Michelin Cie Gen Unsp/Adr

Thank you. Good evening, ladies and gentlemen. Good afternoon for those who are listening from North America. So I'm very pleased to have the privilege to present you our sales performance for the first quarter of 2024. And I will jump directly on the market evolutions as the selling markets developed slightly driven by replacement demand. You will see that in detail. The truck tire market is sorted by Asian imports into North America ahead of expected tariff heights. Passenger car markets, so on the slide three, grew by 2%. They were basically flat at original equipment with a contrasted situation between China market grew by 4%, North America by 6% with replenishment of vehicles at inventory, dealers' inventory during the quarter, and with basically a flat European market and a dropping market in Asia out of China, particularly Japan and Korea. On the other end, the replacement market passenger car tires grew by 3%. He also led by China plus six, US, North America plus eight. In the North American data, there is some selling effect import due to the reduction of the custom duties from tires imported from Thailand. The truck and bus market grew by 2%. with a negative original equipment minus seven so two percent so it's without excluding china and again excluding china uh we decreased by seven percent mostly driven by uh europe and north america and both markets decreased by 16 percent over the quarter and it was anticipated as uh particularly in the u.s uh there was implementation of a new regulation that lead to anticipated purchase in the first half of 2023. And on the replacement market, grew by 4%, mostly driven by South America, plus 8%. Europe, US, plus 18%. And here clearly, we know that the US administration is going to implement tariffs for truck tires imported from Southeast Asia. This regulation will probably be decided during the second quarter, but with a retroactive effect on April 1st. So that's why there was a surge in the selling market in imports in the U.S. market for truck tires in the first quarter. And the European market was down by 4%. Specialities markets show more mixed trends. Construction, agriculture, regional equipment, and tools The aircraft tire market is still progressing. When the mining market, although the demand is favorably pulled by the extractions, mining companies are reducing slightly their inventories, which leads to a market which is slightly negative on the quarter. And the market is flat in polymer composite solutions, belts, conveyor belts, and other categories. Now, moving to our sales bridge. So our sales were down 4.6%, including currency exchange rate. which is strongly negative at minus 1.9%, so excluding exchange rate, our sales are down by 2.7%, with a scope effect, positive scope effect, which is mostly due to FCG integration. Volume effect, minus 4.1%, anticipated on our side, driven by our value-driven strategy. We have a selective segment approach, and most of these volume drops were managed by our team. We have a price effect which is negative at 0.9%, which is mostly and uniquely the effect of the raw materials and energy prices adjustments that are on our index business. And it has been overly compensated by 1.6% mix effect. Knowing that this mix effect, we consider that we do not have yet the full benefit of the mix effect due to the fact that we still have an original equipment replacement mix, which is not the one that we are aiming for. Non-tire business outside the FCG integration were flat with very high comparison for the first half and the first quarter of 2023. And of course, the currency that I already comment. Looking now at the sales by business segment, the volume decline is mostly in truck and specialities, which reflect the soft overall demand and our selective market approach. On the other hand, you see that on the SR1, the volume effect is less impactful. So SR1 cells decreased by 2.4%. Our volume are down in 18-inch and minus segment, but we are having a strong growth in 18-inch and above, which now represents 63% of machine cells, machine branch cells, original equipment and replacement up five points year on year. We have in this segment a favorable mix, which is overcompensating the negative price impact from indexation causes, particularly for original equipment. And this is a segment which is the most penalized by the Forex. The truck segment, the transportation segment, I've seen sales decreasing by 6%, including 5.8% of volumes, supported by a very selective market approach, which is impacting our volume on lower-value segments, including non-Michelin-branded products. And our mix and prices effect both are horrible with improved OE contracts. On the SR3, you see a decrease of 7.6%. Our mining volume were penalized by a strong 2023 reference and a slight customer destocking. The Beyond World segments are focusing on the most value-creating business segments. And we have, as you know, this segment is the most exposed to indexed business. is probably the most penalized by the negative price effect, but that are fully compensated by the mix between the different businesses. And our polymer composite solution sales are up 11% including the SCG integration. So before now coming to the guidance, I would like to draw your attention on several elements. The first one is related to our portfolio of activity. Each of these activities are driven by underlying economic trends that are somehow independent from each other. So I always remind that if you look at 2023 yearly figures, our pure exposure to regional equipment for automotive, for passenger car tires, represent 10% of the group sales. When we have 36% of our sales that are linked to replacement of four-wheels or two-wheels vehicles, and driven mostly by constructions, mileage-driven used car market. The pure transportation tire market, which is mostly correlated to GDP and PMI, represent 20% of our overall sales. The specialty segment that can be correlated more to drivers such as Of course, GDP, but also public spending and commodity prices and construction represent 18% of our global sales. And we have 5% linked to polymer composite solutions and 11% in fleet services, retail, distribution, and lifestyle, so more service kinds of activities. The second element that we wanted to share with you is related to our strategy. We clearly prioritize value over volume. In a market which is characterized by overcapacity, we focus on segments where we can create value on our three dimensions, people, profit, and planet, for the benefits of all our stakeholders. It leads us to be selective both for original equipment and replacement, whatever the business segment. At Original Equipment, we rely on our innovation potential, our strong brand leadership to partner with OEMs and to leverage this presence on our loyalty at the replacement market. And of course, we are focusing on replacement segments that are creative in terms of value. reinforcing our leadership by increasing our market share on these value-accretive segments, enhancing, of course, our partners' performance, and valorizing our technologies and offers. So all these strategies should lead us to improve our value creation for both our customers and the group and shareholders. Third, in 2023, we have announced, at the end of the year, the breakdown of several activities in Europe and North America, in Arnmore for passenger car tires, in Carrefour-Rombaud for truck tires in Europe, and the closure of our Trier steel core factory in Germany. We have completed this plan in 2024 by the announcement of the closure of our truck tire activity in Poland, in China, and the associated semi-finished components still called activities in Shanghai. In parallel, the group is investing in mostly improving its capacities in passenger car tire. Last year, we already announced the increase of capacity in Shanghai, in our Shanghai factory, in Bridgewater, in Leon, in Mexico. In Shenyang, we will, along with the decrease of our capacity in truck tire, we are increasing our capacity in Shenyang, as well as in Poland, which means that the two projects of the two truck tire capacity closure in Poland and in China are done with practically no social effects as we are transferring our employees from one activity to another. And of course last year we have announced the improvement of our capacity in Junction City in the USA to grow our capacity to build agricultural tracks for very high-power tractors. So all together, this project has led the group to reinforce its local-to-local strategy, improve our value-driven production mix as we, particularly for passenger car tire, we decrease the share of our capacity in 17 inches and above and increase our capacity in 18 inches and above. lower our environmental impact, and improve the retention of the talent in the factory that are impacted by these transformations when we switch people from one activity to another. So basically, it leads us to remove around 7% of the group global capacity in passenger car and light truck below 18-inch, and around 15% of our global truck tire production in the world. Last, I would like to remind you that over the past year, the group has been able to wave on different crises and structurally improve its segment operating income in its 3K flow. I would say despite the fluctuation of the volumes, and we have structurally lead the group to progress both in operating margin and in cash flow generation.

