Compagnie Generale des Etablissements Michelin SCA

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Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to the Michelin Conference Call. The conference call will be conducted by Mr. Florent Menegaux, CEO; and Mr. Yves Shapot, General Manager and Group CFO. You are able to download the presentation from Michelin Corporate website.

I now hand over to Mr. Florent Menegaux. Gentlemen, please go ahead.

[Florent Menegaux, Chief Executive Officer]

Good afternoon to everyone. Thank you for joining us for this semester's result. Let me start by saying that, I am very proud to confirm the resilience of Michelin weathering one of the strongest and most intense crisis in its history, and I want to take this opportunity to thank and to express all my gratitude to all our teams around the world that have done an outstanding job, during this very difficult period.

So let me tell you that, during the crisis we had one priority, which was to protect our people. And then, we expressed also to everyone that we have to make sure that we will ensure the business continuity and conserve our cash to make sure that we could weather the storm in good condition. So despite collapsing markets, and a 20.6% contraction in sales, what you can see is that Michelin ensured our segment operating income of €310 million positive, which I want to stress, which is better than what we anticipated when we entered into the crisis.

We have had a robust financial position that is recognized by the rating agencies. And we've made strategic choices that are validated during the first half. Our global presence and diversified business base has contributed heavily in making sure that we would have a portfolio of activities that can help others -- any other activity to weather difficulties in every market. And I want to stress the resilience of our specialty business, with a very strong operating income at 15%, which I think is very good in such a period.

The key to recovery will for sure be conditioned by the fact that, businesses that will survive in the future will have to have a positive contribution to the ecological transition. And the CO2 reduction pathways and objectives have been approved the Michelin objective of course has been approved by the science-based target initiative. And we have in terms of governance created a CSR governance within the Supervisory Board of Michelin.

During the crisis, we took specific measures to make sure that, our people could operate safely. So we were one of the first ones to close our operations where we were not in capacity to maintain the safety of our people, but we were one of the first to restart production, because we had the experience of what happened in China, and we have been very quick at implementing many different initiatives to make sure that our people will stay safe.

During this period, we've also demonstrated the strong support to communities. We gave mask tires different type of initiatives. But we also supported our weakest suppliers and our weakest customers that had difficulties, and I'm very proud of that. And you probably noticed as well that, we have produced extensively a lot of health care products.

Lastly, Michelin sees its CO2 emissions reduction targets validated by SBTi as introduced during pertinently and I want to stress two things. The first one is, we have a path towards zero net emissions in 2050. And you see on your screen what would be the different steps that are going to ensure that we reach the 2050 targets on the scope one and two. And the second thing is, as I told you, we've introduced a new CSR committee to make sure that we fulfill all our commitments in that manner and in that matter.

So before -- and I want to leave now the floor to Yves, who is going to detail you our results for the first half.

[Yves Chapot, General Manager & Group Chief Financial Officer]

So good evening, ladies and gentlemen. Let me walk you through our first half results and our full year guidance starting, of course, with the results and the market environment.

So we have decided to present you the sequence month by month at least for the two first segments of the global market and the market of three regions: Europe, North America and China. You see that, of course, the market has been very impacted by the coronavirus crisis: first in China during the month of Feb and March; and then later on in Europe and the North America starting end of March and then extending in April and May.

Overall, the global passenger car and light truck tire market both original equipment and replacement have been impacted clearly minus 24%. We can spread it between minus 34% for regional equipment and minus 21% for replacement markets worldwide.

On the truck and bus side the market have been overall down by 18%, but you will immediately recognize that the Chinese market has recovered pretty well during the second quarter. And as it is the biggest market in this segment, it has also an overall positive impact on the market mix. Zooming between original equipment and replacement, OE has been down worldwide by minus 15%, while replacement was negative by minus 19%.

The specialty tire market have been -- have shown very contrasted trends. Of course according to the different business segment, agriculture, replacement, mining and in some extent two wheels and the conveyor belt market has been pretty resilient showing slight decrease of the global markets, but still resilient. On the overall, some markets such, of course, the aircraft business, the agriculture, original equipment and the construction have been heavily impacted by the crisis.

