Michelin Cie Gen Unsp/Adr

Ladies and gentlemen, welcome to the Michelin Conference Call. I now hand you over to Mr. Yves Chappell, General Manager and Group CFO. Please go ahead, sir.

Thank you very much. Good evening, ladies and gentlemen. So I will have the pleasure to share with you our sales figures for the first quarter of 2026 and try to give a little bit of color about our performance business going forward. For this meeting, I am accompanied by Benedict de Bonchose, who is going to take over as a group CFO from June 1st. But I will handle the presentation. So first, the quarter, the first quarter of 2026 started slightly better than what we were expecting. The group is posting stable revenue at ISO Forex. We have 3% growth in the volumes sold at the machine brand in all our replacement markets across all our business segments. The free M&A operation that we have announced at the end of 2025, early 2026, are going well on completion, and two acquisitions have been already closed at the moment I'm speaking. The Kool-Aid group is integrated for two months over the first quarter, and the Flexitalic will be integrated in the group figures from the first of April. Nevertheless, the context in the Middle East has dispelled a shadow over the year to go. And at this stage, it's very difficult for us to assess the precise impact on our businesses, except one certainty, which is the increasing cost of energy and raw material, which is going to impact our costs. But in this context, we have not changed our guidance for the full year. And I will come back at the end of the meeting over the elements that lead us to maintain this guidance. Looking first at the market, the market in the first quarter of 2026 were negative as expected, particularly the original equipment market. The passenger car tire market overall is negative. OE being down by 4%. mostly driven by the scale down of incentive in China, and market which is as well decreasing in North America. Stable in Europe, but with a mix which is positive in term of electrification, as the European market is posting positive for electric vehicles. The replacement market is stable overall, We have nevertheless to keep in mind that the minus 3% in Europe and the minus 7% in North America are mostly driven by 2025 Q1 and Q2 anticipated by from the importers in the respective areas in Europe due to the anti-dumping inquiries lead by the European Commission. and in North America due to the perspective of the types. So, 2025 figures have been, as you know, very distorted by the non-pool businesses, and that's why these two markets are posting negative figures. On the other hand, the Chinese market is growing by 9% over the first quarter. I do not mention it, but the two-wheel market is likely growing as well in most of the areas. Regarding transportation, so truck and buses, the businesses, as expected, the original equivalent market is negative, minus three, mostly driven by North America, where the market is at minus 19%. It is in the continuation of what has happened during the last half of 2025. And when we look forward, although we see that the orders of new vehicles have started to increase in North America, there is still a quite important backlog of inventories, of tractors inventories at the dealership that will take a few months to be fully absorbed by the market. So for the time being, of the vehicle is absorbed not by the production of new vehicles, but mostly by the construction of already vehicles that are already . North America, South American market is as well highly impacted, minus 16% over the quarter. On the replacement side, plus 3% overall, plus 7 in Europe, minus 12 in North America, In North America, it's mostly the consequence of the tariff that has led to a surge in import during the first two quarters of 2025. In Europe, the market is quite segregated between a pool and non-pool market. The growth of 7% is mostly triggered by the non-pool market, so the import. We have as well to keep in mind January and February was plagued with some difficult weather conditions in North America that has impacted, by the way, both passenger car, by truck, and truck sales market. On the specialty side, we see a recovery in small machine segments, particularly in Europe and North America, but high-powered tractors, market is still depressed at all. The replacement market is recovering slightly in the different zones. The infrastructure market is posting more favorable trend. Material handling is stable. Mining market is growing at a modest pace, but with a slight decrease in inventory of mining companies, but it's still growing. And the aircraft market, was positive over the quarter. So, having this element in mind, as I mentioned, the group posted stable revenue at the constant exchange rate, but the exchange rate is waiting heavily on our top line, minus 355 million euro, or minus 5.4%. of which 70% is coming from the U.S. dollar. Volume, so first, in terms of scope, we have the positive effect of the integration of the Kure group for two months, which is affected by the impact of the disposal of our compact line activities to the SEAT group. which explained a very, let's say, small scope effect over the first quarter. Our volumes have lost 1.4% over the quarter, and taking into account the strong growth in the replacement market for the Michelin brand, that was free, and it mostly triggered, and we will see the detail later on, by the original equipment market both in transportation and consumer businesses. Price mix is positive, 