Michelin Cie Gen Unsp/Adr

Ladies and gentlemen, welcome to the Michelin conference call. As a reminder, to ask a question, you may press star N1 on your telephone during the Q&A session. I will now hand over to Mr. Ferrand Menegault, Chief Executive Officer, and Mr. Yves Chapeau, General Manager and Group CFO. Gentlemen, please go ahead.

Thank you. Good evening, good morning, and good afternoon to all. Yves and I are very pleased to welcome you to our half a year results. So without further introduction, I will start directly by saying that Michelin has delivered sales growth of 5.9% in the first semester and has increased its segment operating income by 11.4% over the semester. on adverse markets. The free cash flow before M&A reached €9222 million. And I'm pleased to tell you that we have revised our guidance upwards on both segment operating income and free cash flow. So if we enter into more details, the sales up by 5.9% to €14.1 billion. were lifted by a pricing discipline and the fast-growing non-tire sales. The tire markets were flat in passenger car and decreasing in trucks, supported by OE, but penalized by the strong destocking from distribution and B2B fleets. The tire sales values were down by 3.7 percent, reflecting market dynamics and groups' priority on value accretive segments. Our price mix effect reached 9.4%, recognizing the value of our offers, and we recorded net positive mix despite adverse OERT sales development. Our non-tire sales grew by 17% at constant exchange rate, fueling our group's growth. The currency effect turned negative at minus 1% due to the depreciation of most currencies against the euro. Our segment operating income increased by 11.4% to 1.7 billion, reflecting our value steering, our value management, and the value management has been offsetting the cost inflation, and the negative impact of volumes. The auto and specialties segments have increased their performance. The road transportation is facing negative OERT mix. Their volumes were heavily impacted, and the plant loading and the fixed cost absorption has suffered from that. We had a strong price mix effect benefiting from sustained product mix enrichment and the pricing policy and lag effect of indexation closures. The specialty segment, the segment three, operating margin has been reaching 18.3% coming back to where it used to be, supported by a dynamic mining, aircraft, and high-tech materials businesses. Our free cash flow before acquisition reached 922 million, driven by tight business steering. Of course, it benefited from our EBITDA, reaching 2.6 billion euros, or 18.8% of our sales. The working capital has been benefiting from the tight inventory management and the cash recovery we carried over from the Q4 of 2022. and our positive cash generation from TBC, including the divestment of some company-owned retail network in the US. The fourth point is our growth beyond mobility has been accelerating with the FCG, flexible composite group acquisition, in line with our group ambition to become a key player in polymer composite solutions. As I was telling you, our 2023 guidance has been revised upwards with a segment operating income we forecast to be in excess of €3.4 billion at constant exchange rate and our free cash flow before acquisition in excess of €2 billion. If I now come back to... the resilience of our business model. And I think sometimes we forget that we are not strictly an automotive supplier. Of course it is true when we say we are an automotive supplier, but we cannot summarize our activities to this. We see on the chart, you see on your screen, that our dealings with auto OEMs only represent 9% of our revenue. The rest of our revenue is generated in various market segments with different cyclicalities. Coming back on our strategy, Michelin in Motion 2030, we want to expand the reach of our know-how to other sectors. We see on the chart on the top right Our new activity, the polymer composite solution, and with our recent FCG acquisitions, we will get to the final, when we will get the final approval of the regulatory authorities to acquire FCG, this overall sector, including FCG, will represent 5% of our revenue. And this segment is growing faster than the rest of the group. And the share of these activities is therefore going to grow within our revenue. If I now move to conclude into our introduction, if you see on your screen, at the core of our strategy, Michelin Motion 2030, We want to leverage our deep innovation capabilities that feed our group leadership in the chosen targeted end market we operate in. So you see on the left what are these deep innovation capabilities, and on the right of the screen, where we operate. From the tire businesses, we have seven core businesses. ranging from passenger car, both with the OEMs and mainly on replacement, down to two-wheel or aircraft. On the services to fleet, we have three main offers. Michelin Connected Fleet, which offers a blend of different services, digital services to fleet. We have our tire as a service operations, where Basically, we lease our tire and we manage the tire on behalf of our customers. And then we have our recent new activity, What They Are by Michelin, aiming at helping fleets to move to electric mobility. And then we have our third element, which corresponds to our Beyond Tire activity, our Polymer Composite Solutions. And you see there, we have four main businesses there, the Sealing Technologies, the belting solutions, the engineer fabrics and films where FCG fits, and the engineer polymer. Let me now leave the mic to Yves, who is going to detail you our performance.