In that very tough environment, we are relying on a portfolio of activity which is pretty well-diversified both on a -- from a geographical standpoint and from the business drivers that are behind our different activities reminding that construction-driven activities represent around 41% of our activity; manufacturing so let's say, GDP-based businesses 27%; commodities 21%; and the pure original equipment automotive 11%.

Our sales as Florent has already mentioned, have been declining by 20.6% with -- during the semester with a slight currency effect minus 0.5%, but mostly of course, the volume effect which is minus 22.4%. A little bit compensated by the price/mix effect plus 1.9%. And we still have a little bit of scope of consolidation effect for €51 million plus 0.4%.

Quarter-by-quarter, you see very clearly the heavy impact of the COVID-19 crisis on the Q2, where the volumes were minus 32.5%. As our global presence is stronger in Europe and North America, it was during this period and these regions have been under lockdown measures from the different governments. And you see a pretty stable price-mix effect at 1.7% for Q2. And the currency effect that is coming negative, mostly due to emerging market currencies.

So in this context, we have been able to generate still a positive segment operating income at EUR310 million. And the waterfall from 2019 first half segment operating income and 2020 figures are mostly impacted by the volume effect which is EUR1.5 billion, of which you have of course direct impact of the volume -- the margin of the volume decline but also our inability to absorb the fixed cost from our manufacturing organization. These amounts are partly offset by EUR124 million in federal grants from the different governments.

We have pretty resilient price mix raw material effect at EUR261 million, of which EUR217 million is price mix. The SG&A cost reduction is representing EUR192 million. And we have isolated in our P&L, the specific COVID-19 cost measures, which are mostly the supply and the manufacturer of all the protection we have implemented during the semester mostly masks and hydroalcoholic gel for EUR77 million. Currency effects and other effects are pretty marginal at this stage.

If now we look at the way this segment operating income has been generated by business segment. So you will see obviously that both SR1 and SR2 has seen a similar sales decline around 22%, 23%. And their operating margin has been slightly negative but let's say very close to zero.

Most of the contribution of the group is coming from the third segment, which is obviously -- which is generating a 40.7% operating margin, with a strong contribution of course from the mining activities, the conveyor belt activities, and in some aspects also our specialty polymer businesses and our two-wheel business and the agriculture replacement segment.

Now if I just want to take a little bit of step back for each of the segments. Some key elements of performance and let's say more long-term drivers of the performance of each of these segments. In SR1, what we want to highlight is the fact that we are strengthening our position in the electric vehicle segment because these products are much more demanding and are let's say raising the bar in terms of product performance by location of the range, the reduction of the cockpit noise and of course, the torque generated by the electric engine and the heaviness of the batteries.

We estimate that including hybrid and full electric vehicles, this market will represent around 12% of the market in this year and should represent 30% of the global market in 2025. And Michelin is a leader in EV tire and we are present in all the key segments of this market.

Regarding SR2. We are deploying our strategy centered on value segment and our purpose is to provide the same services in terms of tonne kilometers transported with less raw material or another way to maximize the usage of material. And for that purpose we have launched -- we are launching the Michelin Agilis 3, which is generating the same performance with one kilogram less of material. And on the let's say traditional truck and buses activities I would like to highlight the importance of retreading, which is a way both to use and reduce the materials we are putting on the road by retreading a tire you are saving 50-kilogram of material.

Regarding the specialty businesses. I just would like to highlight the segment that has been the most resilient during the semester. Overall, this segment has absorbed a 14% decline in sales and we were able to maintain a pretty good level of operating margin at 15%. Of course as Florent has mentioned in his introduction, one of our priorities during the crisis was to protect the liquidity of the group and our financial position.

We have been able -- so our free cash flow for the semester is slightly negative at €351 million. And we have been able to partially offset the volume impact which is behind the change in EBITDA by the effort done on the trade working capital with a strong monitoring of our inventory thanks to a weekly sales and operation process. And of course the measures that we have taken in other areas such as the reduction of costs of our SG&A, but the change in our capital expenditure the program to decrease our CapEx by around 30% for the full year, which are starting already to generate €120 million of savings during the first half. And the fact that we have put on hold our merger and acquisition program versus what we have done in 2019.

