Michelin Cie Gen Unsp/Adr

Ladies and gentlemen, welcome to the Michelin 2024 First Half Results Conference Call. I now hand over to Mr. Spolin-Menigault, Chief Executive Officer, and Mr. Yves Chappot, General Manager and Group CFO. Gentlemen, please go ahead.

Thank you. Good morning and good evening to everyone. Yves Chappot and myself are very pleased to host you for Mid-Year Results. Before unveiling these results, I would like to start by emphasizing our key Michelin in motion strategy. We are building a worldwide leader in life-changing composites and experiences. And for that, we leverage four key differentiating assets across enlarged playgrounds. The assets, you can see them on your screen. Of course, highly engaged and talented teams, a powerful and widely recognized brand, strong innovation leadership and unique R&D and industrial capabilities, and defining products and services. All of that into enlarged playgrounds. Of course, you have our historic activities in tires, but now you have services and experiences on a wide range of activities and our polymer composite solutions As shared during our latest CND, our wide variety of destination markets ensures our performance resilience. We operate in different market verticals that you see on your screen, and we have balanced activities across three worldwide geographies. ensures the resilience of our performance. So without further delays, we are pleased to share our strong performance in the first semester. Starts with our segment operating income reaching 13.2% of sales in H1 with a strong cash flow generation. So we have operated in a tire market supported by high inflows of budget tires across the entire world with a group value-driven approach generated a strong increase in mix. We have generated a strong operating income from 13.2% of sales compared to 12.1 in H1 2023, and we have a strong cash flow generation before acquisition of $669 million, driven by discipline, budget, business management. If I zoom in into the market environment, the tire selling markets were positive in the period, but inflated by very high export of Asian tires into replacement markets. OE markets have been sharply down in business-to-business and are gradually deteriorating in business-to-consumer. Our polymer composite solutions markets are temporarily soft relative to a first half 2023 comparative. Our groups focus on value-accretive segments and regions translate into a strong 1.9% mixed improvement. more than offsetting the negative price effect from indexation closures in contractual businesses. Our sales ended at $13.5 billion, down 3.1%, excluding the currency effect. And now zoom in into our operational performance. In automotive, we have enjoyed further growth in operating margin, despite the negative impact of indexation closures. and supported by a strong and continuous mix improvement. Low transportation, strong margin recovery with price and mix benefiting from targeted market approach, and growing contribution from connected solutions. In the specialty segment, we have a high 16.8 margin in adverse contexts from weak OE, especially in agricultural or construction, and price indexation closes. High prior year comparative in mining and polymer composite solution. Overall, we had a favorable operating cost across all business lines in terms of raw materials, energy, and sea freight. Then if I tell a little bit of free cash flow performance, our segment EBDA, has reached 2.8 billion or 20.4% of our sales, up 1.6 points versus the first half 2023. And our working capital has been benefiting from efficient inventory management and software volume. Overall, we maintain our 2024 guidance with segment operating income exceeding 3.5 billion at constant exchange rate and a free cash flow exceeding $1.5 billion before acquisition. I now hand over to Yves Chappot, who is going to give you further details.

