Compagnie Generale des Etablissements Michelin SCA

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Earnings Call Analysis

Michelin Reports Robust H1 2024 Performance Amid Market Challenges

Michelin delivered strong results in the first half of 2024, with operating income improving to 13.2% of sales from 12.1% last year. The company's segment EBITDA reached EUR 2.8 billion, accounting for 20.4% of sales, and generated a robust pre-acquisition free cash flow of EUR 669 million. Despite a 3.1% drop in sales due to currency impacts, a 1.9% mix improvement helped offset negative pricing effects. Michelin maintained its guidance for 2024, with anticipated segment operating income exceeding EUR 3.5 billion and free cash flow above EUR 1.5 billion .

Introduction and Strategy Focus

Michelin's leadership team, including CEO Florent Menegaux and CFO Yves Chapot, emphasized their strategic focus on becoming a global leader in life-changing composites and experiences. This strategy leverages several key assets: highly engaged teams, a strong brand, innovation leadership, and unique R&D and industrial capabilities. They aim to diversify from their traditional tire business into services and polymer composites, a move intended to ensure performance resilience across various markets and geographies.

Financial Highlights

Michelin reported a segment operating income of 13.2% of sales in the first half of 2024, an increase from 12.1% in the same period in 2023. This resulted in an operating income of EUR 2.8 billion, up 1.6 points from the previous year. Despite a 3.1% drop in sales to EUR 13.5 billion (excluding currency effects), the company demonstrated strong cash flow generation before acquisitions, amounting to EUR 669 million.

Market Environment

The tire market faced challenges due to an influx of budget tires from Asia, which affected both original equipment (OE) and replacement markets. OE markets saw a significant decline, while the polymer composite solutions markets were softer compared to the first half of 2023. Despite these challenges, Michelin’s focus on value-accretive segments and regions resulted in a mix improvement of 1.9%, counteracting the negative price effects from indexation clauses in their contractual business.

Segment Performance

Automotive segment operating margins improved due to strong mix effects, despite negative impacts from indexation clauses. The road transportation segment also showed a strong recovery in margins, benefiting from targeted market approaches and contributions from Connected Solutions. The specialty segment, which includes mining and polymer composites, maintained high margins of 16.8% despite a weak OE market.

Cash Flow and Debt

Michelin generated a positive cash flow of EUR 669 million in the first half of 2024, largely driven by a strong EBITDA of 20.4%. The company managed its working capital efficiently, resulting in a moderate increase in working capital needs. Additionally, net debt decreased by nearly EUR 400 million, and gearing stood at a solid 23.9%. Notably, Moody's upgraded Michelin's long-term debt rating from A3 to A2.

Guidance

Michelin reiterated its full-year guidance for 2024, expecting segment operating income to exceed EUR 3.5 billion at constant exchange rates and free cash flow to surpass EUR 1.5 billion before acquisitions. They highlighted expectations of continued benefits from their strategic focus on value-accretive segments and markets, although some headwinds like inflation and raw material costs are anticipated to increase in the second half of the year.

Sustainability and People

Michelin made strides in sustainability, achieving a 7.2% reduction in CO2 emissions and a 6.3% reduction in water withdrawal compared to the first half of 2023. They also focused on increasing the number of women in managerial positions, which rose to 30.6%. Their greenhouse gas reduction targets have been validated by the Science Based Targets initiative, aligning with the Paris Agreement's goals.

Challenges and Future Outlook

The company is navigating market distortions caused by an influx of budget tires, particularly in emerging markets like South America and Southeast Asia. They anticipate this inventory buildup will gradually be purged. Looking ahead, Michelin is focused on value creation and operational efficiencies. They expect continued market mix improvements, especially in the replacement market sectors in the second half of the year, despite ongoing challenges in the OE market.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, welcome to the Michelin 2024 First Half Results Conference Call. I now hand over to Mr. Florent Menegaux, Chief Executive Officer; and Mr. Yves Chapot, General Manager and Group CFO. Gentlemen, please go ahead.