1.1%. As planned, the price effect is minus 0.8. It's mostly due to the effects of raw material prices adjustments, as raw material prices have started to decrease during the second half of 2025. Mechanically, we have the adjustments for around 30% of our revenue. And as well, some measures that were taken that have started already during the second half of 2025 in order to adjust our competitivity. The mix is positive, plus 1.9%. It includes both the very positive, the constant effect of our growth in 18-inch and above at the Michigan brand, which now represents 69% of our global volumes at the Michigan brand, both OE and RT for the consumer segment, as well as a positive mix effect between original equipment and replacement market. Non-tire cells are stable at isoscope and . and the forex have been already commented. So, that's the first time that we are presenting our actual figures through our new reporting segment. So, the first time that you see the Polymer Composite Solutions segment published separately. And I will start by this segment, which is posting 5.1% growth overall, which is basically the only segment posting positive revenue over the quarter, which demonstrate the relevance of our strategy. Of course, with the help of the inclusion of the Kool-Aid group, which contributes 10 points to the revenue growth. And I will later on do a zoom on this business segment. Consumer volume are going by 1.3% with a constructed situation between original equipment, where our volume has probably decreased, in line with the market, probably less than the market in China, a little bit more than the market in North America. due to the different fitment and the segment of vehicles where we are present. The replacement market on the other end are very positive, particularly at the Michelin brand, but at the same time, we are still losing ground on the tier three segment, both in Europe and North America and in some as well in Asia. Two will post a strong growth over different geographies, including China. The transportation segment is showing, it's not a surprise, a stronger decline in volume due to the contraction of our sales in the regional equipment, particularly in North and South America. Replacement sales are positive in Europe and decreasing in North America and South America. In the specialities, you see a volume growth of 2.5% thanks to mining and aircraft, but as well stabilizing the on-board activity at ISO scope as the disposal of our compact line business is in the scope effect. So beyond the road, destabilizing is the situation. Despite the challenging situation in agro tracks and material handling. So the window on the higher performance overall at the group level, so you see that most of the, 100% of the volume lost is coming from original equipment, mostly equally shared between truck and bus and passenger cars, with a slight decrease in that group. And on the other end, the replacement, the volumes are stable with a growth of 3% in the Michelin brand and a volume loss in the Tier 2 and Tier 3 brands over the quarter. So as far as the polymer composite solution is concerned, so we have, yeah, we'll share with you the situation of the market not by hand market, but by product. In the ceiling business, we record a very strong performance, in particular in hydraulic applications. The coated fabrics and films are growing as well, thanks to business development beyond the marine application, which was the main, which is still the main destination market for this product. And the belting market is posting a slight growth, particularly in general industrial and aeronautics applications. On the other hand, the conveyor belt market, so heavy conveyor belt, particularly the one that are servicing the mining market, are declining, particularly in Australia. And on top of that, we have an industrial maintenance in the site that takes, three months instead of one, and that has weighted on the performance of this division in this geography. But overall, we are seeing a solid growth in sealing and coated fabrics with a slight setback in conveyance. As we are coming, we are zooming on this, on the PCS activity, and we just would like to remind you the figure that was shared during the last capital market day in 2024, and that we have updated. At that time, it was a comparison between 2018 and 2025, 2023. Now, it's updated with 2025. So, basically, you can see two things on this graph. First, 2028, which was the first year of integration of TENER. Fener joined the mission group in May 2028. The Fener activities were generating 820 million euros of sales, not including Solesis, the medical application activity that has been later on sold and put in a joint venture with the North American private equity company. And this activity should, in 2025 pro forma, represent 1.7 billion euros. So it's a compounded organic growth of 3%, and let's say a growth generated by acquisition, which is of a similar magnitude. At the same time, in 2018, the operating margin of this activity was 11.5%. and it would have been 15% in 2025. You see as well that the portfolio of activity has evolved over the period. In 2018, two-thirds of the businesses was mostly conveyors. One-third is 30% or 25% and the rest was . We have now an activity which is much more balanced. Conveyor belt is still a very important activity, but it has been balanced with the growth of the ceiling and mostly the coated fabrics and things, thanks to the different acquisition that has been done in the past years. We are still expecting