YVES CHAPPOT Good morning and good evening, everyone. So beyond the strong business performance that were highlighted by Florent, the group is continuing to deliver and to continue to create value on the people and planet dimensions as well. As it is illustrated on this slide, we have continuously improved in the number of women in managerial position by nearly one point at 36.6% 30.6%, sorry. And we have also slightly improved our performance in terms of safety with a total K incident rate at one. Our ambition being during the year to go I will come back on the profit dimension later on. And on the planet, two key indicators where we are very proud of what has been achieved by our team, reduction of the CO2 emissions scope 1 and 2, so either the energy that we purchase or the energy that we produce by 7.2% versus H1 2023. and a reduction in water withdrawal by 6.3% versus the first semester of 2023. A very important event as well for our team regarding the planet, our CO2, our greenhouse gas reduction targets have been validated by the SBTI and has been considered as compatible with the Paris Agreement of 2020. an increase in average temperature by 1.5 degree by the end of the century versus pre-industrial world. So now, looking at the markets. Markets have been distorted by very strong inflows of budget tires, mostly in passenger car and light truck and truck for replacement. Overall, the passenger car market has grew by 3% during the semester, which, in fact, is hiding a decrease of 1% for original equipment and an increase of 4% for replacement. The decrease of 1% in original equipment has been specifically strong in Europe, with the market ending at minus 5% when China was at plus 5%, mostly pulled by the export of vehicles. And on the replacement side, Although both Europe and America are posting respectively plus 6% and plus 4%, it was mostly the selling market was mostly driven by the import of tires from Asia. On the track side, we are seeing exactly a phenomenon which is very similar. Market overall at plus 2%, but with the OE at minus 5, with a strong decrease in sales Europe minus 17, and North America minus 9% for original equipment, when South America was rebounding after a very low 2023. And on the replacement side, the market is at plus 4, mostly pulled by the strong performance of North America, plus 17%, the top of which most of the growth is coming from the import of tires, particularly from Thailand, in anticipation of potential duties that were effectively adopted, but that will be enforced only from September onward. On the speciality side, the mining market, the consumption of tires is growing slightly, but mining on one side is decreasing their inventories. And we are also seeing in parallel, if I look at the off-highway transportation, a strong drop of original equipment markets in agriculture, construction, and material handling. While replacement is more resilient, but we have to keep in mind that in this market, original equipment and replacement are, let's say, waiting nearly for the same amount of these markets. Aircraft is still growing, and the two-wheels market is also recovering after a very poor 2023. Now, looking at our sales, so you observe that our sales were down by 3.1% at ISO 4X. The scope effect is mostly coming from FTG. The volume effect at minus 4.4% is very strong in specialties, minus 72%, mostly driven by the beyond road regional equipment and some mining adjustments linked to inventory adjustments and less sales in Central Asia. Transportation, so SR2 at minus 4.7% and automotive at minus 1.9% with a strong Mix effect at plus 1.9 when the price effect at minus 0.8 is mostly coming from the application of raw material and energy clauses in our contractual business. Non-tire are flat, but with a high level of comparative for during the first half of 2023. and currencies are weighting negatively on our top line, mostly coming from currencies such as Turkish Lira, the Japanese Yen, the Chilean pesos, or the Chinese Yuan. Sorry. So looking now at the segment operating income, like for like, our segment operating income increased by 100 million euros, which is an outstanding performance. So if I eliminate both the currency and the scope effect, it's plus $100 million, and it's plus $127 million if I exclude only the currencies. It's probably a record high operating margin at 13.2%, 110 basis points over the first half of 2023, with a volume which is weighting negatively at $325 million. A very strong mixed effect of $189 million compensates the effect of the closings on the price side. And we benefit from a strong tailwind related to raw material, energy, transportation of nearly $450 million. SG&A are increasing by 100 million, mostly driven by inflation and labor cost inflation. And non-tires has a slightly negative contribution on that bridge due to a combination of multiple factors, but mostly the decrease of the volumes in the conveyor belt businesses, which is, let's say, a contractual effect. Now looking at the performance by segment, you can observe that despite volume being down by 1.9%, RS1 increase in segment operating income by 5.6% with an increase in margin of 1.1 point. RS2 is showing a very strong recovery from 5% operating margin to 9.2%. It's a main contributor to the group improvement in the segment operating income. And here also, despite volume drop by 4.7%, revenue growth by 3.9%. Of course, the segment is impacted by the closest, particularly on the original equipment, but our team has been able to strongly valorize our offer, both at OEM and fleet, And we benefit in this segment from positive market and geographical mix. It's important to notice that this segment does not yet benefit from the consequence of the footprint decision that we announced end of 2023 and early 2024. It should start to pay off in 2025. RS3 with volumes down by 7.9%, 7.2% is of course impacted, but is still posting margin at nearly 17%, which is in line with our ceiling threshold for this segment. The cash flow generation in this context is positive for the first half of the year. Generally, before we started to enter into a more volatile environment with the COVID in 2020, but before this period, our cash flow was around 100 million during the first half, so we post 669 million, mostly coming from a very strong EBITDA at 20.4%. A change in working capital, which is, of course, negative. It's linked to the seasonality of our working capital, and the group is a particularly building inventories