Moving now to the guidance.

Our market assumptions have been unchanged versus what we share for the full year 2023 disclosure. Also, Q1 was particularly for the market, as I said earlier, artificially boosted by some anticipation, particularly in the truck tire selling market in North America. And the PC and passenger car markets will be in the range slightly lower than our 2023 actual market for the year to go. So basically, year to go, passenger car market should be slightly lower than last year. We estimate that the combination of OE and RC in track tire should lead us to be, let's say, in the range of 2023, but with a complete reverse mixed effect between original equipment and replacement, particularly in the area where we play, mostly the Americas and Europe. And in specialities, we consider that in mining, there is still some fundamental demand positively oriented with some customer inventory reduction impacted by the selling demand in a context a little bit also polluted by the red sea crisis and some disruptions in the supply chain. Beyond road tires, will grow slightly in replacement, but with a sharp decrease in original equipment for agriculture and construction as it was anticipated. And the two-wheel market, which was probably the one which was thought to be destocked at the end of 2023, should have further destocking in H1 and recover, let's say, a normal market growth in the second half And we also believe that aircraft tires should continue to grow, but let's say on a more normalized pattern after a very strong 2023 growth. So given this hypothesis, our guidance remains unchanged for the full year. So we believe that volume should be between zero and minus two and with let's say a stronger negative Q1 and which will gradually ease along the year. We bet on a slight positive impact on our operating performance net of inflation. We are on change in our CapEx hypothesis and it leads us to reaffirm our segment operating income guidance, which will be above 3.5 billion euros at constant exchange rate, and free cash flow generation before acquisition above 1.5 billion euros. So that's all for my presentation, and I'm here to answer your questions in the Q&A.

Thank you, sir.

