U.S. Markets closed

Edited Transcript of ML.PA earnings conference call or presentation 25-Jul-19 4:30pm GMT

Half Year 2019 Compagnie Generale des Etablissements Michelin SCA Earnings Call

Clermont-Ferrand Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Compagnie Generale des Etablissements Michelin SCA earnings conference call or presentation Thursday, July 25, 2019 at 4:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Florent Menegaux

Compagnie Générale des Établissements Michelin - CEO

* Marc Henry

Compagnie Générale des Établissements Michelin - Executive VP & CFO

* Yves Chapot

Michelin (China) Investment Company, Ltd. - President

================================================================================

Conference Call Participants

================================================================================

* Gaetan Toulemonde

Deutsche Bank AG, Research Division - Research Analyst

* Gungun Verma

Goldman Sachs Group Inc., Research Division - Research Analyst

* Henning Cosman

HSBC, Research Division - Analyst

* José Maria Asumendi

JP Morgan Chase & Co, Research Division - Head of the European Automotive Team

* Kai Alexander Mueller

BofA Merrill Lynch, Research Division - Associate and Analyst

* Raghav Gupta-Chaudhary

Citigroup Inc, Research Division - Analyst

* Sascha Gommel

Jefferies LLC, Research Division - Equity Analyst

* Thomas Besson

Kepler Cheuvreux, Research Division - Head of Automobile Sector

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to Michelin First Half 2019 Results Conference Call. I now hand over to Mr. Florent Menegaux, CEO; Mr. Yves Chapot, General manager; Mr. Marc Henry, CFO. Gentlemen, please go ahead.

--------------------------------------------------------------------------------

Florent Menegaux, Compagnie Générale des Établissements Michelin - CEO [2]

--------------------------------------------------------------------------------

Ladies and gentlemen, good evening. Thank you for joining us for this semester result meeting. Let us review our main highlights for the semester. So in a summary, in a very difficult environment, segment operating income rose by 8% to EUR 1.4 billion, led by a robust price mix, a competitiveness plan that is yielding interesting fruits and by our acquisitions.

So if we come back to the main activities, the markets have been weaker than what we had anticipated and our volumes, therefore, have declined by 0.9%. Within particular: passenger car market positions have been maintained in markets down 2% due to the fall off of original equipment demand; stable volumes in truck tires in a market that is down 1%, benefiting from the deployment of service and solutions, which once again, reemphasized the relevance of our strategy; and in the third sector, we had growth in mining tire business, helping to offset the steep drop in agricultural tire volumes due to declining markets.

So in this environment, we have been consistent in our steering. We have been very acute on price-mix/raw material management, and therefore, the price-mix/raw materials effect has been net EUR 79 million contribution. And we have had a strong pricing discipline, which will continue for the next semester.

We have had nice competitive gains for the semester of EUR 40 million net of inflation, which has been a very strong performance, especially from our manufacturing activities. And we had a strong contribution of our recently acquired Fenner and Camso businesses, very much in line with what we were anticipating. In the semester, I'm sure you've noticed, we have made 2 acquisitions with Multistrada and Masternaut. Again, very much in line with our strategy. So therefore, in a nutshell, in a summary, what we can say is we have a lower scenario -- market scenario for 2019 and, however, we confirm our guidance in this environment.

So if we move now to Slide 2 (sic) [Slide 3], we can see how -- were the 2 latest acquisitions we've made, what are they for? Multistrada is mainly on the tire activity and Masternaut is to give us a European footprint for our telematic business, which are -- which is an indispensable element or component of our service and solution business.

If we look to Slide 4, I would like to come back and reemphasize the importance and the fight we have for now a long time against program obsolescence. And it is very important that -- for Michelin, that we push regulation that will be protecting better the consumer. We knew we have had a fight on long-lasting performance, and many of you often ask us where we are at. So in this slide, what you can see is the benefit of leading the tire wear down to the 1.6-millimeter wear indicator and where Michelin is also showing very strong advantage. And you have benefits for both the consumer and you have benefit for the environment. So where we are at. In 2019, the European Parliament has approved 1 tire testing principle. And by 2022, if everything goes according to plan, in Europe, long-lasting performance will be a prerequisite for every tire. And the long-lasting performance test will be -- at 1 stage, will be enforced. So you'll have to test the -- same performances will be tested new and on 1 state.

So before leaving the microphone to Marc Henry, who will give you more details about our results, I would like to come back on our big innovation announcements that we did during MOVIN'ON, and I want to talk about Uptis. So you have a very nice picture of this foreign object, which we call it an airless tire, but it's a lot -- a sort of contradiction in terms because the tire is made with tires and -- with air, sorry, and what you see is this tire has all the benefit of a tire without the drawback that it cannot lose air because it is airless. So we have a great hope with this technology, and we have a strong partnership to develop this innovation and to see whether we can bring in scale by 2024 into the markets with General Motors. So with this first insight, I would like to leave the floor to Marc Henry, who will give you much more details on our results.

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [3]

--------------------------------------------------------------------------------

Good evening, everybody. Thank you to Florent. So if you go to Slide 7, you would see what happened in the market for passenger car, truck and specialty tires over the first half of 2019. Of course, demand plunged in passenger car and light truck OE, very well known. It has been down in truck, specifically in Q2, and we have a mixed bag, I would say, in the Specialties.

To be a bit more specific, in passenger car, of course, it's well-known that OE worldwide demand was down 7%, even 8% on Q2, especially in China where demand went down 15% and Europe. In the replacement, however, we had a positive but lower demand in the different markets where Europe including Russia was down 2%. On the contrary, North America at 4%; and China, which is a good news, I think, it's at 4%. Because you remember what happened in the last semester of 2018.