ahead of the winter season. And generally, we have a strong inflow of cash during the last three months of the year. So it's a moderate increase of working capital thanks to the business steering. The other elements are in line with our expectations. I just want to highlight the positive contribution of our joint ventures, mostly coming from CBC 100 million dividend, which was paid during the first quarter. Our gearing has improved. Our net debt has decreased versus the 30th of June 2023 by nearly 400 million, knowing that if you look at the bridge the construction of the net debt. We have already booked during the first half the full effect of the share buyback, although only 50% of this program has been done at the end of last week. So the gearing is solid at 23.9%. It mechanically increased always at the end of June versus the end of December. and maybe the main event of the semester is the upgrade of our long-term debt by Moody's from A3 to A2, and the notation by Scope, which is a European rating agency, who started to note our debt and rate us at A. So a very, very positive and very healthy balance sheet at the end of the semester. Before moving to our full-year guidance, I would like to come back on some aspects of our strategy that we have highlighted during our last Capital Market Day, our value approach. It can be summarized by the sentence that we want to win where it matters. We are looking to maximize the value creation for our customers as well as for of other stakeholders. At Original Equipment, we are relying, as Flora mentioned in her introduction, on very strong innovation, brand power, very strong partnership with some of these customers, and the loyalty that is generating on the replacement market. So we try to maximize the value creation on these segments as well. And on the replacement, we are trying to focus on value-accretive segments, which are not necessarily the ones that are today the biggest in volume, but it's generally segments of the market that are growing faster than the average of their segments. Typically, high-power tractors in agriculture with large tires or tracks, or, of course, the premium 18-inch and above tires within the SR1 segment. So some concrete example of this strategy, looking at the three reporting segments, starting by SR1, our share of 18-inch and above tires at the Michelin brand, both in replacement and original equipment, has increased by an increment of five points during the semester, as we did for the last three or four or five years. which contribute generally over a year nearly 100 million of sustainable mixed effect impact on our EBIT. And this segment of the market, 18 inches above, we're growing by 12% during the semester. On SR2, the choose and focus strategy has led the teams to focus on mostly Europe and the Americas to have a more targeted approach in the other regions, or to look at some niche where we can really create value, for example, for dandruff goods in some regions such as China, for example. So we are looking to capture markets that represent 50% of the market value, although it's less in volume, which are characterized by fleet looking at premium suppliers, tech-oriented, so with a strong contribution of our connected mobility offers, and fleets that are also looking at their environmental impact and are looking to lower their environmental impact. Regarding SR3, you see several examples of business segments from material lending to mining to high-tech agricultural tracks. or conveyors, as well as marine inflatable boats, where, thanks to the technological leadership of the group, we can offer different products that are very differentiated from the competition and that are contributing to our customers' performance and value creation. So this example shows that when we are looking to win where it matters, we have in all the three reporting segments very concrete examples of this strategy. Now, looking forward for the second half of the year, we have not changed our hypothesis regarding the passenger car, light truck, and truck market outside China. We consider that these markets will probably evolve in a range of minus 2% or plus 2% versus last year. Probably two inflections versus the first half of the year. We should see a lower impact on the Asian imports, particularly, for example, for truck tire replacement in North America in the second half. And in all the markets, we are seeing an erosion of OE volumes that have, let's say, gradually increase over the second quarter and should continue during the second half of the year. We should not forget that in the previous years, the original equipment market, particularly in truck, has been impacted by the anticipation on the regulations, particularly linked to the emissions of the vehicles. In specialities, we have lower our market hypothesis from, let's say, a range around zero to something between zero and minus four. Mining tires, the demand remains there fundamentally, but we observe a gradual stock reduction at customer level along the year. It's not dramatic. It's just, let's say, a reduction of some weeks. We are not speaking in months. The beyond tire market will be flat on replacement, but very negatively impacted on the regional equipment, particularly in agriculture and construction. Two wheels is a more seasonal business, so second half is waiting less than first half. And aircraft, we should come back to normal growth versus the pre-COVID reference base. And in polymer composite solutions, overall markets are soft across verticals. mostly because 2023 was a very high reference base. And we are also observing some destocking across industries. So based with this hypothesis, we have a slightly lower down our volume hypothesis for the year in a range of minus two to minus five. We consider that our operating performance net of inflation should be slightly positive. Of course, it was strongly positive during the first half, but the tailwind that we observe in raw material of energy will, of course, erode and maybe become negative, particularly for some raw materials such as butadiene or natural rubber. Our CAPEX hypotheses are in line with what we have announced at the beginning of the year, so there is no fundamental reason to modify guidance, and we are confident that we should achieve a segment of parity income above 3.5 billion euros and a free cash flow before acquisition above 1.5 billion euros. Having said that, I think, Florent, we can start with the Q&A session. Thank you, Yves.