[Florent Menegaux, executive]

Thank you. Good morning and good evening to everyone. Yves Chapot and myself are very pleased to host you for our midyear results. Before unveiling these results, I would like to start by emphasizing our key Michelin in Motion strategy. We are building a worldwide leader in life-changing composites and experiences. And for that, we leverage four key differentiating assets across enlarge background. The assets, you can see them on your screen. Of course, highly engaged and talented teams, a powerful and widely recognized brand, strong innovation leadership and unique R&D and industrial capabilities and defining products and services. All of that into enlarged playgrounds, of course, we have our historic activities in tires, but now you have services and experiences on a wide range of activities and our polymer composite solution as well. As shared during our latest CMD, a wide variety of destination markets ensures our performance resilience. We operate in different market verticals that you see on your screen. And we have a balanced activities across three worldwide geographies. That ensures the resilience of our performance. So without further delay, we are pleased to share our strong performance in the first semester. Start with our segment operating income, reaching 13.2% of sales in H1 with a strong cash flow generation. So we have operated in a tire market distorted by high inflows of budget tires across the entire world with group value-driven approach generated a strong increase in mix. We have generated a strong operating income from 13.2% of sales compared to 12.1% in H1 2023. And we have a strong cash flow generation before acquisition of EUR 669 million, driven by disciplined budget business management. If I zoom in into the market environment, the tire sell-in markets were positive in the period but inflated by very high export of Asian tires into replacement markets. OE markets have been sharply down in business to business and gradually deteriorating in business to consumer. Our polymer composite solutions markets are temporarily soft relative to a first half 2023 comparative. Our group's focus on value-accretive segments and regions translate into a strong 1.9% mix improvement, more than offsetting the negative price effect from indexation clauses in contractual business. Sales ended at EUR 13.5 billion, down 3.1%, excluding the currency effect. I now zoom in into our operational performance. In automotive, we have enjoyed further growth in operating margin despite the negative impact of indexation clauses and supported by a strong mix and continued strong and continuous mix improvement. Road transportation, strong margin recovery with price and mix benefiting from targeted market approach and growing contribution from Connected Solutions. In the specialty segment, we have a high 16.8% margin in adverse context from weak OE, especially in agricultural or construction and price indexation clauses. High prior year comparative in mining and polymer composite solutions. Overall, we had a favorable operating cost across all business lines in terms of raw materials, energy and seafreight. Then if I tell a little bit of free cash flow performance, our segment EBITDA has reached EUR 2.8 billion or 20.4% of our sales, up 1.6 points versus the first half 2023. And our working capital has been benefiting from efficient inventory management and softer volume. Overall, we maintain our 2024 guidance with segment operating income exceeding EUR 3.5 billion at constant exchange rate and free cash flow exceeding EUR 1.5 billion before acquisition. I now hand over to Yves Chapot, who's going to give you further details.

[Yves Chapot, executive]

Good morning and good evening, everyone. So beyond the strong business performance that were highlighted by Florent, the group is continuing to deliver and to continue to create value on the people and planet dimensions as well. As it is illustrated on this slide, we have continuously improved in the number of women in managerial positions by nearly 1 point at 30.6%. And we have also slightly improved our performance in terms of safety with a total case incident rate at 1. Our ambition being during the year to go below 1. I will come back on the profit dimension later on. And on the planet, two key indicators where we are very proud of what has been achieved by our team. A reduction of CO2 emissions Scope 1 and 2. So either the energy that we purchased or the energy that we produce by 7.2% versus H1 2023. And a reduction in water withdrawal by 6.3% versus the first semester of 2023. A very important event as well for our team regarding Planet, our CO2, our greenhouse gas reduction targets have been validated by the SBTi and has been considered as compatible with the Paris agreement of an increase in average temperature by the 1.5 degree by the end of the century versus the pre-industrial world.