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

Hi, good evening. Thank you for taking my questions. I just have a few short ones, if I may. Firstly, the prices of key raw material inputs, such as natural rubber and butadiene, have continued to rise significantly. since you last reported and set your full year guidance. Should we be considering raw material headwinds for H2 or do you have hedges in place to mitigate that? And linked to that, would rising raw material prices potentially have a negative impact on free cash flow as was the case in the second half of 2022? My third question is on the pre-buy effect in North America. Has this resulted in an overstocked situation again? And could this continue to weigh on selling volumes for the coming quarters? And one final one, if I may, just on non-tire. We've become accustomed to non-tire being a high growth segment. After a flat Q1, how should we consider the growth prospects for the coming quarters? Thank you.

Mm-hmm. So regarding raw material, our hypothesis for the full year, it should still have, let's say, slightly positive effect versus last year. And at this stage, we are absolutely not concerned about the effect on the free cash flow, although you are right, there was a still, let's say, uptrend on some raw material, but we are absolutely not in the order of magnitude we have experienced in 2021 and 2022. So, at this stage, with the current hypothesis we have, we don't see a huge impact in terms of free cash flow by the end of the year. There will be some impact due to, as I mentioned earlier, the Red Sea crisis. For some activities, the ones that are heavily relying on intercontinental flows are slightly impacted because it impacts the quality of inventory. And then it's up to us to manage the overall inventory. But that's true that for these activities, we have an increasing share of inventory that are on the sea versus inventory that are close to our customers. Free buy in North America, Yeah, it's impacting the selling market, but it's mostly impacting importers first, and not necessarily, particularly for truck tires, as we are not addressing ultimately the same end users and the same fleets than the importers that are importing budget tires. It's not necessarily impact our own, let's say, downstream value chain. As the non-tire business is concerned, don't forget that non-tire businesses post double-digit growth for several semesters in a row, at least four semesters in a row. In first quarter of 2024, we knew that there was a slight decrease in the AV conveyor belt market, but we can see that the other markets are more resilient. And there might be also some destocking effect as well in this segment, but we are not too concerned by this one quarter. And as I said, first quarter of 2023, were at record high volumes for these activities. Very clear. Thank you. Thank you, Michael.

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

Thank you. Good evening, everybody. The first question is on prices in Q1, focusing on the minus 0.9% I imagine this is entirely due to original equipment, so my question is how the aftermarket behaved in the three divisions in terms of prices. And on the full year guidance, I know it's very early in the year, but assuming Forex remaining where they are today, what is your best estimate in terms of Forex impact at EBIT level?

Okay, so you're right to say that the negative price effect, which is in the range of $100 million for the quarter, is mostly driven by OE, but I would say by index businesses. Either OE on some replacement businesses, particularly in SR2 and SR3, uh fit some free businesses or some mining businesses so when we address directly end users on basis of a long-term contract so it's practically the entire price effect that we are we are seeing in fact it's even slightly bigger than the the entire price effect that you see because our teams have been able to renegotiate some contracts in order to improve the profitability of some contracts, particularly in the truck segment. Regarding the Forex impact, It's very early because currencies are moving every day. For the time being, we expect an overall negative effect in the range of around 100 million for the full year. But based on the currencies, the currencies at the level they were at the end of March.

Yeah, thank you. If I may, a very quick question on the 18 inches and above, which are 63% of the Michelin-branded volumes. Could you translate this figure in amount of sales, just to have an idea on what is the percentage of the car division represented by 18 inches and above?

You have roughly... We speak in volume, not in value, but... You know roughly that overall passenger car businesses, both original equipment and RT, represent a little bit less than 50% of our global sales. Michelin brand represents around 85%, so you can guess it by yourself.

Yeah, it's 80% of the Michelin branded sales, more or less.

Michelin brand represents 85% of the overall SR1 volumes.

Yeah, and my assumption is on sales, the Michelin branded 18 inches and above are probably more than 80% of the sales of all the Michelin branded.

Yeah, that's your assumption. But as I say, we don't enter into a sub-segment reporting. But just to give you the fact that what is most important, I think, is to say that every quarter or every semester, we are incrementally improving the share of this segment in our global sales by an average between three to five points. For the first quarter of 2023, it was five points versus the first quarter of 2023.

Okay, thank you, Yves. Thank you, Martina.

The next question, sir, is from Jose Azumendi of JP Morgan.

Thank you, Ais. Two questions, please. Can you talk a little bit around the volume trend in SF3 between the remaining quarters of the year and the subdivisions within SF3? How do you see... those negative comps to improve, maybe also impacted by the base effect on the year-on-year basis. And then can you comment on the expected restructuring cash-out flows in 2024?

