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.

Ladies and gentlemen. If you wish to ask a question, please press star and one on your phone keypad. Please ask your questions in English. The first question is from Michael Jacks of Bank of America.

Hi, good evening. Thanks for taking my questions. I have two. The first one is on indexation. When should we expect to see the first major impacts of the lower raw mat costs? And is the timing going to be different between SL1, 2, and 3. Could you perhaps just provide a little bit of steer on the potential magnitude of the indexation adjustments that are needed at current spot raw material prices? And could you also then please remind us what proportion of total group sales are indexed And then one additional question, please, just on the employee bonus effects for 2023. Can you just remind us how that will impact the bridge in the second half of the year and whether or not it's included in the cost inflation guide or in SG&A? Thank you.

I will take a portion of the question and then Yves will complete. So as far as the bonuses, management bonuses are concerned, we have raised the bonus provision because we anticipate our results to be better than what we had envisioned previously. And now, so we have upgraded, of course, our forecast, including a better provision for management and general bonuses indexed on the group. As far as the indexation clauses between SR1, SR2, and SR3, they vary a lot. We have business by business. Everyone has contract. It varies from quarterly review to semester review to yearly review. It depends. But on average, you can consider that it takes six months before it applies. Now, due to our forecast, we anticipate that in the second semester, the impact of index close and all of that has been included in our forecast, of course, will be not major. And it will be more significant in the first semester of 2024. And maybe about the proportion.

So overall, our index business represents around 30% of ourselves. It's slightly below that for SR1 and SR2. And there is a higher exposure to index business in SR3. You can consider that it's around 60% to 70% indexed. And of course, as Flora mentioned, we have different kinds of clauses and reference depending on the contract. So generally there is a lag between six to nine months depending on the contract. We are expecting a neutral or slightly negative impact on the Q3. and a little bit more negative on the Q4. But overall, we are not speaking about a huge amount for the second half.

And everything is included in our guidance.

That's clear. Thank you. Just a technical question and just on the bonus effect. Is that included in the cost guidance of 200 million or does that fit in SG&A?

Yeah, it's included in the guidance of segment operating income.

Thank you very much.

The next question is from Sanjay Bhagwani of Citi.

Hello. Thank you very much for taking my question also. I've got three questions as well. Like two of them are actually follow-up to my question. So my first one is on the volume drop through. I think you mentioned that the reason why this is higher in first half is because the production dropped more particularly in SR2 than the sales. So could you maybe provide some color on will this actually be normalizing by end of the year? So should we maybe think more of like let's say for the full year volume drop through of 40 to 45% or... or any color on that would be helpful. Then my second question is to follow up to Mike's question on the other line item. So is it fair to say that now you are going to be achieving more than what you had targeted? So the headwind from the other line item could be more for the full year? And yeah, any more color on that will be very helpful. And finally, on pricing for the full year. So if I understood it correctly, index portion, not a big impact in H2 of this lower raw materials cost. And can you please confirm that the pricing messages on the replacement tires has not changed much as well? So maybe just trying to ascertain maybe last part of these reduced cost inflation guidance directly close into gardening? Those are my questions.

I would start with the pricing and the pricing volume ongoing question, and then Yves will answer on the drop-through and the other line item. So on the pricing and volume, the market is now under heavy destocking. There is no point of trying to... push some additional volume into inventories at this period of time. So we have no intention to change our pricing policy and everything is included in our forecast. We just want to make sure that we valorize the quality of our product and service offering rather than trying to chase volume all of that. What we foresee in terms of volume in the second semester is that the destocking in passenger car is probably not at the inventory level in passenger car are probably at the adequate level except in Europe in winter where there is still excess inventory in winter tires in Europe. But in the rest of the world it's at the appropriate level. We anticipate still in terms of volume some destocking in Q3 in truck tires overall because we have to remember that there are three layers of inventories in the truck sector. You have the dealership, in the fleet, and also in the equipment that are idle when the economy is down. And so it takes more time in truck to absorb the excess inventory. And then, again, in pricing, we think we are priced dynamically according to the value of our products. Now for the drop-through, maybe Yves and the other line items.