At the end of June 2020, we had a pretty solid cash position. We are holding €2.8 billion in cash and cash equivalents of which €1.4 billion is coming from our issuance of commercial paper out of a maximum program of €3.1 billion and we have not been obliged to withdraw on our confirmed credit line. I remind you that we don't have any significant bond failing due before the first half of 2022 and that we have updated at the end of the semester of the stress test that we have initiated in -- at the end of March. And we are pretty confident that the group has the financial means to pass the stress test conducted for the next 18 months.

Industrial context. Our net debt have increased by €326 million mostly due to the free cash flow generation. And we are ending the year -- the semester with a €5.5 billion net debt, which represents a gearing ratio of 45%. I just want to remind you that at the same period last year, this gearing ratio was at 54%. And during the semester, particularly during the month of May, all the rating agencies have confirmed our rating both for short- and long-term debt.

So now let me introduce you our 2020 guidance. Starting with the markets we have entered in -- with this COVID-19 crisis, in period where markets are characterized by high volatility and very low visibility. So in this -- let's say unpredictable environment, our reason of visibility -- our firm visibility reason is now reduced to the couple of months ahead of us. That's why we have -- we are issuing guidance based on the range of growth for the different markets.

For the passenger car and light truck business both OE and RT we are betting on the range between minus 15% to minus 20% for the full year, after minus 24% for the first halve. So it gives you approximately a minus 10% for the second halve of 2020. We are betting on a pretty similar evolution of the market during the second semester for truck with a range between minus 13% to minus 17%. We continue to decline in global demand with -- in a very, very uncertain environment. And we are seeing replacement market still depressed in every market maybe except China.

The specialties markets are also showing a very contracted picture with a -- between minus 13% to minus 17%. Mining is impacted by a lower demand in the global economy. Some mines in some countries are closed or their activities impacted by the resurgence of the pandemic. The off-road -- on the off-road side the agriculture replacement market still very resilient, but are sharply down in OE and in infrastructure tires. Two wheels is improving and of course the aircraft demand particularly for commercial and regional airlines is collapsing.

Our 2020 scenario is basically we are aiming to follow globally the market. So in terms of volume -- our volume should be in line with the market excluding of course the geo mix effect which is particularly important for SR2. We expect to have a cost impact of raw material prices and custom duty is positive and the impact on the second half should be higher than the impact we have known in the first half.

Currency effects will be negative if, we are based -- we based then on the June 2020 rate. And we are expecting an overall net price mix raw material effect positive probably in the same range than the first half effect, but with the different components probably a higher raw material tailwind and a mix effect that should be probably less strong in the second half mostly due to the mix the market mix particularly between replacement and original equipment.

So in that context, we are expecting to generate for the full year a segment operating income at constant exchange rates above €1.2 billion and structural free cash flow above €500 million. Of course this guidance is based on the hypothesis that there will be no major new systemic effect from the COVID-19.

So having guide you for this -- our first half results and our full year guidance, we are now opening the Q&A session and Florent will take the question and we'll share the answers.

[Florent Menegaux, Chief Executive Officer]

Thank you, Yves. So let's start with the first question.

[Operator]

[Operator Instructions] Your first question comes from Kai Mueller from Bank of America. Sir, please go ahead.

[Kai Mueller, Bank of America]

Hi. Thank you very much for taking my question. As a first one is when we think about your volume forecast by end markets that you nicely put out, you obviously said the biggest difference is the truck market, which is obviously a geographical mix. When we put that all together how -- what do you think is a reasonable assumption on group volumes for you for this year?

[Florent Menegaux, Chief Executive Officer]

Yves, take this one.

[Yves Chapot, General Manager & Group Chief Financial Officer]

Yes, I can take it. So you have seen our -- the different range we have used by business segments. And we interpose you this range, because honestly beyond the month of -- the end of August or the end of the month of September, it's extremely difficult to put a figure on the market partially for the Q4.

So at this stage if you take, let's say, the middle of the range and you include the ponderation the mix, the geographical mix ponderation for SR2, you will not fall too far from our assumptions, but remember that we operate right now in an extremely high volatile environment.

[Florent Menegaux, Chief Executive Officer]

Yes.

[Kai Mueller, Bank of America]

Yes. And then the follow-up of this question is we knew obviously your drop-through in the first half was 58% on volumes. When we think about the second half, do we expect a similar level? Or is there -- should we expect an improvement from here?

