Michelin Cie Gen Unsp/Adr

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

Good evening, good afternoon, and good morning to all of you. Thank you for joining us, Yves Chaput and myself, for our 2025 Results Call. I would like to start by summarizing our 2030 Michelin in Motion strategy. What you see on your screen is our group relies on four strong and clear distinctive assets. Our mission's way of managing based on empowerment, autonomy, and responsibility. Our company's resilience comes from team cohesion and shared values. Number two, we have a strong and well-recognized brand. Our Michelin brand is now worth more than 10 billion dollars and it is the 9th strongest brand in the world across all categories, not only in tyres. We capitalize on a powerful innovation with deep expertise in complex materials assembly. And finally, we sell best-in-class products and services with long-term value delivered to our customers. Our group operates, and that's in the middle of your screen, in two complementary fields, tires and mobility on historic core business and polymer composite solutions in which our group is leveraging its material expertise acquired in tires and where we are accelerating our growth. In 2025, and that's the right of your screen, our group achieved the following performance. An engagement rate at 84.4 high and stable close to our 2030 target of 85%. A segment operating income of 2.9 billion at Isoforex. This is, of course, disappointing performance as we did not reach our initial 2025 guidance. I am sure, however, you have noticed that we have reached the upper part of our revised guidance. It shows that we were able to turn things around in the last quarter. Our free cash flow before M&A reached €2.1 billion, reinforcing our financial strength and our ability to generate cash. Our renewable and recycled material rate stands at 32%, one point better than last year. The road ahead to our 2030 ambition is long, but we make strides. Regarding the shareholder return, we are proposing a stable 1.38 euro per share dividend, which corresponds to a 57% payout ratio. Confident in our future, we intend to launch a new share buyback program of up to 2 billion euros over the next three years, 2026-2028 period. Here, I would like to re-emphasize to all of you that M&A is still a priority as we are deploying our Mission in Motion 2030 strategy. Our structurally strong cash generation allows us to finance both capex, dividends, and share buyback programs in a flexible way. Regarding our financial guidance for 2026, our ambition is to progress in terms of segment operating income at ESO scope and ESO parity, which we want to make clear that our ambition is to progress at 2025 perimeter. On the cash side, we intend to generate at least 1.6 billion euros in free cash flow before M&A. Now, I would like to take a few minutes to come back on our polymer composite solutions development. Aside from our core business in tires and mobility, where our ambitions remain intact as being the world leader, we are determined to grow our PCS polymer composite solutions businesses. By doing so, we will improve the resilience of our group and its profitability. Michelin's approach in PCS is based on three pillars. Leveraging group R&D. Michelin leverages over 100 years of experience in developing the best tires. Our deep science in material. and unrivaled ability to industrialize and produce at scale provide us with a unique opportunity to access several very attractive adjacent categories. We are building a diversified portfolio of independent businesses targeting Michelin critical applications. Within our group, we manage our polymer composite business with a specific operating model. We have got strong synergies in terms of R&D, and we operate in a much more decentralized way than in tires. The destination markets represent an addressable market of more than €70 billion, organized around six main product categories, as you can see on the bottom left of your screen. Since we acquired Fener in 2019, we have grown at a CAGR of around 7% with a balanced mix of organic and external growth. And with the latest three acquisitions we have announced, we could reach pro forma 2025 sales of around €1.7 billion with an operating margin of more than 15%. Our polymer composite solutions business including our recently announced acquisitions, show a good balance, both in terms of market verticals and geographies. That's on the right, and market verticals are on the left. And what you can see is North America becomes our largest region after the three latest acquisitions, and it will enable cross-selling synergies and contribute to the upcoming growth in PCS. Now, I'll hand over to Yves for the rest of our presentation.