Good evening, ladies and gentlemen, or good afternoon. For following floor introduction, I will try to provide you some more details about our H1 performance. and our four-year guidance. Let's start with the 360 view on our performance during the first semester. And this performance is very solid across the board, either we speak about people or profit or planet. On the people side, we have further improved our diversity, particularly the gender diversity with now 29.7% of women in managerial positions. We have also improved our total case incidence rate, so we improved the safety of our operations from our employees' point of view, and it's with an enlarged scope of employees than in 2022. On the profit side, I will zoom afterwards, but all the indicators are green. And on the planet side, we have chosen to highlight two important KPIs. First, our scope one and two CO2 emission that has been reduced by 14% on a 12-month rolling basis. And our water consumptions, which has been reduced by 11% on the same period. Moving now to the financial performance, I will start with the description of where the market stands during the first half of the year. So in 2023, first half of 2023, the market has demonstrated a very contrasted pattern, depending on whether we speak about the business segment, the OE and ORT markets, or the geographies. In a nutshell, you see that over the semester, passenger car and light truck tire market has been overall flat, but with a 9% increase in original equipment and a 2% decrease in replacement. And this 2% decrease has been mainly focused on Western Europe and the Americas. when continents, regions of China have seen their market increasing. The passenger car, so passenger car is roughly in line or slightly better than what we expected, at least for the quarter. Regarding truck, it's another story. The market has shown lower performance than what we expected. during the quarter. They were even below the ranges, the lower range that we share with you at the beginning of the year. The market has been down by 4% overall, with the original equipment at plus 9% and replacement at zero, but with also very strong decrease in some markets such as Western Europe. And it's mostly due, in both cases, to destocking, an activity that has been pretty resilient if we look at miles driven in the U.S., for example, for passenger cars or fuel consumption in Europe, which is a good proxy of, let's say, mobility. On the truck side, we are seeing the final demand also maybe a little bit more timid with, for example, ton and kilometer transported in the U.S. at minus 0.8, but not a massive evolution. But what we have seen mostly is a massive destocking, both at distributors and at fleets for the truck tire market. We consider that the destocking is probably finished for passenger car and light truck tires. we'll still probably continue until the end of the Q3 for truck tires. So in these conditions, our revenue has been increasing by 5.9%, reaching 14.1 billion euros. And you see that beside a very small scope effect, due to the acquisition of CPS in our conveyor belt activity. Our volume, our sets have been negatively impacted by the volume, minus 3.7%. In this volume, we must always keep in mind that Russia is accounting for 1.1%. So without Russia, volume loss has been only 2.7%. An important price and mix effect, which is coming from mostly three drivers. The first one is a full year effect of the price increase that we implement during the first half of 2022. The second one is the price increase that we implement first of January 2023. And the third one is the effect with the lag of the raw material close adjustments for all our contracted businesses. Non-tire grew by 17%, contributing to 0.8 at the growth of the group sales. And we have started to see a negative currency effect one point over the period. Looking now at our segment operating income, so it's raised by 11.4%, nearly twice the pace of our sales improvement, and is reaching 1.7 billion. Our segment operating income increased by nearly one point at constant exchange rate, so it's reaching 12.4% for the semester. It's an improvement at a constant exchange rate of 235 million euros, which has been only 170 million euros if we take into account 74 million euros if we take into account the negative effect of the Forex. In volume, we have an important drop-through effect due to negative fixed cost assertion Our sales has been down by 3.7%, but our production has been down by nearly 10% over the semester. Raw material prices have continued to increase over the semester in our cost of goods sold, but is stabilizing at the end of the semester when other inflators like energy for the beginning of the semester or other operating costs or wages, labor costs, are still increasing. Our mix is impacted, which is 47 million euros, is impacted by the negative OE and RT mix across all the segments. We still