Michelin Sales, Profits Down in 1st Half 2008

In its first half 2008 results, Michelin has reported sales and net income slightly down on the same period last year. Net sales of 8.239 billion euros in the six months to June 30 represent a decrease of 1.9 per cent, however Michelin calculates that, at constant scope and exchange rates, this figure actually indicates a 4.2 per cent rise over last year. The company’s operating income of 708 million euros in the half-year was 11.3 per cent less than that in the corresponding period last year, and the operating margin of 8.6 per cent was down 0.9 pt. Net income, at 430 million euros, is 1.4 per cent lower than in 2007.

Commenting on the first half results, Managing Partner Michel Rollier stated: “Michelin continues to grow and gain market share despite a particularly unsupportive trading environment. All of these achievements have to be attributed to the work and skills of Michelin’s teams who clearly rose to the challenge of a stiffening international competition and an inflationary environment. Michelin, now better armed to adjust to market developments, in particular through a product offering tailored to today’s environmental and fuel-efficiency requirements, is holding the course of its strategic plan: improving competitiveness, leveraging product differentiation and increasing foothold in the high-growth markets. All this makes me confident in our future prospects”

In addition to the negative impact of exchange rates, Michelin adds, the first half 2008 results were characterised by two major developments; the significant decline in passenger car & light truck and truck replacement markets in Europe and North America, a drop that accelerated in Europe in May and June; and the raw material cost increases that were sharper than anyone could have anticipated. This led, the company says, to a time lag between group cost of sales increases and the mitigating impact of price increases.

Global tyre sales for OEM passenger and light truck tyres increased 3.0 per cent in the half year, while sales in the replacement segment declined 0.3 per cent. The global truck OEM market displayed a 9.8 per cent rise in the six months to June 30, while replacement market sales increased 4.4 per cent. European sales for OEM passenger and light truck tyres increased 2.2 per cent, driven by East European growth of around 20 per cent, while replacement market sales dropped 3.0 per cent. In the European truck tyre market, OEM sales jumped up 14.0 per cent, again primarily on the back on East European demand, while replacement sales were down 6.0 per cent.

Regarding its full year 2008 outlook, Michelin anticipates that tyre markets will be mainly driven by emerging country dynamism and high growth in the specialty product segment. Extra raw material costs estimated are at 750 million euros for the full year, at constant exchange rates. Michelin will also continue deploying its worldwide price increase strategy, and expects to deliver full-year operating margin before non-recurring items approaching the first half 2008 level, provided tyre markets do not worsen in the second half beyond current estimated levels. In addition, free cash flow, eroded in the first half by the increase in inventory value, should be nearly balanced at the end of 2008 through the action taken in the second half to reduce working capital requirements.

Morgan Stanley Research Europe rates Michelin’s stock as ‘underweight’, noting that the company’s 1.9 per cent drop in sales to 8.2 billion euros was even greater than Morgan Stanley’s 1.0 per cent estimated decline, to 8.3 billion. It also referred to Michelin’s passenger car business as the “biggest area of disappointment” during the half-year, with 7.6 per cent margins falling short of the 9.0 per cent consensus and Morgan Stanley estimate of 8.1 per cent. Truck tyres were the second largest area of disappointment for Morgan Stanley, as its 5.2 per cent margin compared unfavourably with the 6.5 per cent consensus and 6.0 per cent estimate.