Thank you, Florent. So I'm going to lead you through our performance in our key performance indicators regarding people, profit, and planet. Regarding people, the group has shown very strong improvement in terms of safety. Our TRIR is now at below 4.5, which is an improvement of 53 basic points versus 2024. And our net promoter score with our partner customers has improved by 5.3 points versus 24. We are on track for both indicators on our 2030 ambitions. I will come back on the profit more in detail afterwards. And regarding the planet versus 2019, we have already achieved 48% CO2 emission reductions versus 2019. which was nearly the objective we intend to reach by 2030. So we are far ahead thanks to a lot of levers including purchasing of green electricity but as well transiting from more carbon intensive energy to less carbon intensive energies. And last I would like to comment the abrasion performance If you compare the set of offers of Michelin in 2025 versus 2020, in average, the performance of our tires in abrasion has improved by 8.4%. which translate in less material for the same usage, but as well as an improvement and competitive advantage in terms of total cost of ownership for our customers. It makes us the indisputable leader in this area. Now coming back more to the economic situation, I would like first to comment the market. The market has shown very contrasted pictures over the world and over the different segments. But overall, there were more generally soft versus 2024. Very tough in original equipment, particularly in B2B applications. If you look at original equipment and if you set apart passenger car tire in China and truck and bus in Europe, all the markets were down versus 2024 with even minus 20% for the heavy duty vehicles in North America. The replacement market, if you look at the figure, seems to post a more positive picture. But in reality, we should not ignore that this trend was triggered by the inflow of Asian tires in anticipation of the tariffs in North America and the anti-dumping measures that the European Union is intending to implement versus passenger car tires coming from China. So overall, at the end of the year, when we look at the inventory of our wool sellers, they are pretty heavy loaded with these tires. And we estimate that it takes probably another semester to flush out these tires from the distribution channel. On the other hand, when we look at our own inventory, they are at a quite healthy level in all channels of distribution. Regarding specialties, mining aircraft are posting positive growth. B on road is still plagued by the regional equipment cycle, and that will have the opportunity to come back on the situation of B on road, particularly in OE. Replacement has shown some signs of recovery, particularly in Europe. And the polymer composite solution are posting low single digit growth over the year. Regarding our cells, so 2025, I've seen very strong headwinds. First one being the volumes. Our volumes were done by 4.7%. mostly driven by original equipment, and I will have the opportunity to come back on that. The situation of volume has improved over the year. Volume in H1 were at minus 6.1, in H2 at minus 3.4. Price mix is still positive over the year, 3%. The non-tire activity are contributing to 0.3. So you have seen the weight of polymer composite solution, but this activity grew in itself by 3.4% during the year. And of course, we have been severely impacted by the currency effect, 800 million, 3%, of which half is coming from the US dollar, and two-thirds in the second half, one-third in the first half. Overall, our sales, including forex, have decreased by 4.4% over the year. Now, zooming on the volume, so volume decreased by 4.7%, so nearly 5%, of which 80% is coming from original equipment businesses, half from the truck tire businesses with a strong... drop, particularly in the North American, which is a very important market for us. And the rest is shared between passenger car and agriculture all across the regions. Passenger car tires have grown in China, but the market and our volumes have decreased in the other regions. Our overall replacement cells were posting a slight negative, so one point volume contribution overall, but with a very diverse situation between Michelin brand, which is growing, across practically all the business segment and our tier 2 and tier 3 brand that has been probably more impacted by the inflows of budget tires both in our North American and European core markets. Our operating margin. So the margin land at 2.7 billion euro or 10.5% including forex. I will start with the forex because half of this 200 million is coming from the USD and three quarters of the forex effect is coming in the second half of the year. Before the month of April, the USD tend to be more resilient versus the euro. But if you look across the full year, the euro has revaluated against nearly all currencies and particularly the USD. Volume is done by 700 million of which is shared between the margin effect and the lack of fixed cost absorption from our factory due to the very low level of factory loading. We have a very positive price mix who nearly hedge the volume effect. Raw