2.7 billion in higher costs, which is really an unprecedented rise in 2022. Operating margin reflected a 1.2 dilutive effect from price increases, and each reporting segment contributed to improved segment operating income with specialties, RS3, our segment 3 margin, reaching 16.2% in H2 2022. The reported free cash flow before acquisitions was minus 104 million. The structural free cash flow was 378 million, down from the revised guidance we gave a few months ago. with a one-off impact of inflation on working capital. The reducing structural free cash flow was down 500 million, and the Q4 has been penalized by two events, one purchasing cut and the stronger December sales. And that's equal to 300 million down on our free cash flow. All of that will be offset by a timing effect in the Q1 2023. That's why we say it was punctual. But Yves will come back in more details on this. The overall group performance improved in line with the Machine in Motion 2030 strategy plan, which sits on three main pillars, people, profit, and planet, and managing the best equilibrium of those three pillars at the same time. Our net income reached 2 billion euros. The dividend has been set and will be proposed at the AGM at 1.25 per share. And looking at the projected environment in 2023, we've taken a conservative stance at the year that just started. That's why we have a conservative guidance of €3.2 billion in the segment operating income at constant exchange rates and in excess of €1.6 billion in the reported free cash flow before acquisitions. Once again, this is a conservative stance. If we rewind a little bit over the period, what has happened between the results 2019 up to the results in 2022? In the first three columns, you see the effect of volume, price mix, and basically cost of inflation. You've seen the unprecedented swing in the price mix effect with the cost inflation. And that was offset by volume down, mainly due to Ukraine, China, and the determination to make sure that we offset every cost to protect our margin per unit. And then, of course, we have improved our performance, and that's what explains the major increase we had in our full year results. industrial performance, SG&A performance, and all performances in every type of businesses that were driven even through this unprecedented crisis period we went through over the past three years. So I just want to take the opportunity to congratulate all our teams that really did a fantastic job during this period. Now I leave the floor to Yves that will give you greater details on our results.