As far as truck is concerned, first half with volume minus 1%, where OE sustained a growth with strong momentum in North America, plus 9%, but we saw a slowing in Q2 and start up of contraction in Europe. In replacement, we had a steep drop in North America linked to the effect of duties that were set up last year. And to a lesser extent, a drop in Europe, minus 1%; and in China, minus 2%. The drop in Americas was minus 10%.

As far as specialty are concerned, growth of plus 2% where mining tires had a sustained 4%, 5% growth in demand, in line with the tire consumption, we will review that in a moment. In off-road activity, we saw a sharp downturn in agricultural tire market, even more in the second half. And so this created a cooling demand, mostly in ag and, by the way, in infrastructure tires. We saw a continued growth in two-wheel commuting and aircraft segments.

On Slide 8, you would see that sales are up 11%, lifted by our acquisition, of course, our disciplined price management and the sustained improvement of mix. If we look at it this way, that our consolidated growth was up 7.6%, of course, linked to our change in consolidation. But it's a regrowth of turnover. We had a strong price-mix improvement of EUR 176 million, bringing our turnover up to EUR 11.6 billion. Of course, we had a positive currency impact of EUR 196 million.

If we look at a quarter-by-quarter figure, of course, you would see that the first quarter in Q2, and in particular, in June, our volume went down. I have to -- we have to say that up to May, our volume were slightly positive. So most of the drop, of course, all the drop went down in June, which, of course, was well highlighted by the volume -- the market figure that we provided to you mid-July. As far as price-mix is concerned, you can see that it's pretty strong and it highlights the price robustness that Michelin is carrying inside the market on all the product lines. Currency impact, of course, has been positive.

On Slide 10, you would see the evolution of our EBIT through our EBIT bridge. And here, you would see, as usual, first of all, the growth of the company but it's a mixture between the scope of cost consolidation, EUR 101 million, which is exactly in line with what we said; balanced by the slight drop of volume within the tire business, bringing EUR 52 million of growth.

Second, a price-mix/raw mat that is positive, plus EUR 79 million. I think that shows the commitment of Michelin to steer its business without compromising on pricing and margin. You notice that the raw mat at minus EUR 97 million is in line with what we guided.

And third, that is very important is our competitiveness plan that is still running at the speed that was able to generate a EUR 40 million net competitiveness versus the inflation this first half. All those 3 boxes are key for the performance of Michelin, as you know. Startup costs have been slightly up, linked to the Mexican project and the synthetic rubber project in Indonesia, leading to an increase of bottom line of EUR 78 million.

On Slide 11, you would see, of course, the history of our net price-mix versus raw mat. To highlight this constant growth of Michelin margin linked to the management of our mix is in passenger car, as you know, and also the growth of the subsegment, mainly mining. And on top of that, the pricing management. What we would say also in this graph that for H2, we envision price-mix versus raw mat above what we demonstrated in H1, reaching something around EUR 100 million for the second half. This would be, of course, done through some price increases and also the reduction of increase of raw mat that we will see in the second half. Price increases have been already announced, as you probably have seen, in Europe, passenger car and truck and in North America in truck.

If we now go to detail a little bit on the competitiveness plan. Of course, what we saw is a strong SG&A management, with a competitiveness program ranging EUR 49 million. We had also a strong manufacturing, because inside the manufacturing and logistics actually the EUR 67 million is made by EUR 58 million of manufacturing and both SG&A and manufacturing overcome the inflation. The logistic cost will have to increase also because of our competitiveness plan, because in that case, and we will mention that in the future, that logistic cost inflated more strongly in this half -- first half like it was last year, specifically in North America.

On Slide 13, we will go through some specific highlights for the first sector. The -- what is remarkable I think is our position has been maintained in a market down 2%, of course, impacted by the 7% to 8% fall off in OE demand. Second point happened that in the same time, we had the fixed costs under absorption of course, due to weaker demand, and a ramp up cost at our León plant, new León plant in Mexico. And as I said, our styrene and butadiene rubber in Indonesia, which reduces the margin by about 0.5 points. We had also the introduction of Multistrada that created a 0.20 point reduction of operating margins.

On the sub-point that happened during this quarter is the fact that during the NTW networks. I remember, you -- NTW is the subsidiary of TBC running the wholesale division which is the merger between the TBC and the Michelin wholesale division. During the restructuring, of course, this led to a decline in inventory in H1, which is normal, it's same, it's a good management. But of course then, our sell in to NTW have been slight, somewhat reduced in this first half such, I would say increasing slightly, the reduction of volume in sector 1. What we could say is that our mix, however, start -- continued to increase. And as you can see, the ratio of 18-inch and above tires within our Michelin tire sales mix has been up 2 points at 41% versus 39% in 2018, notably to the success of the MICHELIN Pilot Sport4.

And to say one word about the technology, I think we can say that definitely the Michelin technology is meeting tactical vehicle changes. We give you the main reason, of course, what do a tire can bring to the electrical vehicle? And you know that all of this is exactly in line with the advantages -- strong advantages of the Michelin technology. And as such, we are very strong, for example, at Tesla. We are strong at Renault Zoé, at Renault Kangoo at GM Bolt and Volt. So we really have increased our share of market there. In Asia, we are certified by a large number of Chinese OEM and partnering with Hyundai on EV vehicle. So basically, we are on all markets, pushing our technology inside EV tire vehicles. As you know that this has been a key advantage of the Michelin technology over the years. Thanks to what was started years and years ago by François Michelin, by the way.