So now looking at the market. Markets have been distorted by the very strong inflows of budget tires mostly in passenger car and light truck and truck for replacement. Overall, the passenger car market has grew by 3% during the semester, which, in fact, is hiding a decrease of 1% for original equipment, an increase of 4% for replacement. The decrease of 1% in original equipment has been specifically strong in Europe with a market lending at minus 5% when China was at plus 5% mostly pulled by the export of vehicles. And on the replacement side, although both Europe and Americas are posting, respectively, plus 6% and plus 4%. It was mostly the selling market was mostly driven by the import of tires from Asia. On the truck side, we are seeing exactly a phenomenon which is very similar. Market overall at plus 2%, but with OE at minus 5%, with a strong decrease in Europe, minus 17% and North America, minus 9% for original equipment. When South America was rebounding after a very low 2023. And on the replacement side, the market is at plus [indiscernible] mostly pulled by the strong performance of North America, plus 17%, but of which most of the growth is coming from the import of tires partially from Thailand in anticipation of potential duties that were effectively adopted, but that will be enforced only from September onward. On the specialty side, the mining market is the consumption of tires is, let's say, growing slightly, but mining are, on the one side, decreasing their inventories. And we are also seeing in parallel, we look at the off-highway transportation, a strong drop of original equipment markets in agriculture, construction and material lending. While replacement is more resilient, but we have to keep in mind that in this market, original equipment and replacement are, let's say, weighing nearly the same for the same amount of the market. Aircraft is still growing and the 2-wheels market is also recovering after a very poor 2023. Now looking at our sales. So you observed that our sales were down by 3.1% at [indiscernible] ForEx. The scope effect is mostly coming from FCG. The volume effect at minus 4.4% is very strong in specialties, minus 7.2% mostly driven by the [indiscernible] both original equipment and some mining adjustments linked to inventory adjustments and less sales in Central Asia. Transportation, so SR2 at minus 4.7% and automotive at minus 1.9% with a strong mix effect at plus 1.9% when the price effect at minus 0.8% is mostly coming from the application of raw material and energy clauses in our contractual business. Non-tire are flat, but with a high level of comparative during the first half of 2023 and currencies are weighing negatively on our top line, mostly coming from currencies such as Turkish lira, the Japanese yen, Chilean peso or the Chinese yuan. So the -- looking now at the segment operating income, like-for-like, our segment operating income increased by EUR 100 million, which is an outstanding performance. So when if I eliminate both the currency and the scope effect, it's plus EUR 100 million, and it's plus EUR 127 million, if I exclude only the currencies. It's probably a record high operating margin at 13.2%, 110 basis points over the first half of 2023. With the volume which is weighing negatively at EUR 325 million, a very strong mix effect of EUR 189 million compensate the effect of the clauses on the price side and we benefit from a strong tailwind related to raw material, energy, transportation of nearly EUR 450 million. SG&A are increasing by EUR 100 million, mostly driven by inflation and labor cost inflation. And on tires has a slightly negative contribution on that bridge due to a combination of multiple factors, but mostly the decrease of the volumes in the [indiscernible] businesses, which is, let's say, contractual effect. Now looking at the performance by segment. You can observe that despite volume being down by 1.9% RS1 increased in segment operating income by 5.6%, with an increase in margin of 1.1 point. RS2 is showing a very strong recovery from 5% operating margin to 9.2%. It's a main contributor to the group improvement in the segment operating income. And here also, despite volume dropped by 4.7%, revenue rose by 3.9%, of course, the segment is impacted by the clauses, particularly on the original equipment, but our teams have been able to strongly valorize our offers, both at OEM and fleet. And we benefit in this segment from positive market and geographical mix. It's important to notice that this segment does not yet benefit from the consequence of the footprint decisions that we announced end of 2023 and early 2024, which will start to pay off in 2025. RS3 with volumes down by 7.2%, is of course, impacted, but it's still posting a margin at nearly 17%, which is in line with our ceiling or thresholds, sorry, for this segment. The cash flow generation in this context is positive for the first half of the year. Generally, it's -- before we started to enter into a more volatile environment with COVID in 2020. But before this period, our cash flow was around EUR 100 million during the first half. So we posted EUR 669 million, mostly coming from a very strong EBITDA at 20.4%, a change in working capital, which is, of course, negative. It's linked to the seasonality of our working capital and the group is partially building inventories ahead of the winter season. And generally, we have a strong inflow of cash during the last three months of the year. So it's a moderate increase of working capital, thanks to the steering -- the business steering. The other elements are in line with our expectations. I just want to highlight the positive contribution of our joint ventures, mostly coming from TBC EUR 100 million dividend, which was paid during the first quarter. Our gearing has improved. Our net debt has decreased versus the 30th of June 2023, by nearly EUR 400 million. Knowing that if you look at the