Michelin 9-month Sales up 20%

Michelin has reported that its net sales for the first three quarters of 2010 shot up 19.4 per cent to 13 billion euros. According to the company, the growing figures reflect increased unit sales growth across all sectors and follow a particularly sustained recovery in unit sales of passenger car and light truck tyres. As a result of the good third quarter figures, Michelin reaffirmed is predictions that the company would achieve around 12 per cent growth in unit sales by the end of 2010, “close to 9 per cent operating margin before non-recurring items” and positive free cash flow for the year.

Referring to the company’s third quarter sales of 4.65 billion (which were up 24 per cent year-on-year), financial analysts praised the fact that the results were 6 per cent ahead of consensus estimates. However, writing in an investor’s note published 27 October, Morgan Stanley analysts wrote that this figure was largely down to better-than-expected foreign exchange rates. Sales growth is said to have equated to +15 per cent excluding foreign exchange effects during the quarter.

Overall unit sales reportedly grew 13.8 per cent in the year to 30 September 2010, in line with the full-year target, sustained by robust performances across all operating segments. Michelin reported a 0.5 per cent improvement in the price mix, reflecting the positive impact of price rises implemented since the start of the year, which is said to have more than offset the effect of the negative OE/RT mix.

European OE markets are said to have continued to recover during the first nine months, boosted by higher sales by the region’s carmakers and increasingly buoyant demand in Russia. Meanwhile the Chinese market continued to expand rapidly, supported by government sponsored carbuying incentives.

Michelin reports that Growth in European passenger car replacement sales was led by strong demand for winter tyres (up 25%) sustained by dealers re-stocking after the dual effects of last year’s
harsh winter and de-stocking during the recession. As a result the seasonal effect is said to have lifted the replacement market to a level slightly above pre-recessionary levels “observed in the first nine months of 2007.”

Looking globally it is worth pointing out that Michelin observed a strong recover in the Russian truck tyre replacement market, which is said to have expanded 71 per cent in the first nine months. In South America, the market continued to recover, led by Brazil where increased truck use and higher freight volumes helped to sustain the market, along with dealer action to rebuild inventories. In Asia, the radial market expanded by 13 per cnet, lifted by advances of 46 per cent in India and 10 per cent in China.

Where is Michelin going to spend its cash?

On September 30, Michelin launched a rights issue with pre-emptive subscription rights for existing shareholders. The issue was strongly oversubscribed, with the company reporting that demand stretched to 3.5 times what was being required valuing the sale demand at 4.3 billion euros. Michelin reports that proceeds from the issue will be used to fund “more rapid expansion, which will lead to an increase in annual capital expenditure to approximately 1.6 billion euros” starting in 2011. In addition the issue is said to have the secondary effects of: Strengthening Michelin’s credit rating and ability to raise funds on the financial markets and generally improving the group’s financial flexibility.

The question now is: where is Michelin going to spend the funds it raised? These questions are likely to be answered when the company releases its new industrial plan in February 2011, but in the meantime, analysts and industry observes alike are making every effort to prepare themselves for the inevitable news announcements when they come.

For their part Morgan Stanley’s analysts wrote that Michelin is now position to “turn round its poor history of growth,” adding: “Michelin’s capital expenditure averaged 7.3 per cent of sales in 2000-10 versus a revenue compound annual growth rate of just 1.1 per cent over the same period, in nominal terms.”

The bank’s view is that too much money was spent on fuelling “marginal productivity increases of old European and North American plants” which reportedly average 90 per cent of capital expenditure averaged over the 2004 – 2009 period.

With competitors Continental and Pirelli signalling that they are targeting significant investments in emerging markets over the next 5 years (Pirelli is aiming at a 20 per cent capacity increase by 2012, doubling China car tyre capacity as it goes and Continental has announced it has made 500 million euros available for this purpose) Michelin’s management is making it increasingly clear the emerging markets are the key focus from now on.

In addition to the competing European tyre majors, Bridgestone has expansion plans in six countries, Hankook is focusing on China and Indonesia, Cheng Shin Rubber is heavily investing in China. Referring to these plans, market watchers don’t expect increased output to flood the Asian manufacturers’ domestic markets.

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