If we go to Slide 15, for truck, I think what is remarkable is, of course, that with volume stable in a market down 1%, our operating margin was up 0.8 points. And this is, of course, thanks to a strong disciplined pricing management. And we have been extremely clear in that and we have been doing what we said. And I think this is clearly showing that we are able to maintain our share in a difficult market, while maintaining as well our bottom lines. Of course, the successful sales of service and solution and some faster development in Europe with future -- with the acquisition of Masternaut, will help us to grow there. We have already more than 1 million vehicles under contract worldwide.

The MICHELIN AGILIS CrossClimate has been a success for light-truck vehicles in the all-season tire range. And I would say that to be noticed for this sector is a temporary impact of custom duties between China and the U.S. We had controls of tires going from China to the U.S. Of course, we are rapidly changing this supply of the U.S. market through other plants to reduce this impact.

What you can see on Slide 16 is the fact that entire service and solution is a strong pallet of different activities that are successful. Tire as a service has been increasing North America and Europe. Our fleet solution, of course, we mentioned Masternaut but all the other activities have been green. And I would say that we are extremely happy with the development of Sascar offerings in Poland and South America. And more recently, we made breakthroughs in selling our data-driven business models, DDI. So I think this is a very strong direction of Michelin that will, of course, continue.

To move to Slide 17, where, of course, our Specialties continued to grow bottom line. Of course, as you know, Fenner and Camso are recorded there so, of course, there's a very, very strong increase of bottom line by 29%. The operating margin is, of course, slightly diluted by the impact of Fenner and Camso. But globally, Fenner and Camso performance are in line with expectation and showing a very smooth integration within Michelin and running thee operation, I would say, as dynamically as they were doing.

Tire volumes are up 1%, with a strong growth in market share in mining business. And all 4 businesses, as we said, hit -- hardly hit -- hit hard by the downturn of ag ma tire markets. However, our improved margin are there following pricing repositioning in OE ag.

We confirm also in Slide 18, what we said for a long period of time, that now consumption of tires and selling volumes are aligned. That's what you see on this slide. And, of course, that -- the fact that we are continuing to grow our share is linked to this offer of the most efficient tire offer in the marketplace. Specifically, XDR250 or XDR3 in 63 inches.

On Slide 19, remind you that, of course, during 2019, we continue to invest to create value. These investments are, of course, in the circle or perimeter where we focus on reducing CapEx per tire to increase, of course, the value of our investments. We wanted to reinforce, of course, our Michelin footprint where our growth is. And you know that we have been doing this plant in Mexico exactly for that. We also bought Multistrada because, of course, Southeast Asia is an area where growth is really present and where we have been very successful with our tire base. And, of course, some CapEx in specialty business, of course, especially in mining or in aircraft typically.

We, of course, increased our investment for developing new territories in fleet management and high-tech material, as you know. And this is -- those numbers are actually in the JVs, which are, of course, in the financial investment and not in CapEx. And, of course, we also speed up our digitization plan, both for customers and for the plants and for Michelin employees.

On Slide 20, we remind you that I think Michelin has been showing a constant growth of its dividend policy. And with the payout ratio that was 36.4%. And, of course, that -- we -- this -- finally, I would say, shareholder -- I hope so, shareholder performance is also complemented by the share buyback that we announced in April.

Now I hand over to Yves, who will describe the second half and the guidance.

--------------------------------------------------------------------------------

Yves Chapot, Michelin (China) Investment Company, Ltd. - President [4]

--------------------------------------------------------------------------------

Thank you, Marc. Good evening, ladies and gentlemen. So following the first half presentation by Marc, I will now lead you through the underlying market scenario that are leading us to confirm our 2019 guidance.

So looking at the markets, if we take it by segment, the passenger car and light truck segment, we are seeing overall market slightly declining over the year by 1%. I'll remind you that our initial market assumptions at the beginning of the year was the lower growth between 0% and 1%. This is, of course, led by the declining OE equipment market that we see landing at minus 4.4% after a bad first half where the market was down 7%, particularly. And we are seeing, let's say, a decline in the second half less than in the first half, partly because the Chinese market last year has started to drop from July onward and the -- but this is for comparison, will be different than in the first half.

We are seeing the replacement market slightly up in every geography with a pickup as we have seen in the first half in Chinese demand. And the overall 18-inch and above segments, growing demand, growing by around 10%.

Regarding the truck and the road transportation segments, our assumptions is today, yearly market down by 2% versus 1% at the beginning of the year, mostly linked to a slowdown in the North American OE market and the contraction in Europe. When in replacement, we are seeing a contrasted situation between a further decline in demand in North America and a slight increase of stabilization in the European market.

The Chinese market, of course, is weighting heavily on the performance of this segment. And I'll remind you that we are, let's say, less exposed to this market. The Specialties, we are seeing a growth of 2%, mostly pulled by the mining tire business. We see a demand that is sustainably growing by 4% to 5% and actually were linked to the actual tire consumption. And -- but on the other hand, we see the off-road market, downturn has -- it was mentioned during the first half, the agricultural tire market has been helped by a different phenomenon and we see the demand in infrastructure replacement stable. The 2 of the segment within the Specialties, that are the 2-wheels and commuting and aircraft segments are growing at the same pace.

I take this opportunity to remind you that despite our, let's say, low exposure to the original equipment passenger car and light truck market, that's 13%, is protecting us when this market is sharply down, as it was the case in the first half, because all the other segments are not behaving at the same -- are not showing the same, let's say, growth pattern than the original equipment market.

Regarding the 2019 scenario, if we go more precisely, we have built the following assumptions. We see the cost impact of raw material, including custom duties, slightly above EUR 100 million. It was already EUR 97 million in the second -- in the first half, but we are seeing, clearly, raw material decreasing in this last part of the first half, which will have consequences on the second half.