So regarding the drop-through first, of course, if you look at the two bridges, you see 66% drop-through. In reality, the drop-through is 52% on the first half of the year. because our inventory has been also, our own company on distribution companies has been also destocking during the first half. So their sales, their sellout were better than the group selling. So it means that our manufacturer's sales has been slightly decreasing more than the 3.7%. It has been partially compensated by the distribution sellout performance. And this 50% should become around 45% on the second half. Last year, we had the peak of inventory during the summer, and we had to slow down sharply our operations and our production during the second half. As we have from a manufacturing standpoint in a healthier situation at the end of H1, we should not have this such effect in the second half. Regarding the other line items, in fact in the other line items we include the movement as we did last year and the year before regarding the bonuses. in order not to distort the way we can read the performance in terms of manufacturing or . So we should see similar or slightly bigger effect on the second half regarding the first half because last year we underperformed. So it penalizes the second half provision for these items. But in fact, overall, our forecast includes, when we build our forecast, we build our guidance, it includes the impact of bonuses or this kind of effect on our overall performance.

Thank you, that is very helpful. So just to confirm, for H2, the other line items are similar or just slightly more, is that correct?

Higher than the first half, yes.

Thanks, very helpful.

The next question is from Jose Alomendi of JP Morgan.

Hi, it's Jose from JP Morgan. A few questions please. I wanted to navigate a little bit away from the profit bridge discussion that we always end up having. I was just wondering if you could talk a little bit around the capacity expansion actions you're taking in China. If you could just take us a little bit through where you're expanding capacity, where you are trimming capacity in SR1 or SR2 on a global basis. That would be the first one. Second... I'd love to hear a little bit more around when you plan to give us an update with regards to the margin targets. You're making good progress in SL1 and SL3. SL2 will come over time. But when do you expect to revisit again the margin targets? Is this a 2023 discussion or is it a little bit more like 2024? And then finally, back to the bridge, I just wanted to confirm, in your guidance for 2023, are you expecting a a positive or negative volume contribution in the second half of the year? Thank you.

Okay. So as far as the capacity expansion is, we have to be very clear. There is no capacity expansion in a truck, and that was our policy for a few years now. In passenger car, we expand capacities mainly in Asia and in North America where our markets are very good and where we today we are net importers and we want to local to local strategy we want to make sure that our capacities are located where the markets are and when we put new capacity it's first of all with 100% electric curing for the environment. And also it's in 18, 19 inch and above capabilities so that we make sure that we can chase the mix. And then we also have expansion. We have announced a new expansion in track tires for agricultural in North America. And right now we are having some productivity improvement, which may lead to marginal capacities everywhere around the world. As far as the margin targets for where they will be, we had made a commitment for three years from 2020 to 2023. So in 2024, we will have a capital market day where we will discuss together our new commitments for the year to come and we will rewind what we have been achieving. So it will be done in 2024. And maybe for the last question.

Yeah, the volume effect should still be negative in the second half, less than the first half, hopefully, but we are still betting on a negative volume effect. You see that our overall volume range is now between minus 2 and minus 4. We are at minus 3.7 on the first half. If we want to land, let's say, just in the middle of the range, you can assume that we should be slightly around minus 2 during the second half.

Thank you very much.

As a reminder, if you wish to register for a question, please press star and 1 on your telephone keypad. The next question comes from Ross McDonald of Morgan Stanley.

Yes, thanks. Good evening. Thanks for taking my question. It's Ross McDonald of Morgan Stanley. Three questions, if I may. Firstly, just on the EBIT guidance for 2023, over $3.4 billion, and the over $2 billion free cash flow guidance, Can I just check the assumptions you're making underlying that guidance? Is this based on minus 4% volumes, but with the implicit assumption that there's no price cuts in the second half? I think if I understand your previous comments correctly, you're saying we should assume no SR1 price cuts with this new guidance. Secondly, on the free cash flow outlook specifically, If we assume that you hit this 2 billion euro free cash flow target, could I check if you have any short-term plans to return some of that extra cash to shareholders, potentially via a share buyback program? And then lastly, on asset disposals, obviously some of the first half free cash flow beat is helped by asset disposals. Could you maybe comment on how you're thinking about your retail portfolio after that transaction, whether that's been right-sized at this point or if there's scope for more disposals in the future? Thank you.