bridge, the contraction of the net debt, we have already booked during the first half, the full effect of the share buyback, although only 50% of this program has been done at the end of last week. So the gearing is solid at 23.9%. Mechanically increased our way at the end of June versus the end of December and maybe the main event of the semester is the upgrade of our long-term debt by Moody's from A3 to A2 and the notation by Scope, which is a European rating agency who started to note our debt and rate effect A. So very, very positive and very healthy balance sheet at the end of the semester. So before moving to our full year guidance, I would like to come back on some aspects of our strategy that we have highlighted during our last Capital Market Day, our value approach. It can be summarized by the sentence that we want to win where it matters. So we are looking to maximize the value creation for our customers as well as for our other stakeholders. At original equipment, we are relying as Florent mentioned into introduction, very strong innovation, brand power, very strong partnership with some of these customers and the loyalty that it is generating on the replacement market. So we try to maximize the value creation on these segments as well. And on the replacement, we are trying to focus on value-accretive segments, which are not necessarily the one that are today, the biggest in volume, but it's generally segment of the market that are growing faster than the average of their segments. Typically, high-power tractors in agriculture with large tires or trucks or of course, the premium 18-inch and above tires on the -- during -- within the S1 segment. So some concrete example of this strategy, looking at the three reporting segments, starting by SR1. Our share of 18-inch and above tires at the Michelin brand, both in replacement and original equipment has increased by an increment of 5 points during the semester, as we did for the last 3 or 4 -- 4 or 5 years, which contribute generally over a year at nearly EUR 100 million of sustainable mix effect -- impact on our EBIT. And this segment of the market, 18-inch and above were growing by 12% during the semester. On SR2, the choose and focus strategy has led the teams to focus on mostly Europe and the Americas to have a more targeted approach in the other regions or to look at some niche where we can really create value, for example, for [indiscernible] goods in some regions such as China, for example. So we are looking to capture markets that represent 50% of the market value, although it's less in volume, which are characterized by fleet looking at premium suppliers, tech-oriented, so with a strong contribution of our connected mobility offers and fleets that are also looking at the environmental impact and are looking to lower the environmental impact. Regarding SR3, you see several examples of business segments from material lending to mining, to high-tech agricultural tracks or conveyors as well as marine inflatable boats, where thanks to the technological leadership of the group. We can offer different products that are very differentiated from the competition and that are contributing to our customers' performance and value creation. So this example shows that when we are looking to win where it matters, we have in all the three reporting segments, very concrete examples of this strategy. Now looking forward for the second half of the year. We have not changed our hypothesis regarding the passenger car, light truck and truck market outside China. We consider that these markets will probably evolve in a range of minus 2 or plus 2% versus last year. Probably two inflection versus the first half of the year, we should see a lower impact on the Asian imports, particularly, for example, for truck tire replacement in North America in the second half. And in all the markets, we are seeing an erosion of OE volumes that has, let's say, gradually increased over the second quarter and should continue during the second half of the year. We should not forget that in the previous years, the original equipment market, particularly in truck has been impacted by the anticipation of the regulations, partially linked to the emissions of the vehicles. In specialties, we have lowered our market hypothesis for, let's say, a range of around 0 to something between 0 and minus 4. Mining tires demand remained higher fundamentally, but we observed a gradual stock reduction at customer level along the year. It's a dramatic -- just, let's say, reduction of some weeks, we are not speaking in months. The beyond tire markets will be flat on replacement, but very negatively impacted on regional equipment, partially in agriculture and construction. Two wheels is a more seasonal business. So second half is weighing less than first half. And aircraft we should come back to normal growth before versus the pre-COVID reference base. And in Polymer Composite Solutions, overall markets are soft across verticals, mostly because 2023 was a very high reference base. And we are also observing some destocking across industries. So based with this hypothesis, we have slightly lower down our volume hypothesis for the year in a range of minus 2% to minus 5%. We consider that our operating performance, net of inflation should be slightly positive. Of course, it was strongly positive during the first half, but the tailwind of that we observed in raw material energy will, of course, erode and maybe become negative, particularly for some raw materials such as detergent or natural rubber. Our CapEx hypothesis are in line with what we have announced at the beginning of the year. So there is no fundamental reasons to modify our guidance. And we are confident that we should achieve segment operative income above EUR 3.5 billion and a free cash flow before acquisition above EUR 1.5 billion. Having said that, I think Florent, we can start with the Q&A session.

