Compagnie Generale des Etablissements Michelin SCA

PAR:ML

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to the Michelin conference call. The conference call will be conducted by Mr. Florent Menegaux, Chief Executive Officer; and Mr. Yves Chapot, General Manager and CFO. You are able to download the presentation from Michelin Group website. I now hand over to Mr. Florent Menegaux and Mr. Yves Chapot. Gentlemen, please go ahead.

[Florent Menegaux, Chief Executive Officer]

Good evening. Thank you for joining us for this quarterly call on our sales and markets at the end of Q3 for the year 2019. As you know, we have only 45 minutes for the call tonight, so I leave the floor to Yves, who's going to introduce you to the numbers.

[Yves Chapot]

Thank you, Florent. Good morning, everyone. So I will go directly on the Slide 2 of the presentation. As you see, our growth has been 10.4% for the first 9 months of the year, lifted mostly by the contribution of acquisition and a very strong price/mix effect.In the weaker markets, we have seen our volume decline by 0.8% during the period, particularly due to the weakness in the automotive tire market, particularly the original equipment. The decline in the truck tire volumes, which saw a sharp decline particularly at the end of the quarter, and growth of the mining tire business in line with our expectations, counterbalancing very steep drop in the agriculture and construction tire markets, particularly to the original equipment.So this is -- this 0.9% decline in volume is composited by a strong price/mix effect of 2.1%, thanks to very strict price discipline management in all our regions across the board, particularly with the price increase that we have implemented during the third quarter and the strong mix effect, which is shaped both by a very strong OE [ auto ] mix for the automotive sector and the mix of activities particularly in the third sector. And within the automotive sector, with very strong mix -- product mix with more premium tires.The contribution of acquisition is in line with our expectation by 7.1%, and we have sustained the deployment of our competitiveness plan during the period.So now I move to the markets for the first 9 months. You have here in the slide the figures of at least for the 2 first segments by quarter. So in the Q3, there was an improvement in the automotive market, thanks to, on one side, the sustained growth in RT in North America and Asia despite, to say, no growth in markets. And of course, the basis of comparison for original equipment markets, which start to be more favorable from September onwards, particularly in China, the OE market being down by 4% during Q3. But probably mostly the main event of the quarter is B2B markets, and we have seen the transportation truck market declining -- dropping over the summer. We had a sharp contraction in the truck OE market in Europe in Q3 at minus 7%. The North American market, which has been growing for several years in a row and which was growing in the first half of the year by 9%, has been declining by 2% during the third quarter. And on top of that, we have also seen some emerging markets in India and original markets dropping sharply.On the replacement side, we have seen an increase in the market data, particularly for Europe, which is partially linked to the fact that some Asian or Chinese majors who have been, let's say, stopped by the duties implemented in late 2018 were back in Europe through their -- at the end of [ 2018 ].And regarding the SR3, we have seen the mining market growing in line with our expectations. And in the off-road, as I mentioned, we have seen the agricultural market declining and, partially, the construction original equipment market turning down during the third quarter.So in this context, you have the -- on Slide #4, the bridge of our sales for the first 9 months. So you will observe that the consolidated growth has been 6.3%, mostly triggered by the external growth, 7.1%, and the decline in volume by 0.8%, partially composited by the price/mix effect of 2.1%. So in a nutshell, the like-for-like growth for -- over the first 9 months of nearly 1.3%. And on top of that, you have 2 points of currency effect.If we move now to the Slide 5, you will see the same bridge for the third quarter of the year. We see [ that the growth ] -- that the consolidated growth is lower than for the first 9 months. [indiscernible] is no consolidated organic growth [indiscernible] particularly consolidated in June -- July 2018. So external growth impact is 4.5%. The organic growth, the volumes have been declining by 0.6%. And we have a very strong price/mix effect over the quarter of 2.9%. So the like-for-like growth for the quarter has been 2.3%, in which you have to add the currency effect, which lead us to the EUR 6.1 billion turnover.So all together, if you look now our sales segment by segment, the sales increased -- so you have the figures to hold the full segment. Keep in mind that for all the segments, you have a mix effect of around 2 points. So including Forex, external sales has been growing by 3.7% mainly driven by the very strong product mix. Favorable mix effect also lead to the [indiscernible] differential and higher production of ATV [indiscernible] tires in our sales mix, which, at the end of September, for the first 9 months represents 43% of our total volumes instead of 39% for the full 2018 year. You must note the success