Michelin grows sales, profits despite declining volumes

Michelin’s 2012 financial results are now public, and in a pithy sentence the tyre maker describes its performance last year as “strong 2012 earnings in lacklustre markets.” During the year the company earned net sales of 21.474 billion euros, up three per cent on 2011, although Michelin says weak demand, particularly in Europe, dragged sales volumes down 6.4 per cent year-on-year. Western Europe and North America each accounted for 34 per cent of total net sales, with North America gaining three percentage points at Western Europe’s expense, while the rest of the world’s share of net sales remained unchanged from 2011 at 32 per cent.

Operating income (before non-recurring items) rose 24.6 per cent to 2.423 billion euros. Although a significant rise, according to DB Equity Research Automotive this figure fell three per cent below consensus and five per cent below Deutsche Bank estimates. “The slight miss is entirely attributable to the volume effect which remained very negative in Q4,” commented DB analyst Gaetan Toulemonde, who noted that volumes are
currently “very weak”, especially in Europe where passenger car tyres are ten per cent lower than in 2007 and truck tyres are 20 per cent lower. Operating margin increased from 9.4 per cent to 11.3 per cent of net sales, and net income increased 7.5 per cent per cent to 1.571 billion euros. Based on this performance, the company has proposed a dividend of 2.40 euros per share, subject to approval at Michelin’s Annual Shareholders Meeting of 17 May 2013.

Alongside its 2012 financial information, Michelin reviewed the overall markets during the year:

Passenger car and light truck tyres

In Europe, demand for original equipment passenger car and light truck tyres contracted five per cent in 2012. The collapse in new car registrations, which fell to a 17-year low in the European Union, masked a contrast between the decline in broadline carmaker sales and the firmer resistance of specialty and export-driven brands. Markets in Eastern Europe continued to expand, increasing by 11 per cent over the year. The North American original equipment passenger car and light truck tyre market grew 16 per cent in 2012, returning to 2007 levels thanks to strong new car sales as buyers replaced aging models. In Asia (excluding India), original equipment passenger and light truck tyre demand rose 11 per cent overall. While still buoyant, the Chinese market cooled somewhat, ending the year up six per cent. Demand in Japan and Southeast Asia, up 11 and 38 per cent respectively, rebounded off of a 2011 impacted by natural disasters. The South American market was stable overall, with Michelin reporting a brisk seven per cent gain in the second half, offsetting the seven per cent decline in the first. Demand in Brazil rose by three per cent, lifted by government measures introduced in the autumn.

In Europe, replacement passenger car and light truck tyre demand dropped ten per cent year-on-year in a highly uncertain economic environment. Western Europe saw a record decline, steeper even than in 2008, that was accentuated by dealer inventory drawdowns. The winter tyre market dropped 16 per cent, as Michelin expected, while the high-performance tyre segment (17-inch and bigger) slowed to a lesser extent than the European market average, reflecting the sustained improvement in the mix. Demand for replacement passenger car and light truck tyres in North America retreated two per cent as consumer confidence weakened, despite the relative stability of average miles traveled and fuel prices. After an upturn in 2010, the market has returned to 2009 levels, with volumes sold noticeably lower than in 2007. Impacted by the significant increase in Chinese imports after customs duties were lifted, the US market declined by three per cent. In Asia (excluding India), replacement passenger and light truck markets ended the year up two per cent overall. Demand rose four per cent in China despite slowing economic growth, but eased back one per cent in Japan, where winter tyre sales were stable and volumes moved back in line with recurring trends after the run-up in replacement buying in 2011 following the natural disasters. In South Korea, the market fell six per cent in an export-driven economy hit hard by global economic uncertainty. The South American market gained a slight two per cent overall, but with wide variations among countries. Demand expanded by three per cent in Brazil as sell-out held firm at 2011 levels.

Truck tyres

Demand for original equipment truck tyres in Europe declined four per cent, to below 2007 and 2008 levels. Although the fall-off was a relatively limited two per cent in the first half, it gained momentum in the second, to five per cent, under the impact of the worsening economic situation in the region. After surging 17 per cent in the first half, the North American market slowed precipitously in the second half, to end the year with just a two per cent gain. Economic uncertainty caused by tax issues in the United States weighed on new truck orders during the year. In Asia (excluding India), demand retreated by nine per cent overall, with a fairly steep 15 per cent drop in China as growth in the economy (particularly exports) cooled over the year. The Southeast Asian market, which continues to shift to radials, was highly active, up 42 per cent, while the Japanese market rebounded 12 per cent. In both cases, growth was lifted by prior-year comparatives shaped by, respectively, flooding and the tsunami. The South American market plunged 30 per cent after Brazil introduced Euro V emissions standards during the year. However, the Brazilian government’s introduction of more favorable financing terms helped the market to turn around, with an upturn in the final quarter.

