Camso deal positions Michelin as global leader in OTR tire market

MAGOG, Quebec—Some years ago a reporter asked an executive in the rubber industry about a recent acquisition and the synergies he expected from that deal.

His reply? "Interesting word—synergy," he said. "It's like the Yeti," he said.

"Yeti?" I asked, somewhat perplexed.

"Yes," he replied, "because everyone believes in it, but no one's ever seen it."

Michelin, with its pending acquisition of off-road tire/track specialist Camso Group, wants the investment world to believe it's positioned to challenge that supposition.

In presenting the deal to the business community in mid-July, Michelin Chairman Jean-Dominique Senard and CFO Marc Henry repeatedly evoked the "S" word in explaining their company's reasons for striking the Camso deal, as well as the 2018 purchase of conveyor belting producer Fenner Group.

In addition, Senard said he views the Camso deal as a great opportunity to jump into market leadership positions in at least four market categories where up to now Michelin hasn't been active, then leverage his company's strengths in technology and logistics to keep these individual businesses growing at rates above the segment averages.

The deal, announced July 12, is the third acquisition of consequence in the industrial/OTR sector in the past few years—along with Trelleborg A.B.'s purchase of CGS/Mitas and Yokohama Rubber Co. Ltd.'s of Alliance Tire Group—but easily the biggest and one with considerable potential synergies since the companies' respective product portfolios have little overlap.

Through studies and discussions with Camso, Michelin said it has identified opportunities to increase sales and reduce costs, thereby unlocking up to $55 million in synergies by 2021.

In addition, Senard said Michelin's deep resources in rubber technology will provide a stable platform that will help the merged enterprises develop Camso's solid tire and rubber track businesses.

Michelin is paying $1.45 billion for Camso—formerly Camoplast Solideal—and is melding its own OTR tire activities (farm, earthmover, off-road truck, etc.) into a new division to be based in Quebec and overseeing a global business with 26 plants, roughly 12,000 employees and annual sales exceeding $2 billion.

"Michelin and Camso have many values in common," Senard said at that time. "This acquisition is a wonderful mutual opportunity. Michelin will benefit from all of Camso's skills in the off-the-road mobility markets and Camso from the full range of Michelin's expertise in the specialty markets."

The Michelin executives noted that Camso is profitable with a 14-percent pre-tax operating ratio, and they expect it to contribute to the company's bottom line in its first full year of integration. Sales per employee is north of $125,000.

The deal represents a backward integration, of sorts, into the bias-ply and solid tire business areas, activities the French company has not participated in for decades but at the same time businesses Senard sees as potentially lucrative.

"I was wrong in saying years ago that bias would disappear," Senard said during the question-and-answer session with analysts.

"As we speak, in the agricultural and construction sectors bias technology is extremely still robust," Senard said. "Those competitors that produce in low-cost countries like China and India, it's extremely profitable.

"We are more than happy with Camso to grab a share of this (bias) market, and it will evolve in time and at some point I will probably be right in some years,…we will be able to monitor the transition (to radial). By being able to work with customers comfortable with bias technology, then we can build them to Michelin radials in time."

Henry noted that companies such as BKT and Alliance Tire Group are quite profitable with mostly bias-ply tires because they manufacture in India and Sri Lanka and export to Europe and North America. "It's a very strong business model."

As for the businesses themselves, Michelin noted Camso is considered a market leader in four off-road segments—No. 1 worldwide in solid tires for the materials-handling sector; No. 1 in tracks and track systems in both the agricultural and power sports (snowmobiles and ATVs); and among the top three in the compact construction tire (less than 25 inches rim diameter) and construction equipment rubber track segments.

Camso—which goes to market as the "Road Free" company—derives 40 percent of its revenue from materials-handling, 32 percent from construction, 20 percent in agriculture and 8 percent from power sports. Geographically, the sales breakdown is 59 percent Americas, 30 percent Europe/Middle East/Africa and 11 percent Asia/Pacific.

Looking at the combined Camso-Michelin enterprise, Michelin sees the business' three key segments as:

Materials handling—The market breaks down as 10 percent radial, 45 percent bias and 45 percent solid. Michelin describes itself as a "strong" competitor in the radial sector, while Camso (with the Solideal brand) is active in the highly competitive bias sector and "strong" in the solid segment. Growth is projected at 5 percent a year through 2021.

Construction—The market breaks down as 30 percent radial, 60 percent bias and 10 percent tracks. Michelin considers itself a strong player in the radial segment and said its "intimacy" with OE customers should help grow Camso's bias-ply business. It also expects to enhance its Michelin-branded portfolio by leveraging production at Camso's Sri Lanka plants. Annual growth is projected at 3.5 percent.

Agriculture—The market mimics the construction sector: 30 percent radial, 60 percent bias and 10 percent tracks. Michelin is seen as a strong competitor in the radial sector and Camso the leader in tracks, but the business has no presence in the bias area. Michelin intends to drive sales of Camso products and solutions through its Michelin dealership network.

On a macro-economic level, Michelin noted that the enterprise will benefit from a research and development "cross fertilization" in the agricultural sector involving Michelin, Camso and Fenner to meet market challenges presented by growing demand for food and by association, farming.

Michelin also noted growing urbanization will boost construction and drive demand for equipment and components, including tires and tracks, and increased globalization in driving growth in port facilities, airports and logistics hubs.