Michelin's diversifying business model shows strength in H1 2023

CLERMONT-FERRAND, France—Equal and opposite reactions are to be expected. It is, after all, the law of physics.

And tire markets.

For Michelin, 2023's first half shaped up to be one of those equal-and-opposite reaction periods. Original equipment and replacement tire demand rose and fell as OEMs found their strides and cycles of destocking played out as markets stabilized in the wake of the COVID-19 pandemic and war in Ukraine.

And it was despite the inflationary headwinds and geopolitical impacts that the French mobility company saw sales increase by 5.9 percent to $15.6 billion compared to the first half of 2022.

Segment operating income rose 11.4 percent to about $1.88 billion year-over-year. Michelin noted that this performance was buoyed by a favorable price-mix effect, "disciplined (and) assertive pricing management" and strong performances in specialty and non-tire related businesses.

During a call with investors July 26, Michelin CEO Florent Menegaux credited the company's continually diversifying portfolio of product offerings and services as well as its intentionally diversified and resilient business model for the solid performance.

"I think, sometimes, we forget that we are not strictly an automotive supplier," Menegaux told investors. "Of course, it is true when we say we are an automotive supplier, but we cannot summarize our activities in this (area alone.) … Our dealings with our automotive OEMs only represent 9 percent of our revenue. The rest of our revenue is generated in various market segments with different cyclicalities."

Sales in the Specialty businesses group grew 13.5 percent year-over-year, eclipsing $4.05 billion for the six-month period. Segment operating income for H1 2023 was around $742.2 million, or about 18.3 percent of sales, showing continued growth when compared to the $456 million in segment operating income—or 13.5 percent of sales—for the same period last year.

This is driven in large part by Michelin's High-Tech Materials business—which includes Fenner Precision Polymers' activities—and an area expected to get a further boost later this year when the acquisition of Paris-based Flex Composite Group is finalized.

"The High-Tech Materials business reported robust growth, particularly in engineered seals and precision polymers, which enjoy a very high value-added positioning in critical applications for the medical, energy, aerospace and defense industries," Michelin said.

Mining tire sales are expected to remain strong in the short term, particularly as metals needed to support energy transitions continue to grow in demand. And with potential for growth in the mining sector comes further demand for conveyor belting.

Demand for Beyond-road tires products—agriculture, construction, materials handling, etc.—remain mixed. With this in mind, Michelin said it will maintain a "sharp focus" on high-value segments such as agricultural tracks where it sees favorable margins, particularly in the Americas.

OE passenger car and light truck tire sales—previously dampened by the lingering effects of the pandemic—have continued to rebound in the early part of the year. In addition to the increase in manufacturing spurred by supply chain easements, Michelin credits rising electric vehicle sales for the uptick.

Automotive tire sales for the first half of 2023 came in at $7.78 billion, with a segment operating income of around $959.3 million and an operating margin of about 12.3 percent.

Overall, demand for passenger and L/T tires was up about 9 percent globally compared to the first half of 2022.

Western and Central Europe saw the biggest gains in this arena, with demand rising 14 percent year-over-year. This, Michelin said, is indicative of the region's supply chains stabilizing after being hit hard last year from the impacts of war in Ukraine.

Meanwhile, North and Central America saw an OE tire demand increase of around 11 percent, and demand across China rose by 6 percent.

"In China, demand rose by 6 percent over the (year-ago) period, with a 6-percent drop in the first quarter stemming from the high inventory overhang from year-end 2022, and a 20-percent rebound in the second three months due to the favorable comparison with second-quarter 2022, impacted by the health crisis," Michelin said. "EVs accounted for nearly 30 percent of the country's new car sales over the first half of 2023, up more than five points year-on-year."

Continued destocking of replacement tires, however, continues to weigh on passenger and light truck replacement tire demand. Globally, the tire maker saw demand drop about 2 percent, though demand in China did rise 16 percent.

Regionally, Western and Central Europe as well as North and Central America saw replacement demand slump 6 percent from January to June.

Michelin, however, expects to see demand pick up in the later part of 2023 and early into 2024.

"We consider that the destocking is nearly probably finished for passenger car and light truck tires," Yves Chapot, general manager and chief financial officer, said during the July 26 investors call. "It will still probably continue to the end of Q3 with truck tires."

For the road transportation businesses, sales eclipsed $3.76 billion. The segment operating income was around $186 million for the six months, while the operating margin stood at 5 percent.

In the first half, global truck tire demand grew 9 percent globally year-over-year, excluding China where Michelin noted its "presence was not significant." Replacement demand remained flat globally, China excluded.

Western and Central Europe saw demand for OE truck tires jump 9 percent, while replacement tire demand fell by 13 percent. North and Central America saw little fluctuation in OE truck tire demand (down 1 percent), while replacement demand fell 11 percent.

"The robust (OE) demand reflected deep truck-maker backlog, with order books full through third-quarter 2023. The North American market was lifted by truck purchases ahead of the introduction of a new greenhouse gas emissions standard in 2024," Michelin said.

In South America, OE truck tire demand fell 22 percent, while replacement tire demand grew slightly (up 3 percent). This, the company said, mainly was due to an influx in truck purchases last year ahead of new emissions standards, which took effect Jan. 1.