[Florent Menegaux, executive]

Thank you, Yves. And now we are all ears to your questions.

[Operator]

[Operator Instructions] The first question comes from Harry Martin of Bernstein.

[Harry Martin, analyst]

So I'll ask one question on the passenger tire business and then one on RS2. So in RS1, I wondered if you could confirm whether the 5 percentage points of improvement in the 18-inch tire mix means year-on-year growth in that segment in the premium segment. And on your estimates, does that mean that you gained share, either on value or volume. And then on the margin recovery in RS2. I mean you presented the plan at the CMD to get the RS2 margins back to above 10%. But the speed of improvement here is really notable in the context of the OE weakness and the Asian imports into the U.S. as well. So could you give us some more color on the drivers of that margin improvement? And it sounds like fleet management solutions are contributing. So any color on how significant those are would be really useful.

[Florent Menegaux, executive]

Okay. So I will start. And so in RS1, yes, we have seen a sharp improvement in the overall content of our sales into higher mix. Now in relative terms, the markets are moving. So overall, we are pleased with the way it develops, and I will not comment further on this. And on the RS2, there are stronger drivers. Of course, all the -- what the plans we have detailed about how we plan to restructure that activity by what Yves explained, winning where it matters. We have strongly focused on where we can demonstrate our performance and where we have willingness to pay for our performance by our customers. That includes OE that includes replacement market, and we will further see some improvement in this market due to the restructuring of our overall capacities that we don't see yet. Because right now, we are not as efficient as we could be because we are moving down some production in some plants while ramping up and industrializing in other plants to offset the remaining margins -- remaining volumes. So we are sure that -- we are confident that the segment 2 will get to the performance expected. Now of course, I know it's tempting to always look at improvement in a linear manner. But of corse, unfortunately, we cannot reach that performance all the time. We would like, if we can do it, we will do it. But things cannot go to the sky all the time, but we are confident in our ability to deliver our commitment.

[Yves Chapot, executive]

And it's mostly for RS2, there was a main driver is the chosen focus. So the focus on either the geography of the business segment and also a very positive contribution of our connected fleet businesses, which is now accretive to this segment operating margin. But through that, we can demonstrate the performance of our offer.

[Operator]

The next question is from Monica Bosio of Intesa Sanpaolo.

[Monica Bosio, analyst]

I have two. Can you give us an update on the dealer's inventory situation for the different segments. And the second one, I suppose that minus 0.8% negative pricing is entirely attributable to the indexation. Should we expect the same effect in second half or maybe will indexation be neutral. And on top of this, a plus 1.9% mix effect is a very remarkable achievement. Would you see these results as repeatable in second half and should we still expect some price mix drop through overall in the region of 55% in the second half.