Thank you, Florent. Good evening, everyone. To rebound on Florent's introduction, I will start to share with you an holistic view of the group achievements in 2022. I will later zoom on the profit KPIs that I will cover in detail in my presentation. But looking at the people and the planet KPIs, you can see that we have reached all our targets in 2022. On the people side, The percentage of women in management improved by 0.5 points to reach 29.4%. Our associate engagement improved by 3 points versus 2021 to reach 83%. And we have seen the number of labor-related accidents decreasing in ratio from 1.29 to 1.07%. On the planet side, our scope 1 and 2 CO2 emissions, so basically the energy we produce or the energy we purchase, have been decreasing by 17% thanks to partially production reduction, but also efficiency improvement. And our ability to source renewable electricity in several countries in 2022, 52% of the electricity we purchase is from a renewable origin. And it's an increase of 10 points versus 21%. And you can see that both the IMET, or the environmental impact of our factories, and the sustainable material rate has also improved versus 2021. So moving to the activity, I will start by sharing with you the situation of tire markets around the world in a year that has been heavily perturbed by both the conflict in Ukraine and also the outbreaks and the lockdown due to the COVID-19. Passenger car and light truck tire markets landed one point above 2021, but still below 2019. Thanks to a dynamic OE market, the OE market grew by 7%, but is 8% below 2019, and a sluggish replacement market which decreased slightly by 1%. The seasonality by market has been very contrasted. OE market was below 2019 during the first half, minus 1, and has seen a sharp rebound in the second half, plus 15. On the other side, the replacement market which is overall back to 2019 level, have seen a sharp drop in the Q4, minus 11%. This phenomenon is both due to poor winter season, particularly in Europe and also in North America, but mostly to the destocking in distribution. Distributors have received important quantities of budget-pair brands during Q3. Truck and bus market is down by 4%. If we exclude China, the market is up 7% versus 2021. It is mostly due to the original occupant market, which is down 19%, but up 12% if we exclude the Chinese market. I remind you that in 2021, the China 6 norms have led to massive new vehicle purchase from fleets, when 2022 has been penalized by COVID lockdowns and outbreaks. European and North American markets are well-oriented as lack of drivers and strong demand in freight constitute a strong incentive for fleets to renew their vehicles. The replacement market is up 1% globally and 6% outside China, led by strong freight demands all along the year. In specialties, market has been overall well-oriented, pulled by the demand in mining, the recovery of commercial aviation in Europe and North America, and a strong demand in material handling and corveillon belts. Construction and agriculture offer a more contrasted picture according to the different segments and geographies. So in this market, our sales reached a new record at 28.6 billion euros. Volumes were down by 2% for the full year, with a better Q4 than expected, minus 0.9% thanks to SR2 and SR3, when our SR1 sales have been down by 4.1% in Q4. And also, we have seen a better sell-out than sell-in in our distribution entities. We benefited from a scope effect, mostly driven by Alupno integration. Price mix reached 3.25 billion euros, of which 3 billion is coming from price effect of 12.8%, when mix contributed to the 8 of nearly 200 million euros. The price effect was 11.4% during the last quarter, with the lag effect of raw material adjustments on our long-term contract businesses. Non-tire businesses overall grew by 22% and contributed by 1 point to our overall turnover improvement. Lastly, we benefited from a strong tailwind from Forex, including a 5.5% effect in the last quarter. In this context, our segment operating income increased by 430 million, of which 184 million is due to Forex effect, and nearly 250 million is coming from the progress of the company. Volumes effect was negatively high due to a sharp slowdown of our activity in the last quarter. If our overall sales were done by 2%, our selling tire volumes were done by 3%, And our tire production was done by 5.8% with sharp reduction in the last quarter in order to manage our inventory level. Price and mix have more than offset all our inflators. In these inflators, you can see that raw materials accounted by nearly 1.2 billion euros. Logistics, 600 million. Energy, nearly half a billion. And labor costs, 200 million euros. The non-tire activities, high-tech materials, mobility experience, and fleet management contributed to 26% of our segment operating income improvement, although they account only for around 5% of our sales. Other effects are a sum of different amounts, of which the most important is the reduction in variable pay, as we have not reached our free cash flow targets. Looking at the performance by segment, I think there is three key takeaways. The first one is you can see that all segments contributed to our segment operating income improvement. Second one is that the dilutive effect due to the price increase represents nearly 120 basic points when the overall group operating margin has only reduced by 60 basic points between 2021 and 2022. And the third message is that SR3 is nearly reaching 50% in SOI at the end of the year and was at 16.2% in the second half of the year. Our free cash flow is landing at minus 104 million before M&A and after the financing of our joint venture and has been heavily impacted by the inflation and the seasonality of our transactions. Most of the increase in inventory, more than 1 billion euros, is due to inflation. We landed with the same level of inventory in finished product than in 2021, but with slightly higher raw material and semi-finished inventory to compensate for the disruptions in procurement all along the year. Inflation impacted our accounts receivable as well, and better sales than expected in the last months have contributed also to an increase in accounts receivable. As we sharply reduced production and raw material purchasing during Q4, our account payable landed despite inflation at a level which is slightly ahead of 2021, but lower than what we were expecting initially. These last two effects are temporary, and we are already seeing an improvement in free cash flow versus standard years in the first month of 2023. And as mentioned in our previous call, CAPEX are catching up after the decision to reduce them in 2020 and the challenge we encounter in order to restart the CAPEX in 2021. The other elements contributing to the free cash flow, interest costs, taxes, are in line with our forecast. Looking now at the evolution of our net financial debt, you see that the net financial debt increased and mostly pulled by the payment of dividend, share buyback. We buy 120 million of our shares during 2022, but stay at a very healthy level with a gearing at 25%. At the same time, all our credit ratings, short-term and long-term, have been renewed by the rating agencies. Looking now at the return on capital employed, which is one of our strategic KPIs, you can notice that despite inflation, which heavily impacted our capital employed, the rocky return on capital employed improved by 50 basic points over 2022, thanks to a better asset turnover ratio and a slight reduction of our NOPAT due to the price increase. 10.8% is above the target we have set for the group within our machine-in-motion strategy and is above our weighted average cost of capital, which has been constantly the case since 2019, except, of course, in 2020. It shows the ability of the group to create value even in this highly inflationary environment. Our next results has progressed by 164 million. Also interest rates increased way down on our financial results. And we must remind that in 2022, we have recorded more than 160 million euros of provision due to the stop of our operation in Russia. when at the same time in 2021, we have recorded a strong positive result for the sales of 51% of Solesis, our medical subsidiary. Therefore, earnings per share increased by 9% in 2022, and we are proposing a dividend increase by 11%, in line with our target to gradually reach 50% payout ratio. It represents a yield of 4.8% for shareholders who have acquired machine share in the last day of 2022, or 4.38% for shareholders who invested at the average 2022 share price. We will pursue our share-by-back program, aiming to neutralize the effect of employee shareholderships program. Moving now to the guidance, we first build our 23 guidance with the assumption that market will be stable or slightly around zero. Some markets will be slightly positive, but we'll have fundamentally a very different seasonality, a different market mix, and a different geographical mix than 2022. I remind you that 2022 has been marked by an unprecedented volatility. We expect a strong decrease in the first quarter, looking at the market, followed by a rebound in the second quarter. We are also expecting more dynamic OE markets versus replacement, and probably a rebound in China from the second quarter. So with these market abstractions, we have built our budget with conservative sales volumes due to all the uncertainties around us and with an inflation in between 600 million to 1.2 billion euros. This funnel may appear wide, but I just remind you that last year at the same period we were betting on an inflation of 1.2 billion and we land at 2.7 billion at the end of the year. We are looking to compensate this inflation with our pricing and retain the mixed effect for the company. Our CAPEX should reach between 2.2 to 2.4 billion to continue the catch-up of 2020 and 2021, integrating also some inflation in CAPEX with some components such as semiconductors, and also the necessity to accelerate our energy transition, particularly in Europe, and our digital manufacturing effort. You will see in the appendix that if we calculate the average capex between 2020 and 2022, you will find 1.8 billion euros, which is the exact similar figure of our capital expenditure in average between 2016 and 2019. But of course, the distribution between the different years is pretty different. In conclusion, we are aiming to generate a segment operating income above 3.2 billion euros at constant exchange rate and a free cash flow above 1.6 billion euros. We have decided to abandon the notion of structural free cash flow, which was relevant when we were coping only with raw material prices increase and to guide on free cash flow before M&A and after financing our joint venture that you can directly read in our financial statement. I thank you for your attention, and I think that now it's time to take your questions.