Okay. I will take some part, and Yves will take other parts of your question. First, as far as returning to shareholders, we have a policy there where we have been very explicit. We... favor dividends, and we are gradually increasing the dividend policy. We will have the discussion after the year end of 2023 to see how do we allocate cash, depending on where we are and how our strategy is developing. As far as in our guidance, in our EBIT guidance and the cash flow guidance, We have included all the assumptions, whether our pricing policy, the indexation clause, the additional bonus. We have put everything in it. But we won't go into details about how we are going to manage. But basically, I've been very clear in the beginning, saying that in terms of pricing policy, we don't see in a heavy destocking environment why we should try to add smart others in selling where we would just displace inventories without probably structurally gaining anything. So at this stage, we don't, we have a dynamic pricing policy that has proven very efficient and we will continue on that policy. Maybe Yves, if you can.

Maybe on the, so regarding, there was some asset disposal in our GV in North America. Just to give you a little bit of background, we entered into this GV with Sumitomo Corporation in 2018. At that time, we injected a little bit more than $600 million in the GV because most of the asset was coming from our partner. And the aim of the GV was to build the second largest wool seller in the U.S. market. We have done that. And the GV is still owning this asset, which is called NTW. Part of that, this GV is also operating two franchise, very successful franchise program. One is MIDAS and the other one is Big O. And the last, this GV is also operating wholesale in Mexico and having some import activities in the North American market. And from the beginning, we knew that we wanted to dispose of the retail, the companion retail activities, which were diluted from a rocky standpoint. And simply, we have not been able to achieve it earlier because in the meantime, we have three, two years, two and a half years with COVID-19 and a lot of, let's say, external events. It has been made possible by It's a project that has taken nearly one year. It has been achieved during the second half. And now, basically, we get back nearly at the end of the semester, we get back nearly 60%. 60% of the cash that we injected in 2018, we still have on top of that the assets, which is key for our market access in the North American and the U.S. market. which is for us our most important market in terms of size. So we simply, let's say, deploy our strategy. We earlier said that we were not contemplating further investing in company-owned retail, at least in store, in brick-and-mortar stores, retail activities. We might have some other disbursements in the future, but it will be highly connected to the strategy and what I describe as a more active management of our business portfolio in order to move towards, let's say, higher value or more performing business segments. Thank you. And maybe the last question. So in the BIT guidance, so Florent mentioned the price, and we have no planned price cuts across the board, and particularly in SR1. There will be some mechanical effect of some raw material close, particularly at the end of the semester. And we indicate to you a range regarding... the volumes. Generally, at this stage of the year, you can bet on the middle of the range until we give you a little bit more indication in the future.

Again, everything is included in our forecast. Thank you. Thanks again.

The next question is from Philip Koenig of Goldman Sachs.

Hey, guys, and thank you for taking my questions. I just want to come back to the $3.4 billion on the new SOI guidance. At the lower end, it does still imply a lower SOI in the second half than in the first half where you did $1.75 billion of of segment operating income. If I think about what you've laid out throughout this call, it seems like volumes are getting better, inventories are at more normalized levels, pricing seems to be holding up, or you plan to keep prices stable in the replacement market, and there's deflation when it comes to your costs. So is it fair to say that the $3.4 billion is a fairly conservative assumption and there's not really any reason why the second half SOI could actually be better than the first half if we exclude the FX? Then my second question is on the working capital. Obviously, I'm seeing an improvement in the inventories in the first half, but if we think about the full year, do you expect working capital to be a tailwind compared to 2022? And then my last question is just coming back to the price mix. Very simple. For the second half, do you expect price mix to be positive, neutral, or maybe a slight negative? Thank you very much.

Okay. So on the EBIT, theoretically, you're right. H2 is normally, in terms of seasonality, better than H1. Now, we are afraid for the past three years in very, very – environment. So at this stage, we've taken our best assumption is we said we should be in excess of 3.4 billion in terms of EBIT. I'm sure you can make your assumption. We think that that's why we say it's strictly above 3.4.

At the exchange rate.

Because the dollar is weakening against the euro right now. As far as the working capital, we continue with our tight inventory management. Depending about how the market is talking, the speed at which it will adjust, we may have better sales or not. It's very difficult to assess this stage, especially in truck tires. So that's why we've taken in terms of cash flow as well. the best estimate of what we think we can achieve syndrome today.

