Earnings Transcript for ML.PA - Q4 Fiscal Year 2021

Florent Menegaux: Good afternoon to everyone. Thank you for joining us Yves Chapot and myself for Yearly Presentation of our 2021 Results. To start with, I would like to share with you my pride on behalf of our associates that have delivered in this very challenging environment of 2021, what I would consider as being solid and resilient numbers. Michelin Group delivered an operating income of almost €3 billion, €2.97 and a margin back in line with 2019 level at 12.5% knowing that, if you take out the exchange rate, margin has been sharply enhanced. So in the midst of the persistent health crisis, with disrupted supply chains and sharply rising costs, our group continued to focus on protecting its employees, and once again, demonstrated the strength and the resilience of its business model. The sales are up by 16.3% to almost €24 billion, with a segment operating income of almost €3 billion or 12.5% of sales. If we zoom in to that revenue increase, we can see that tire volumes were up almost 12% and the non-tire sales almost 8%. We had a favorable OE replacement mix in the Automotive segment, with market share gains in the 18-inch and above. Coming to group’s technological leadership in that domain, we had dynamic price management all year long in a non-indexed businesses, leveraging our brand pricing power and offsetting all cost inflation factors. The Specialty business was hit harder by labor shortages, supply chain disruptions and cost inflation hence the performance of segment three. We’ve been able to generate a €1.5 billion in free cash flow before acquisition or €1.8 billion in structural free cash flow terms, adjusted for high – higher raw material costs. Our group performance in 2021 was in line with our Michelin in Motion strategic plan with the objective set for 2030 for each of the three pillars

Yves Chapot: Good evening. Good afternoon, everyone. So as we get ready for one year, I will start by a global picture of our performance. As you remember, we measure our performance according to our three pillars, and we deliver overall a strong performance in the three pillars. First, regarding people. We have now, as Florent mentioned, close to 29% of managerial position occupied by women, which is an improvement of 0.7 point versus last year. We have engagement rate of 80%, slightly decreasing versus 2020, but still at a pretty high level. And we have a slight deterioration of our TCIR, our labor incident ratio by 0.1 point. I’ll remind you that our long-term target is to reach TCIR of below zero 0.50. It’s mostly due to supply chain disruption and the fact that in the factory were probably in 2021 less moves and in previous years. Regarding profit, Florent already commented the operating margin and the free cash flow. I will mention the ROCE, return on capital employed, which is at 10.3%, an improvement of 30 basis points versus 2019 and very close to our long-term target for 2023 and beyond. Regarding planet, zooming CO2 emission for Scope 1 and 2, so the – our own operations emissions, they have decreased versus the previous years. And we are minus 29% versus 2010, which is the basis that we have – we are using for the science-based initiative. And in 2019, which was the last comparable year, we were at minus 26%. So, we have improved during 2021. Our i-MEP, which is a composite index of our overall and their overall performance in the factories, including not only CO2 emission, but also water consumptions, solvents, consumptions or waste has improved by 7, close to 8 points versus 2019, which is the last comparable year in terms of activity. Just as an example, our water withdrawal has been reduced by 7% during 2021. And last, you know that one of our key challenge is to improve the sustainable material rate, which is the percentage of the raw materials that are either coming from renewable or recycled sources. We have improved by 1 point between 2020 and 2021, reaching 29% and on our road to our target, which is 40% by 2030. Coming now back to the business and the operations. Let’s speak about the market. So of course, in 2021, we faced a sharp rebound versus 2020, led by the upturn in the economic activity, the mobility and also the needs of different players to rebuild their inventories. Passenger car and light truck businesses, tires volume grew by 9% overall the market, but which is still 4% below 2019. And if you look more precisely, in fact, the replacement market was mostly at 2019 level, where the original equipment market is still 15% below 2019. All the regions have of course contributed to this growth. North America, Europe were more buoyant than China, because the market in China has already recovered during the second last of 2020. Truck market is up by 4%, here also with a very complex picture, but still below 2019 by 3%. So contrasted picture between Europe and North America, we are posting sharp growth when China because of the implementation of norms, new norms for vehicles have seen the original equipment market dropping sharply from April 2021. And all the specialties market all in one grew by 10%, with a very dynamic market in construction, agriculture, material lending led by the rebound of activity. The aircraft market is also rebounding and mining and two wheels are showing, let’s