of the pilot for SUV, which has been instrumental in this strong mix effect.On the SR2, you observe the growth. If you take in account the Forex of the 2,000 -- [ 2 plus 2 ] points, which is, of course, weaker, and that's where we have seen the declining markets, particularly in Europe. That has been, of course, offset by our strong price discipline with the price increase implemented in most of the regions from August. And the growth of the third segment, 39.7%, which includes 34% contributed by the acquisition and the remaining growth of 1 -- 5%, including, of course, Forex, which is mostly by the mining activity and offset by a relative decline in agriculture and construction markets.So based on these first 9 months figures, I will just come back on the 2019 scenario. So we expect the passenger car and light truck to the automotive market to be overall declining by 1%, with a slight increase in replacement. Of course, completely hedged by the original equipment decline that we expect now at around minus 6% and this -- let's say, this -- the total mix has not been changed since we published our half year results.On the contrary, regarding the transport segment, the truck market that we were seeing earlier in the year at minus 2%, we expect the market to land at minus 4%, mostly due to the slowdown in original equipment in North America, which while growing during the first half of the year, which has started to decline during the Q3, and the contraction in Europe. And we expect also in the equipment a further decline in demand in North America and the -- including the Asian market, China and India are down.Regarding the specialty, we were previously expecting a growth of 2% of the market. Our forecast now is a market which will be basically flat. Mining tires growth, that should land around 4%, will be completely offset by the steeper downturn in the agriculture markets and the decline of the original equipment construction markets. That will lead us to have a specialty market, let's say, flat for the entire year.Today's [indiscernible] positive, we have the concern -- of concern our 2019 guidance, so maybe we have revised the overall benefit to be market [indiscernible]. We maintain our operating -- segment operating income and [indiscernible] guidance, thanks to sticking to our price discipline, carefully monitoring our expenses and our capital expenditures.The basis for this guidance is an impact of raw materials that is flat. That is what we announced -- which is the same as what we announced during the half year communication, so minus EUR 100 million. The raw material had been -- some raw materials have been increasing during the first year and declining during the second half. And some others might be different in one segment to another. But overall, the effect of the group should be around minus EUR 100 million. The currency effects will continue to be positive, and we expect the net price/mix raw material effect to be above EUR 200 million, which is higher than what we communicate earlier in the year. And we stick to positive gains of our competitiveness plan versus inflation.At this stage of the year, we are not yet ready to provide you a guidance, of course, for 2020, but we would like to share our first outlook for the market. Basically, we expect the SR1, the automotive market, to be, let's say, in the range of between 0% and minus 1%, replacement market being slightly positive, but only we see the OE market down by 3% next year, although, we know that the basis for comparison for some regions are lower, but that's, at this stage, our hypothesis. We also expect the truck markets to be down between minus 1% and minus 2%, with a strong decline in Europe and North America and stable demand in China and in India. And we expect the SR3 underlying [ market ] being between 0% and minus 2%. Mining, aircraft and 2-wheel markets being -- remaining positive, but we expect a steeper drop in the off-the-road tire demand, first, in the original equipment. We [ already ] see the construction market coming down during the last summer, and we it will be -- these kinds of markets are very cyclical in our January, [indiscernible] 2-years cycles, so we expect this market to be very active in the next year.So that's, for the time being, our outlook. And we'll be ready to take your questions.

[Operator]

[Operator Instructions] We have one first question from Mr. Kai Mueller from Bank of America Merrill Lynch.

[Kai Alexander Mueller, Associate and Analyst]

The first one really to come to your Q3 results. You showed a very strong price/mix effect in the third quarter, which was actually a big step up off -- from Q2. How do you think about this going into the fourth quarter? And can you give us a bit of color in terms of how is your focus really price over volume? Would you have been able to capture more volume had it not been so aggressive on price? And what gives you that confidence to get that more than EUR 200 million price/mix effect? So is that something we should be looking at on the margin? And then for next year, just to really understand, you obviously have a very cautious outlook. If I blend this with your current business portfolio, looks like about a minus 1% in terms of volumes for next year. Do you think, again, because you tend to guide performance in line with markets, that you would be able to outperform that? Or would you be looking again to just grow in line?

