Michelin “More Agile Than Ever” – 2009 Financial Results

Despite recording a net income 70.9 per cent lower than that of the previous year, Michelin managing general partner Michel Rollier appeared satisfied enough with the company’s 2009 financial results to comment that “in an environment shaped by a historic decline in tyre demand, especially in mature economies, Michelin was able to respond quickly and more agilely than ever. Thanks to the dedicated commitment of our teams and tight management, Michelin has delivered robust performance and improved its major financial metrics, the foundations of its future growth.”

Net income for the year amounted to 104 million euros, down from 357 million in the 2008 financial year. Explaining this lower figure, however, Michelin points that its 2009 net income was achieved in spite of restructuring costs of 412 million euros required to “specialise” certain plants in France, to implement a manufacturing reorganisation plan in North America and a voluntary separation plan in France, and the closure of the Ota factory in Japan. The company achieved net sales of 14.807 billion euros in 2009, a figure 9.8 per cent lower than a year earlier. Operating income came to 862 million euros last year, 6.3 per cent less than in 2008. This decline, notes Michelin, reflects a “steep” 14.8 per cent in unit sales and an underutilisation of production capacity. These factors, however, were partly offset by a 318 million euro reduction in raw materials costs, the company’s pricing policy and a reported structural improvement in competitiveness.

“The market visibility prevailing in early 2010 and the rising cost of raw materials (particularly natural rubber) are prompting us to exercise extreme vigilance,” Rollier continued. “Michelin is therefore sharply focused on preserving its competitive strengths and increasing its leadership by continuing, as in 2009, to pursue its innovation initiatives, maintain cost discipline and enhance its future growth potential by investing in growth countries. With the constant support of its teams, Michelin is starting 2010 with confidence.”

Passenger Car/Light Truck Tyres

Original equipment passenger car and light commercial vehicle tyre sales declined in every region except for Asia during 2009. European (including CIS) sales dropped 19.9 per cent during the twelve month period, while North America was slammed with a 32.3 per cent reduction. South American sales declined 7.9 per cent and those in Africa and the Middle East by 16.9 per cent The 3.1 per cent sales increase in Asia provided the only improvement over 2008 in this area. Sales here were boosted by demand in China; Michelin reports that Chinese demand surged 65 per cent, making the country, for the first time, the world’s largest market ahead of the United States. Global OE sales fell 11.9 per cent.

Replacement market passenger car and light commercial vehicle tyre sales declined in every global region last year. In Europe, demand fell 12.1 per cent in the first half but gained 2.1 per cent in the second on a technical rebound driven by the end of dealer destocking, with the upward trend amplified by strong sales of winter tyres. Excluding the CIS, which was still impacted by the collapse in Russian demand, the European market shrank 1.1 per cent over the year. European and CIS sales combined declined 5.2 per cent. The North American market contracted 10.7 per cent in the first half before rebounding a strong 6.2 per cent in the second as people traveled more miles, leading to an annual decline of 2.3 per cent In Asia, demand varied by region, rising 16.9 per cent in China but declining in Japan, South Korea, Taiwan, Australia and India. Overall Asian replacement market sales fell 0.8 per cent during the year. Sales in South America and Africa/Middle East declined 4.4 per cent and 4.1 per cent respectively. Worldwide, replacement market sales for this sector fell by 3.2 per cent.

Net passenger car and light truck tyre sales and related distribution segment stood at 8.280 billion euros for the year, down 4.5 per cent on 2008. While negative for the year, Michelin notes that the volume effect steadily eased with every quarter. The price mix improved, which the tyre major says reflects the impact of the 2008 price increases, the firm resistance of the Michelin brand and an enhanced segment/speed rating mix. Operating income before non-recurring items amounted to 661 million euros, versus 370 million in 2008. Operating margin widened to 8.0 per cent from 4.3 per cent in 2008, led by the year-end upturn in volumes, particularly in winter tyres, as well as by the still positive price mix, the decline in raw materials costs and the improvements in production flexibility.