have a very positive product mix in the SR1, but we have a negative mix in all the segments, and particularly in the SR2 segment. and some extent in SR3. And we should also note that our price effect include the compensations of the forex for some currencies such the Turkish Lira or the Argentinian pesos for nearly 19 million. So the price mix raw material and manufacturing and logistics is extremely favorable over the semester. non-tire business are also contributing positively to the growth of our operating income. Looking now at our performance segment by segment, SR1 performance has improved. The sales of SR1 are increasing by 6.4%, with a volume effect of minus 2%, which is exactly the weight of Russia in our 2022 versus 2023 volume effect. So without Russia, SR1 sales has been volume-wise flat. The operating income is improving by 10.7% thanks to our market share gain in, let's say, growing 18-inch and above segments, which is now accounting for 59% of the Michelin brand sales on the semester, up by five points versus the first semester of 2022. The second segment, the transportation segment, I've seen is the sales heavily penalized by the volumes, minus 8%, mainly from replacement in Europe. heavily impacted by the destocking, and also it's penalized by the unfavorable market mix. And of course, fixed cost absorption under absorptions, which has impacted directly the margin, the operating margin of the segment, lending at 5% for the first half. SR3 is in line with our expectation. I remind you that we are looking to generate an operating income above 17%. We are at 18.3% over the semester, an improvement of nearly 500 basic points versus last year. It's supported by very dynamic sales in both mining, aircraft tires, and our high-tech material businesses, including the conveyor belt, the ceiling, and the belting or precision polymer activities. Beyond road activities, such agriculture, construction, material handling are a little bit more impacted by the destocking and DOE-NRT mix as well. Our free cash flow is probably the record free cash flow for first semester at 922 million euro. before acquisition. It's first driven by 200 million improvement in EBTDA, EBTDA which reached 18.8% over the semester. Tight management of our working capital, generally the working capital tend to increase over the first semester. And of course, In line with our expectation, CAPEX and the other elements of the free cash flow are in line with our forecast. The free cash flow has been positively impacted by two, let's say, non-recurring effects. First, the 300 million slide from the Q4 2022 to the Q1 as we have explained at the end of 2022, and the cash collected from TBC, including a shareholder loan reimbursement plus a payment from the proceeds generated from the company-owned retail network disposal to Mavis. All that represents 256 million euros. So even if we discount these two one-off effects, our free cash flow is positive, nearly 400 million over the semester, which is, again, a record high performance. This contributes, of course, to the fact that our debt is stable, as we have nearly been able to finance our dividend through the fixed flow generated during the first semester. We have 152 million of M&A, including two operations in our polymer composite divisions, and 50 million coming from the fact that we sold our Russian subsidiary early June, and we have to abandon the, let's say, intragroup loans, which is considered as a negative cash effect for the group. Altogether, the event in Russia, besides, of course, the operating the sales and the operating margin impact. As cost to the group, nearly 200 million, 150 million were accounted in 2022 and 50 million during the first half of 2023. In this context, our gearing is stable, nearly stable versus the end of the year, improving by three points versus June 2022. And our rating agencies has been stable. This slide to demonstrate the ability of the group to increase its margin and its cash generation across the business cycles. We'll have probably to be two consecutive year of negative volume effect. Why the group will be able to improve its performance both from the segment operating income and the free cash flow. Before moving to the guidance, I just would like to make a focus on our merger and acquisition portfolio management. Within our Michelin in Motion 2030 strategy, we are more and more actively managing our business portfolio, which is always also a way to show and to demonstrate the group ability to create value around and beyond tires. Although some of these activities have been sometimes acquired at a higher multiple than the group core multiple. During the first half of the year, we have conclude, although the closing will happen probably in the third or the fourth quarter, the acquisition of STG Flex Composite Group, which is going to help us to create the leader in engineering fabrics and films, both in