[Florent Menegaux, Chief Executive Officer]

Okay, so thank you for the -- I will take the first part of the question, and I will let Yves answer the second part of the question. So about the price/mix and the influence of our pricing policy on volume, we've been consistent in what we've been saying for many months now. In the market environment the way it is, there's no point trying to chase additional marginal volume at the expense of price. In this market environment, the only thing you do is you destroy your margin, and you do not get volume. So we don't do that. We have adjusted our price according to what we think is acceptable by the market and by our customers, basically. And to take into consideration the raw material impact we had in comp for this year, and we will stick to that policy in the Q4 because I don't see why, in a deteriorating market environment, we should think we can outsmart the market by pricing. So we have no reason to believe -- and we don't manage our business, we don't steer our business by decreasing the price. Second part of the question, Yves?

[Yves Chapot]

So maybe regarding the question about the fourth quarter and regarding price/mix, so I will repeat what Florent said regarding the price. We strive to stick to our price discipline policy. Regarding the mix, of course, you have to understand that there is the mix that we pilot, the mix of the segment mix -- product segment mix. And there is a mix which is a consequence of the market, particularly the original equipment replacement and the mix between the different segments of business, for example, between mining and what we call [ highway ] transportation. So the effect overall, the price/mix effect to be -- price/mix, raw material effect to be above EUR 200 million because, first, our strong price policy. And because, this year, we have quite favorable mix effect, with impact this [ 3 weeks ] all aligned in the same way. We have the product segment mix which is positive in SR1. Within the SR1, the mix between OE and RT which is positive. And within SR3, the link between mining [indiscernible] which is positive. And that makes us relatively confident in the fact that we will outpace the EUR 200 million price/mix raw material effect. But we have, effectively, a cautious outlook for 2020. As said, we have seen the -- particularly all the B2B markets may be cooling down during the summer and in September. So we are prudent regarding next year. And we will try, as we do every year, we try to grow at least at the pace of the market, sticking to our policy regarding pricing.

[Operator]

Next question is from Mr. Raghav Gupta from Citi.

[Raghav Gupta-Chaudhary]

Another question on price/mix. Your peers are talking about intense pricing pressure in Europe. You have a very clear strategy to try and maintain discipline. I was wondering if you could provide a little bit of color on the dynamic in the 2, I guess, high value-add and low value-add, so greater than 17-inch and less than or equal to 17-inch, just some color about perhaps what you're seeing there in the market. And then secondly, on inventories, in the September market data, you referred to the wait-and-see attitude of the distribution. Can you just talk us through the current inventory situation at distributors, please?

[Florent Menegaux, Chief Executive Officer]

Okay. So as far as the market pricing environment, we have made our price increase and what we have -- what we are observing is -- through declaration, is that our competitors are, depending on the region, following but at a different date. We were pushing in segment 2 as of 1st of August and for segment 1, the 1st of September. From what we see so far is, just based on the declaration, the competition has pushed some price increase in SR1 and SR2 as well with 1 to 2 months difference and, sometimes, with apparently some price cover for a few weeks. But at this stage, it's too early to say what will happen in the market. What we see is that customer demand is still adequate for pricing positioning for us. Now, as far as the inventory situation, from what we see in Europe, especially, we don't have anything wrong in that inventory situation, in the overstock or understock. What -- the winter season has not yet really started in Europe. Now for the rest of the world, we don't have any indication that we have an inventory situation as you were talking about.

[Raghav Gupta-Chaudhary]

Helpful. And the pricing dynamic, can you split it out between high value-add and, I guess, less than or equal to 17-inch tires -- oh sorry, 17-inch, yes.

[Florent Menegaux, Chief Executive Officer]

Yes, if we talk about 18-inch, 18-inch plus and 17-inch minus. Again, in the mix effect, you also have to take into consideration that the vehicle mix supporting the mix effect is also changing. So now you have the [ Renault ] [indiscernible], which is a 20-inch tire, but the price you can command on the [ Renault ][indiscernible] is obviously different from the 20-inch tire you can fit on a Porsche. So again, but on average, you can see that, on 18-inch plus, the price are -- overall, 18-inch plus, the price are holding together. But in the 15", 16" and 17", there is a [ heavy plateau ], yes. But we don't -- what we can tell you is that we were telling you at the end of the semester is that the price gap between us and our competition has widened without having any effect on the market share.