[Yves Chapot, General Manager & Group Chief Financial Officer]

In the second half, we should have an improvement in the drop-through, because our plants right now are operating at the max of the capacity that they can activate. We have to remember for example in the Americas that the COVID-19 is still very active. And therefore here and there in our plants sometimes we have to stop production in a workshop, because we have a case of COVID, and therefore we have to take off all the people that were surrounding that person. So even though right now we could operate at 100% of our capacity, we do not, because we have some here and there, especially in the Americas COVID-19 still present. However, the drop-through will improve slightly.

[Kai Mueller, Bank of America]

Okay. Okay. And then on top of that maybe just one quick comment around the latest trading. We've heard from one of your peers that basically as soon as lockdowns have been lifted a month later sales have really picked up quite well almost at the prior year level. Is that the same that you are seeing as well on the replacement side?

[Yves Chapot, General Manager & Group Chief Financial Officer]

It's a very different picture depending on the geographies. Of course, what we have observed is that in the region where the government enforced, let's say, a stricter lockdown measures, after the lockdown there was a peak in sales. So it was the case for example in Southern Europe.

It was the case in China. China has been generating growth during the Q2. The big question particularly for Europe is the sustainability of this trend, let's say, beyond the month of August. And you have also to remember that June had a calendar effect with 22 open days versus last year.

[Kai Mueller, Bank of America]

Okay. That's very helpful. Thank you very much.

[Florent Menegaux, Chief Executive Officer]

Okay. The next question, please.

[Operator]

The next question comes from Gabriel Adler from Citigroup. Sir, please go ahead.

[Gabriel Adler, Citigroup]

Hi. Thank you. My first question is also on your volume outlook, particularly given the positive trends that we saw in June and the trend that you've shown on your slide 6 of sequential improvement since the last volumes in April. The volume outlook for SR1 of minus 15 to minus 20 does seem quite cautious. And then on SR3 the volume outlook seems to suggest no improvement in the second half compared to the first.

So my question is just around whether you can provide some more color on the assumptions that you're making small volumes and what do you think of it? You're highly cautious.

And secondly my question -- my second question is on the capacity plan and whether we should expect the €200 million of gross SG&A savings that were achieved in the first half to repeat in the second half. And where that leaves you in -- with regards to your competitive impacts plan going forward?

[Florent Menegaux, Chief Executive Officer]

Okay. So for the first one on the volume. Yes we have to be cautious because as we have explained, we have a huge volatility and a huge uncertainty in -- going forward. So, we of course -- you say it's similar to the first semester. I would tell you that what happened in Q2 was extremely strong and normally Q3 and Q4 will be less impacting than what happened in Q2.

[Yves Chapot, General Manager & Group Chief Financial Officer]

Yes. Do not project the Chinese market evolution particularly on SR1 on the other regions. Don't forget that China is a market in automotive that is still under equipped. So, in 2020, we are benefiting from the original equipment market growth over the past years so -- because the car park has increased in China.

And China wasn't one of the country with let's say the most strict enforcement lockdown measures. And for the time being they have not seen let's say a strong resurgence in the pandemic.

[Florent Menegaux, Chief Executive Officer]

As far as the cost reduction is concerned we -- yes, we have had exceptional circumstances. So, therefore, we took some very important measures. In the third quarter and the fourth quarter we have to also make sure that our activities we are able to respond to the demand. So, therefore, the savings will be less than what they have been in the first semester.

[Gabriel Adler, Citigroup]

Okay. Thank you very much. And if I could just follow-up with one more on the U.S. tariffs that are being considered on passenger cars from Asia. And could you give us some color on how meaningful an impact this could be on the pricing environment in the U.S. if that was part?

[Florent Menegaux, Chief Executive Officer]

The evolution of the trading environment around the world is evolving a lot. And it's a little bit difficult to assess what it will be in the future. So, at this stage, for example,, if I take Europe what we have seen so far in Europe is that the measures that the European Commission is taking are more towards making sure that they ensure that there is a sort of equal rules of the game around countries especially in terms of Q2 content which is different from what has happened in the U.S.