On the currency effect, at this stage of the year, should be slightly positive. I will not comment in detail the effective tax rate. On the other side, we are betting on the net price-mix/raw material effect between EUR 100 million and EUR 200 million. Reminding you that EUR 79 million has been already achieved during the first half.

And we confirm some gains regarding our competitiveness plan versus inflation. We have been delivering EUR 40 million during the first half. Given the pattern of last year, we are not expecting the same gain during the second half, but it should be overall positive. Therefore, taking in account all these assumptions, we see our volumes growing in line with the markets. We confirm our segment operating income at consolidation rate taking in account, of course, beyond the estimated EUR 150 million additional contribution from Camso and Fenner above 2018 segment operating income. And we also confirm the structural free cash flow above EUR 1.45 billion.

So based on this scenario, we confirm our guidance. And I think now Florent, it's time for the Q&A session.

--------------------------------------------------------------------------------

Florent Menegaux, Compagnie Générale des Établissements Michelin - CEO [5]

--------------------------------------------------------------------------------

Yes. Thank you, Yves. So now the floor is yours, and we are open to take all your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Kai Mueller from Bank of America.

--------------------------------------------------------------------------------

Kai Alexander Mueller, BofA Merrill Lynch, Research Division - Associate and Analyst [2]

--------------------------------------------------------------------------------

It was quite interesting to hear your comments about guiding the Chinese market replacements improving again from what you've seen before. Can you sort of outline a little bit also the other regions, North America and the U.S. as well? How is that phasing? And can you give us a little bit of a comment on the pricing as well in Europe, in particular, because you're pricing has actually been quite strong, but we've heard some comments obviously about pricing pressure in that market.

--------------------------------------------------------------------------------

Florent Menegaux, Compagnie Générale des Établissements Michelin - CEO [3]

--------------------------------------------------------------------------------

Okay. So thank you for your questions. So we made a comment on the Chinese replacement market just to reemphasize the fact that what we said consultative was that structurally, this market will still be continuing to grow on replacement because of the nature of this market. Now the market in North America, has been on replacement as well, well oriented. And we see also the fact that the growth in North America has been led by the nonpulling markets, which is very volatile at the time and it's not really stabilized. So at this stage, it's difficult to extract any trend from this. And if we look at South America, market is pretty depressed. And for Europe, it's also contrasted. And we have -- replacement is well oriented year-on-year. However, you have a difference between Western Europe and Eastern Europe, basically. And so that's -- at this stage, so that's what we can say on these markets. Now the figures if you wish on Slide 33, just to get in the -- so as far as pricing is concerned, yes, I confirm there is a very intense price pressure. However, the Michelin brand is very capable of sustaining this pressure and to see that we want to send a signal that having a price war in this environment is not a good business decision.

--------------------------------------------------------------------------------

Kai Alexander Mueller, BofA Merrill Lynch, Research Division - Associate and Analyst [4]

--------------------------------------------------------------------------------

Okay, that's very clear. And then on our guidance, if -- you always obviously guide excluding FX and M&A. If I take your last year's number, the 2-7-7-5 plus your EUR 150 million M&A, plus if you take the FX you've done so far, the EUR 30 million. And then you add the next net price-mix benefit, you would already be ahead of consensus minus then some volumes. How do you think about where the consensus stands right now, and so what should be read in that, your guidance in terms of an absolute number? Is that above EUR 3 billion, is it above EUR 3.1 billion possibly even? And in that regard, can you outline a little bit what these costs you had regarding step up, startup costs that you showed in the bridge?

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [5]

--------------------------------------------------------------------------------

Okay. Two points. First of all, if we look at what you say here, of course, some of those things are -- will be present. Of course, what you should also take into account is that our guidance is relative to volume -- of the market volume because our guidance is to grow at the speed of the market. You would notice that we made a market revision. That is basically roughly giving you, as far as the market is concerned, 1 point of growth globally less than -- and what it used to be for the full year. So you need, of course, to take into account. After that, the technical parameter that we have taken or the one that we have been seeing in the consensus are, of course, correct. But of course, as I said, to be -- you need to take into account the fact that, as Florent said, we are effectively strong on pricing, it's absolutely key for profitability. And so the thing that we will follow the market, which is a good performance, by the way, in such. I would remind you also that the tire market is not a -- volume are not linked to global pricing. Nobody changed tires because he has a -- there is a bargain, he changed tires because there is a -- tire is at the end of its life, so that's why. Specifically in this market, there's absolutely no point to reduce pricing and hope to get volumes. Actually, this is not working and that's why we are firm on pricing. And, of course, our Michelin brand is specifically made to sustain such environment.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Next question comes from Raghav Gupta from Citigroup.

--------------------------------------------------------------------------------

Raghav Gupta-Chaudhary, Citigroup Inc, Research Division - Analyst [7]

--------------------------------------------------------------------------------

I've got 3 questions. And first one was a follow-up on Kai's on pricing. The price impact on sales stepped down in Q2 versus Q1, just picking up isolating price. And you mentioned the price increases in North America. Just thinking about that, can we expect a price-mix if we're going to look at that component together, impact on sales at the same level as Q2 in the second half or will it rise given that kind of price increases that you talked about? And let me kind of give you the other 2 questions. The second one is on the management of inventories. Working capital was a drag in the half. The inventory levels have picked, quite high relative to history, which reading the report you attribute to kind of the recent M&A. Given the slowdown that we're seeing in OE and the suggestion that this is going to continue into the second half, how are you managing production going forward to ensure inventories don't pile to such an extent that you need to discount heavily? Any kind of comfort that you can give on that would be helpful. And then finally, just on this competitiveness plan. Actually, surprised positively in the first half given the guidance of EUR 50 million per year. I mean will it be fair to say that you expect it to exceed the EUR 50 million and kind of can you give us an indication of the magnitude? Those are the 3.