Thank you, Yves.

Ladies and gentlemen, if you wish to ask a question, please ask your question in English. The first question is from Thomas Basson with Kepler-Chevreux. Please go ahead.

Thank you very much. I have three questions, please. First, on the guidance, I understand, I think you've both repeated that twice, but it is a blatantly cautious guidance today in the context of limited visibility. Or do you think it's really the best view you would have? And can you confirm as well that the 1.6 billion free cash flow guide refers to the reported free cash flow pre-acquisition? So if we use the former structural free cash flow and the reversal you're expecting, the reported forecast flow should be more in excess of 2 billion. That's the first question. The second, could you talk about the pricing environments by region? I think you and a few competitors announced price hikes in December, January, North America, Europe, Japan, but others have not followed. Could you comment on that? Are they sticking? And did you see as well, tar distribution, more position for price cuts than price hikes? No ordering again. And last question, could you talk about the SR3 margin trends in 23 and the lag effect from indexation? Is it fair to think that we get further support from that indexation in H1 before it wanes in H2, and therefore should we maybe expect SR3 margins to eventually progress further from 22 levels? Thanks.

So I will answer, we alternate so it's more lively. On the first one I think we've answered that already but I will repeat. We've taken a conscious decision to be cautious for the year 2023 because there are still many uncertainties. So we've taken, as Yves explained in details, cautious stance on volume. We are still in a very volatile environment and we still operate in the crisis condition in many domains. So that's why we've taken this on the question number two.

So the free cash flow, the guidance is on the reported free cash flow pre-acquisition, but after financing of our joint ventures, And in an inflationary environment, the gap between this reported free cash flow and the structural free cash flow we use to report on is in the opposite way. Inflation tends to inflate particularly the working capital, even if you stay with exactly the same level of activities, the same level of inventory. So generally in the past, structural free cash flow was above the reported free cash flow. But we will guide you all along the year and it will oblige us to better communicate, particularly on the impact of inflation on the working capital, inflation both from raw material that we captured pretty well in the past with the structural free cash flow, but also other inflation factors such as energy costs, for example.

So on question number three, on the price hikes, let me rewind a little bit. We were entering in 2022 thinking that we would not have to raise the prices and we ended up by raising the prices three times. So, for the year 2023 now, we still have the follow-up of this coming. We still have some inflationary that will also lagging effect of inflation in many domains that will hit 2023. As far as we are concerned, we are not really looking at whether the prices are sticking or not. So far, we are constantly monitoring our relative share versus our prices. And so far, I would say it's okay. Let me take an example. If we look at the U.S. market, what we have seen is the Tier 1 players have been exactly following the market in terms of volume, while the only segment, the Tier 2, the Tier 3, have decreased more heavily. for the benefit of the Tier 4, so really the very cheap prices. So I would say that if I look at the US market, the Tier 1, the premium brands are still holding their share because they are addressing a market that is less sensitive to prices than others. And it's exactly the case for Mishnah. The anticipation from the distribution, what I can talk about is the level of inventories at the Michelin brand in every market on the worldwide basis. We are well positioned everywhere. There is still high inventory in winter in Europe. But apart from that, level of inventory are adequate. So I don't see any really attempt from the distribution to anticipate price decrease. We will see because as we have said constantly, in this environment, we are looking at, we have a three-month horizon. So we're looking ahead three months and we are then deciding on what we should do in terms of pricing. But so far, I would say we have zero reason to change our policy.

For the last question about SR3, the SR3 margin improvement in the second half was due to two elements. price and the lag effect from indexation that you captured very well, but also the fact that we were able to de-bottleneck our operations, particularly in the mining business where we were able to de-bottleneck both production but also expeditions and logistics issues that have been handicapping us all along the first half of 2022. Of course, we will have, let's say, a favorable comparative for during H1 2023 and less favorable, less effect in the second half, as you mentioned.

And the demand on SR3 is holding, especially on mining, is holding very well. Thank you very much. Next question.

The next question is from Philip Koenig with Goldman Sachs. Please go ahead.

