Michelin Cie Gen Unsp/Adr

Ladies and gentlemen, welcome to the Michelin Conference Call. I now hand over to Mr. Florent Menegault, Chief Executive Officer, and Mr. Yves Chappell, General Manager and Group CFO. Gentlemen, please go ahead.

Good evening, ladies and gentlemen. Thank you for joining us tonight for our semester results. In a highly volatile environment that I am sure everyone has noticed, I would like to emphasize the very solid profile of our group. What we can see on the slide is that we have a very engaged and agile team. We have an 85 engagement rate in 2025, which puts us in a very good position in terms of engagement. We have the ability to cope with crisis quickly and to adapt. and we also have a very strong innovative background. We have built over time robust financials, a high level of profitability and cash generation, and a strong balance sheet. All major agencies rating at A-level, with Scope and Moody's reaffirming their notation a few weeks ago. Our local-to-local sourcing strategy pays dividends, especially in this time. 70% of our U.S. sales is produced in the U.S., and the same U.S. sales, 90% of the same U.S. sales is USMCA compliant. Our business profile is very balanced, both in terms of destination markets and geographies, and this participates to our resilience in turbulent times. We are evolving in a very challenging and unpredictable context. First, public regulations that are amounting, appearing everywhere. We have duties, UDR, taxes, and all in all, these new duties, taxes, regulations have a negative impact of more than 100 million on our group results in the first semester of 2025. Forex as well and I'm referring mainly to the US dollar euro exchange rate is evolving very quickly and we started the year with a positive FX assumption for 2025 and now we see a negative impact with a euro appreciating sharply versus most currencies especially the US dollar. We also have risk on global growth and the consequence of economic and geopolitical uncertainty. Businesses hate uncertainties in the context. But we have taken actions to manage risk and to seize opportunities. We have adapted and stabilized our way to play. We have now exited from most of the least accretive areas and this adjustment is mostly behind us. We have a clear OE positioning, working with the right partners and other fair contractual conditions. We have optimized our manufacturing footprint. We have done a lot over the past two years. Twelve activity closures have been announced, and we are pursuing with two announcements over the past quarter. We are starting to see the benefits of it, both in terms of loading and in terms of financials. We also have a sharp steering mode in the short term, agility in adjusting our spending to the current context, both in OPEX and CAPEX. And in the medium term, we continue to invest in the drivers of our differentiation. I mean, two of them, one is digitalization and two is innovation. And thanks to our actions and despite numerous uncertainties, we are maintaining our financial ambitions for the year 2025 in the absence of any further deterioration in the economic environment in the second semester of 2025. A lot of unexpected events will occur across the world and will affect the general economy and our markets in a positive or a negative way in the year to go. We have and we are solid on our fundamentals and determined to leverage every opportunity. What you can see on the screen now is our performance in a 360 mode. As you are aware, at Michelin, we always look at the group's performance from a combined perspective, people, profit, and planet. On the people side, we have made strong improvement in terms of safety. and also in terms of retention rate for employees with less than two years seniority. And you see the rate has improved. That shows the ability of our group to retain its new talents. In terms of profit, we have generated 1.5 billion segment operating income, which is a solid H1. If you consider the strong headwinds, and it is in line with our sequencing of our profit generation for the year. This year should be more back-end loaded. In terms of free cash flow, you see almost at the equilibrium, we have returned to a seasonal pattern of cash flow generation with a strong increase in working capital requirements in the first half of the year. In terms of planets, you see we have had a strong reduction in our CO2 emissions, minus 15%, mostly driven by our progress initiatives in that respect. And it's across all our activities. As a reminder, our climate-related ambitions have been validated by SBTI. And the second metric to emphasize our progress there is around Water withdrawal, you see, it has diminished by 11%. Thanks to, again, the numerous actions taken into our plans, we have just obtained a AAA from the Carbon Declosure Project, CDP, rewarding our group's commitment towards climate change, water security, and supplier engagement. And now I'll leave the floor for more details with Yves.