[Operator]

Next question is from Mr. Thomas Besson from Kepler Cheuvreux.

[Thomas Besson, Head of Automobile Sector]

Two questions, please. Firstly, could you confirm that you're happy with the current consensus view of your adjusted EBIT for this year, pleased with your slightly decreased value for Q4 in terms of volumes?

[Florent Menegaux, Chief Executive Officer]

Yves?

[Yves Chapot]

So we are fine with the consensus. [ We don't detail many ], but we are fine with the consensus.

[Thomas Besson, Head of Automobile Sector]

Great. My second question is how should we look your 2020 scenario? You have clearly more negative views than [ IHS ] or most analysts on this call, I guess. Should we see it in the context of your current restructuring actions? So is that also a message to your [ operators ]? Or are you assuming a more -- a higher likelihood of recession in 2020 in your business plan?

[Florent Menegaux, Chief Executive Officer]

So for -- as far as the 2020 scenario, all the signals we have is that the market -- the economies around the world are showing signs of slowing down with various situations around the world. If you look at South America, we see a very sharp slowdown. North America, we are seeing signals that it's plateauing. We have no signals that it's decreasing but a lot of signals that it's probably reached the max. And China, OE is still not in a recovery mode. So that's why we are cautious because we were expecting a faster recovery of the OE production in China earlier and we have not seen that. And actually, it showed signs that it was not improving. So that's why we say we are cautious. Now the fact that the economy is slowing down has a big effect on 2 elements of our way of going to market. One is in the truck market because trucks mainly are moving inventories. So happens is, when the economy are slowing down, inventory are moving less. So therefore, the trucks are moving less, but we'll say no, And if I track the [indiscernible] truck market assumption for the year 2020, North America, we believe it will be minus 13%, and in Europe, it will be minus 15% but we're all saying that. So the outlook on the vehicle producer is not strong as it is, and replacement should be, of course, more heavy.

[Thomas Besson, Head of Automobile Sector]

And it's true, you have been right to be more cautious overall this year.

[Florent Menegaux, Chief Executive Officer]

Absolutely.

[Operator]

Next question is from Mr. Gaetan Toulemonde from Deutsche Bank.

[Gaetan Toulemonde, Research Analyst]

It's Gaetan speaking. Two questions for 2020 but very simple. First one, if raw materials stay where they are now, is it right to assume that it would present, roughly speaking, a tailwind of north of EUR 100 million for next year?

[Yves Chapot]

I think, at this stage, it's too early to go into this consideration because the products that we have part of our business which is long-term contract with the indexation of price and some raw materials is a bit too early to disclose and figure out about potential raw material effects.

[Gaetan Toulemonde, Research Analyst]

Okay. Second question, probably it's easier for you to answer. You have announced some restructuring measures concerning 3 different plants recently. I suspect that most of the savings will be in 2021. But will it be any savings in 2020 on top of this annual cost saving net of inflation costs of approximately EUR 50 million? Is there anything on top of that linked to those bank closures recently closed -- announced?

[Yves Chapot]

So you are right. The effect, we'll mostly be seeing in 2021. But don't forget that our competitivity plan, firstly, not only covering manufacturing, we have also logistics and SG&A cost, and second, within manufacturing, continuous improvement as we show a very important source of productivity improvement which are included in our overall competitivity plan.

[Gaetan Toulemonde, Research Analyst]

Okay. Can you be a little bit more precise about [ might your ] saving could expect next year, which is pretty automatic since everything is in progress?

[Yves Chapot]

We have disclosed the overall [ activity ] for 2019 and 2020, which is around 2 years to generate EUR 100 million [ saving ] net above inflation. So we expect to generate EUR 50 million in 2019 and another EUR 50 million next year.

[Operator]

The next question is from José Asumendi from JPMorgan.