Yeah, thank you very much for the presentation. My first question is just on the fixed cost absorption, which obviously weighed on your earnings in the second half of the year. Can you just describe the drivers? Was that mainly driven by the production in Europe, where you maybe scaled back to destock some of your inventory? And is that something that you continue to expect in 2023, or should we sort of assume a more normal drop-through on the volumes? My second question is just... On the cost drivers, I know you gave quite a wide range, but maybe you can maybe give a bit more of a breakdown of the different items between raw materials and other inflation. Some of the raw metals obviously came down quite a bit in the second half of the year, so could we maybe expect potentially a bit of a tailwind actually from raw materials in the second half of the year? And then my last question is just generally on the volumes. I know you're being conservative, but obviously you are guiding for markets rather flat, and for Michelin's volumes to be down at the midpoint. You know, you made very clear that you will hold very firm on your pricing policy, but just how long would you be willing to sort of grow below the markets, you know, in order to hold your price? Maybe very keen to hear your thoughts there. Thank you very much.

So I will start and then it will complete. So as far as the fixed cut absorption, we had... We had a change in the market during the summer, which led for us to have more inventory than what we wanted to have. So therefore, in Q4, we had to sharply cut the production down. But again, this was to adjust the inventory in the second half. which we have done, and therefore we expect to have less impact of fixed cost absorption in the year 2023 than what we had in the year 2022. As far as the volume and pricing element, it's like fine cooking. It's always a question of proportion. So, so far, we are OK with the way volumes and margin per unit are evolving. Again, we have accepted the fact that we wanted to protect the margin per unit first. In a very hectic environment, there is no point of trying to chase market share, especially in this oversupply market. We have to focus ourselves into extracting the value, demonstrating the value to our customers and insisting on the quality of our product. And so far, it's proven to be right. And maybe if you want to...

No, what I can maybe on the inflation breakdown, I mentioned quite a wide funnel between 600 million to 1.2 billion. That because there is a lot of uncertainties. Who knows what will be the cost of energy during the summer and the next fall? That's true that there was a slight relief in the past weeks versus the cost of energy in the month of October, for example. We have, let's say, in accordance to our policy, we hedge part of our energy for 2023, but generally we hedge half, so that we still have uncertainties about the other half of the energy. We also expect some inflation in labor costs. And regarding raw material, that's true that some raw materials such as natural rubber prices are going down, but versus the average acquisition price of 2022, some raw materials such as silica or other raw materials that deserve a lot of energy, that are energy intensive to produce, will be probably at a higher price in average in 2023 than 2022. So that's a lot of elements on which there is plenty of uncertainties. And what we are aiming for is to hedge this inflation with our price and retain the mixed effect for the company.

Just the last complement is you mentioned energy, raw materials, labor. And the fourth element is logistics. On maritime, it's true that it is better. The environment is easing. However, on terrestrial transportation, it is still high. And the lack of drivers does not lead to excess capacity in that transportation. Therefore, we don't foresee a massive decrease in that transportation. the transport prices on the ground.

Thank you both. Thank you very much.

The next question is from Michael Jacks with Bank of America. Please go ahead.

Hi, good evening. Thanks for taking my questions. The first one is could you please comment on the velocity or run rate of Asian tire imports into the U.S. and Europe? Have you witnessed any moderation there, or are they still continuing at a similar pace? My second question is on pricing dynamics between Tier 1, Tier 2, and 3 brands. I know you mentioned that there is an art to pricing, but do you perhaps have a sense for the magnitude of pricing divergence between Tier 1 prices, which have been going up, and Tier 2 prices, which could have been going down due to Channel B stocking in the past quarter? And at what sort of level do you start becoming concerned that a further widening in this gap could drive a larger trade-down effect potentially? And then my last question is on share buybacks. Your presentation suggests that additional opportunistic buybacks will be considered or a program will be considered. Is there any timeline on this in terms of when a decision might be taken? And are there any value parameters that you can comment on initially? Thank you.

Okay, so... On buybacks, I will leave Yves to answer. On the pricing dynamics and the question of the Asian imports, so it is true that we have seen the Asian imports catching up heavily, especially in the second semester, everywhere around the world. Now, do we see anything easing there? The level of inventory in the dealership are high with the Asian tyre imports. So now I think they have taken the inventory they could take so I don't foresee another such a big influx of these Asian tyre imports happening in 2023 but they would remain at a high level. Now in terms of the pricing dynamic I was explaining so we We mainly sell Michelin brand. More than 83% of our entire business is on the Michelin brand. So overall, on every segment, every segment. And what I was explaining that the price war that exists on tier 2, tier 3, tier 4 is for tier 2, tier 3, tier 4, not for tier 1 at this stage. So we don't see at this stage any concern for us, even though There is a slight trading down, but it's mainly happening between tier 2, tier 3, tier 2 to tier 3, tier 3 to tier 4, rather than tier 1 to tier 2, tier 3, tier 4. But we have seen, it is true also that we have seen a slight volume down, but for me, it's more inventory adjustment effect than anything else. And back to inventory, For us, we see adequate inventory level everywhere in North America, Europe in summer tires. The only excess inventory that exists overall is for winter tires in Europe. I think it will, over time, fade away. Now, as I was mentioning, the dealers are heavily loaded with Asian tires at this point.