--------------------------------------------------------------------------------

Florent Menegaux, Compagnie Générale des Établissements Michelin - CEO [8]

--------------------------------------------------------------------------------

Yes, thank you. So Yves will take the answers for that.

--------------------------------------------------------------------------------

Yves Chapot, Michelin (China) Investment Company, Ltd. - President [9]

--------------------------------------------------------------------------------

So regarding the price-mix effect, we give you a guidance between EUR 100 million and EUR 200 million in raw material, of course, including so the net effect of price-mix and raw material, knowing that we have already delivered EUR 79 million. And as Florent mentioned, in this context, there is no way to play on the price, to bet on price in order to generate additional volumes. And actually, we have plan to bid some slight price increase partially in Europe, both in the passenger car and truck segment, partially to offset logistic cost in the context. Regarding the working capital and the inventories, we adapt our factory's production to the trend. We try more and more to link directly the factories to customers when it's effectively possible. And we have a policy to strictly monitor our inventory. It's one of the KPIs that we are monitoring closely, both for finished product and also raw material and semi-finished product. So we adapt the production to the demand. And the last -- your last question about the competitivity or competitiveness plan, that show that we have delivered EUR 40 million on the first half of the year. I just remind you that last year's pattern was strong, let's say, novel saving during the first half and a strong saving during the second half. So we stick to our earlier objective but will not -- I will not -- I cannot tell you at this stage, how far are we going to go above the existing EUR 40 million.

--------------------------------------------------------------------------------

Raghav Gupta-Chaudhary, Citigroup Inc, Research Division - Analyst [10]

--------------------------------------------------------------------------------

Okay. And can I ask a quick follow-up then on the price. You fell to I think less than 1% price impact on sales specifically. Given I guess, the comp that you're lapping in the second half on pricing specifically, should we expect the price rises that you've put through in Europe and kind of I think you've mentioned North America as well earlier, will that be kind of result in at least a 1% price increase being maintained in the second half or not?

--------------------------------------------------------------------------------

Florent Menegaux, Compagnie Générale des Établissements Michelin - CEO [11]

--------------------------------------------------------------------------------

Very probably. Of course, we are already in July and one of the first price increase are going to occur 1st of September, so we'll have an effect on the end of last 4 months of the year. But I think your assumption is correct.

--------------------------------------------------------------------------------

Yves Chapot, Michelin (China) Investment Company, Ltd. - President [12]

--------------------------------------------------------------------------------

I mentioned that in the second half, the price-mix/raw mat will be above -- what did happen -- which did happen kind of in the first half. So take it an assumption that's probably roughly in the EUR 100 million range.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

The next question comes from Thomas Besson from Kepler Cheuvreux.

--------------------------------------------------------------------------------

Thomas Besson, Kepler Cheuvreux, Research Division - Head of Automobile Sector [14]

--------------------------------------------------------------------------------

It's Thomas Besson, Kepler Cheuvreux. I'll start with a question back to your bridge and to the sum of startup cost depreciation and others, so EUR 94 million negative in H1. So it's almost as negative as what you had in 2018. What should we expect for these 3-year things together in H2, please? Because I think that's broadly where you've missed expectations.

--------------------------------------------------------------------------------

Florent Menegaux, Compagnie Générale des Établissements Michelin - CEO [15]

--------------------------------------------------------------------------------

Okay. Startup cost will basically grow, but less in the second quarter. For depreciation, you can make it double, I mean, it will be doubled and effectively and startup cost will grow, but less. So it will be -- it will take the EUR 42 million twice and some startup cost with development lower increase. The other, it's something that is with ups and downs, so there's no real forecast on that.

--------------------------------------------------------------------------------

Thomas Besson, Kepler Cheuvreux, Research Division - Head of Automobile Sector [16]

--------------------------------------------------------------------------------

When we look at the segments margins, you entirely missed on passenger cars I think because of the volume portfolio described for June boosting up in OE and replacements. When we protect ourselves into H2, you stress a lot of the volumes will be much worse in the truck tire business. Can you make qualitative comments about the direction of profitability between the different segments in H2 versus H1? So do you believe you have seen the low point for passenger car margins, but that at the opposite, the industrial cars may see a decline in profitability in the second half?

--------------------------------------------------------------------------------

Yves Chapot, Michelin (China) Investment Company, Ltd. - President [17]

--------------------------------------------------------------------------------

So if we take segment by segment, so let's start with the most simple one is the segment 3. Segment 3 which we see now in Circle business, we have seen a progression. Now we have a dilution effect built in this integration of our recent acquisitions. However, it's a good addition in volume of results. And it's -- the dilution is only on operating income and it's far less in value creation, in low-key. Now if you look at segment 2, what we had experienced in the first semester, we are confident and we are driving this business, say, it needs to reach a minimum level of profitability, so we are not chasing volume at any cost or price. We want to focus on the places where our customers value our offerings and only on that. And we stick and measure in terms of investment and in terms of management to make sure that everybody is focused on that. And you've also seen that we -- in terms of pricing, we have made movements starting 1st of July in some part of the world to indicate clearly that, that's our strategy. So if you look at segment 1, segment 1 in the first semester has been hit by specific subject like the startup costs with the ramp up of the Mexican plant, with the ramp up of our Indonesian synthetic rubber plant. So when we look at those numbers, as Marc mentioned, the startup cost will diminish in the second semester. Now also in terms of pricing, we think in terms of pricing, we can improve. And therefore, we've taken appropriate measures to do that.