[José Maria Asumendi, Head of the European Automotive Team]

Two quick questions, please. José, JPMorgan. Can you comment indiscernible] of CapEx plans for next year? And in the light of the current, I think, realistic outlook for next year, you plan to cut CapEx more than the initial plan. Second question would be with regards to the OE truck market decline outlook that you have for next year, have you already started taking action to cut output? What is the plan to basically -- to adjust to the lower levels?

[Florent Menegaux, Chief Executive Officer]

Okay. So I think, for the numbers for 2020, I think we will not disclose more numbers for 2020. We have here only [ lemons ] for 2020. And it's too soon to [indiscernible] the numbers. As far as the OE truck is concerned, of course, yes, we are constantly adjusting our inventories to the forecast we have on the market environment. And that's also due to this deteriorating market environment in truck. That's why we took the decision to accelerate the La Roche-sur-Yon plant closure announcement. Because we knew that we would be in difficulty to be able to produce -- to grow this plant in the coming years. So yes, we are, of course, adjusting production according to what we see and what we anticipate in the market.

[Operator]

Next question is from Mr. Ashik Kurian from Exane BNP Paribas.

[Ashik Kurian, Analyst]

I've got 2. The first one is, if I've I looked at what you gave in your press release, it probably implies that SR1 volume growth was positive in Q3. Can you confirm that is the case? And if so, what is driving that volume growth?

[Florent Menegaux, Chief Executive Officer]

Sorry, can you speak a little bit closer to the mic or a lot closer?

[Ashik Kurian, Analyst]

Is it better? I think based on the numbers that you have [indiscernible ] Just can you confirm that SR1 volumes grew in Q3? And if so, what is driving that against, I would say, much weaker market numbers that you're seeing?

[Yves Chapot]

So regarding the SR1 figure, in fact, the Q3 growth is also due to the fact that the basis for comparison with 2018 is more problematical because we have, overall, our growth for the segment is 1.5%. The fact that you remember in [indiscernible] the new [ Chinese ] market original equipment [indiscernible] in September, and you have our slight growth [ in pocket ].

[Ashik Kurian, Analyst]

Okay. Maybe I can just follow up. Do you have anything -- what's your view on why the European markets are remaining weak? I mean is there any underlying reasons? I know you said that the channel inventories don't look high to you, but we've now seeing a sustained period of market weakness. And I think, when I look at your 2020 guidance, you're still expecting replacement market to be slightly up. So is there any reason or any event, in your view, that is going to inflect the current trend of volumes that we are seeing in Europe?

[Florent Menegaux, Chief Executive Officer]

Yes, so in SR1, basically in Europe, the weakness in the demand due to 2 main factors. The first one is the fact that you have less export opportunity due to the slowdown in other parts of the world, that's number one. And the second one is there is also a shift in the consumer's mind [indiscernible] through the new [indiscernible] right now is not a [ typical ] one because [indiscernible] hybrid, we take a [indiscernible] and you take -- what type of cars can you invest in, and they could produce [indiscernible] adapting offer very sharply right now, so I think the whole combination explains why we think the market in Europe is -- will be more depressed. Replacement is a different story. It's [ industry ], a factor of the mileage movement of car and the need for mobility has not really changed in Europe. So -- and the mileage is, on average, we didn't see a real movement so that's why replacements will be more stable for next year, but we anticipate OE to be sharply down next year.

[Ashik Kurian, Analyst]

Okay. And just lastly, how should we think about organic growth for Fenner and Camso within SR3 into 2020?

[Florent Menegaux, Chief Executive Officer]

I think it's too early to say. Fenner and Camso have delivered so far and much. We are very pleased with what they are doing. We are, right now, assessing what -- so it's early to say.

[Operator]

Next question is from Mr. Martino Ambroggi from Equita.

[Martino De Ambroggi, Analyst]

To follow up on the price hikes because just the -- first, a confirmation. In Q3, you've haven't any problem in implementing price increases and so this is true for all the 3 divisions. Am I right?

[Florent Menegaux, Chief Executive Officer]

Yes.

[Yves Chapot]

Yes, [indiscernible]

[Martino De Ambroggi, Analyst]

Okay. And you are implementing more price hikes in Q4.

[Florent Menegaux, Chief Executive Officer]

No, no, we would have the benefit of the price hike we did in Q3.