At this stage, we see no effect yet on the behavior of imports in North America. We have to remember ourselves that in the previous measures we had the exporters to the U.S. had taken the taxes as of their margins. So we didn't see a major effect at this stage.

[Gabriel Adler, Citigroup]

Okay. Thank you very much.

[Operator]

The next question comes from Tom Narayan from RBC. Sir, please go ahead.

[Tom Narayan, RBC]

Hi, yes, thank you. Tom Narayan, RBC. Thanks for taking the question. A question on the 2020 free cash flow guidance. If I do my math right I think it implies something like €850 million free cash flow in H2. The operating income guidance is around €1 billion in H2. So, if I take H1 €745 million CapEx, it implies working capital could be a €500 million to €600 million source of cash in H2. So, first question is, is that right? And if so maybe what's driving that?

Then I think you'd said that decreasing CapEx by 30% in 2020. How long could that be at depressed levels? So, is that just a 2020 item? Presumably you have a lot of initiatives that may require CapEx to ramp back up again. Thank you.

[Florent Menegaux, Chief Executive Officer]

Okay. I will start with the second answer and then Yves will talk to you about the cash. So, in terms of investment yes we have reduced our investment. But to a degree that is manageable especially that is protecting our future activities. So, we've only postponed some investments that would have no effect on our trading activities in the future. You can expect that by 2021, we would go back to a level that is maxed at around €1.8 billion. And Yves on the cash?

[Yves Chapot, General Manager & Group Chief Financial Officer]

Yes. Well first, we have a working capital profile that is extremely balanced between H1 and H2. If you look at our previous years, in fact, we have generally a negative profile until the month of August and then we have a strong cash generation between September and November. So that's explaining the calculation that you did and it's perfectly logic and coherent with what we have seen in the previous year. Again 2020 is not completely let's say not a normal year. So we can have here or there some variance that will not be totally in line with what we have seen in the previous years of course. But we are expecting positive free cash flow by at least EUR500 million and with a strong contribution from the working capital particularly inventories.

[Florent Menegaux, Chief Executive Officer]

And maybe to give you some idea in the second semester. If the sales go back to normal, better level in the Q3 of course the cash will arrive in Q4. But if the recovery goes higher in Q4 then the cash will come back in 2021. So you have to be in the cash assessment that's why we've looked at it and said there are many assumptions behind. It depends on the speed of recovery and month-by-month by the way.

[Tom Narayan, RBC]

Understood. Thank you. I will turn it over.

[Operator]

The next question comes from Thomas Besson from Kepler Cheuvreux. Please go ahead.

[Thomas Besson, Kepler Cheuvreux]

Thank you. It's Tom Besson for Kepler Cheuvreux. I have a few questions as well please. Can I start with a question on the specialty business? Is it possible to get a comment on the acquired businesses contribution because I think you've done a small write-down and took at least qualitatively of the weight of the mining towers in the H1 operating results from the specialty business? That's the first question.

And the second question. Could you comment on whether you have overproduced or underproduced in H1? I think you started 2020 on the right route. We've seen a big volatility, big uncertainty as you said. Is it fair to assume that you've continued to be very cautious on the level of production given the lack of visibility you have on H2? And small last question if I may. Could you please give us an update on your sensitivity to the euro-dollar given the recent move and confirm that this recent move is one of the reasons for your relative caution on the guidance for adjusted EBIT for 2020? Thank you.

[Florent Menegaux, Chief Executive Officer]

Thank you for these questions. So I will take this question about overproduction, under production. You certainly noticed that our inventory level at end of June has been very low. We have been very, very clear with all our teams that in this type of crisis, cash was king. And therefore, we have tightly managed our production level to make sure that we would not take any risk. And by the way, our inventory level have been very well managed. So if everything had to be said, I think, we've tightly managed inventory and production at the same time. So, we are not either underproduced or overproduced. We just produce what we needed to produce. In terms of acquisitions and the weight of mine, Yves?

[Yves Chapot, General Manager & Group Chief Financial Officer]

Yes. So, on acquisition, we just -- and you will see that in our financial report, we just have impaired one small acquisition that we have not bid in the past Tablet hotel which has been of course heavily impacted by the crisis because of particularly with their strong let's say position in Europe and North America. The mining business weight, we have always said it represents roughly around 30%, 40% of the SR3. So, it does not change dramatically.