[Florent Menegaux, executive]

Thank you. So on the dealer's inventory, of course, it varies, but in a nutshell, we see. In terms of -- in passenger car, we see the stocks at the norm across all the regions. In winter, we have seen additional sell-in sales in the beginning of first semester as we started the year with a very low inventory in the winter in Europe. So we see that. In truck tires, the stocks are at normal or across everywhere. And in mining, we see a slow decrease, especially in -- with some customers that had put some excess inventories. So across what we see is a slight decrease. In terms of pricing for Q2, then I would do just a remark on this. We have -- we received conflicting inputs from the market authorities that tell us we need to disclose as much answer as much questions that are asked on this. And the European Commission that tells us we should not basically disclose any type kind of information. So I can only be -- Yves and I can only be very vague on this and said, we have no chance. And we expect overall second semester comparable to what we have done in the first semester, but we cannot comment further. And that is true for every question on this, we will just repeat the statement. And maybe for the remaining question on the mix.

[Yves Chapot, executive]

To complete on the price on the Q2, the negative pricing is entirely attributable to the indexation. No other effect. Regarding the mix, yes, we are expecting a mix, which will be maybe even better because we think that market mix between replacement and original equipment will be more favorable in the second half as we are seeing OE market deteriorating. And which will globally probably compensate the volume effect that are linked to this market deterioration on the original equipment.

[Florent Menegaux, executive]

There are plenty of mix. We have product mix, segment mix, geographic mix, OE/RT mix, many different mixes, but we expect things to be steady.

[Monica Bosio, analyst]

Okay. Very clear. If I may, taking pricing comparable to the first half and maybe a better mix in the second half, should we still expect a price drop through on price/mix at 55% or maybe it could be target.

[Florent Menegaux, executive]

Yes. Monica, the price effect, the little proof for price is 100%. The proof for mix, if you look on the first half is around 70% And historically, it has moved between 50% to 70%.

[Operator]

The next question from Michael Jacks of Bank of America.

[Michael Jacks, analyst]

Firstly, what was the contribution from logistics in the manufacturing and logistics tailwind that was realized in the first half? And now that you have concluded your annual shipping negotiations, can you give us some guidance on your expectations for transport costs for H2 and into the first half of 25%? That's my first question. And I'll stop there and ask my second question afterwards, if that's okay.

[Florent Menegaux, executive]

Yes. So we don't disclose that detailed information. But of course, we had -- but I can tell you that we have a positive maritime logistics -- maritime freight cost input, and we think that will remain as we have plenty of contract renegotiations that have been signed. And so we are confident in our ability to enjoy this renegotiated maritime freight.

And maybe what we can add is that at the beginning of the year, we are concerned about the potential effect of the red sea crisis. In fact, it has not led to inventory cost related to the shipping.

[Michael Jacks, analyst]

That's helpful. And then my second question on the SR3 segment. It seems like the drop-through rate there was particularly high. I know you don't disclose that separately, but could you perhaps just provide a little bit more analysis on that? Is that comment fair? And what are your expectations there for H2? And then I have one more question, if I may.

[Yves Chapot, executive]

Yes. SR2 has been high.

[Michael Jacks, analyst]

SR3, sorry. Not SR2.

[Yves Chapot, executive]

SR3, yes. SR3 has been high, but mostly because we have seen, as I mentioned, original equipment market partially for construction material lending and agriculture. Some very big OEMs are announcing restructuration, very sharp volume drop -- have announced share volume drop during the first half. And it has -- it's a market where in -- each market is different, but in average, you can consider that in this kind of market, OE weight is around 40% to 50% of the market and replacement is around between 50% to 60%. So that's a segment where the volume impact is important, which leads to this higher [indiscernible].

[Michael Jacks, analyst]

And then my final question, are you observing any other market distortions or impacts from the imported budget tires? Is there any trading down that's become visible? And do you worry yet that the price gaps between premium and budget segments is getting too wide?

[Florent Menegaux, executive]

On the price, I will restate what I've just said, we will not comment further because up until we have a clear understanding of what the market regulators expect versus what the European Commission expects. On the trading -- the market distortions, we see that happening, especially in the emerging countries, South America, Africa and Middle East, Southeast Asia, were there, it's very significant. Now does it change the landscape structurally or not because we think it's just an influx of an inventory buildup. We don't anticipate structural market distortions linked to that.

