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A solid finish to ''23 with a 7% H2 SOI and 28% FCF beat, but our concerns over net pricing into ''24 are not assuaged by a relatively cautious guide. With margins touching all-time highs, pricing flipping negative, and an antitrust investigation looming, we stick to our Underperform rating. What did we learn from the quarter? Michelin finished 2023 with H2 margins close to a record high at 13.1%, supported by fading but still strong price/mix. Michelin''s FY24 guide was cautious however, notably on FCF where a guide for EUR1.5bn fell well short of consensus, even if partly reflecting FY23''s strong EUR3bn showing. SOI guidance for EUR3.5bn (at constant FX) is unlikely to unsettle consensus though, not least given conservative volume assumptions for a slight decline YoY. Michelin expects stable pricing in general, though indexed contracts will need to reflect lower input costs. Meanwhile a share buyback of EUR1bn is modestly helpful, while keeping powder dry for MandA, which remains a priority. How does it change our investment view? Michelin expects ''operating performance net of inflation'' to be slightly positive in FY24. We remain unconvinced, largely due to our more cautious view on pricing. We note for 10 years over 2012-21 the net of price vs raw mats and operating cost inflation was very slightly -ve on average, and -ve c.EUR800m in aggregate. In 2022-23 this balance has been +ve EUR1.7bn, with EUR1.3bn of this in ''23 alone. We expect this to flip -ve from ''24e, especially with the EU industry likely treading carefully while cartel investigations are ongoing (Michelin has denied any wrongdoing). With cost saving measures unlikely to be felt until 2025, we thus see FY24 margins slightly shy of consensus. Earnings, rating and target price changes Our ''24e EPS rises 2% on a lower share count, but we trim ''25/26e by 2-3% as we factor in ongoing price headwinds. Our TP falls from EUR27 to EUR26 as a result. We retain our Underperform rating.
Cie Gnrl des Etblsmnts Michelin SCA Cie Generale des Etablissements Michelin SA
Michelin released Q3 23 results broadly in line with expectations as pricing offset the weaker-than-expected volumes and FX effects. The group lowered its estimated headwind from cost inflation for the second time this year, leading to an upgrade to the FY23 FCF outlook. Our estimates are slightly below the new guidance, calling for an upgrade. A slight miss in the Specialties division could be a short-term worry for investors, while we welcome the additional disclosure on the HV tyre market outlook.
In-line print with guidance upgraded but only at the FCF level. Despite the lack of SOI target upgrade, we see limited risk of downgrades. Management sounded optimistic about a normalization in volumes in 2024. CMD confirmed for 2024 with targets for 2026 to be presented. Underperform. What did we learn from the quarter? Q3 sales came in-line with expectations with weaker than expected volumes offset by better than expected price/mix, a recurring theme for Michelin in 2023. Volumes in RS1 started to recover, although mainly in North America while elevated winter tyres inventories still weigh on European demand. Volumes in RS2 were down ~4% in Q3 impacted by weak replacement demand. Pricing was once again positive in Q3 at 2.1% and is expected to be flat in Q4. Management also expressed confidence in the ability of the company to further increase prices should cost inflation headwinds continue to rise. Looking at 2024e, Michelin expects a more balanced year for volumes with inventories now at normal levels supporting better replacement demand. The guidance was raised, but only at the FCF level and we see the lack of an upgrade at the SOI level as somewhat puzzling given solid pricing environment. The CFO however confirmed that he is comfortable with the current level of consensus, despite the latest consensus estimates being ~9% above the floor of the SOI guidance which EUR3.4bn (at c.c. FY; FX headwind ~280m BNPPE). How does it change our investment view? The resilience of pricing in the premium tyres market remains impressive and better than we would have anticipated a year ago. Michelin cash generation in 2023e is also impressive, although we do need to adjust for ~EUR500m of non-repeat items included in the FCF guidance. We continue to see consensus estimates for the mid-term as too elevated in the context of persisting inflation and lack of an obvious catalyst for a significant step-up in volume growth. Earnings, rating and target price...
Michelin’s H1 23 results were slightly above consensus through the P&L. The group reached a record FCF generation on tight inventory management and (expected) non-recuring effects. The FY23 guidance was raised as cost inflation slows down and offsets lower volumes. We will raise our forecasts for FY23 and continue to see the valuation as an opportunistic buy on weakness as we believe investors are over-focusing on the decline in volumes.
