Michelin Cie Gen Unsp/Adr

Ladies and gentlemen, welcome to the Michelin Conference Call. I now hand over to Mr. Yves Chapeau, General Manager and Group CFO. Sir, please go ahead.

Thank you very much. Good evening, ladies and gentlemen. I'm very pleased to have the opportunity to present our 2024 Q3 sales performance and our updated guidance for the full year 2024. Before entering into the numbers, I would like to come back on the unprecedented succession of events and headwinds that we are facing since the end of 2023. First, exacerbated geopolitical tension with conflict in the Middle East, heading to disruptions in maritime shipping, the increasing numbers of tariffs and export controls rules which are triggering more and more complex supply chain to manage and sometimes is heavily perturbating these supply chains. We have as well the impact of an increasing number of regulation that is disturbing sometimes customer choices, such as the EV regulation or the withdrawing of EV incentives in some regions. Furthermore, some of these regulations are far to be stabilized and are weighing down on our European manufacturing companies' level playing field. I will just take two examples. EUDR, the European Union deforestation regulation, which was supposed to be enforced from 2025, January 1st, and that is now under discussion for a potential delay of one year, less than three months before the due date of implementation. Another example is CSRD, which is the new non-financial reporting regulation. Here also, that should start 1st of January in 2024, but the first reporting will be in the beginning of 2025. At the moment I'm speaking, nearly half of the European countries have not translated this directive into their own regulation, which can create distortions between companies depending on the country where they are headquartered. On the business side, we are seeing a sluggish economic context with consumer demand in China, particularly triggered by the lower mileage driven by consumers. Residential construction is depressed in large markets such as Europe or China, and some mining investments are postponed due to the global demand falling. On top of these elements, we are also seeing some Post-COVID demand normalization, agricultural commodity prices decreasing, so impacting farmers' net income and leading to contraction in tractors and machines in regional equipment markets. New passenger car vehicle mix, which is softening. Consumers are looking for more and more basics models, particularly in the U.S. markets. And I was already mentioning mileage driven by passenger car in China that has dropped as consumers tend to choose high-speed train for long-distance trips. So in this context, the group is strengthening its value-driven strategy, reinforcing its 3P model. And for that purpose, we can rely on our three key assets, the highly engaged and talented teams a powerful and widely recognized brand, our innovation leadership and our unique research and development and industrial capabilities able to bring innovation at scale, and the excellency in the market-defined product and services and the quality of our offers. Of course, we are looking thanks to these four key assets to create value, of course, with tires, but as well around tires in services and experience for our connected solutions for fleets, our distribution and e-retail activities, either franchise or company-owned, and our lifestyle activities with the famous machine star for restaurants that are now completed by the machine keys for hotels. And beyond tires, we are leveraging our material science research and development and manufacturing capabilities to grow in polymer composite solutions, in ceilings, conveyor belts and hoses, engineering film and fabrics, and engineered polymers in a very diversified range of applications. Now, looking at the tire market, they were supported during the first nine months by replacement selling and by an increase of Asian imports in American, Americas, and EMEA, but penalized by very strong original equipment down cycles across every segment and gradual destocking in mining. Q3 market has evolved within the range that we have shared with you at the end of July with some very contrasted trends. In passenger car and light truck tires market, Q3 was at plus 1%, and year-to-date we are at plus 2%. Replacement markets were during Q3 at plus 3, with an increase in non-pool and a good start of the winter season, but with a surprising decrease of the Chinese replacement market, when original equipment was down by 6%, Europe by 9%, North America by 5%, China minus 3%, the weak local demand being compensated by an increase of vehicle exports, and Asia outside China at minus 8%. In the truck and bus tires market outside China, we are here to date at plus 2% with a replacement at plus 3% and original equipment at minus 6%. And this trend has been exacerbated during the Q3 with the OE at minus 7%, with very strong drop in Europe, minus 23%. North America, minus 14%, while it was partially compensated by increase of OE market in South America. And replacement is at plus three. If we look over the year, it's mostly driven by an increase of imports, and partly Asian imports in North America. For speciality, although some fundamentals are positive, but the demand is impacted partly for mining by the inventory drawdown. The beyond road markets are globally depressed with a very strong drop in original equipment for agriculture and infrastructure and construction with a double-digit market drop during the quarter. On the other hand, tools markets have recovered. Aircraft post a slight increase after a very strong 2023, thanks to the rebound of Chinese domestic traffic. And in polymer composite solutions, the demand is normalizing along the value chain after a very strong 2023, particularly in the conveyor belt market. So in this context, our sales during the third quarter have been hit by deteriorating OE market across all the segments, partially offset by strong mix improvement. So our sales dropped by 4.2% at the historical Forex at 5.4 at the current Forex during Q3. We have a slight scope effect plus 0.2. The volume decrease by 7.1% that we can share between original equipment minus 19% across all the segments when replacement is at minus 1.8% across the board. We post a very strong mix effect, price mix effect with price becoming positive at plus 0.6% during the quarter, thanks to the end of unfavorable impact of contractual clauses, which has weighed down on our price mix during the first