And maybe if you want to... To come back on the SOI guidance, H2 versus H1, at historical exchange rate, don't forget that last year we have a completely different pattern with a very low, a relatively low H1 performance and a very high H2. So when you look at the progress year on year, you have to look at that. And at the historical exchange rate, H2 should be better than H1. Of course, there will be the impact of the forex during the second half. Working capital should continue to improve. at least in value in the second half. When you look at working capital, you look at the balance sheet, so you look at the lending at the end of the year or the semester. Volume-wise, we might lend not too far from the volume we had in the end of 2022, at least in finished product. because we have a better sales in H4 last year than what we expected. But value-wise, we should see the impact of the material cost on the value of our inventory.

And the price mix effect in H2 would be slightly better than what we have had in the first semester. It depends on the index close, which are going to affect the price.

We consider that price should be nearly neutral over the second half. The product mix should continue to be the same. We are also expecting a less negative OE and RT mix, and we should benefit from the effect of a decrease in the cost of goods sold, particularly in terms of raw material, transportation, and in some aspect energy, although it's a little bit more tricky to forecast, when at the same time we are still seeing some inflators, for example, on the labor cost side.

Thank you very much.

We would like to ask all participants to please limit their questions to two maximum. The next question is from Thomas Besson of Kepler Cheveux.

Thank you. I'll have two themes then, please. First on M&A, could you update us on whether you plan several mid-size deals like the one you just announced or are eventually prepared to go for a more transformational, larger deal? and whether you effectively commit to the amount that has been discussed so far, 5-10 billion maximum budget, and therefore totally rule out any potentially rights issue for acquisitions. And finally, on that topic, is it reasonable to assume that you're going to concentrate acquisitions likely over 2023-2025 to increase your chances to meet your 2030 ambitions in terms of proportion of revenues outside task? And then the second topic I'd like to discuss much more simple. You're still showing SR3, including SR4, despite the growth of this future SR4. Could you just give us a slightly more detailed view about how much it accounts in terms of revenues and margins, whether it's really different or not? and whether you will separate that after your CMD in 2024 or whether we have to wait until it accounts for more than 10% of group revenues. Thank you.

So the second question, I think you have, in your question, there is the answer. We've been very clear saying that we will split segment four if it's significant in terms of, if it's meaningful, basically. So if it's above 10% of the group revenue, that's when we will issue a segment four.

And 10% of the group revenue is IFRS standards. Then afterwards, if one day we arrive at 8.8 or 9.3, we might decide to then it's a management decision to publish a separate segment.

And then in your question, the segment four that is embedded in segment three has similar margin as the average segment three. So roughly it's within segment three, you have different activities. Some are more accretive than others. The one on what you call segment four are accretive compared to others within segment three. Now, as far as M&A. We are very happy to have concluded the FCG and that our focus now is to, as soon as we get the authorization, then integrate that activity. We are very active in terms of M&A. And what we've been saying constantly, it is true that we have a strategy mission in motion by 2030. We have said, we think that this activity should represent between, this new activity should represent between 20 and 30%. And if you do the math, we will need to do some acquisitions. And it ranges between 5 and 10 billion, which may occur between now and 2030. And then it may be that different avenues towards achieving our strategy there is an avenue where we make bigger deals and an avenue where we make a sum of smaller deals. There is so much volatility in the capacity to conclude deals that we cannot be more explicit than that. But we confirm the fact that, yes, we will need to, in order to achieve our objective by 2030, to do some deals amounting between 5 and 10 billion euros and all of them would be financed through cash anyway.

Thank you very much.

The next question is from Giulio Pescatore of BNP Paribas.

Hi, thanks for taking my question. Just two for me. One on the guidance and one maybe a bit more long-term. So on the guidance, I'm just trying to reconcile the moving parts here. So your cost inflation improved at the midpoint by more than 400 million, 450, right? But your SOI guidance only increased by 200 million. Now, I understand the deterioration of volumes, but what are the other moving parts that we should consider? And then, um, the second question more long-term on the outlook for China. I mean, China in terms of replacement market is still the, pretty much the only growing tire market globally. How competitive is the Michelin brand in the market with the consumer? Is that, is the brand awareness similar to other regions? And, uh, are Chinese customers careful, as careful as the European and North American ones in terms of tire quality? How does that compare to other regions? Thank you very much.