Good evening, ladies and gentlemen. So I'm going to drive you through our results for the semester and the guidance for the full year. So first, regarding the market, I just want to remind that when we speak about OE volumes, it's linked to the production of vehicles and the sales of tires to produce vehicles. And the replacement volumes are the sell-in markets, so the sales from manufacturers to distributors or the imports in a given country for non-local production. So you see first that the passenger car and light work segment, we have a complex picture between original equipment and replacement with a sharp drop of original equipment sales market in Europe and North America. plagued by consumer confidence, questions about the pace of electrification in some countries, and, of course, the impact of incentives on these electrifications. On the other hand, the market in China was pulled by incentives and by exports and grew by 10%. On the replacement market, the market grew by 3% overall, plus 5% in Europe, plus 2% in North America, and 0% in China. In Europe and North America, we believe that the market is mostly pulled by anticipation in the inclusion of anti-dumping inquiry in Europe and the threat of strong tariffs, particularly from Asian countries in the U.S. On the two-wheel market, the market now is at a pace which is quite coherent between sell-in and sell-out, and the market grew steadily in the first semester. On the truck and bus market, you see as well that the original market are down in Europe and North America. In truck and bus, we focus only on the regions where We have a significant market share, so basically it's Europe and the Americas. In North America, the 19% is even worse if we look at Class VIII vehicles, so the widest, the biggest tractors. And it's mostly due to the accumulation of inventory by OEMs over the past three years. when at the same time the new U.S. administration decided to postpone some environmental regulation that would have triggered anticipated purchase from the fleet. And on top of that, in the current environmental context, the fleets are hesitating to invest in new vehicles because of a lack of visibility and uncertainties. So the market has been down already since July, August last year, and it has continued over the first semester. On the replacement market, I will probably do the same comment on the passenger car. The market grew by 4%, but we observe very strong movement of imports, particularly in North America, from the tier 3 brands from Asia. probably as well in anticipation of some tariffs over the countries of exportation. Overall, when we look at distributors in both passenger car and truck tires, they seem to be a bit overstocked looking at the budget brands. But looking at our own brands, we consider that we are at a healthy level both in Europe and North America across both segments. On the speciality side, the picture has not considerably changed versus last year. We are still seeing mining replacement in the entire aircraft growing at a steady pace. mining and replacement tires for beyond-route tires at, let's say, low single-digit pace. At the same time, the original equipment market for agriculture, infrastructure is still down. It's probably the third semester in a row. And we believe that probably during the second half of the year, the market will have probably bottomed. The composite polymer solution show overall stable evolutions over the semester. Now looking at the bridge of our cells. So first you observe that the cells are down by 3.4% at current foreign exchange rate. Given the 200 million, so 1.5 points of currency effect, the sales are down by 1.9% at ISO Forex. So maybe before I detail the different elements of the bridge, I would like to do a preliminary statement. As the Open Union has opened an investigation into statement or answer to question about pricing during public earning calls, although limited to Europe, will not comment on pricing matters. And we maintain that we are complying with the competition rules and we are actively defending our case. But given the circumstance, we will not detail, for example, the breakdown between price and mix and we will not enter about detail about the pricing. So, the different elements. You see, of course, the volume effect, which is minus 6.1%. Basically, if you look overall at the group level, it's minus 18 for original equipment and minus 1.2 for replacement. You see that the entire business are contributing positively, plus 0.2% at the group level. And we benefit from a strong price-mix effect driven both by price. We benefit from the indexation clauses following 2024 raw material cost increase and mix both with the product, brand, and market mix. which is obviously positive due to the big difference between original equipment and replacement market evolutions. Looking now at the evolution of our volumes and to give you a little bit more flavor about this volume evolution, so you see that overall original equipment account for 85% of the total volume decline mainly in truck and agricultural markets when some targeted business segments are generating growth. So in original equipment, we are as well penalized for passenger car in RS1 by customer and vehicle mix, which is unfavorable, versus the market. On the replacement market, the machine brand is flat, and the loss of volume is mostly coming from other brands, such as Corsa, for example, in Indonesia, or Unirail in the US. Looking at the second segment, so transportation, you observe a sharp drop of OE on heavy vehicles, particularly the Class 8 I mentioned in North