Thank you.

So for SR3, in fact, first you have to keep in mind that in the mining business, we still have very strong volumes in the first quarter of 2023, in the first half of 2023. So when we compare 24 with 23, we should have a sort of reverse situation between the first Rolf and second Rolf, particularly for mining. We also believe that the destocking for two wheels will probably end before, during the summer. So it will have a favorable effect on the second Rolf. And we also believe that at one stage, the construction and entire business will reach a bottom, particularly for regional equipment. So we believe that, and it's true for SR3, but also for the other segment, we should have a gradual Q2 will probably still negative, and then Q3 and Q4 will move toward flat volumes. If I can, it's the assumption that we have at this stage of the year. Your second question, was about the cash flow of the restructurations. In fact, we have already... So first, what I must add is that the restructurations that were announced during the first four months, both in China and Poland, will not have a massive effect in terms of cash or restructurations. There will be some write-off, but something limited in the range to 50 to 60, 70 million euros, and a very limited impact on the free cash flow. So the free cash flow is mostly driven by the restructuration announced in 2023. We have, based on what we have announced already, we know that over the next two to three years, we'll have to be around 500 million of cash out. We have not yet fully concluded the negotiation with our partners in Germany, but We can say that there will be probably 40% of these amounts in 2024 and 60 in 2025.

Thank you. Thank you.

The next question is from Christoph of Deutsche Bank.

Good evening. Thank you for taking my questions. Those will be on volumes and one on mix. So a competitor of yours is indicating quite a decent uptick sequentially in q2 partially from the calendar effect obviously but also on an underlying basis you already commented on sr3 could you comment a bit of the on the sequential phasing for sr1 and sr2 and then second question would be on the oenrt mix you highlighted that you think there's more to come should we expect an uptick in that already or a decent uptake already in Q2 or more in the second half of the year. Thank you.

I might start by the last question. As I said, both for the two first segments, we should expect, let's say, a gradual fading of this OENRT market crossing each other. during the year, with probably the full magnitude of this positive mix effect on the second half, but gradually improving in Q2, in Q3, and in Q4. Regarding the replacement market segmentation and sequential improvement, That's true that in the first quarter, we have, particularly in the Western world, the impact of Easter vacation. There was more weekends in March 2024 than in March 2023, but there was also one day more in February this year than last year. Of course, there is some impact of the number of working days. That's true. But beyond the question of the working days, we believe that the market will gradually improve during the year. As I said, we expect Q2 to still be negative, and then to have probably a neutral either H2 or Q4, which would lead us in the range of volume that we expect. share with you which is between we should end at the end of the year between zero and minus two and you can consider at this stage that we are probably around the middle of the range but honestly we are in april it's still very early to predict in particularly in an activity where we know that we have a strong seasonality over the summer and the fall thank you

The next question is from Ross McDonald of Morgan Stanley.

Hi, Yves. Thanks for your time. Three questions for me. Firstly, on mix, this quarter sounds quite upbeat on mix with all three segments seeing positive mix effects. So I'm just curious on your guidance for 100 million euros of sustainable benefit in the EBIT bridge from mix. Is it possible to be more accurate about the specific numbers around that for 2024? Are we tracking towards a much higher outcome this year than 100 million in your view? Secondly, just to follow up on Hosea's question on SR3, just to better understand the drawdown that we're seeing in mining inventories, do I understand your comments correctly that there could be some restock in the second half of this year that may coincide with contractual price ups, so both price ups and potential volume growth in SR3 in the second half. And then final question just on SR2 volumes on the capacity reduction. Do I understand that at minus 15% on the SR2 volume takeout, is that bringing the Michelin Group to an appropriate level going forward, or do you think there's potential for further capacity reductions in that sector going forward?

Thank you. So on the last question, I will not, I'm sorry, but I will not answer your question. We don't have the habit to share about this kind of information publicly. Regarding the mix, so the 100 million euro yearly mix effect we mentioned in the past was mostly the product mix effect in SR1. So we have a 1.6% mix effect on the first quarter. We know that we have a drop-through effect between 50% to 75% depending on the activities. But beyond the product mix in SR1, there is the OERT mix in all the business segments. There is also some mix effect between business lines. And on top of that, there is business mix between the regions, countries. And you can bet that this year, our overall mix effect on our EBIT bridge should be higher than the pure passenger car tire product mix effect that we mentioned in the past.