--------------------------------------------------------------------------------

Florent Menegaux, Compagnie Générale des Établissements Michelin - CEO [18]

--------------------------------------------------------------------------------

Top of that, you know that first half has been hit by the cost of synthetic rubber that was ignited in the last semester of last year. You know that the -- I mean the is butadiene is going down right now, so it will help with the time, of course, but with -- probably it will be really seen in the last quarter of the year, will have a help either cost of butadiene in the first quarter probably. And the last element to take into consideration, which is more structural for -- towards the end of the year is Multistrada. It will take us certain time to be able to shift the volume from existing tire lines produced in the plant right now into new Thailand, bringing much better margins to us. However, we've taken instant measures to raise the price in the -- in most of the volume at Multistrada. And we have the aim to manage and steer Multistrada more on the margin per unit than on volume.

--------------------------------------------------------------------------------

Thomas Besson, Kepler Cheuvreux, Research Division - Head of Automobile Sector [19]

--------------------------------------------------------------------------------

Okay, very clear. Last one, if I may. Your other operating income and expenses is negative EUR 90 million this year. There hasn't been any big announcements. Can you explain the different impairments you made just to -- is that linked with spot acquisitions or amortization of brands, et cetera?

--------------------------------------------------------------------------------

Florent Menegaux, Compagnie Générale des Établissements Michelin - CEO [20]

--------------------------------------------------------------------------------

Out of that, you have EUR 45 million that is linked with amortization, intangible of amortization for Fenner, Camso and some previous acquisition. On the other EUR 45 million, it's a mixed bag of many things. There is a slight impairment but not very much. There is also a fees for M&A that were achieved last year and this year because there is a -- and there's another -- so it's really only punctual things that will not -- the first EUR 45 million will, of course, develop in the second half. The second one is only punctual in the things that will not impact the second half.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Next question comes from Sascha Gommel from Jefferies.

--------------------------------------------------------------------------------

Sascha Gommel, Jefferies LLC, Research Division - Equity Analyst [22]

--------------------------------------------------------------------------------

The first one, can you confirm that the structural free cash flow was round about EUR 93 million negative in H1?

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [23]

--------------------------------------------------------------------------------

It's always negative on H1. So we don't -- and we don't publish structural free cash flow per se. But yes, free cash flow is slightly negative on H1 as usual, as every year because you know that our working capital requirement goes up until September, and then goes down until December. So this calculation is only valid on the 12 months value. So I don't know the calculation you have done, but at least you can think that our guidance about the free cash is EUR 1.45 billion is, of course, good. By the way, the impact of format between free cash flow and structural free cash flow will be very, very limited, difference will be very limited at the end of the year, most probably as we speak.

--------------------------------------------------------------------------------

Sascha Gommel, Jefferies LLC, Research Division - Equity Analyst [24]

--------------------------------------------------------------------------------

Okay. And then follow up on cash flow, you increased your reverse factoring versus the end of the year is that entirely, the reason M&A or did you actually also underlying increase your factoring?

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [25]

--------------------------------------------------------------------------------

The -- again, I mean the cash flow for the end of year is linked to different things. We explained in February that our guidance of cash flow is based on achieved cash flow in 2017. You add up the cash flow that you generated by -- the changes in accounting method with IFRS 16, and that's our new reference the follow up year. It's like we grow our -- we commit to grow our cash flow step-by-step a bit like our operating result guidance, which is being better than the year before. This just means being better than the year before.

--------------------------------------------------------------------------------

Sascha Gommel, Jefferies LLC, Research Division - Equity Analyst [26]

--------------------------------------------------------------------------------

Understood. But the question is more on reverse factoring in particular, how that changed, if that is an M&A effect or if there's an underlying increase?

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [27]

--------------------------------------------------------------------------------

Reverse factoring has been implemented a long time ago, so it has absolutely no effect on this year free cash flow. Nothing specifically. What you can notice, of course, is that our payables have increased a lot. And this is linked to the fact that we negotiated most of the increase is linked with negotiation with our suppliers of course. Then reverse factoring has been helping to some extent, but it's not the majority of the increase of our payment -- part of the free cash flow of the working capital impairment.

--------------------------------------------------------------------------------

Sascha Gommel, Jefferies LLC, Research Division - Equity Analyst [28]

--------------------------------------------------------------------------------

Understood. And then last question is on your M&A. I think you sounded during the last few months very confident on Camso and Fenner. Nevertheless, you never increased kind of your guidance for the earnings contribution this year. Maybe you can give an update on how you see the integration of those 2 evolving at the moment.

--------------------------------------------------------------------------------

Florent Menegaux, Compagnie Générale des Établissements Michelin - CEO [29]

--------------------------------------------------------------------------------

We stick to what we have said for both of them. And especially with the market environment we are in I think it's what it is. Integration is going extremely well. We are very happy people are -- I can tell the management team of Fenner and Camso has, of course, very happy to be with us. And we see a very good alignment of objective and culture actually between Camso and Michelin, which are extremely close. And Fenner and Michelin, which are somewhat different, but there's a lot of interesting going out of it. So obviously, a very good integration for those 2 companies.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Next question comes from Henning Cosman from HSBC.

--------------------------------------------------------------------------------

Henning Cosman, HSBC, Research Division - Analyst [31]

--------------------------------------------------------------------------------

If I could start on the volume piece, I appreciate your statement that you anticipate to grow in line with the market. I think in the last call, we have discussed that your ambition though is to effectively outperform in every segment. If you could please just discuss that and maybe specifically, with respect to the third sector. That's my first question.