On the buybacks, in fact, the strategy has not changed. It consists in neutralizing the effect of the shares that we are issuing for employee shareholdership program or for the shares that are given according to our long-term incentive program. Last year, we bought 120 million of shares and we gave a mandate to a bank for a given period. The decision for this year's program will be made in the coming probably two months. Generally, we give to a bank a mandate for a period of four to six months to achieve this buyback.

And we have risen. We will propose an enhanced dividend per share.

Understood. Thank you very much.

The next question is from Giulio Pescatore with BMP Paribas Exane. Please go ahead.

Hi, thanks for taking my question. The first one on pricing. Don't you think there is a price difference at which brand almost doesn't matter anymore in tires? So I understand that so far trade-down has only been in the tier 2 and tier 3 segments, but don't you think there is a price difference at which brand cannot justify the gap? I mean, we're talking about tires. It's not really a luxury product in my view, but I could be wrong, so please search. You can elaborate on that. And the second one on volumes. Volumes were really good in Q4. I was pleasantly surprised to see that, and especially given how much the market was down. At the same time, you managed to achieve a destocking. So can you maybe help us reconcile the things? So you outperformed the market, and you also achieved a destocking. What led to the market being so strong in Q4? And then the last point, a bit more technical on this other line, what should we expect in 2023 from this other line, which was quite significant? Thank you.

Sorry, I missed the last portion. What can we expect from?

Sorry, the other line in the SOI, in the segment operating income bridge, was a very significant portion of your SOI in 2022. Just wondering how should we think about this line in 2023?

So, to the first element of your question, on pricing, at which point do we become a luxury product? I don't know. So far, tires are still cheap in relative terms compared to what they do. And they are still indispensable. And the quality product, especially in a time where you have a high inflation, is a much better investment than having a poor performing product at a relatively high price. So, when we look at that at this stage we have not seen especially in the premium and luxury segment we have not seen um tread downs the tire is a very highly technical uh component in the vehicle it's an indispensable to your pleasure of riding to your safety to uh to the performance of the vehicle. So therefore, and it is still relatively cheap. So I think we are far from having reached the level where it becomes a so-called luxury product.

And then for you Yves. For the volumes, the outperformance in the second half was due to first the SR3 because our mining sales have been growing and we know that in mining we gain market share in the second half, both in Q3 and Q4. And also the fact that our distribution companies, particularly in Europe, had a better sell-out than the sell-in. So they grew in terms of volume versus the selling, what they purchased from tire manufacturers, of course, including Michelin. And that was a good surprise of the last month of the year. Regarding the segment operating income bridge, generally, we set the other element at zero because we build on our budget based, for example, on the assumption that bonuses will be reached because by definition, if we achieve our budget, the managers and people will get their bonus. And of course, all along the year, depending on the expectation we can see for the landing we might adjust this line mostly in the second half till the end of the summer it's very difficult to to guess precisely where we are going precisely to land. And there can be also other elements in 2020 and 2021. For example, we recorded there all the COVID-19, let's say, extra costs or specific costs, such as masks, all the devices that we bought to protect our employees. So it's a line where you will find also, let's say, other activities, but that are, let's say, either non-recurring or that we cannot include in the AG&A or the cost of goods sold.

Thank you. The next question is from Martino D'Ambrogi, Equita. Please go ahead.

Thank you. Good evening, everybody. The first question is on the free cash flow, just to understand what's your expectation to recover what you lost and you consider one-off in 22, so what is expected in 23. The second, and sorry, I'm asking you again on volumes, but if I take the midpoint of your guidance, in terms of your guidance, you have minus 2%, while if you look at your market projections, the midpoint is basically flat. So I was wondering if you can discuss where you are losing the volumes by division, by regions as you prefer. And the last question is on the car business return on sales. So I suppose the negative mix in terms of channel will put under pressure your margin in the car business, considering the equation that specialty is recovering and maybe also trucks. Thank you.

So, on the mix OERT, yes, it is true that we will have, as OE will catch up, we will have a negative OERT mix. However, The mix are very complex in our business. So you have to consider that OE is also under index contracts. So as we go and as the inflators somewhat stabilize, we will have the backlog effect of all the index contract that will come into fruition. So that will offset somewhat the negative OERT mix. But as you said, as well, there is a segment mixed amongst SR1, SR2, SR3, which would have a positive effect because SR3 right now is under very strong dynamics. So overall, and it's very... difficult to predict exactly what will happen in time of remix so that's why we've taken a conservative stance as far as the volume the volumes are concerned we have taken as i said a conservative So, we have said we just want to make sure that we over-deliver versus over-forecasting. Yves and I have had long discussions on this and we said, okay, let's make sure that we forecast low and we will see. We don't have enough time to describe what will happen in every market around the world, but basically that's the look we've taken on this. We've said let's be conservative on our volume forecast and overall we should deliver. Now the last point is we are prepared to lose some market share to make sure that we maintain our margin per unit. Because again, in this environment, there is no point trying to chase market share at the expense of profitability.