Commercial Vehicle Tyres

In the commercial vehicle tyre sector, Michelin reports that original equipment radial sales were “severely impacted by the recession” and that “markets stabilised at very low levels during the year, in line with truckmaker capacity utilisation rates”. In Europe, demand in both the truck and trailer segments fell sharply throughout the year, a fact reflected in sales 63.7 per cent below those of 2008. In North America, the rate of decline eased in the second half, yet this market still experienced a 37.9 per cent drop in sales. The South American market fell 22.4 per cent despite an upturn in demand in Brazil, where the impact of an improving economy was boosted by government incentives to purchase new trucks. Asian markets retreated over the year, but performance varied widely between the mature countries, which saw double-digit drops, and countries like China, with a 4 per cent decline. Demand fell fastest in Japan, at 49 per cent for the year. Overall, Asian OE sales were down 15.4 per cent. Sales in Africa and the Middle East region plummeted 62.5 per cent, and worldwide sales for this sector were down 39.2 per cent.

Sales of replacement market commercial vehicle radials were also down in every region, although to nowhere near the extent of OE sales. Michelin comments: “With international freight markets still hesitant after contracting sharply in the first half due to the global economic recession, replacement markets ended 2009 down, but the decline bottomed out in the autumn with the end of dealer and fleet destocking.” Markets in Europe and North America plummeted in the first half but are now showing signs of stabilising, the tyre maker reports. While still down on prior-year levels, demand has moved back in line with freight trends. Michelin also notes that there has been a “certain upturn” in retreading demand. European sales were down 19.8 per cent during the year, while those in North America fell 11.6 per cent. In Asia, markets were down for the year, but showed an improvement in the second half (up 5.5 per cent) compared with the first (down 12 per cent). Demand in China, India and the ASEAN countries rose during the year, but remained depressed in the rest of the region. Overall, the market shift to radials continued apace. In total, Asian sales declined 2.9 per cent over the course of 2009. South American sales dropped 18.6 per cent while those in Africa and the Middle East were 4.5 per cent lower. Globally, replacement market truck tyre sales were 9.6 per cent less than in 2008.

Net truck tyre sales and the related distribution segment stood at 4.496 billion euros for the year, down 17.2 per cent on 2008. The impact of the steep decline in sales volumes, which Michelin says reflects the collapse in demand and its subsequent stabilisation, was only partly offset by the sustained focus on extremely firm pricing policies. Operating income before non-recurring items, which represented a loss of 163 million euros in the first half due to the sharp contraction in sales volumes in deeply depressed markets, low capacity utilisation and the still negative impact of raw materials costs, swung to a profit of 94 million euros in the second half, thanks to firm prices, the positive impact of raw materials costs and higher capacity utilization rates. For the full year, the operating loss before non-recurring items came to 69 million euros, corresponding to a negative 1.5 per cent operating margin.

Specialty Tyres

Results for Michelin’s specialty tyres segment were mixed. The Mining and Quarries segment held firm at record highs in 2009, supported by robust demand for ore and energy from fast-growing countries and lifted by improved tyre supply. The original equipment market stayed very depressed, particularly in mature regions, but showed what Michelin describes as “timid” signs of a technical rebound in the fourth quarter. Demand in the Infrastructure segment fell sharply in every region, the company states.  In the agricultural tyre business, both the replacement and the original equipment markets suffered from the decline in farmers’ purchasing power and the resulting hesitation to invest. The fall-off was particularly steep in Europe and North America and affected every segment, including high-powered farm machinery. Motorcycle markets fell sharply in mature economies and continued to expand in the major emerging markets. Aircraft tyre sales were affected due to declining airline business as a result of the economic slowdown, and this particularly impacted the General Aviation segment. Demand for radial tyres remained less affected, Michelin reports.

Net sales from the Specialty businesses segment declined to 2.031 billion euros from 2.307 million in 2008, and Michelin states this reflects the “fall-off in volumes in the original equipment Earthmover, Infrastructure and Agricultural tyre segments”. On the other hand, the Mining and Quarries segment demonstrated “firm resistance”. In the second half, certain price lists were adjusted downwards following application of clauses indexing prices to raw materials costs. Operating margin remained high, at 13.3 per cent compared with 17.9 per cent in 2008. The decline in sales volumes was only partially offset by the price mix, which remained favourable despite the adjustment in certain prices indexed to raw material costs. 

Net Financial Position

Despite major contributions to pension funds during the year, Michelin’s free cash flow totalled 1.387 billion euros in 2009 compared to a negative 359 million in 2008. The improvement, the company says, was driven by the disciplined management of both working capital (particularly inventory) and capital expenditure, which was reduced to 672 million euros from €1.271 billion in 2008. As a result, gearing improved by 29 points over the year to stand at a record low of 55 per cent at December 31, 2009, while net debt was reduced by 1.222 billion euros to end the year at 3.051 billion euros.