Sizable FCF beat and 2023 guidance upgrade for Michelin in H1. But consensus is already ~7% above the new adj. EBIT floor and we don''t anticipate positive revisions. Volumes should stabilize and pricing remain stable this year, but deflation is likely to accelerate in 2024e. Underperform. What did we learn from the quarter? Solid H1 print for Michelin with SOI ~2% ahead of consensus and impressive and unusual cash flow generation in H1 at EUR922m, ~550m better than expected by consensus. FCF included, as expected, ~EUR550m of one-off effects, of which EUR300m from working capital reversal and EUR250 linked to the divestments of the company''s retail network in the US. FCF also likely benefited from the lack of payment of employee bonuses in 2022, we estimate this benefit at ~EUR300m in H1. These benefits allowed Michelin to increase its ''23 FCF target to EUR2.0bn (from 1.6bn). The SOI target increase was largely expected, in our view, and we don''t see scope for positive consensus'' revisions following the upgrade. Once adjusted for the EUR260m FX headwind (guided by Michelin) the SOI target is EUR3,140m, 6% below cons. at EUR3,353m. How does it change our investment view? We leave our estimates largely unchanged and we do recognise that the pricing discipline of Michelin and other premium tyremakers has so far been impressive. While indexation clauses will start to put pressure on pricing in H2, Michelin expects its pricing to remain stable this year. We see OE pricing weakening materially in 2024e and continue to forecast a normalization in pricing also in the replacement market overtime as inflation continues to ease. We don''t expect the strong cash generation of the company to generate much excitement given the one-off effects and the strong commitment of the company to MandA. Despite better than expected resilience, we continue to see Tyres as less attractive than suppliers at this point in the Auto cycle. Earnings, rating and target price...
Michelin reported in-line figures for the Q1 23, reflecting unwavering pricing power and a mixed volume trend as the company navigated negative territory on tough comps. The guidance was confirmed. However, the amendments to the assumptions used to build the guidance suggest that cost inflation may be easing. We anticipate a positive risk of an upgrade to the guidance with the H1 23 release. We stick to our current forecasts for FY23 and our positive recommendation on the stock.
Q1''23 topline came ~2% ahead with price/mix more than offsetting weak volumes. Management reminded us that its goal is to hold on to mix improvements while prices will be managed to respond to costs changes and ensure competitiveness. Market expectations remain too high. Underperform. What did we learn from the quarter? Michelin''s Q1 was solid with topline beating expectations by ~2% in what remains a very challenging environment. The annualization of the price increases of 2022 and the January price hike led to an 11% price effect in Q1. Mix remained positive at ~1% with product mix and Mining more than offsetting weak RT/OE mix. Volumes disappointed at negative ~7% and while Russia explains ~25% of the decline, the weakness remains largely linked to destocking and tepid demand. Volumes should be positive in Q2 as we lap the anniversary of China''s lockdowns and Russia''s invasion of Ukraine. Michelin confirmed its 2023 guidance across all metrics and expects limited margin seasonality between H1 and H2. Expectations on input costs were revised down by ~EUR250m thanks to positive developments in raw-mat and logistics. This revision did not lead to an adjustment of the SOI target, suggesting, in our view, a more conservative view on the outlook for pricing. FCF will follow the usual seasonality and a EUR300m positive working capital tailwind should support a FCF close to breakeven in H1 this year. How does it change our investment view? The outlook for pricing was the clear focus of today''s call. We continue to see the risk that Michelin could start to disappoint on this metric in the coming quarters as we lap tougher comps and declining raw-mat costs weigh on the indexed business. Consensus estimates remain too high, in our view, and we are ~8% below consensus on 2023e adj. EBIT. We expect input costs deflation in the coming quarters to support a margin recovery but naturally weigh on pricing and topline across the sector, while we see...
Michelin held a strategy update fully confirming its initial expansion plan. The company is focused on leveraging its knowhow around and beyond tyres; a way to further diversify a company that has already mastered the diversification exercise. It fully confirms our long-term positive stance on the stock. Without many fresh figures reported, all eyes were on the M&A strategy backed by a healthy balance sheet offering up to €5bn firepower according to the management. The key risk: being seen as a conglomerate.