Maybe to complete on the volume, we also know that the first quarter will be lower than last year because I remind you that 2022 has been impacted by both the start of the conflict in Ukraine at the end of February So the first two months was basically without this event. And then there was a very strong effect of the lockdown in the second quarter in China. Then another lockdown in the fall. And then when the opening of China, the outbreak of the COVID-19 in November, December. That's also the reason why we have built our guidance on the conservative volume assumptions. Regarding free cash flow, I remind you last year we were betting to reach free cash flow above 1.2 billion. Basically, free cash flow has been impacted by 1 billion euros of inflation in the working capital. that we can, let's say, spread in half between raw material and other elements of inflation. If you look at just our inventory, they are up by 1 billion. And the finished product inventory are exactly in tonnage at the same level than they were at the end of 2021. So inflation has heavily weighed on the working capital. And on the other hand, there is the calendar of our transaction at the end of the year that has also an impact. The fact that we reduced purchasing in the last four months, which has led to have less account payable than we were expecting. and a better performance in terms of sales in the last month that has also led to a higher account receivable than expected. And these 300 million should, let's say, mechanically be transferred to the first quarter of 2023. As far as inflation is concerned, of course, we might have to bear some inflation in 2023, but we have decided to take an aggressive stance to control our level of inventory better manage our payables and receivables in order to generate free cash flow above 1.6 billion in 2023.

Okay, thank you.

The next question is from Jose Azumendi with JP Morgan. Please go ahead.

Thank you. Good evening. Just a couple of questions, please. Can you comment a little bit around the dynamics, volume dynamics in SF3 within agriculture, infrastructure, mining? How do you see that evolving? Second, can you comment on the revenue contribution from scope in 23? And then I'd love to hear a little bit around We have this debate on Asian tire imports, they're taking market share in China, and you've been excellent at passing on price increases, offset romance, and also adjusting capacity in Europe. I'd love to listen a little more around your view as to how can you basically take the opportunity to take market share in China, and although you might lose some market share in Europe, how China is longer term structurally an opportunity for you to grow the business and offset some of these losses in market share in Europe. Thank you.

I will start with the last portion of your question on China. There is still a lot of uncertainty about when China will recover from where they are today. Again, as you mentioned, we went through zero COVID policy to easing policy, which led to major destruction in the Chinese market and in the overall supply chain on a worldwide basis. Now, when will that be over? That's the uncertainty in 2023. The fundamentals of the Chinese economy are strong. The number of people accessing to market and eager to access to mobility are still very high. So there, it is the big unknown for 2023, when China will be on a more stable basis. Again, If you compare China right now versus Europe or North America, the collective immunity in the country is not yet known. So that's the big uncertainty. So on the positive side, it could offset some of the drawbacks in Europe. Yes, at this stage, we said to ensure to bet on it right now. So that's what we have said. And maybe if you want to take SR3.

Yeah, on SR3 volume dynamics, so for 2023, we are expecting a bit the continuity of what we have seen in the second half of 2020. in 2022, in particular in the second half. We should see mining continuously growing, in particular in the first half. We should also see the aircraft division growing, particularly if China is opening up In 2022, the commercial airlines have grown sharply in Europe and North America. With the opening up of China, we can maybe come back not too far from the pre-COVID level. And for the other segments, such as construction, agriculture, material handling, we are a little bit more prudent as these segments are also impacted by inventories of building and linked to the evolution of GDP, particularly the material handling. But mostly we bet on strong growth in mining, commercial aircraft, and let's say stable activities overall in the other segments.

Thank you. And scope should be 2% or so on revenues in 2023?

Scope, you mean change of perimeter, change in scope. We did not perform a huge acquisition in 2022. So therefore, the scope effect should be minor. In 2021, just the last day of 2021, we acquired 100% of Halopneu. In 2022, we did a couple of acquisitions. We have RLU, the plantation in Indonesia. We had an operation in Australia for our conveyor belt division. But it will not, let's say, It will not have a huge effect on the scope line. Thank you very much.

The next question is from Sanjay Bhagwani with Citibank. Please go ahead.

Hi. Thank you. Thank you very much for taking my question also. My first one is on the pricing. So I understand that you include the prices a year in January. Could you maybe remind what was the magnitude of this price increases? And how much was of that is basically covering the backlog inflation of 22. That is the inventory that is sitting at a higher raw material cost. So my question is basically, let's say, if this year we end up with inflation at the upper end of the guidance range, then how much of more price increases would you require? So that is my first question, and maybe I'll just follow up with the next one after this.

So in some regions around the world, we've done already in 2023 a price increase where we needed to adjust. So that's, again, to cover the three-month horizon we have in front of us. And then we'll see. That covers the lag effect plus what we foresee, what we see in the inventory and the time it reaches the market, three months basically. So we've done what we needed to do. What else we see? how the inflation goes and it covers all the inflators. Now, I want to remind you as well that we have the index contract that is still lagging between three months and sometimes nine months behind and all those price hikes in the contracts will come into fruition during 2023. So now, If we look at the magnitude of what we have done already, basically, it comes back. If we look from 2019, the price mix effect has been 4.6 billion euros. of which we had a nice mixed effect, but the buck is pricing, and we have offset 100% of the inflation. So if you look at the inflation column, we had 3.9 billion euros. if you divide by our revenue and you have the magnitude of the price increase. So it has varied from 15% in some segments to 45% or 50% in other segments.

