Michelin operating income, margin stable as 1H sales increase

Michelin has released its first half financial results, showing stable operating income of €971 million for a 9.6 per cent operating margin, with net sales up 21 per cent. The Group says the figures are in line with its corporate “road map”, revising its full year sales volumes objectives upwards – after 12.6 per cent market growth in the first half – and reconfirming its profitability estimates. The Group suggests market growth should accelerate in line with long-term trends by the end of the year, targeting an 8 per cent growth in full-year sales volumes.

Michelin says it is “diligently pursuing” a pricing policy of passing on increased raw material prices, which have mitigated general sales growth in worldwide tyre markets. Michelin expects to offset estimated additional full-year costs of around €1,800 million. The impact of raw material prices on working capital requirement, which Michelin puts at “approximately €400-500 million for the full year”, alongside the Group’s investment plans suggest free cash flow will be “temporarily negative in 2011”, according to the Group’s statement.

Overall demand increases in PCR, LTR

In the passenger car/light truck segment Michelin’s original equipment results were buoyed by a record number of car registrations in South America, where the OE market expanded 8 per cent, and a Chinese market that expanded 3 per cent in spite of the termination of government-sponsored car buying incentives and the impact of the Japanese tsunami, which say Asian demand contract by 5 per cent (excluding India). European and North American new vehicle sales growth in the first quarter was adversely affected in the second quarter by the impact of a lack of parts and components from Japan for OEMs, though Eastern European demand “continued to rise sharply”.

In replacement markets, European demand was up 9 per cent in the first half, supported by “partial dealer inventory rebuilding ahead of the announced early-year price increases and by very strong demand for winter tyres”. North American demand was up 1 per cent for the half, though record first quarter sales were pegged back by lower mileage as a result of higher fuel costs, according to Michelin. V and Z speed rated tyres were particularly strong in the region.

Asian, sans Indian, markets rose 14 per cent overall, tough China reached 20 per cent The Japanese market expanded 15 per cent as dealers restocked lost product after the natural disaster. South American replacement markets continued to expand, increasing by 10 per cent overall, with the major Brazilian market growing by 7 per cent despite higher interest rates.

Truck tyre demand growth

Demand for Michelin’s radial truck tyres recovered sharply during the year in every region, though the improvements in mature markets were more a reflection of 2010’s low base, particularly in the OE segment (up 17%). Europe for example expanded by 61 per cent, lifted also by “sustained exports of new trucks”. In North America too the market saw robust 66 per cent growth, reflecting new vehicle purchases needed because of the high average age of tractor trucks (nine years).

In Asia (excluding India), demand fell by 10 per cent, due mainly to a 12 per cent contraction in China, a result of slowing construction-related businesses and tighter credit controls. In South America however, market expansion was driven by rising sales in advance of the introduction of new truck standards and by infrastructure development projects for the 2016 Olympic Games in Brazil. Replacement markets around the world had similar growth in the range 9-18 per cent, with Asian markets at the lower end and European at the higher.

Michelin’s EMOTR segment grew on mining expansion, growing by more than 10 per cent, led by renewed work on major projects and healthy demand for ore and energy. This also meant that supply chain constrictions are beginning to resurface. Agricultural product demand rose, while the increases in aircraft loads and passengers carried aided a sharp upturn in that segment, while military demand was stable.

New product performance

Michelin’s increased passenger car and light truck distribution, up 13.7 per cent year on year, was helped by increased sales resulting from the solid performance of the brand and new products, the Pilot Super Sport and the BFGoodrich Rugged Terrain. Michelin also said net sales in the first half were lifted by the Group’s pricing policy, with a slightly positive mix effect reflecting the impact of the relative growth in OE and replacement sales and of the sustained improvement in the segment/speed rating mix. Michelin was overall helped by the increased demand for higher speed and larger UHP tyres.

Operating income before non-recurring income and expenses rose to €535 million, compared with €497 million, though margins were slightly down to 10.2 per cent of net sales,  compared with 10.8 per cent in first-half 2010; figures that compare favourably with certain other comparable brands.

Net sales in the Truck and related distribution segment amounted to €3,266 million, up 27.3 per cent from first-half 2010. Sales volumes rose by 15.6 per cent. However sharply rising raw materials costs were not fully offset by price increases during the first half, leaving operating income before non-recurring income and expenses at €115 million, or 3.5 per cent of net sales, down from 4.9 per cent in 2010. Unfavourable currency exchange was a reason for this reduction, according to Michelin.

In the specialty businesses, the rise in net sales of 36.6 per cent to €1,587 million meant that operating income and margins improved at €321 million or 20.2 per cent of net sales, compared with €199 million and 17.1 per cent in the 2010 first half. The 29.1 per cent increase in tonnage sold, the significant contribution from the Earthmover segment and the contractual clauses indexing prices to raw material prices amply offset the unfavourable currency effect, Michelin said.

Compagnie Générale des Etablissements Michelin reported a profit of €276 million in first-half 2011, with financial statements presented to the Supervisory Board at its meeting on 25 July, 2011.

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