Europe and in North America. We have acquired a company in simulation called Canopy Simulation, which is a feeding the group artificial intelligence capabilities in engineering and development. We have acquired TRK, which is the machine-connected fleet distribution company in Italy. And we have concluded the deal with Enviro and Anta around the development of a company which is aiming to create the leader in tire recycling in Europe for paralysis in order to generate recycled oil and recycled carbon black in Europe. On the other end, besides, of course, the disposal of our Russian activities, we have seen the entrance in the capital of Stellantis, which put a valuation of nearly 900 million euro in enterprise value. The disposal of the retail businesses of TBC for 525 million dollars and the proceeds generated to its shareholders and the entrance of Créa École in Ouatea, which has been also, which is for us a way to boost Ouatea growth in the future. and also recognition of the group Noros in terms of leveraging Noros in terms of understanding road usage and selling insights to fleets in order to improve their operations. So now let's move to our 2023 full year guidance that we have revised upward following first reassessments of the market. So regarding passenger car and light track tires market, as I mentioned earlier, we consider that this stocking is nearly achieved. Of course, looking forward, Q3 and Q4 will see different patterns because in Q3 last year, we've seen the rebound of, for example, the market in China and then the cool down during the Q4 when the COVID-19 strike again. So we'll have some comparisons basis that will be very different during the two coming quarter. But we are expecting overall that the overall passenger car and light truck market should be either flat or slightly decreasing over the year. So between minus three and zero. Truck tire outside China should continue to see a destocking on the replacement side at least till the end of the third quarter. in the context of economic uncertainties. On the other hand, we see that, particularly in Europe, OEM's order books are still very robust, and we should continue to see this slight unbalance between original equipment and replacement during the second half of the year. All in one, we consider that if we put aside China, we have revised onwards Our overall market forecast, which includes, of course, part of what has been achieved during Q2, to between minus 1 and minus 4%. Specialities should be nearly flat plus if we look overall. We still have to see a strong demand in mining and aircraft, aircraft due to the recovery of the commercial market, particularly in the Western world. Mining is still holding very strong, although we have very high comparison basis for the second half of 2022. Beyond tire, we expect a slight growth in agriculture. but it will be offset by lower demand in material handling and construction with the same phenomenon of destocking in these segments, which is a bit the case also in two wheels. After the COVID, there was a surge in demand in two wheels, both in OE and replacement. And for example, we are still seeing high level of inventory, for example, in bicycles. which is going to slightly depress the market for the year to go. So, in that context, we update our scenario. We consider that the volume will be probably lower than what we expected at the beginning of the year. I remind you each one was at minus 3.7. We consider that H2 will see an improvement, but will not fully compensate the impact of H1. Cost inflation. We consider it should be still, we should have still around 200 million of inflation over the year, if we look at all inflation. After nearly 560 million euro of inflation during the first half, It means that we will start to see some deflation or interest cost reduction in our cost of goods sold during the second year, but it might not fully compensate the inflation that we have seen during the first half. So overall, we should generate a positive mix between net price mix and cost inflation factors. Our CapEx are probably going to land at the lower range of the range that we share with you at the beginning of the year, around 2.2 billion euros. And in this context, our segment operating income should, at constant exchange rate, be above 3.4 billion euros. And our free cash flow, including FX, should be above 2 billion euro. I must add that we expect to have, we have 60 million negative forex effect during the first half of the year. This figure will probably increase during the second half. We do not have a crystal ball regarding currencies, but if we just take the currencies at the end of H1, and we use it as a reference for the second half, we should have seen a negative forex of nearly $200 million on our segment operating income during the second half of the year. So thank you very much for your attention, and we can now move to a Q&A session.