H2''22 was disappointing, Michelin missed its FCF guidance and the quality of the small ~2% SOI beat was low. The 2023 SOI target was disappointing and talks about conservativeness are unlikely to be enough to support the shares. We think it''s time for Tyres to come back to earth. Underperform. What did we learn from the quarter? Despite strong pricing resilience and better volumes in Q4, Michelin''s H2 results were disappointing. The company''s Segment Operating Income (SOI) came ~2% above consensus but only thanks to a ~EUR350m benefit linked mostly to lower variable employees compensations in 2022. FCF was also disappointing as the company missed its Structural FCF target by ~EUR300m, despite having already adjusted this target down by EUR500m in October last year. Fixed cost absorption was impacted by a reduction in production volumes meant to bring inventories under control. The delta between Price/Mix and raw-mat costs and other inflators reached an impressive ~EUR 450m in 2022. The 2023 SOI guidance of EUR3.2bn was disappointing, in our view, and could lead to MSD% negative revisions to consensus'' estimates, while the FCF floor of EUR1.6bn was broadly in-line. How does it change our investment view? After having benefited from unprecedented pricing and demand resilience in the last two years, things are clearly starting to normalize in the tyres space. Asian imports are back, inventories are high and a pricing war has started at the lower end of the market. We found the debate on pricing interesting but we are not convinced about the elasticity of demand argument. The brand has so far been immune by trade-downs but we feel that it is just a matter of time before pricing pressure starts to spread to the premium segment. Michelin is prepared to lose market share to protect unit margins, which is certainly the right ambition, but difficult to implement in practice in an environment of weakening demand. For our views on the tyres market,...
Today, we host our 24th Annual Investment Ideas Seminar, addressing the topic ''Safety, security... success?'', as we explore points of resilience, vulnerability and opportunity in 2023. We begin the day with our Economic Outlook for the coming year. Then, in Energy Security - Securing Europe''s future, we identify potential winners from the continent''s pivot towards energy security: Total Energies, Air Liquide, Schneider Electric and Endesa. In Food Security - Seeds of Change, we turn the lens to food security. Our ESG team traces the deeper potential of the theme, while several of our sector teams outline their preferred ways to play it, with DSM, Nutrien and Sodexo. Then our Strategy team takes us through their recommendations for the year ahead. In our EU Consumer Outlook, we look for ways to weather the economic storms ahead, selecting LVMH, Inditex and Ryanair, plus Underperform Michelin. Finally, in Seeking Alpha, we pick out some more of our top long and short ideas: Outperforms Infineon, AXA, Relx and Metso Outotec; and Underperforms Telefonica, Wise, Amazon and Klepierre.
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Michelin kicked off its Q3 22 results with a €500m slash to the Company’s FY22 FCF outlook as “other inflators” (i.e energy, wages and logistic bills) soar. This largely overshadowed the price and FX-driven revenue figures. Volumes moved lower as expected, a trend likely to extend into the Q4, at least. Low-cost Chinese tyres started to flow onto the market during the summer, increasing worries regarding the sustainability of high prices. Lastly, the postponement of the November strategy update does not bode well for the management’s visibility.
Q3 sales beat consensus by 6% with better price/mix and a larger FX tailwind more than offsetting a weaker than expected result on volumes. The 2022 guidance was cut by EUR500m at the Structural FCF level due to the adverse impact of cost inflators on working capital and lower volumes. Neutral. What did we learn from the quarter? Michelin''s 6% Q3 sales beat was underpinned by the recovery of the Mining business, which benefitted from easing of constraints on maritime shipping and better pricing thanks to indexation clauses. However, the performance of SR1 and SR2 was lacklustre with price/mix struggling to keep up with comps becoming tougher sequentially and negative volumes in both SR1 (-5.1%) and RS2 (-1.0%) due to lower RT demand and some market share losses. Michelin confirmed its 2022 SOI target of EUR3.2bn but revised down by EUR500m at the Structural FCF level. The negative effect on working capital of FX and energy, logistics and wages inflation resulted larger than prev. expected by the company at ~EUR400m. While Michelin FCF target adjusts for the impact of changes in raw-mat prices on working capital, it does not do so for other cost inflators, hence the negative revision. How does it change our investment view? We remain generally concerned about the outlook for the tyres market going into 2023. Replacement demand continues to weaken in most markets, competition on pricing is increasing as imports recover, and costs, particularly in Europe, are bound to continue to rise led by energy and wages. Michelin remains best-in-class in terms of pricing power but should the current downward trend in demand continue, pricing discipline might not be enough to offset the headwind on margins. On the positive side, we are pleasantly surprised to hear that the expected headwind from higher energy prices expected for 2023 (at spot prices) should only be ~EUR200m (vs. EUR500m in 2022e). Earnings, rating and target price changes We reiterate...
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