[Martino De Ambroggi, Analyst]

Okay. So it's finished. Okay. And could you separate or exactly the same in each -- in every division? So there is no differences in market [ upset ] in your price hikes?

[Yves Chapot]

So far, so good. We have guaranteed the price increase in truck in 1st of August and in passenger car in 1st of September. And at this stage, we have not seen a negative comment, nothing to add.

[Martino De Ambroggi, Analyst]

Okay. And on 2020 volumes and market volumes expectations, for the mining, in particular, have you any rough number for the growth you expect?

[Yves Chapot]

Yes. I did say [indiscernible] in the market are very volatile and uncertain, so that's why we have produced and we have provided you a range not a figure, which might evolve over time, of course. But at this stage, that's for the entire SR3 that's our forecast for next year, the range between 0% and minus 2%.

[Martino De Ambroggi, Analyst]

Okay. And still on the volumes of the trucks. If I take your minus 1%, minus 2%, and I take the broader expectations that you mentioned, you need an aftermarket growing at least 3% in order to match the market growth. So seems a little bit aggressive. I should believe you are expecting lower miles for trucks.

[Yves Chapot]

Be careful because the figure that we have shared with you, that has been disclosed by Volvo, who are about North America and Europe original equipment. On top of that, you have what we call the secondary OE market opportunity, so trailer and other categories. And China and India, which are very important markets for this segment, should be stable. India has dropped sharply in 2019, and we don't expect to forward [ look ]. But I remind you that our exposure to these 2 markets is relatively [ relative ]. We will define market assumptions as we go towards the end of the year, beginning of next year.

[Martino De Ambroggi, Analyst]

Okay. And very last, you already answered to a question for the plant for shut down. Could you summarize what is the benefit and what is the cash out for the announced restructuring costs?

[Florent Menegaux, Chief Executive Officer]

I think we have published what is the provision we have booked for this, and we will give you more details about that once we have finalized the negotiation with the authorities, and especially, the personnel representatives so it can -- to be [indiscernible].

[Operator]

Next question is from Mr. Henning Cosman from HSBC.

[Henning Cosman, Analyst]

Seeing that we're running out of time, I'll just ask one quick question. I need to come back to the price/mix. I would've actually asked it in addition, right, because you've already generated EUR 243 million price/mix in the 9 months now. And seeing that you just said that you will also have the benefit of the price increases in the fourth quarter and seeing that you've said the entire -- that the entire raw material headwind in the first half already, I'm surprised you haven't guided for something closer to EUR 300 million price/mix raw material for the full year. Am I missing something? Or is there any reason why price/mix raws should be negative in Q4?

[Yves Chapot]

No, we did not -- what I -- the -- above EUR 200 million the price/mix raw material effect. The figure you mentioned is impact of the turnover, which is the 2.1% of price/mix over the first 9 months. But I was mentioning that our price/mix raw material effect should be, on our operating margin, positive and beyond EUR 200 million.

[Henning Cosman, Analyst]

So EUR 164 million price/mix of the third quarter will drop through at 100% into your EBIT bridge, correct?

[Yves Chapot]

Yes.

[Henning Cosman, Analyst]

And you had EUR 79 million net price/mix raw material in H1, and you're not going to have more negative raw material in H2.

[Florent Menegaux, Chief Executive Officer]

[indiscernible] and then we will -- next time we can show you a better shot of what it should be.

[Operator]

We have one last question from Mrs. Deeya D'souza from Morgan Stanley.

[Deeya D'souza, Associate]

Deeya D'souza from Morgan Stanley. I just have 2 quick questions on the SR3 division. Could you just confirm that you still expect to grow above the market in mining? And my second question would be what percentage of SR3 is in the now weaker construction and ag markets, roughly?

[Florent Menegaux, Chief Executive Officer]

We confirm that we are gaining market share in mining. And the SR3 is composed more of different activity. Historically, before the integration of Fenner and Camso, I would answer that around 30% -- 30% to 40% of our turnover is made SR3 is coming from what we call OHT. But of course, this percentage will decrease, likely decrease with Fenner from the growth in mining. There is a proportion -- a small proportion in mining that is also a carrier, and I think that is also impacted by [indiscernible]. Okay, so thank you very much for all these questions and have a good evening.

[Yves Chapot]

Thank you.

[Operator]

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