Michelin reports solid first-half financial results despite hurdles

CLERMONT-FERRAND, France—Despite geopolitical and economic headwinds, Michelin is adapting and moving steadily forward, posting solid first-half results even as global tire volumes slipped.

Consolidated sales eclipsed $13.54 billion during the first half of 2022, marking an 18.7-percent increase over the same period a year earlier. Meanwhile, operating income rose 7.7 percent to $1.28 billion, reflecting an operating margin of 11.5 percent. Net income was down 18.3 percent to about $858 million.

First-half EBITDA stood at $2.47 billion, while free cash flow before acquisitions came in at negative $1.03 billion. The half ended, Michelin said, with a free cash flow of negative $975 million, compared to the positive $408 billion a year earlier. The company cited the impacts of inflation and value of inventories as the reason for this, but noted it expects to see a turnaround in the second half, given the historically strong performance it has seen during the second semester.

"We've delivered good results in an extremely unsettled environment, led by the remarkable commitment of all our teams," Managing Chairman Florent Menegaux said in a statement. "The uncertainties of today's world make it difficult to express a medium-term outlook. However, we can count on our clear and value-creating strategy, on our resilient business model, and on our employees' outstanding agility to steer our operations in such challenging circumstances."

Michelin points to its "assertive price management" as a primary driver of its overall growth, saying early moves to manage rising material, shipping and manufacturing costs allowed it to maintain its margins.

And these results came even as global volumes—excluding China and Eastern Europe—dropped 2.2 percent compared to 2021. Michelin said volumes were stable in China and Eastern Europe.

With this in mind, the tire maker is maintaining its financial guidance for the year but is slightly shifting expectations around segment market growth. The company expects the passenger tire market to remain fairly steady through year-end (between -2 percent and 2 percent), while anticipating modest growth for both truck (2-6 percent) and specialty tires (4-8 percent).

"The market is far more uncertain—and the environment—is far more uncertain than six months ago," Yves Chapot, Michelin's general manager and chief financial officer, said during the July 26 conference call. "And we consider that, overall, with let's say the global risks (that) lean to supply chain, the energy crisis in Europe, the fact that the original equipment market for passenger car tires has not yet recovered, we have decided to lower our assumptions regarding the market scenario."

In the passenger and light truck tire segment, North and Central America was the only region to show year-on-year demand gains in both OE (5 percent) and replacement (1 percent).

In North America, especially, Michelin remains optimistic it will see additional recovery, noting that OE demand—impacted severely by the semiconductor shortages—was 17-percent lower than the first half of 2019. Despite slowed production, demand for new vehicles in North America hasn't waned.

The continent's replacement tire market remained a bright spot. Buoyed by economic growth, aftermarket tire demand in North America saw a resurgence, growing just 1 percent compared to 2021, but eclipsing pre-pandemic levels by 10 percent.

Western and Central Europe saw a 7-percent increase year-over-year in replacement P/LT tire volume, while OE volume slipped by 7 percent. War, Michelin said, had the biggest impact on demand. Compared to 2019 levels, OE demand in the region plummeted by 29 percent.

China's OE demand remained steady while its replacement tire demand fell 16 percent. COVID-19, the tire maker said, forced OE demand down, causing it to "hit new lows" in April and May before "rebounding past 2019 levels."

The impact of China's COVID-19 resurgence was felt across segments.

For the six-month period, truck tire sales fell 9 percent globally, weighted by China's staggering 36-percent drop in demand.

Excluding China, Michelin said, the market showed a 6-percent improvement when compared to the first half of 2021 and an 8-percent increase over the same period in 2019.

Likewise, replacement truck tire sales fell 2 percent when China's impact is factored in. Outside of China, however, global demand rose 5 percent year-on-year and 10 percent compared to 2019's first half.

The OE truck tire markets in both Europe and the Americas experienced "robust economic growth" and this, coupled with the driver shortage, Michelin said, "prompt(ed) trucking companies to massively upgrade their fleets."

South America saw the greatest growth with first-half OE truck tire demand improving by 12 percent, compared to 2021, and 25 percent when matched against pre-pandemic levels.

In North and Central America, OE truck tire demand was up 9 percent compared to the first half of 2021. In North America specifically, however, demand is down 5 percent compared to 2019's pre-pandemic levels.

OE truck tire demand in Europe was up slightly compared to the previous year's first half, coming in with a 1-percent improvement.

On the replacement side, truck tire demand in Europe and the Americas combined to grow 10 percent and 30 percent when compared to the first halves of 2021 and 2019, respectively. More specifically, Western and Central Europe outpaced other regions with 12-percent year-on-year growth.

North and Central America posted a 10-percent improvement in replacement truck tire demand over the first half of 2021, while South America saw a 7-percent increase for the same period.

Mining tire demand "remained very high in the first half," Michelin said. The agricultural and construction markets also saw growth, but they were stymied by supply chain disruptions, which impacted OEM production.

Non-tire related sales—led by Fenner—grew by nearly 18 percent. This was due mainly to the conveyor belt market, which Michelin said saw "robust" sales globally, driven by commodities demand in mining and capital investments in the manufacturing space.

Michelin—which has defined its growth strategy as being with, around and beyond tires—aims to have between 20 and 30 percent of its overall annual revenue generated from activities not directly related to tire manufacturing and sales by 2030. Fenner's continued growth in seals, conveyor belts and transmission belts will be key to achieving that aim.

"Fenner, which is the core of our flexible composite activities, is developing its activities both with organic and bolt-on M&A," Chapot said.

Fenner, in May, acquired Australia-based Conveyor Products & Solutions. This follows the December acquisition of Lumsden Corp., a 45-year-old Pennsylvania-based company specializing in industrial conveyor belting and wire cloth for the quarry, mining and food processing industries.

Moving into the second half, Michelin is choosing a cautiously optimistic outlook, knowing that, historically, the second half of the year is buoyed by sales from winter tires.

"In terms of cash, we also have generally a strong position because the winter season has been ordered by our distributors in September and October, and are generally paid by the end of the year," Chapot said. "There is a strong seasonality component between the two semesters."

Given the economic and geopolitical uncertainties ahead, Menegaux noted that Michelin is well-positioned to manage them. He also asserts that the company's management of those challenges in the first half of the year signals its ability to steer the company through an uncertain second half.

"We are staying the course in a very turbulent environment," Menegaux told investors during the July 26 call. "The global GDP is under stress after a deep dive during the COVID period with a very sharp recovery and a lot of uncertainty in front of us. Plus, a lot of these issues are in transportation, logistics and the overall supply chain, and also, the energy transition, which we must accommodate. These paradigm shifts are impacting our activities, and we are adapting to them."