Thank you.

And then just on SR3 in terms of the probability of restocking and contractual price ups in the second half, is that something we should be modeling?

No, we are not expecting a restocking in the mining companies. We know that the mines today are sitting with an inventory which is probably slightly above six months of consumptions. overall with a normative which is generally in the range of five months. But it's also influenced, of course, it's influenced on their own cash targets, but it's also influenced by the reliability of the supply chain. And for the time being, we are not anticipating any change in their policy beyond what we have seen for

during this first quarter. Thanks, Yves.

As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question comes from Sanjay Bhagwani of Citibank.

Hello. Thank you very much for taking my questions also. I have got three quick ones. The first one is on the volume development. I think we have already commented quite a lot on the overall development for the market. Can you please provide some color on should we expect the gap between the Michelin volume growth versus the market volume growth? Does it narrow down as we progress into the year or this remains the same? My second question is a follow-up to the mixed effect to Tiroz's question. So thinking of the change in dynamics here between the segments, even SR3 volumes have been weaker, and that essentially means that the higher margin business is weaker than expected. Does it change anything on the mixed drop-through overall? So last year, the mixed drop-through was somewhere around 52%. So does it change anything or it stays at somewhere around 50%? And then my final question is on the profitability in H1 versus H2. If you could comment a little bit about here on if the trend is likely to continue as it was last year, that is H2 better than H1 driven by better sales. That would be very helpful. Thank you very much.

Okay. Thank you, Sanjay. So basically, first starting with your last question, the last of your three questions. For the time being, we are including the effect of the currency. We are expecting a pretty balanced segment of operating income between the two half of the year. But that's the hypothesis we have at that stage. So we are not expecting today a strong, very different distribution of our profitability between the two halves. On the volume development and our overall volumes versus the market, very part of this volume development are driven by our teams. They are focusing on the segments where we believe that we can really create value both for our customers and our shareholders and for the company, of course. So that can explain part of the gap between the market and our own volumes. But we also believe that as we are trying to position the group on the faster-growing segments, this gap might narrow down in the future. Regarding the mix, as I mentioned, we have generally a mixed drop-through, which is between 55% to 70%. Last year, we were at 50% or 55%. So you can consider that this hypothesis is accurate for your

for your model.

Mr. Bhagwani, your line is open, sir.

Sorry, that's very helpful. Okay, next question.

The next question, sir, is from Michael Espinal of Jefferies.

Good evening, guys. Just a couple for me. Thanks for taking my questions. You were very successful in increasing prices in the replacement market last year with high raw materials. With raws, a small positive this year. Are you seeing some pressure on the pricing in replacement markets yet? Or that's flat at the moment? And the second question, I saw an announcement that you're rolling out the living wage across your operations, which is, of course, a great initiative. Can you talk to the phasing of that? And do you expect to offset any higher costs with efficiencies or price?

So this activity, this initiative started a few years ago. It's an initiative that we launched in 2020-2021 and the communication we did last week was just to say that we have achieved what we wanted to achieve so that by this year 100% of Michelin employees are within the living wage standard defined by the NGO with whom we were working and audited by this NGO. And of course, including in our overall strategy and our value approach strategy, of course. Regarding the price pressure in the replacement, Well, as I say that we have been able because most of the price effect, negative price effect that you have seen on the first quarter were driven by the raw material closest adjustments on the index business. It means that we have been able to hold on on our prices on the replacement market. In a market which is again characterized by work capacity, huge inflows sometimes of budget tires for Asia, but we believe that the quality of our product, the overall outstanding performance of our product, and the quality of the teams that are delivering and servicing our customers fully justify our price position.

There's a kind of comment that most of the price impact from the index clauses imply that, you know, there's a little bit of a price impact on non-index prices?

No, because you can see that the amount I mentioned for the non-index, the index impact is higher than the price effect that you are seeing in our bridges.

Okay, so you've got positive price elsewhere.

Yeah, particularly in some segment of the market, such as the truck tires, for example, in original equipment.

Okay, great. Thank you.

For any further questions, please press star and one on your telephone. Mr. Chapeau, there are no questions registered, sir.

Okay, so I thank you very much for your attention. It was a pleasure to share this information with you, and it gives me the opportunity to thank you and to welcome you for, of course, our shareholders meeting on 17th of May, but for the most on our Capital Market Day, which will be held on the 28th of May in Clermont-Ferrand. you are all welcome to attend to these meetings. Thank you very much. And looking forward to meeting you in person during these next meetings. Thank you. Bye-bye.