--------------------------------------------------------------------------------

Florent Menegaux, Compagnie Générale des Établissements Michelin - CEO [32]

--------------------------------------------------------------------------------

I don't think we have said -- I think our guidance is clear, it is -- we have said in our guidance that we will grow at the pace of the market.

--------------------------------------------------------------------------------

Henning Cosman, HSBC, Research Division - Analyst [33]

--------------------------------------------------------------------------------

Okay. So you don't any longer think that you can maybe outperform the now 2% guidance in the third sector specifically?

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [34]

--------------------------------------------------------------------------------

In the third sector, what is clear is that we continue to outgrow the market in mining, that's pretty clear. In the rest of the segment, we just are like in the other ones, so that's it. And let's remember, I think you need to think about the point that was highlighted by Florent, once again, our strict pricing policies and growing at the pace of the market is a very good performance. You cannot expect of a strict pricing policy and outpricing the market in terms of growth. So I think let's take our guidance as already a strong guidance.

--------------------------------------------------------------------------------

Henning Cosman, HSBC, Research Division - Analyst [35]

--------------------------------------------------------------------------------

Of course, yes. I didn't see a slide confirming the free cash flow target for 2020, which was above EUR 1.7 billion. I assume that's still intact?

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [36]

--------------------------------------------------------------------------------

This is what we have said is -- I think we said in the past, there's very -- if we have to change, we will change it. But so far, we are -- in terms of cash flow, we are focused on 2019.

--------------------------------------------------------------------------------

Henning Cosman, HSBC, Research Division - Analyst [37]

--------------------------------------------------------------------------------

Okay. And if I may, please, attempt on the guidance again. The way I understand as I said almost a hard floor EUR 3 billion, which is the last year's EBIT plus the EUR 150 million plus effect. But from everything that you're saying, I guess, the impression that you don't even see necessarily that the consensus has to come down with the EUR 180 million, net price-mix/raw material. In fact, being above current consensus, volumes, of course, being a bit weaker. But net-net, it's -- I would assume you're most comfortable with the EUR 3.1 billion where consensus is. Is that fair?

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [38]

--------------------------------------------------------------------------------

I remember I just said in few minutes ago, that our guidance is confirmed in the new scenario of market. So you need to do some thinking to be made with a different assumption we have given you about what is the impact of this market scenario. But the impact of the new market scenario will, of course, materialize with somewhat less volume, let's be clear. It's not rocket science, I guess. And second was we mentioned is that our price-mix/raw mat will be good through the second half. So those are the assumption we are working on for the time being. Now if you take -- talk about 2020, you remember that those were made with assumption of a market in passenger cars, 2.5% of growth; truck, 1.5%; and assumption of 4%, 5%, if I recall correctly, in specialty. You can see that this was roughly correct for 2017, 2018. We see a slowdown of market in 2019. So let's wait for 2020 for the time being. I mean in 2019, there is -- the market is more depressed than what we had anticipated.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Next question comes from Gaetan Toulemonde from Deutsche Bank.

--------------------------------------------------------------------------------

Gaetan Toulemonde, Deutsche Bank AG, Research Division - Research Analyst [40]

--------------------------------------------------------------------------------

Good news. I've only one small question. So the volume looks pretty weak and we're hearing that from most of your competitors. My question is very simple, what is the level of inventory at the dealers because we talk about the sell in? But I have no idea how bad is the situation at the dealers?

--------------------------------------------------------------------------------

Florent Menegaux, Compagnie Générale des Établissements Michelin - CEO [41]

--------------------------------------------------------------------------------

Yves will take the question.

--------------------------------------------------------------------------------

Yves Chapot, Michelin (China) Investment Company, Ltd. - President [42]

--------------------------------------------------------------------------------

Generally, the level of inventory, and during the first half, the dealer had a tendency to destock. We observed that in China, in North America, particularly some of our key dealers has a tendency to reduce their inventory during the first half of the year.

--------------------------------------------------------------------------------

Gaetan Toulemonde, Deutsche Bank AG, Research Division - Research Analyst [43]

--------------------------------------------------------------------------------

So when the sell in volume.

--------------------------------------------------------------------------------

Yves Chapot, Michelin (China) Investment Company, Ltd. - President [44]

--------------------------------------------------------------------------------

So the current market, there is -- right now, what we see in the market, not a lot of dealers are willing to carry a lot of inventory right now. So -- and there's also an overall trend where everybody is looking at the overall inventory from manufacturing up to the customer. And we know as an industry, that we have way too much inventory overall. And I think there is a good realization of that. Therefore, I don't see people taking onboard a lot of inventory right now.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

Next question comes from José Asumendi from JPMorgan.

--------------------------------------------------------------------------------

José Maria Asumendi, JP Morgan Chase & Co, Research Division - Head of the European Automotive Team [46]

--------------------------------------------------------------------------------

Very quickly, and sorry to come back to this. Profit bridge, this other cost line, the EUR 20 million. What is this exactly, please? And can it turn to as a positive swing in the second half? That will be the first one, please.

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [47]

--------------------------------------------------------------------------------

What do you call EUR 20 million, what is cost in other?

--------------------------------------------------------------------------------

José Maria Asumendi, JP Morgan Chase & Co, Research Division - Head of the European Automotive Team [48]

--------------------------------------------------------------------------------

Yes, what is this figure and can it turn into a positive figure or into a more negative figure in the second half?