Regarding the update of the euro-dollar position, we have the sales gross through which is around 40% to 50% with the USD. And that's -- let's say another reason for the fact that we were cautious on our guidance. And maybe just to complete with Florent's comment about the inventories, we have seen a drop of volume of 22.4%. Our drop of production was close to 30%. So, we have managed very tightly our inventory during the semester.

[Thomas Besson, Kepler Cheuvreux]

Okay. Maybe if I may just -- my question was really not sufficiently. I was referring if to the large acquired business in the specialty and the impact of Fenner and for specialty enlarged, how did that effectively impact the resilience? So, do we have more elements to effectively support the more resilient business? Or is it still largely hanging on the mining business? That was more my question.

[Florent Menegaux, Chief Executive Officer]

The -- so if I take Fenner the conveyor belt division, the medical division of Fenner and some of what we call advance engineering product of Fenner have been pretty resilient during the crisis. So, it was the first major acquisition in this segment. Regarding Camso. Camso is of course centered on OHT. So, we have -- the overall Camso activities has probably been a bit more resilient than the Michelin One, the historical Michelin One.

But the overall, let's say OHT business have seen original equipment in agro sharply down. But at the same time, good behavior of the replacement market with -- in some regions, we have been able to grow in the second quarter in the replacement market for agro tires. And of course in terms of material handling, it was down and construction has been down. But as soon as these things will recover, we are confident that they will be strong. So, we are actually very pleased with these acquisitions. And the integration is going very nicely. And the synergies, we wanted to extract are there.

[Thomas Besson, Kepler Cheuvreux]

Perfect. Thank you, very much.

[Operator]

The next question comes from Martino De Ambroggi from Equita. Sir, please go ahead.

[Martino De Ambroggi, Equita]

Thank you. Good evening everybody. The first question is on the prices, in such a volume environment. What is the pricing evolution in each and every segment if you could elaborate a little bit on this?

[Florent Menegaux, Chief Executive Officer]

To be very clear, we have had several times that question. It's very clear. This is not a period where you play on prices. This is a period, where you maintain what you have. So we've been very strict on this. What you may see is, we have some index contract and when the raw materials evolve, we have to adjust mechanically those index contracts. But on the rest of the activities, we don't play on price. We don't play on price. And you are seeing that in the bridge, in our sales bridge where among the 1.9% positive price-mix effect.

The mix is representing 1.3 -- 1.6. So you have still a positive price effect, despite the fact that in some of our businesses, such, for example, the original equipment or some long-term mining contract, we have raw material adjustment clauses that we have applied, of course, during the semester. So it means that we have been able to more than compensate on the other segments of the market, the impact of this raw material prices adjustments, a payroll gain covering around 30% of our global activities.

[Martino De Ambroggi, Equita]

Okay, okay. Very clear. For the car division, could you elaborate on the split between above 18 inches and below 18 inches in terms of trend and in terms of prices? And if I remember correctly, in the previous call you mentioned you gained 200 bps of market share in this field. Obviously, this is, maybe not meaningful quarter, but is this something you can confirm going forward?

[Florent Menegaux, Chief Executive Officer]

[Indiscernible] plus it's continuing. And we -- and it's due to the original equipment content of the vehicles that have been produced in the past. We continue to see that trend with the vehicle manufacturers. And replacement is just following. So we have no indication of a change of this.

Maybe so in 2020 first half, 18-inch and above tires represent 46% of our volume for the Michelin brand, overall, original equipment plus replacement. And what is important to understand from a price standpoint is that, this is a segment where we have the highest royalty rate between original equipment and replacement.

[Martino De Ambroggi, Equita]

Okay. Very last on the guidance. For the full year, you're guiding €1.2 billion. How much of COVID costs are factored in? Should we add something in the second half?

[Florent Menegaux, Chief Executive Officer]

In total, we factored €90 million, of which €77 million have been shown in the first semester.

[Martino De Ambroggi, Equita]

Okay. Thank you.

[Operator]

The next question comes from Henning Cosman from HSBC. Sir, you can go ahead.