[Yves Chapot, executive]

And one part of the market distortion, for example, for truck tires, we have seen imports growing by 90% in the U.S. import from Thailand. Because there is already tariff between China and U.S. for truck tires and the rumors of a potential implementation of tariffs for tires coming from Thailand and Southeast Asia has lead to an inflow, which is completely artificial, 90% were never seen. Yes. This inflow will be absorbed by the sellout probably in the next 6 to 12 months.

[Florent Menegaux, executive]

This inventory buildup will fade down in the second semester, and it will take some time to be purged.

[Operator]

Next question, gentlemen, is from Jose Asumendi of JPMorgan.

[Jose Asumendi, analyst]

Two questions, please. If you could please help us a little bit with the profit bridge expectations across the three categories, raw mats, manufacturing, logistics and SG&A. Directionally, how do we think about them into the second half of the year? And second, can you help us a bit with your restructuring cash outflows in '24 and maybe 2025, which will reflect on the work you're doing to improve the capacity and the loading of your plants in Europe.

[Yves Chapot, executive]

So, I will start with the first part of your question. For the second half, raw materials should be slightly unfavorable as we have seen already a slight increase in natural rubber and the anticipation of the implementation of EUDR, which is European Union Deforestation Regulation that will lead to all the tire manufacturers that are going to buy a natural rubber to pay a slight premium to get this certification. Logistics will be favorable, partly the sea freight. And overall, for the year, we consider that energy will be favorable. The only element which will remain defavorable -- unfavorable is the labor cost, both in, let's say, the cost of goods sold and SG&A. Regarding the effect of restructuring in our free cash flow. In fact, overall, we consider that we should have around between EUR 200 million and EUR 250 million for the full year of cash outflows for the restructuration that has been announced. So that's in line with what we have announced during the previous calls.

[Operator]

Next question is from Martino De Ambroggi of Equita.

[Martino De Ambroggi, analyst]

Good evening, everybody. The first question is on mix at group level. I clearly understand it is composed by several different effects. But what is the most important contributor, one question. And am I right in assuming that 18 inches and above was one of the most important contributors and probably this year can be even higher than the -- significantly higher than the EUR 100 million that you expect on a yearly basis? This is my first question.

[Yves Chapot, executive]

Okay. So we don't disclose the mix effect by business segment. But what I can tell you is that the mix effect has been positive across the 3 segments. Because as Florent already mentioned, we have the product mix. We have the geographical mix, for example, particularly favorable for RS2. And we have the brand mix that also is impacting and the market mix between original equipment and replacement. So across all the segment, we are seeing a positive mix. And as far as mix effect on SR1. I will stick to the figures that I mentioned of roughly EUR 100 million accretion per year on [indiscernible] because that's one element of the mix, but not the only one that contribute to our mix improvement.

[Martino De Ambroggi, analyst]

Okay. And the second is on track again. Could we consider 10% return on sales is achievable this year? Or we need the effects of the actions you already announced, which will be visible next year.

[Florent Menegaux, executive]

Of course, as I mentioned during the presentation, the improvement that you have seen in the first half does not include any effect from the footprint decision that we took since October last year. So we should have further improvement in 2025, where we will land exactly in 2024, Honestly, we are already very close to 10%, which should be somewhere probably between 9% and 10%.

[Operator]

The next question is from Thomas Besson of Kepler.

[Thomas Besson, analyst]

Could you please help us understanding how much of the H1 volume decline is linked with your more selective policy and how much it may continue to weigh on your relative volumes in the second half and in 2025, please.

[Florent Menegaux, executive]

Yes. So on this, whether it will continue in H2 and in 2025, yes, there will be a portion of selection that will gradually move because we are also phasing down in some markets gradually. So we don't make a sharp movement with that. Now in the volume decline, there are market effects and selection policy effects considered half-half effect.

[Operator]

The next question is from Sanjay Bhagwani of Citi.