close the last of the free deal announced earlier, the TechTech company, let's say during around mid-year. So now looking forward for the full year of 2026. At this stage and being after one quarter, we did not change the outlook for the full-year tire market, which is basically stable market, softer in H1 than in H2, and particularly softer in original equipment, both, by the way, for passenger car and light truck contracts during the first half of the year versus the second half. And for the special, so we think that the market should be around zero both for consumers and transportation overall, OE plus RT. Specialities should post a slight growth given the positive trend of mining and aircraft. Again, this outlook has been, is the same as the one we share with you at the end of, at the mid-career. And in studying potential systemic impact on the demand following the conflict in the Middle East. So now looking to the situation in the Middle East, first in the areas we have mostly commercial operations. We employ around 100 employees in sales. We don't have any tire manufacturing activity in the regions, and we operate two joint ventures in Saudi Arabia. one in uh which is the the machine commercial operation and one which is uh in the ceiling activity of our polymer composite solution which is servicing the oil and gas industries uh all together the the region represents less than one percent of the group cells and we have uh Set up crisis cells very quickly at the end of very early March in order to monitor the situation. Follow potential destruction for regional customer deliveries. Look for alternative commercial routes to serve these customers. And, of course, monitor our upstream supply chain already As I mentioned earlier, at this stage, it's very difficult to predict precisely the consequence of the conflict. It will depend on the duration and the extent of the conflict. But for the time being, we are working on an assumption which is translated in oil price at around $100 per barrel until the end of the year. So, with this assumption in mind, we know one thing for sure is that we'll have to face inflation. You remember that when we start the year, we were expecting a tailwind of 400 million on the raw material. This tailwind will be actually probably at least completely wiped out. by inflation in raw material and energy and logistics. So we estimate that with the scenario that I'm sharing with you, we should have to be around at least 400 million euros of additional costs, of which three quarters are related to raw material and 25% related to energy and logistics. Why only 25% of energy? Because half of our energy costs our energy purchase are already secure since the beginning of the year. So that we know for sure. What is much more difficult to assess is the potential impact on the demand, the tire demand, maybe first on the regional equipment and maybe then on replacement. Today, we don't have any sign of slowdown in the market, but the more we progress during the year, the more we see risk, particularly if the conflict is not stopping at any moment. The other element, which is as well difficult to anticipate, although we are monitoring very closely with our crisis cells, is potential destruction of raw material supply. Again, at this stage, we have a reasonable visibility for our supply until the end of June. But beyond that, it's extremely difficult, given the fact that nobody knows how long and how far this conflict will continue. So, obviously, all these elements will have an impact that we put some pressure on our margin and our free cash flow. The free cash flow is both through the margin, but as well, inflation is contributing to, let's say, the ballooning of our working capital. But at this stage, with the structural levels, so the way we manage the operations, the fact that we are vertically integrated in some area, particularly in synthetic rubber, in some other product as well. The localization of our operations and our proven margin resilience in, let's say, recent similar or very volatile environment, all that lead us to maintain our guidance. So our guidance, I remind, is to generate a segment of parity income at ISO scope and ISO 4X, the one we generated in 2025, and a free cash flow of 1.6 billion euro. In this highly volatile and I would like as well to insist on the strength of the group and the fact that we are holding the cap on our strategy. First, we continue in 2026 to launch a new product to further enhance our innovation leadership. Second, we continue as well to work and to improve our efficiency. In Europe, we have recently announced that we have sold and closed the remaining of our UK retail distribution operations for light vehicles. And we have recently announced the consolidation of our agriculture track activity factories from two factories to one factory in North America, which leads to the close of one of these factories in order to improve the competitiveness of our operation. And last, I remind that we have maintained our dividend per share for 2025 versus 2024, which leads to a dividend yield of 4.9%. And the group has started with the help of banks to complete 750 million euro share buyback program that has been launched in the second half of February and that should be executed by the end of November. So having shared all these elements, I think it's time now to open the Q&A session.

Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad. Please ask your question in English. First question is from Stephen Benhamou, Bank of America.