material is negative for the full year but has a positive effect on the second half, which was mostly concentrated on the last quarter. Manufacturing and log costs are as well negative but impacted by 235 million euros due to the tariffs, mostly in the second half. So if you take out this effect, our manufacturing cost, in fact, our manufacturing performance have been improving despite very low factory loading during the second half of the year. SG&A, which were slightly increasing at the end of the first half of the year, landed $5 million below 2024, and thanks to a strong reaction and around $28 million improvement saving during the second half. We have a positive contribution from non-tiler business, and the other effects are mainly due to our group bonuses as in 2024 we have updated our bonuses in November when in 2025 we did it in June with a last adjustment in December due to a better free cash flow performance than expected. Now looking at the picture by business segment You see that our segments, the most impacted segments are SR2 and SR3 in terms of volumes. SR1 volume loss is mostly coming from original equipment, European and North America and our tier 2 and tier 3 brand. But the Michelin brand in SR1 has been very resilient and has grown over the year. The SR2 is severing obviously from the 9% volume decrease. that I have already detailed. And the SR3 has been impacted as well by a strong volume decrease, which has eased during the second half of the year. At the end of June, we were posting a 6.8% volume decrease in SR3 versus 3.1% for the full year. I would like now to come back on SR2 performance and our plan to recover and to come back to a healthier financial performance on this segment. Here you will see on the right part of the slide two charts, one which is showing you the market fluctuation within a dark blue original equipment and in green replacement for truck and bus tires over the past 10 years. So we know and it's particularly exacerbated for original equipment that this market is cyclical with roughly a market that can fluctuate around 30% below or above its average, depending on the cycle. And you see below with the operating margin, the strong correlation between the operating margin and these cycles. So our strategy is consisting now in trying to desynthesize our SR2 margin to this cyclicality. First by rebalancing the respective weight of our original equipment and replacement volume. right-sizing our manufacturing capacity and it's all the effort that has been done by the teams in the past two years, improving our local-to-local sourcing, accelerating our product plan renewal, increasing the share of services through our machine-connected fleet activity, and re-emphasizing the importance of retrading to extract the full value of the machine technology. And with all these levels, we believe that we can try to have less exposure to these fluctuations in the years to come. The positive results in 2025 is coming from our cash flow generation. So despite a drop in EBITDA, we have been able to generate 2.1 billion euros of free cash flow before acquisition. After acquisition, it's even better because we have made some disinvestments in 2025. Thanks to a huge effort in working capital, despite some inflationary pressures coming from the North American tariff. We spend less in taxes and interest than in 2024. Our restructuring costs have increased versus 2024 by €180 million. You see that our capex has slightly decreased as well, around €100 million. And we have a very positive contribution from our joint venture and associates. and from some asset disposals that we did, real estate in Euromaster or in China. Last, our ROKI has been impacted by a weaker segment operating income in 2025, despite 550 million less capital employed in average in 2025 versus 2024. This cash generation, thanks to this cash generation, it provides us some headroom to deploy our strategy as Florent highlighted. But we have been able in 2025 to further deliver our balance sheet with a gearing which lands at 13% at the end of the year. It gives to the group the flexibility to finance both the growth of its polymer composite solution and to increase its share buyback programs. In terms of shareholder returns, our net results has decreased by 230 million versus 2024 thanks to a Better contribution of GV and associates versus the impact of the segment operating income, less restructuring costs, and despite as well an effective tax rate which has increased from 22% to 26%. We will propose to our shareholder meeting in May a stable dividend per share of 1.38 euros per share, which represents a payout ratio of 57%. The idea being that our payout ratio should fluctuate around 50%. And given the strength of our balance sheet, we will propose up to 2 billion euros share buyback program in the next three years between 2026 and 2028 of which we will implement 750 million euros in 2026. Now, moving to 2026, I would like first to come back on our future segment reporting, which is aiming to provide to our shareholders and to all of you a better understanding of our different activity. In this slide, you will see a pro forma 2025 segment reporting that