America, when replacement sales are stable and we observe that the Michelin brand is keeping its share of line in these segments. And on the specialities, strong drop in OE, mostly triggered by agriculture and infrastructure businesses. A drop in replacement, which is mostly coming from other brands such as the Camso brand, for example, when at the same time, Machine replacement, for example, is growing in replacement in agro as well as in mining and aviation. Now moving to the bridge of the segment operating income. So at the end of the semester, our segment operating income at Constant Forex is at 1.5 billion Euro, representing 11.3% margin. We have nearly 50 million Euro of negative currency effect, mostly triggered by the evolution of the US dollar during the second quarter. And looking at the other elements, so scope effect is not meaningful during the semester. The important volume effect is due at two-thirds by the margin effect driven by the volume, one-third due to the inability to absorb the fixed cost linked to this volume drop, which is penalizing, of course, the level of capacity utilization in our factories. The price mix represents nearly 500 million euro. And looking now at raw materials and manufacturing and logistics. So in raw materials, you have mostly the effect of the increase of the raw materials during the second half of 2024. For example, the natural rubber, the butadiene stay at a pretty high level still basically the month of March it has started to drop after the beginning of April and in these 240 million you have nearly 63 million euros which is coming from the tariffs implemented in North America. When we look at the manufacturing and logistics costs it includes nearly 50 million linked to EUDR so the implementation the The premium we pay on natural rubber, although we have decided to implement, according to the directive, to purchase EUDR natural rubber, the European Parliament decided to postpone this regulation at the very end of last year. And in this context, it's extremely difficult to replicate this cost to our customers. And during the first semester, we had some positive effect of the start of some positive effect of the restructuration. But due to the fact that we are running at a lower capacity than planned, this effect is not fully visible. yet in our PML. You see that SG&A are well managed because 23 million represents less than inflation just on the payroll on the SG&As. And we observe a positive contribution of an entire business over the semester. Now looking at the profitability across segments. They are, it's not a surprise, the segment which is the most impacted by the drop in volume is mostly the second segment where volumes are dragged down by the original equipment market itself, minus 9.3%. So consequently, it has a huge impact on the operating margin of this segment. The first segment is showing stronger resilience, thanks to a very positive mixed effect, both market and product and brand effect. And in the IS3, we land at 14.5%, so it's nearly 100 million, more than 100 million, less than last year, but with a very contrasted situation, strong drop in the beyond road, profitability due to the original equipment effect and the same impact of factory capacity utilization, but with a growing contribution from mining and aircraft tires. Looking now at the cash generation, we end the year with nearly zero cash flow minus 100 million at the end of the semester, not the year. Our EBTDA is globally in line, 18.6%, nearly 19% with the level of the previous years in percentage. Of course, penalized by volumes slightly impacted in absolute value. We are now back to, let's say, the usual seasonality where our working capital is growing during the first semester, in reality growing until the end of August, and then decreasing during the four last months of the year, and particularly at the end of June 2025. we have in the 1.2 billion increase in change in working capital. You have nearly 250 million, 60 million linked to inventories, which is shared between volumes, two-thirds, and price, one-third. A count receivable also increased, and here there is a one-off effect, which is due to the change of our distribution scheme in North America. At the end of last year, we were... still working with ATD, but with a very constraint credit facilities. And when we decided to switch, to stop, to work with ATD during the first half of this year, we are of course working with other customers that are benefiting from, let's say, better conditions. Other elements like CAPEX or restructuring taxes are quite consistent with the previous year. We just have to notice that in the GV and other financial asset variations, we have nearly 90 million euros, 100 million dollars of dividends paid by our joint venture TBC following the disposal of the MIDAS franchise in North America. At the end of June 2025, our debt has slightly decreased versus June 2024, 300 million. Of course, versus the end of the year, it has increased mostly because of the dividend paid at the end of May. And we have a gearing at 22.2%, so slightly better than last year at the same period. And I will not further comment on the agency rating, as Florence already explained, that we have a 4A rating for our long-term debt by all the agencies. So looking in order to try to give you some colors about our guidance, we are in an unpredictable and extremely volatile environment. So when we look at the first segment, passenger car and light truck, we believe the overall year should land between minus 2 and plus 1%. with probably a slightly, comparing H2 to H1, worse