So. first on China our brand equity in China is as strong as what it is in France to give you an idea so the Michelin brand in China is very very strong and we now the markets are what they are but in passenger car we have no issue related to our brand our brand awareness we are far above any other of our competition there So, and we are, we have a strong expansion plan in passenger car. In truck tires, in business to business, it is a different story. Even though our brand equity is very strong, in business to business, we face a huge overcapacity built in China in a very immature transportation market in China. So there we, it's more difficult. But in passenger car, you can be sure that we have very strong foundations for growth in China. And maybe Yves, on the guidance.

Sorry, before we move to the guidance.

On the guidance, of course, we'll have cost inflation improvement on the second half, which will be partially offset by the volume effect. by a little bit of SG&A increase, and the category others, which are the provision on the bonuses or deferred payment to employees. And on top of that, don't forget that in the first half, we have a huge price effect, and that price effect should nearly be zero on the second half between still some effect of increase compensated by the fact that raw material close adjustments will play negatively over the semester.

And we will have a comparison basis that would be less favorable than H123 versus H122. And we had a stronger H2-22. We will compare that to a stronger H2-22.

Don't forget that last year, H1 was 1.53 billion euros, when H2 was 1.86. So we generate 300 million more EBIT SOI in the second half than in the first half. It was partially striking on the SR3 performance, which has started to turn around during the second half. So we don't compare. When we compare the two semesters versus last year, we don't compare on the same comparison basis.

Okay, thank you. Can I just squeeze in one quick one? What percentage of your sales is winter tires? Just as a reminder, thank you.

We don't catch the question. What is the percentage of? Can you rephrase the question?

Yeah, the winter segment, how large it is in percentage of sales.

I don't know in terms of my mind, because especially now, it's around, I think in Europe, it's probably around 20 or 20% of our overall sales. But we are over-indexed in all seasons and under-indexed on the market on the pure winter tires. In Europe, I don't have the figures including Asia and U.S.

Because with our cross-climate offer, we have redefined the category in Europe. Okay, thank you. Thank you.

The next question is from Steve Fernandez of Societe Generale.

Hi, Steve Fernandez from SocGen. Thanks for taking my question. I think I've got most of the answers I want, just two kind of more long-term ones. If I scroll to the latter slides in your pack, it looks like your BEV share has come down from 3.5% in kind of premium BEVs. down to three times your market share. So could you just talk about the competitive landscape for BEV tires and how you think your market share could evolve as the market grows in size? And then secondly, kind of more longer term as well, could you talk about the potential opportunity for you in terms of the Euro 7 proposals that were made towards the end of last year in terms of particle wear on tires? Thank you.

Yeah. So as far as BEV are concerned, we have said, we've been very explicit in the beginning that our share will over time diminish as the BEV share amongst all vehicles increases because we do not operate on every BEV electric vehicles. We select the vehicles where we want to be. And so as the offer by many OEMs in the world are increasing, they are reaching segment type of cars that we don't really want to be in it. It doesn't change the technical dynamic we have. have a very competitive offer in OEMs. We choose to play on with certain type of cars versus others. So that's why structurally our share will diminish, but it is still way above our average share in the market. And that's true in every market we operate, from China to the US or in Europe is the same dynamic. Now, as far as Euro 7 is concerned, Yes, there is a package inside Euro 7 regarding the particles emitted through tires. It's called Tire Abrasion, and we've been very much in favor of this pack because we, as Michelin, we think that for the society, it is very important that every gram of material delivers a maximum performance. And amongst tires, you have... very wide variety of performances as far as tire abrasion are concerned. But I want to reassure you that Michelin tire abrasion is by far the best in the market from anyone. And yes, we are expecting Euro 7 to be in effect by the end of this year and impacting 2024.

Thank you, that was very clear.

The next question is from Pierre Kemenet of CISO.

Yes, good evening. Thanks for taking my two questions. It's very quick clarification regarding slide 9 on the bridge. First one is on the currency. The negative effect in H1 was 61%. If you mention the number of 200 million euros, is it for the full year or for H2 alone, which would lead the total negative impact of currency on segment operating income to roughly 260 for the full year? So is it 200 for the full year or 200 for H2? That would be the first question.