Demand for replacement market truck tyres in Europe dropped 14 per cent in 2012, with a 25 per cent plunge in the first half due to inventory drawdowns and high bases of comparison. In the second half, the market continued to shrink on weak transportation activity and the lackluster economic outlook. In Eastern Europe, the market declined by three per cent, primarily due to dealer destocking. The North American market ended the year down just two per cent, reflecting fleet manager caution in the face of economic uncertainty, despite relative robust freight demand. The contraction may also be explained by the sharp growth in original equipment sales and the availability of retreadable casings. In Asia (excluding India), markets declined by six per cent overall during the year. The Chinese market ended 2012 down by seven per cent, reflecting the slower growth in the economy and in exports. The Japanese market was down six per cent off of a high prior-year comparative, which was lifted by last year’s price increases and inventory rebuilding after the tsunami. Demand in South Korea also declined as the global economic slowdown weighed on exports and transportation demand. The South American replacement truck tyre market gained three per cent during the year. In Brazil, the stricter application of customs inspections reduced imports and dampened demand in general, although the first signs of a recovery appeared in the final quarter.

Specialty tyres

Earthmover tyres: The mining sector continues to expand, led by sustained demand for ore, oil and gas, and the market for large tyres thus remains buoyant. After rising in the first half, the original equipment market contracted in the final quarter, with a particularly steep fall-off in Europe. Demand for tyres used in infrastructure and quarries is shrinking in Western Europe and, after increasing in the first half, turned downwards in the final quarter in North America.

Agricultural tyres: After climbing in the first half, worldwide original equipment demand declined in the fourth quarter, particularly in Europe. The replacement market dropped significantly in mature markets during the year, dragged down by the prevailing economic uncertainty.

Two-wheel tyres: Impacted by the lackluster economy, the motorised segments declined in mature geographies, except North America, but continued to expand in emerging markets.

Aviation tyres: Passenger load factors are continuing to improve in the commercial aviation segment, on both domestic and intercontinental routes, but the cargo market was down for the year.

Segment performance

Against this backdrop, Michelin generated net sales 11.098 billion euros from its passenger car and light truck tyres and related distribution, up 2.9 per cent on 2011. Michelin says its sustained firm pricing policy and ongoing improvement in the product mix, led by the Michelin brand’s premium positioning, helped to offset a 5.5 per cent decline in volumes. As a result, operating income before non-recurring items stood at 1.033 billion euros or 9.3 per cent of net sales, compared with 1.018 billion euros and 9.4 per cent in 2011.

Net sales of truck tyres and related distribution came to 6.736 billion euros, approximately the same as in 2011. In a depressed market, volumes fell 10.8 per cent as Michelin focused on turning its truck tyre business around and restoring its margins. This strategy, along with the wide array of market launches and the decline in raw materials costs, drove a sharp increase in operating income before non-recurring items, to 444 million euros or 6.6 per cent of net sales, up from 233 million euros and 3.5 per cent in 2011.

Net sales by Michelin’s Specialty businesses increased 13.0 per cent to 3.64 billion euros in 2012. At 946 million euros or 26.0 per cent of net sales, operating income before non-recurring items confirmed these businesses’ structurally high profitability. In a particularly favorable currency environment, they benefitted from the still positive impact of contractual indexation clauses based on raw materials prices, as well as from the 1.7 per cent increase in volumes.

Compagnie Générale des Etablissements Michelin

Compagnie Générale des Etablissements Michelin reported a profit of 465 million euros in 2012. The financial statements were presented to the Supervisory Board at its meeting on 7 February 2013. The audit was completed and the auditors’ report was issued on the same date. As mentioned previously, at the company AGM on 17 May shareholders will be asked to approve the payment of a dividend of 2.40 euros a share, with a dividend reinvestment option.

Outlook for 2013

Given its global footprint, Michelin says it expects to hold volumes steady in 2013, in a market environment that is uncertain in mature markets but still expanding in the new ones. Raw materials prices are expected to remain stable in the first half, adding a further 350-400 million euros to operating income. This will be partly offset, however, by the impact of indexation clauses on the original equipment and earthmover businesses.

Michelin intends to operate a capital expenditure programme totaling around 2 billion euros, a sum it says will support the company’s growth ambitions by bringing new production capacity on stream in growth regions, whose start-up will weigh on costs. The programme is also designed to improve competitiveness in mature markets and drive technological innovation.

The French tyre maker describes itself as “confident in its competitive strengths” and says that thanks to the launch of an “ambitious project” to improve its management systems, it confirms its 2015 objectives and for 2013 expects to report stable operating income before non-recurring items at constant exchange rates, a more than 10 per cent return on capital employed and positive free cash flow. DB Equity Research Automotive anticipates a six per cent increase in operating income thanks to a “positive raw materials tailwind” in the first half of 2013.