perspective on H2 than H1, mostly driven by the fact that, for example, in China, in the second half of last year, the government has started already to implement incentives, so the basis of comparison will not be as favorable as this year. So we believe that the market should be slightly down in H2 on OE. On replacement, we expect the market to be overall flat, probably with less sales of less non-pooled brand flows on one hand, and as well a higher comparison basis in 2024. For example, in Europe in 2024, we benefit from a relatively good winter season, which might not be necessarily the case in 2025. As far as the truck and bus segment is concerned, we expect the market to slightly rebound in Europe, but we believe that the North American will still be OE cells will still be depressed over the second semester. And on the replacements, a little bit the same picture with the market stable versus the second half of last year. Speciality, no major change. At one stage, we believe that both agricultural and construction infrastructure, original equipment market will probably reach a bottom. And we rather expect a rebound in 2026 of this market than in the second half of 2025. Now, before coming back to the guidance, I would like to share with you the fact that despite these hazardous conditions, we are determined to fight and enhance our customer value proposition thanks to several levers. The first one is obviously our product plan. We have major new product launch during 2025. I just took two example here in the first segment, the new cross-climate free, which is initiating a new segment with a cross-climate sport segment. and in the transportation industry, the Michelin Eclin Grip D, which will give plus 20% of mileage and plus 20% of rolling resistance to the end user. Looking now at the volumes in the mining, we are now starting to see the hour cells rebounding, so we expect the second half to be significantly above the first half of the year. And in Beyond Road as well, we are observing some segment of the market where sales should stabilize during the second half. Now to give you some other perspective, our presence in China, we have been in China now for nearly 46 years commercially and nearly 30 years from a manufacturing standpoint. China represents roughly 6% of the group sales. We have 6,000 employees. Five factories, including our polymer composite solution factories, an R&D center, which is here to serve the local market, and particularly the local OEMs. And we are engineering a premium first position in a premium tire market share, both in OE and RT, on the first segment. The Michelin brand in China has very strong awareness, 89%, nearly the level we have in some Western European countries. And our sales are supported by a strong franchise program, Tire Plus, with 1,700 service centers across the country. We have as well a very strong position with leading domestic OEMs. that we serve in China, Geely, BYD, SAIC, Xiaomi, Neo, Xiaopeng, Lyoto, and more as well. In terms of innovation and ability of the group to offer the best compromise of performance versus our competitors, I would like to come back on the last publication from ADAC. ADAC summarized in the last June all the studies they have done on tire abrasion since 2022. And looking at real usage with convoy of vehicles across a very large number of dimensions, Michelin stands far ahead of its premium competitors in terms of abrasion. quantity of particles emitted for 1,000 kilometers. So we are in average 27% better than our premium competitors and 18% better than the first of these premium competitors. And ADAC mentioned that Michelin continues to offer by far the lowest aversion rate where at the same time we offer the best balance of performance when you look at energy efficiency, mileage, safety, handling capabilities, and noise. Last, in composite polymer solution, as you know, we have acquired in the recent year different activities, generally exposed to different markets than the automotive. And I just want to share with you two examples where our research and development capabilities allow these companies to accelerate their synergy for their mission-critical applications. In, for example, the gangway bill, so for trains or metro, machine technology enhance the durability, the tear and the UV resistance, and the soundproofing of the vehicles. And in another application, which is linked to expansion tanks for energy supply, we are able to improve the continuity and the security of the product and avoid any contamination thanks to the materials that we introduce in these products. So that's another element which gives us confidence in our ability to further grow in these business segments. So now looking to the full year, as Florent mentioned, we are in a very erratic environment, both from the tariff, the overall economic perspective and the foreign exchange rate. So we have, in the absence of any further deterioration in this economic environment during the second half of the year, our outlook for the full year remains unchanged, with segment operating income above the one of 2024 at ISO Forex and a free cash flow above 1.7 billion euros before M&A, but at current Forex. And in this context, we are going to pursue and to implement from the 1st of August the second trench of our share buyback program to be completed by the end of the year with the program of €250 million, which is consistent with the announcement we made in February 2024 with the €1 billion share buyback over three years. Thank you very much for your attention, and I think now we can move to the Q&A session.