[Henning Cosman, HSBC]

Hi. Thanks a lot. Good evening. It's Henning from HSBC. I understand you want to be careful on your group volume guidance, so I don't want to focus so much on the actual guidance, but rather what you say about the sort of implied effect on the full year guidance, because if I sort of apply 16%, 17% or so volume decline at around €130 million that I suppose we are talking about, with a slightly better drop-through in the second half.

If I do my calculations correctly here, that doesn't really leave anything at all in the EBIT bridge for the second half for all the other items, excluding volume, which appears to be in some sort of contrast to what you actually say on the slide when you talk about the price mix raw material being positive. So I just wanted to see if I'm misunderstanding something there. That's my first question please.

[Yves Chapot, General Manager & Group Chief Financial Officer]

Yes. I think -- thank you for your question. And I think you've seen that we've seen a strict in excess -- strictly in excess of €1.2 billion. I think that gives you a lot of numbers after that.

[Florent Menegaux, Chief Executive Officer]

Yes. Maybe, Henning, just to mention regarding all the drivers. For SG&A, we have been able to sharply cut our cost during the first half. As an example all the motor sport activity were frozen from end of February until the end of June and they had just resumed a few weeks ago. So we are not going to see that again in the second half.

The second is that, we have been also prudent in our forecast, with the fact that for the time being, we have not seen a lot of bankruptcy or companies that are going in trouble with the crisis. And we have factored a certain amount of potential bad debt on the second half which will partially offset some of the savings we achieved on SG&A during the first half.

Again, it's extremely difficult at this stage. As we said, we are in a very volatile and unpredictable environment. Nobody know, what will be the consequences of the -- or how the governments will, let's say, gradually will do their support measures, and we know that some companies have heavily rely on these measures. So, it's our duty to be prudent and to factor some part of that risk in our forecast.

[Henning Cosman, HSBC]

Thank you. But just to clarify, you're not at all envisaging something where all the non-volume components in the EBIT, which would be close to breakeven, right? You're budgeting funding very clearly positive.

[Florent Menegaux, Chief Executive Officer]

Yes. We said we will have a positive price mix raw material effect. But, we have also some -- we clearly think that there is some risk that we have to take in account. I mentioned one on the receivables that they might be over depending on how the situation will evolve.

[Henning Cosman, HSBC]

Sure. That's understood. Thank you. And as a second question maybe just on the free cash flow. Can you maybe just speak a little bit about the free cash flow opportunity in the slightly more outer years? You've obviously previously guided for €1.7 billion free cash flow towards €two billion free cash flow. Do you see any reasons why that wouldn't be possible, once we recover towards volumes more pre-crisis levels maybe in 2022, 2023?

[Florent Menegaux, Chief Executive Officer]

Yes, of course. But, -- and you will see in the detail of our press release that, for the time being, we are expecting the market to recover the pre-COVID-19 level. So, basically the 2019 level in the second half of 2022, which means that we should see a 2023 full year above 2019.

So, of course, if we come back in this range of activity there is no reason that the group will not be able to generate even greater free cash structure. And on top of that, as Yves has expressed publicly, we will do additional efforts in our inventories, which will improve our free cash flow when the activity goes back to a more normal level.

[Henning Cosman, HSBC]

And finally, if I may, just on the synergies and cost savings potential. We haven't been talking about that so much recently because of COVID. But 2021, of course, was going to be a very good year for you when the synergies of the acquisitions and the Multistrada savings come through very strongly for the first time. And you've guided a lot of the absolute amounts that you're expecting in the EBIT bridge by then. Should we assume any material difference as compared to your indications from the time, or would you say it's still fair to be adding these amounts onto the EBIT in 2021?

[Florent Menegaux, Chief Executive Officer]

The synergies rate will be in -- I think extraction of synergies is going well. Now what you have to factor is that as Yves mentioned, we will -- we assume that we will only reach back 2019 levels only by 2022. So, therefore, if you take Multistrada, for example, Multistrada is also impacted by the overall drop in the demand worldwide.

[Henning Cosman, HSBC]

Thank you.

[Operator]

The next question comes from Jose Asumendi from JPMorgan. Sir, please go ahead.

[Jose Asumendi, JPMorgan]

Thanks very much. Jose, JPMorgan. Three items please. The first one, can you comment a bit around product mix in the second half? Do you expect the EBIT contribution to be stronger than in the first half or similar, maybe can you comment on that topic?