So as I said, we don't have a, we are not expert in Forex. So the method we use when we build our own forecast consists of taking the last rate of the previous period and use it as a reference for the year to go. So if we take the rate at the end of June 2022, 2023, And we apply this rate on our business hypothesis on the second half. We'll have a negative forex on the second half of 200 million, which is a three-year effect of 260 million negative. Don't forget that last year, at some moment in the Q3, the dollar were nearly at par with the euro.

Hello, that's very clear. And I'm not an expert as well. on the FX. The other one is on the bucket other in the first half, negative by €69. In that number, is there any additional provisioning if compared to the first half of 22 regarding bonus payments? Whatever the amount has been in 2022, if there are additional provisions on top of what has been done in 2022, in the first half of 2023, in that bucket?

Mostly, so first you have to know that in Michelin, all employees, of course, it depends on if the company has joined the group just two or three years ago, it might not be the case, but generally all employees are entitled to a group bonus. It's part of our... the way we want to share the value between our different stakeholders. And it's highly variable. So when we underperform, it's really a variable system. So in the first half, the effect that you have is mostly due to this in the other column. is mostly due to this bonus provision update versus last year when we knew already at the end of the semester that we were going to be challenged, particularly on one of the KPIs, which was the free cash flow. So, of course, we are updating this hypothesis until the last month of the year. but at the end of each one, it's the main effect that you can find in the other effect. There is, of course, always some miscellaneous effect that you will find in this column, but most of it is the impact of the bonus provisions.

Okay. And the way... The way Michelin works regarding the bonus scheme is that you provision in the beginning of the year, assuming that you will reach your target. And if you don't, just like last year, you just revile the provisioning and don't pay.

When we build our budget, we consider who will achieve it. So we take, let's say, the bonus which corresponds to just the achievement of the target. No more nor less. And then within the year, generally starting in June, sometimes later, because the jury is sometimes out for a longer time, we adjust the provision depending on our expectations and our reforecast, which is fully included in our guidance. And the bonuses... are paid during the first half of the following year.

Okay, very clear.

Thank you.

The final question.

The last question?

Yes, sir. The final question is from Martino de Ambrogi of Equita.

Thank you. Very, very quickly. You mentioned on prices. that you expect most of the negative effect coming in first half 24. Were you referring just to the automatic closes or not? And in any case, I suppose the rest of the business will follow very quickly. And the second is on the inflation costs because at the beginning of the year was a scaring issue. 600, 1.2 billion negative impact, now only 200 million. Could you help us in summarizing what significantly, what drove such a significant improvement?

I will start with the index prices and on inflation, Yves will give you some answers. On the prices, There is no correlation between index closures and our pricing policy on replacement markets. We have the index closures with customers where we have large volumes, long-term commitments, and it's just to make sure that we have no mean of setting larger fluctuation in logistics, in input costs, basically. whether logistics or whether labor or whether materials. So we have those index closures have their life and our pricing policy on replacement has other lives. So there is no correlation and we have no intention to change this over time. So what we were saying was only referring to the index closures.

Regarding the inflators, in fact, you have seen in the first half bridge that we have a negative raw material effect during first half of 2016 and a negative effect coming from other inflators, particularly in manufacturing, including transportation and energy or other elements. Overall, we will have mostly at the end of the year, we should have a nearly neutral for the full year raw material effect. So the raw material effect on the second half should fully hedge the negative effect of raw material on the first half. But we still have some inflators and wages. Transportation should also contribute positively. And energy, we are hedging part of the energy we purchase, partly in Europe, but we are not completely immune from a sudden rise of energy prices, as we have seen, for example, in August, September 2022. But overall, it should be slightly With the current hypothesis, we are betting on a slightly positive effect on energy versus last year. But don't forget that last year, the second half has been the worst from the energy standpoint, particularly in Europe. And then we'll have other inflators, such as labor costs and some that are direct labor costs, but also the labor costs that we purchase through services. that are impacting our cost structure.

Thank you, Yves. And this concludes our semester review with you. We will meet you in October to discuss our third quarter and revenue. Thank you very much. See you soon.

Thank you very much.

Bye-bye.

Ladies and gentlemen, this concludes today's Michelin Conference call. Thank you for participating. You may now disconnect your telephones.