Thank you. That is very helpful. And then my next question is on inflation. So maybe just to understand a bit more color on that, So let's say if raw material stays where it is and the transportation goes down and energy goes down, so how should we think of, let's say, the sensitivity? Is it likely that you end up more towards the lower end of the guidance range? And then what should basically your higher end of the inflation range is incorporating? Maybe just a little bit more color on that.

Part of 2023 inflation is embarked in the valorization of our inventory at the end of 2022. But what will lead to a lower end of the range might be if energy prices were staying at their current level, not fluctuating back to the level we have seen during the summer and the fall of 2022. Mostly that. The rest, of course, if raw material prices were going down, but it's where also there is a lot of uncertainty. back to Florent's comment about certainties about the way China will rebound. We know also that China rebound will have a favorable effect on our volume because we have strong market share, particularly in SR1 there. But also, we might have also effect on the cost side because it will lead to increasing energy prices. So that's where we have plenty of uncertainty in the equation.

And inflation is roadmap, logistics, energy, and now labor. Because after three years of high inflation, of course, labor is increasing. And so we have to factor this as well.

And maybe a last comment. Inflation has a different nature, for example, in Europe, in North America. In North America, we have higher labor components. In Europe, part of inflation, a strong part of inflation is imported through energy and raw materials. So we have also to look at that with different geographical lengths.

Thank you. That is very helpful. And my last question is on the volume. So Q4 volumes came in better than expected. I think you mentioned it. Is it largely just because of the SR3 or partially because of SR1 and SR2 as well? And then I think you mentioned that Q1 volumes are likely to be lower than the full year. Did I catch it correctly?

So Q1 is not over, 2023. So we just had one month of three months. And what we have seen in the last quarter of 2022 is it was mainly SR3. And within SR3, aircraft was high, mining was high, beyond world was slightly down. And SR1 was down replacement on the rise in OE and in SR2 was better than expected. So again, we have 20 different business lines, so it's always difficult to agglomerate this. But are we seeing a similar trend in Q1 2023? So far, it's in line with what we were anticipating.

Thank you. That is very, very helpful.

The next question is from with Deutsche Bank. Please go ahead.

Good evening. Thanks for taking my questions as well. Quick ones, I would say. The first one, you stressed plenty of times now that the guidance in itself is a bit cautious. So I'd like to understand if we take the low end of both volumes and the higher raw material headwind, is that still covered in the above 3.2 billion? Or is it more working with the midpoint? And then the second question will be, you've cut production a bit in late 22. Are you still running on lower production rates right now? And would you keep that ongoing into the next couple of months, assuming that the market is not changing much from where it currently is? Then lastly, more or less on the logistics, we are hearing plenty of other companies complaining about, especially truck deliveries not being on time, creating a lot of hiccups in the supply chain. Do you see the same? And is this to some degree impacting your production run rate and what you are delivering to the dealers right now? Or is it basically smoothing out, as you said, for SR3, which had the hiccups before? Thanks.

In terms of reliability or logistics, it's very simple. It is still problematic. On maritime, it is improving, but on boat transportation, it is still very hectic for the main reason, which is there is a lack of truck drivers in most of the countries around the world now. So that is, for us, we anticipate that to be structural. So it will not ease quickly this. So now we constantly have a small perturbation in our plants due to this. However, the big slowdown we had to do in The Q4 is behind us, and now we are coming back to a more normal level, in adequation with the level of the cells, which are, as Yves mentioned, in the first quarter of 2023, forecasted to be low. because the market has to absorb the inventories and the mileage. We have to wait to see what would be the real mileage driven, etc. So at this stage, it's too early in the year to prognose anything. So the utilization rate of our plants It varies. It varies. We are still not where we would like to be either because of logistic reliability issues or because of hiring or training. We still have, for example, in North America, very high turnover. But in China, we still have a lot of So one third of our staffing in China right now is with COVID. So therefore, we have plenty of reasons why the production is not yet back to a more routine setup. And for the working midpoint on inflation.

Yeah, for the guidance. So, of course, you can try to... to find the point where we set up our guidance. As I mentioned, the guidance is a floor that we are aiming to reach both in segment operating income and on free cash flow. And we work also with the range because at the beginning of the year, there is such level of uncertainties that it's extremely difficult to communicate only on a single point.

Thank you very much.

The next question is from Ross McDonald from Morgan Stanley. Please go ahead.

