Michelin’s First Half Figures – A Mixed Bag

Michelin has released financial figures for the first half of the year. Sales were down 6 per cent to 7.348 billion Euro, but excluding currency effects, this would be a rise of 4.4 per cent. Operating profit rose one per cent to 578 million Euro and net income was 165 million Euro; below what was expected, but this was almost entirely due to charges of 178 million Euro for restructuring in Spain, where 1,200 jobs will go over the next three years.




At an analyst meeting, Michelin executives were extremely cautious concerning the outlook for the rest of the year, forecasting a drop in volume for the second half and only a slight improvement in the impact of currency fluctuations. Other obstacles to improvement are the continuing high costs of raw materials and the continuing losses of the recently-acquired Viborg chain. The acquisition was a major factor in the 0.1 billion Euro increase in Michelin’s debt, to 3.9 billion Euro.




Looking at the product groups, car tyres were something of a disappointment, with a YoY decline in sales of 9.1 per cent. Operating profit was down only 4.5 per cent, due to an improved product mix and better OE/replacement ratios. Michelin continued its policy of selective OE business and this was reflected in a decline of OE sales of 16.8 per cent, compared to the market decline of 5.1 per cent. This figure was affected by the non-renewal of a GM OE contract. In North America, Michelin gained share in the high performance and SUV segments and the company also gained share in Japan and China.




Michelin also lost share in the European replacement market, partly because the company did not promote its winter tyres in Q2 (as did Continental, for example) and also because Michelin increased prices in Eastern Europe, leading to lower volumes. Replacement sales were also down in North America, although much of this was in comparison to the artificially high sales at the time of the Firestone recall. Of more concern is the trend that consumers are moving away from premium brands towards value brands – so much for the so-called „flight to quality“ anticipated after the Firestone saga – although Michelin says that this state of affairs is a temporary blip, caused by consumer worries over the state of the US economy. Elsewhere, Michelin showed slight sales increases in Latin America and continued market share growth in Asia, due largely to the company’s performance in China.




Truck Tyres




Truck tyres proved the surprise package in the 1H results. Although sales were down 1.6 per cent, if we factor out currency variations, these would have grown by 10.5 per cent. Impressive too was the operating margin of 13 per cent, a full percentage point above analysts’ expectations. Michelin gained share in the European replacement market, due partly to the filling of aback-log of orders and partly to pre-buying ahead of price increases announced in Q2 for the second half of the year. The performance in the North American replacement market was good too, with sales up 8 per cent, against a 2.9 per cent rise for the market. Further south, Michelin gained market share in Brazil.




Things were not so buoyant on the OE truck tyre side; in Europe, OE losses were explained by a switching of capacity to meet the increased replacement demand. Market share was also down in North America. One reason suggested for this is that growth in this segment is in trailer tyres, where Michelin has a smaller presence than in other truck tyre sectors.




As was said earlier, Michelin remains cautious on the effect of raw materials and currency variations and the management says that it sees „no evidence of easing in the foreseeable future“ although improved product and market mix and better prices for some products are positive factors for the next six months.