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26 Oct 2022
Q3''22: Clouds gathering on the horizon
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Q3''22: Clouds gathering on the horizon
Cie Gnrl des Etblsmnts Michelin SCA (ML:EPA), 0 | Cie Generale des Etablissements Michelin SA (ML:PAR), 0
- Published:
26 Oct 2022 -
Author:
Pearson Stuart SP | Pescatore Giulio GP -
Pages:
12
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...