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [49]

--------------------------------------------------------------------------------

No, as I said, for other it's -- there is a lot of bits and pieces. So basically, it's -- it will still be a small number, like we always showed. We gave you the guidance for the most significant part of -- what is outside our volume, price-mix/raw mat and competitiveness, which is the fact that the amortization will double and the startup cost will increase but not as much as the first half.

--------------------------------------------------------------------------------

José Maria Asumendi, JP Morgan Chase & Co, Research Division - Head of the European Automotive Team [50]

--------------------------------------------------------------------------------

Got you. Then on the...

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [51]

--------------------------------------------------------------------------------

So it will be a small stuff like what you've seen. But I cannot commit to a number, but it would be small.

--------------------------------------------------------------------------------

José Maria Asumendi, JP Morgan Chase & Co, Research Division - Head of the European Automotive Team [52]

--------------------------------------------------------------------------------

That's fine. That's fine. When you say double, just on the precision just to clarify, we're doubling the full year 2018, right? We're not -- for the second -- so for...

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [53]

--------------------------------------------------------------------------------

The amortization increase that you saw in the first half will be replicated in the second half. Sorry, I might not have been clear.

--------------------------------------------------------------------------------

José Maria Asumendi, JP Morgan Chase & Co, Research Division - Head of the European Automotive Team [54]

--------------------------------------------------------------------------------

So another EUR 40 million in the second half, roughly. Okay.

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [55]

--------------------------------------------------------------------------------

That's roughly.

--------------------------------------------------------------------------------

José Maria Asumendi, JP Morgan Chase & Co, Research Division - Head of the European Automotive Team [56]

--------------------------------------------------------------------------------

Roughly. Yes, okay, and then startup cost, where are they coming down in the second half? I mean what is specifically happening in the second half for those startup costs to be lower?

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [57]

--------------------------------------------------------------------------------

Because they -- some started earlier, like the one -- the plant in Indonesia, it started earlier than the plant in Mexico. So it's just a phase in, phase out of startup costs.

--------------------------------------------------------------------------------

José Maria Asumendi, JP Morgan Chase & Co, Research Division - Head of the European Automotive Team [58]

--------------------------------------------------------------------------------

All right. And then on the just what I'm trying to sort of fine tuning here that the EUR 3 billion up and down. The -- those SG&A gains, it sounds like that you are confident they can accelerate in the second half. Is this part of the normal seasonality? Can you give a bit more color there, please, on SG&A gains?

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [59]

--------------------------------------------------------------------------------

There is, of course, seasonality effect. But we explained that last year, we have strong reduction in the second half. We achieved good performance in the first half, so we continue on our competitivity road map. And we stick to our overall target of EUR 50 million of, let's say, competitivity, net competitivity gain including SG&A, manufacturing and logistic over the years.

--------------------------------------------------------------------------------

Florent Menegaux, Compagnie Générale des Établissements Michelin - CEO [60]

--------------------------------------------------------------------------------

Maybe another way to say it, if you look at our SG&A globally, every year, the second half SG&A in absolute value is below the first half, just linked to the fact that we have a vacation that are taking second half versus the first half. So that is in absolute value. After that, when you compare to the year before, we are also -- this phenomenon happen, of course, then it's -- what Yves told you, the thing that the competitiveness program will be probably -- will not be doubled in the second half.

--------------------------------------------------------------------------------

Operator [61]

--------------------------------------------------------------------------------

Next question comes from Gungun Verma from Goldman Sachs.

--------------------------------------------------------------------------------

Gungun Verma, Goldman Sachs Group Inc., Research Division - Research Analyst [62]

--------------------------------------------------------------------------------

I have 2, please. One on the premium OE market. Obviously, your competitors are shifting by state in 18 inches and above. Can you tell us how your market share have evolved over the second quarter? And are you seeing any pressure on share gain or on the pricing side there? And second is on the specialty market. You've taken your guidance down on ag outlook. Can you maybe comment which regions and segments are you seeing the most pressure in? Those would be my 2 questions.

--------------------------------------------------------------------------------

Florent Menegaux, Compagnie Générale des Établissements Michelin - CEO [63]

--------------------------------------------------------------------------------

So let me take the first one on the premium. Yes of course, a lot of people are chasing the premium markets, we're not the only one. However, it is much more difficult to produce a good tire 19-inch and above than to produce a 16-inch. So yes, a lot of people are putting capacity. However, the market is not -- it's not because you have the capacity to be offsetting this product. So -- and we disclosed what is the content in our premiums in our mix over all, and what we have shown is that we have moved from 39% 18-inch and above content to 41%, but we don't disclose market share for each diameter.

--------------------------------------------------------------------------------

Marc Henry, Compagnie Générale des Établissements Michelin - Executive VP & CFO [64]

--------------------------------------------------------------------------------

I think Specialty is part of the agricultural segment, what we have seen is a decline in the OE markets particularly in Europe linked to the crisis situation in Turkey. And to some extent, also in South America. The demand for replacement tires has been also down in North America due to the flood in the Midwest. And of course, the impact that has on the farmers revenues. If we look in the same segment at infrastructure, tire sales have evolved during the period, but we have seen some signs of slowing down at the end of the first half, taking into account that this segment has been growing for the past 2 to 3 years.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

Ladies and gentlemen, we don't have further questions. (Operator Instructions) We have no further questions

--------------------------------------------------------------------------------

Florent Menegaux, Compagnie Générale des Établissements Michelin - CEO [66]

--------------------------------------------------------------------------------

Okay, so if there are no further questions, so thank you for joining us tonight in French time. And we look forward, our next meeting is early 2020 to discuss about what has happened in second semester. So thank you very much, and if you take some vacation, have a nice vacation.

--------------------------------------------------------------------------------

Operator [67]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.