Yeah, thanks, Ross McDonald at Morgan Stanley. Thanks for taking the questions. I have three questions. Firstly, on free cash flow, I think you suggested that free cash flow is already improving in January, so I'm just curious to what extent we can expect free cash flow to be much less negative in the first half of this year, given the offsets from free cash flow seasonality. Secondly, on mix, I think you show on the slides that 56% of SR1 sales are 18-inch and above, up 500 basis points from 21. How quickly do you think you can pivot on the mix side into larger rim-sized tires from here. Should we be expecting another such move in 2023? And then lastly, you show very strong original equipment share for electric vehicles. I'm just curious if you can share any observations around the length of the replacement cycle for electric vehicles, or maybe the loyalty or pull-through demand that EV drivers are showing towards Michelin.

Thank you. Okay. So... On free cash flow, I will leave Ivan, sir.

Yes, so for the free cash flow, we are not disclosing figures by months. We have already quarterly reporting. So when I'm telling you that we have seen already this transfer from Q4 to the first quarter, that's true that we have already seen part of this effect. And overall, we built our free cash flow guidance with the assumption that this one-off effect on the working capital that we have in the last quarter and then the last two months of 2022 will not be reproduced in 2023. Don't forget that we have a huge seasonality. In a normal year, so a normal year is probably a year before 2019, between the highest and the lowest point of our working capital, you can have a fluctuation of 1 billion. In 2022, the situation was 2.7 billion. And it's partially due to inflation, due to also the disruptions we have in the supply chain. We have, for example, with the war starting in Ukraine, We have accumulated inventories of some raw material that we were fearing missing in the second half of the year. So all that has contributed to the disruptions that we described. And that's why we are, if 2023 is, let's say, not be a normal year, but is a year a little bit less volatile, and with the fact that we want also to better manage our inventory, that's why we are also conservative on the sales side. We should be able to generate more than 1.6 billion euros of free cash flow.

So as far as the 18-inch is concerned, and I'm glad you've noticed that they are still progressing in the share of everything we sell. We anticipate that we will have progression as well in 2023. However, we... As Yves mentioned, we are increasing our level of capital expenditure, but we've been surprised by the speed at which we've been catching market share in 18-inch+. So therefore, we are here and there maxed out in terms of capacity. So we are continuing our investment there. So we still have...

dynamic mix in in the segment one but to what level it's too early to say at this stage but what we can say is maybe five point is rather on the higher gain over the year if you look the average of the past three to five years, we generally gain three to four points per year or per semester. Five points is higher, is rather on the higher side of the range. Yes.

And on replacement cycle for electric vehicles, in terms of loyalty at this stage, we have not seen any meaningful differences from what we have experienced on other types of vehicles. However, This is a very new market, so it's probably too soon to understand really what would be the replacement law. Our share shows that it is still very interesting.

And here also we can add that we are relatively over indexed in premium electric vehicles. where we can expect to have, as in the premium IC vehicle, we should see a higher loyalty to original equipment brands.

Okay, so this would be the last question.

The last question is from Pierre-Yves Comenet with Stifel. Please go ahead.

Yes, good evening to everyone. Good evening, Florent. I guess the first one would be to come back to the breach of the segment operating income. I'm afraid I did not understand what was in that 354 positive impact of other in the breach on the slide seven. The same question, if I should, the three questions I have in a row is related to net debt What's in the $471 million that has inflated the debt on slide 10? And how should we think of that into 2023? And my last question would be rather simple. In your free cash flow guide of $1.6 billion at least, how much of working cap reversal is baked in?

Thank you. So on the SOI bridge, I mentioned in the 354 million, you have a lot of different effects. Some, let's say, non-recurrent or extra expenses. For example, in the past, we used to have the COVID-19 costs that were recorded there. Of course, in 2022, this amount has dropped. So it has contributed positively to the effect. The other, the main effect, is coming from the variable pay provision that we are recording at the end of the year, which is based on the performance of the current year. As you have noticed, in 2022, we have reached our target related to segment operating income, but not to the free cash flow. So therefore, the variable pay for all employees is lower than it was in 2021. Regarding the change in net debt in the 471 million, you have the new lease. It's a mechanical effect that you have every year. And the reimbursement of the lease is in fact in the EBITDA. But the new lease, according to the IFRS standards, is recording in the net debt change. You have also the share-by-back effect of 120 million. And you have also the debt from the company that we acquired. In the M&A, you have purely disposal and acquisitions, which was 76 million, if I remember well. But when you acquire a company, you also acquire some debts, and it's in this amount. And the last question regarding free cash flow reversal, I'm sorry, I did not retain the... That's very simple, Yves.

How much is working cap reversal, the positive inflow you expect from working cap reversal in 2022? How much is baked in at 1.6 billion? How much does that represent?

It's mostly the 300 million that we comment that impacted negatively versus our guidance, the free cash flow of 2022 in the last quarter.

Very good. So thank you very much Stifel for your last question and thank you all for your interest in Michelin. And we will see you very soon and at least in July. Thank you. And at the Capital Market Day. Oh, and we are sorry. Yeah, you're right. Sorry. We have a Capital Market Day in March. On the 13th of March. The 13th of March. So we expect a lot of you to be with us. Thank you. Thank you very much. Bye-bye.