half, and a very strong mix at plus 2.3%, of which nearly a third is due to a positive market mix between original equipment and replacement, and two-thirds to the product mix. Non-tire activities were stable over the trimester, the quarter, with composite polymer solutions slightly declining, and a good trend in terms of services. Foreign exchange rate is still negative, 84 million, or minus 2% during Q3. Year-to-date, our sales are down at minus 4.6%, of which 1.2% is coming from the currencies. Volume at minus 5.3, share between OE minus 10% and replacement minus 3.9%. So you can see that over the year, although the original equipment sales are worsening, but the replacement cells are recovering quarter after quarter. Our price mix is at plus 1.7%, of which the mix is at plus 2%, so year-to-date prices are still negative due to the effect of contractual indexation close during the first half, and we have a strong mix at plus 2%. And the non-tires activities are nearly stable at minus 0.2. So when we break down this performance by business segment, we can say overall that our group cells have been penalized by the original equipment down cycles across the three segments and some contextual headwinds in specialities. Overall, our operating margin has been preserved. For SR1, year-to-date, we are at minus 2.4, which volume is at minus 2.4. Machine replacement cells are flat overall at the end of September, with 18-inch and above tires going at a nearly double-digit year-to-date. Price was impacted by a contractual close, and particularly in the first half of the year, and operating margin is slightly improving at the end of the quarter. For SR2, our year-to-date sales are at minus 4.6 percent, of which the volume at minus 5.5, with the double-digit drop of original equipment volumes in Q3, and the consequence of a chosen focus strategy on replacement markets contributing to a sharp improvement of our segment operating margin. SR3 posted a minus 9.1% sales figure year-to-date. minus 11.6% on the Q3, which is obviously weighting down on the segment margin. And I would like to zoom on our SR3 cells, which are reflecting both an original equipment down cycle and some contextual headwinds, particularly in beyond road and mining. So overall, our year-to-date sales have dropped by nearly nine points over the first nine months of the year, of which six points is coming from beyond-road activities and three points from mining. In beyond-road, we can say that four points from these six can be attributed to the drop of the original equipment market, particularly in agriculture and infrastructure. The construction replacement cells are as well dropping by one point, so present one point of the overall sales of the segments. And when some other miscellaneous segments are as well contributing negatively by one point. On the mining side, the overall drop is representing three points for the segment. Two of these points are coming from tightening export control measures, and one point coming from certain inventory reduction at some mines. Some key customers have reduced their inventory by 40%. during the first nine months of the year, and the stop of mining operation in Central America. On the mining side, we consider that it's really contextual wind, given the fact that if we look for core business, which mostly have mines operations in North America, South America, and Asia Pacific, so Australia, Indonesia, China, our sales are growing by the equivalent of one point in these regions. So having shared with you the sales and the top-line performance, I would like now to zoom on our 2024 guidance. So our guidance has been built on the following market assumptions. These market assumptions have not changed for passenger car and light truck and truck and bus tires. They have been softened by four specialties. On PCLT, we should lend between plus and minus 2% with the demand pursuing is declined during Q4. And replacement should partially compensate probably with a better, partially with a better winter season in Europe based on what we are seeing till now. Truck and bus and tires outside China should land in the same range of plus two, minus two, with the massive reduction of OE volumes in North America and in Europe, partially compensated by a slight growth driven by underlying goods transportation demands, but as well by massive imports from Asia and North America in H1, which is normalizing gradually during the second half of the year. Regarding specialties, we have reduced our market expectations from a range which was initially between zero and minus four to something between minus one and minus five. mostly due to the continuation of what I shared with you for the first nine months. There is no reason at this stage of the year that there is a dramatic change in the evolution of this market for the last quarter. So taking into account these hypotheses, we expect an overall volume to lend between minus four and minus six percent for the year. Our operating performance net of inflation should be positive, and we are betting on the fact that our capex cash-out assumptions will remain in the range of 2.2 to 2.4 billion euro, similar to the one that we share during our Q2 communication. So based on these assumptions, it has led us to fine-tune our guidance slightly downward for our segment operating income, which would be around 3.4 billion euro at historical foreign exchange rate. This is mostly due to the worse volume effect on original equipment and challenging operating margin in SR3. And on the other end, we slightly upgrade our free cash flow guidance for the full year. It should land above 1.7 billion euro. Despite the lower EBITDA contribution, we have better managed our working capital, inventory, accounts receivable, despite some inflationary effect in the value of inventory coming from natural rubber and butadiene, and as well from lower financial costs and interest paid versus 2023. So one indicator is improving, one is slightly degradating versus our previous guidance. So I just remind you that we have generally a strong seasonality in October, November, with December, which is a lower month of the year volume-wise. So this guidance is, of course, centered based on all the information available as of today. Having shared with you this information, I believe that we can now open the Q&A session.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and 1 on your phone keypad. Please ask your question in English. The first question is from Thomas Besson of Kepler Chevreux. Please go ahead.