will allow you in the next quarters to compare our 2036 financial reporting with 2025 actual performance. I would like to highlight four points on this slide. First, you have probably observed that we have decided to rename our reporting segments to better translate, as much as possible, the nature of our customers. So the first segment, which is automotive and tools, is mostly addressing consumers, even if it's through distributors or who else. The second segment has not changed. It's about transportation, goods and people transportation. Specialities, it speaks by itself. And polymer composite solutions, it's the name that we have shared with you since our last Capital Market Day in 2024. So what you will observe is that consumer and transportation segments performance has not changed. Specialty now is made of three business lines. Mining, which represents 40% in terms of sales. Aircraft, 10%. And beyond road, 50%. Although specialties are relative for the group, with a 13.1% operating margin, this segment is clearly underperforming due to the weight and the performance of our beyond-road activity, impacted by the cyclicality of the agro and the construction businesses. And it's clearly, along with the SR2, a priority to the recovery of the performance of this sub-segment is clearly a priority for the management of the company. And you see that the polymer composite solution represents 4.7% of the group cells and nearly 7% of the segment operating income. And it's the most profitable segment in terms of operating margin with nearly 15%. Florent mentioned earlier the acquisition that we have announced in the past weeks and that will be closed during 2026. In reality, the Coulee Group, the first acquisition, had been closed on the 2nd of February and we expect Textect and Flexitalic to close during the first half of the year. If you take all these activities, they are all North American companies, bringing nearly 2,000 new employees within the group, headquartered in different regions, and with an aggregate turnover of €450 million, which is an increase of 35% for PCS, an average operating margin of 17%, which is accretive. and relative versus the existing polymer composite solution business for an enterprise value of around €1 billion, which translates in a ratio of 11.5% EV on EBITDA and even 9.7% if we take the EBITDA of 2025 plus the synergies that we're expecting to extract in the coming four years. So not taking account the growth potential, the intrinsic growth potential of these activities. So in terms of markets, coming back on particularly on the tire market, we are expecting a rather soft market over 2026. with probably a balanced market between regional occupants and replacement both for truck and passenger car and probably a more optimistic picture for specialties. In original equipment in passenger car, due to the fact that the incentive that has been implemented in China will have probably less effect in 2026, we expect the market not to grow at least in the first half. to be close to zero in the second half. So overall, a market that will probably be slightly decreasing versus 2025. And on the replacement market, we are confident that the market should slightly grow, and particularly on the second half of the year. The two-wheel market should as well post a positive trend. In the truck and bus, you see a very contrasted situation in original equipment with a still depressed H1, particularly in the North American market. We expect the OE truck market to decrease by 11% over the year and with a depressed first half and a slight recovery in the second half. And the replacement market should be more resilient over the year. Mining should continue to grow at a mid-single digit pace. We expect Beyond Road to stabilize and start to rebound with the replacement market that should further increase. And we have a positive orientation for aircraft as well as for polymer composite solutions. So in terms of guidance, as Florent shared already, we expect to deliver segment operating income at ISO scope and Forex above 2025 and the free cash flow above 1.6 billion euros before acquisitions. This guidance is relying on some key assumptions. We expect overall for the year to recover a growth in volume, probably with a flat H1 and a slight growth in H2, with a gradual recovery of the regional equipment market, particularly in B2B. And we expect this growth thanks to an increased differentiation from innovation, both in terms of product and data. We should have the tailwind of the raw material that will play for the full year. And we expect, with the assumptions we have in terms of tariff and forex, and I might come back on that, we expect, we build our forecast on the forex situation at the end of 2025. So USD around $118 per euro. and a stable tariff situation. The tariff has impacted us at around 250 million euros, 230 million euros in 2025 and should have an impact of around 120 million euros in 2026. So taking account all these assumptions and the levers and the willingness of the group to recover the growth path during that year, we believe that we can achieve these ambitions. Thank you very much and I think now we can open the Q&A session.