Second, can you comment on your drop-through on volumes? And if you compare second half versus the first half, any direction you could give us there, any color in terms of that drop-through? And have you taken any measures in the first half to improve structurally the capacity of your plants in Europe specifically?

And the third point. Just going back to this SG&A as a percentage of sales, you have made substantial progress in the first half to reduce the ratio. Can you give us some direction as to how far? Or what is your gap now to the best-in-class in terms of the percentage of SG&A to sales? Thank you.

[Florent Menegaux, Chief Executive Officer]

As far as the product is concerned what you have to consider is that in the -- there are many different type of mixes in our mix effect. And so you will have some positive product mix effects coming from 18-inch plus these kind of things. But you will have less favorable effect due to OE in coming back. So OE replacement will offset some part of that mix.

As far as the drop-through is concerned there's a structural capacity. The drop-through as we were telling you is the drop-through will improve slightly versus what the drop-through has been seen in the first semester. However, we're not back to full production where we were entering the crisis. So, therefore, the drop-through will improve slightly, but it's slightly.

Now as far as the structural capacity, we have anticipated the closure of Dundee factory, because we were not in capacity to produce. And we have also -- we did not resume production at La Roche-sur-Yon. So, of course, you will see some impact of that in the months to come.

[Jose Asumendi, JPMorgan]

Thank you. And SG&A as a percentage of sales please, where are you standing turn something up to the best-in-class?

[Florent Menegaux, Chief Executive Officer]

I think we have -- I think we are the first to publish for the first half. So we'll see afterwards when all our competitors will have published their first half result. In the first half saving there was let's say some measures that we have taken due to the circumstance. But we have also realized that we were able to perform some activities. For example, we aren't necessarily having people travelling or -- so there will be some key lessons that we will retain from the first half and that will help us in our future simplification programs. But it's too early to say where are we -- how far are we from the best-in-class, last question.

[Jose Asumendi, JPMorgan]

Good. Thank you, Yves.

[Yves Chapot, General Manager & Group Chief Financial Officer]

Thank you, Jose.

[Operator]

The last question comes from Victoria Greer from Morgan Stanley. Madam, please go ahead.

[Victoria Greer, Morgan Stanley]

Good evening. Just a couple please. Firstly on the Specialty division and Mining volumes clearly have been, probably the best segment in H1, relative to all your other end markets in that business. Do you expect that to be a similar dynamic in H2? Yes, because obviously that's been pretty supportive for margins in that business in H1.

And secondly, could you give us an absolute number for -- either for H2 or -- yes for the full year for raw materials. And because I think we've discussed before that the spot rates have come down quite a lot, but there was a period where you were not really purchasing. So if you could help us on an absolute number for the raw mats and tailwind for the second half that would be great.

And then the third small one which I'm pretty sure I know the answer to already, which is no. But could you give us any commentary around the magnitude of the impact on -- from the site closures, in the second half?

[Florent Menegaux, Chief Executive Officer]

So for the site closure in the second half we will not disclose you details on this. But we've did not resume production at La Roche-sur-Yon. And we have closed earlier at Dundee. You will see that in our drop-through going forward. Maybe Yves on the...

[Yves Chapot, General Manager & Group Chief Financial Officer]

So regarding mining, yes we are expecting let's say a similar trend during the second half. But very comparable with what we have seen in the first half. Of course the geographical mix can be different, depending on the impact of the COVID-19 on the different geographies.

Regarding raw material, we are not going to provide absolute number for this specific item. But what we can tell you is that, the overall price mix raw material effect should be similar in H2 versus H1, but of course with different components, probably more raw material effect and less mix than during the first half.

[Victoria Greer, Morgan Stanley]

Got it. Thank you.

[Yves Chapot, General Manager & Group Chief Financial Officer]

Thank you.

[Florent Menegaux, Chief Executive Officer]

So that concludes our questions session. So thank you very much for joining us tonight in French time. And we all hope that the second semester will be better than the first one. Thank you.

[Yves Chapot, General Manager & Group Chief Financial Officer]

Thank you very much. Bye-bye.

[Operator]

Ladies and gentlemen, thank you all for your participation. You may now disconnect.