[Sanjay Bhagwani, analyst]

I have two questions left. The first one is coming back on the mix drop-through. I understand H1 has been a strong at 70% this time. And I reckon you mentioned normally a range of 60% to 70%. So are you able to provide just some color on. Because there are several moving variables here like product mix, segment mix, geo mix and OE/RT mix. Are you able to provide some color on each of these are, let's say, generally above average to the 60% to 70% range and which are below. The reason why I'm asking this question is because it can help us understand how the mix drop-through may look in H2, but also it can help us in bringing in some perspective for '25 and '26. That's my first question. And I'll just follow up with the next one if that is okay?

[Yves Chapot, executive]

Yes, I will answer to your first question first, Sanjay. On the second half, we are expecting a drop-through effect, let's say, in the range that I already mentioned, between 50% to 70%, knowing that we should have an increased mix effect overall on the market side. But as we mentioned already, there is -- when I say market is between original equipment and replacement. But there is also so many different mix effects that we are always -- I don't want to give you a precise figure and more range. So we should be not too far from 70% in the range for sure, above 50% and maybe close to 70%. As far as 2026 target, I do not have crystal ball, but we are working to win where it matters. And winning where it matters means that we are looking to segment where we can create value for our customers. Our customers are already have a willingness to pay for our technology, our low [indiscernible] performance and should contribute constantly to our mix improvement over time. As far as the drop-through of 2026, I think, as I said, there is so many mix components in the mix that it will be as others to give you a precise figure for 2026.

[Florent Menegaux, executive]

So what we can say is that in a structural overcapacity market, I think that the -- what we're doing is the only right thing to do strategically.

[Sanjay Bhagwani, analyst]

So maybe we can just assume 60% to 70% as it is now.

[Florent Menegaux, executive]

You bet.

[Sanjay Bhagwani, analyst]

Understood. And my second question is on the other line item. And so because this other line items have been one of the key moving variable of the earnings for the last 2 years? So keeping in mind that, let's say, you meet your free cash flow target, would you see this other line item as a tailwind for full year? Because last year, this was I suppose a big headwind and then if you're able to provide some color on the magnitude of how this will look like, assuming you're meeting your free cash flow targets, for example?

[Yves Chapot, executive]

Sanjay, please authorize me to correct what you said. It's not a headwind or a tailwind. It's what -- the main element in the other line items, other items line is the effect of the group bonus that is paid to all group employees -- the following -- during the following year. So we book in advance, of course, the bonus that is going to be paid, linked to the year where we deliver the performance, but the payment is occurring in the spring of the following year. So it's simply the consequence of a value sharing scheme. So when we overperform during one year. We book the provision reserve to -- correspondent to these bonuses. And when we underperform, it has a positive effect on the year or EBIT.

[Operator]

The last question, sir, is from Michael Aspinall of Jefferies.

[Michael Aspinall, analyst]

Just two quick ones. You mentioned tariffs may be coming for North America in September. Can you just talk to what effect do you think that's going to have on the market in '25 once that additional inventory is digested?

[Florent Menegaux, executive]

So we have already seen some effects. But Yves described about situation relative to Thailand and the tariffs were different from what was anticipated, which led to a huge selling there. So they're now -- the tariffs are lower than anticipated. So we think this excess inventory will take time to be purged in the market now. What is the speed? We don't know yet.

[Michael Aspinall, analyst]

Okay. And then just one more for me. I'm interested in your acquisition pipeline. I'm assuming you have both public and private companies in the pipeline, are you still seeing attractive public listed targets in the current market? Or have you seen private targets become more attractive relative to public given equity markets?

[Florent Menegaux, executive]

What we still see in the market is that there are very high price expectation in M&A, whether it's public or private. And of course, we are -- we are following our strategy. But we won't do stupid things, exactly what we said during the Capital Markets Day.

[Michael Aspinall, analyst]

Okay. So you're seeing higher price expectations still in private markets as well?

[Florent Menegaux, executive]

So far, yes. So I think we have -- it was the last question. Yes, we have finished all the questions. So thank you very much for your attendance. And it's a renewed pleasure to present our results and -- so we will see you in a few months from now. Thank you very much.

[Yves Chapot, executive]

Thank you very much. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's Michelin conference call. Thank you for your participation. You may now disconnect.