say, a more moderate growth. Having all these figures in mind, let’s look at our revenue growth. So overall, our revenue grew by 16.3%, including currency exchange rate, which was negative mostly during the first half or most nine months of the year. The 18.2% growth between – at ISO currency rate was mostly due of course to the volume effect, plus 11.8%. Price/mix grew by 6%, 6.1, with price it sales going by 4.5% and not tire business, we’re growing by 7.7%, contributed to – by 0.4% to the overall group revenue growth. Our operating income, as Florent mentioned, landed at €2,966 million, which is very close to the €3 billion we reached in 2019. But in the meantime, of course, currency has moved. Price have been increased. So our operating margin, which is 12.5%, would have been 13.6% at ISO currency and at ISO price than in 2019. When you look at the bridge, of course, the volume effect is considerable, nearly €1.4 billion. The most important is that we were able to face very strong in traders, mostly balanced between raw material on one side and other factors, such logistics, energy, shipping cost on the other half. And altogether, we’re able to cover all this cost, thanks to our price and mix effect by €55 million at the end of the year. SG&A grew by €181 million, but it’s an improvement of €70 million versus 2019. Looking at the performance by sectors, of course, you see very clearly that the passenger car and light trucks or the SR1 segment is posting a very strong performance reflected first in the growth of the revenue, nearly 19% and, of course, the growth of operating margin, which is now at 13.7%, that was mostly due of course to the growth in volume, but also to the mix effect – very strong mix effect between of course, premium tires 18-inch and above. And of course, the favorable original equipment replacement mix in most of the region, but particularly in Europe and North America. The second segment grew also pretty well, 16% and is showing a 4 point improvement in this operating margin, which is now, let’s say, you’re closing the gap to the 10% target assigned to this segment, thanks to robust demand both in Europe and North America and a specific focus on targeted high-value segment. The third segment has been growing less 11.4%, due mostly to disturbance in the supply chain, and I will come back on that. And the operating margin has probably suffered the most, posting 13%, which is a decrease versus 2020. This segment was probably mostly – the most impacted by, of course, operation distribution, such as labor shortage in our factory, particularly in our North American factory, but also inbound and outbound shipping and logistics operations. The segments use a lot of natural rubber coming from Asia, most of our factories are based in Europe and North America. We have also a strong base in Sri Lanka for the beam road activity. And in both way, our operations were strongly disrupted. In terms of overall financial, we are at the end of 2021, we are posting 18.6% gearing ratio. We showed the ability of the group within two years. We have basically cut the debt – the net debt by half since December 2019. And within two years, the group has been able to weather the crisis, reduces debt and absorb the company that we have acquired. So we have been able to digest financially our €4 billion acquisition that we made in 2018 and 2019. And this performance has been confirmed by the rating agencies who have confirmed our A- status for long-term debt A- 2 for short-term debt. Of course, this performance has been achieved, thanks to the €1.4 billion in free cash flow after M&A, mostly supported by EBITDA, which is now at 19.7%, of course, an increase in working capital by €824 million, of which €320 million is coming from the price effect. So, that is reflected in the cost of the raw material in inventory and the finished product, but also the accounts receivable. And of course, most of this networking capital increase has been coming from inventory. And then you will see that the group has of course see an increase in the tax and interest paid. Capital expenditure cash-wise is now at €1.4 billion, but we have been able to invest €1.7 billion during the year and we have less acquisition in 2021 than in the previous years. So at the end of – if we look before acquisition, we posted €1.5 billion – nearly €1.5 billion in free cash flow. And that if you have to add that to the 2020 free cash flow, the group has generated €3.5 billion free cash flow for a four-year program of 6.3%. If you include the 2022 and 2023 targets that have been shared during our Capital Market Days. Return on capital employed that is now including all the elements of our capital employed, all the assets, including the assets due to the company consolidated by equity, but also the result of these companies has improved from 6% in 2020 to 10.3% and now is nearly at the level we want to constantly deliver over a 2023 to 2030 period. As far as CapEx is concerned, you see very clearly that the group is investing nearly €1.8 billion per year, the trend we have between 2016 and 2019, and that was what we have communicated in – repeatedly in 2019 during the Capital Market Day and again in last year – in April last year. So you see very clearly that in 2020 and 2021, we are not able to reach the level of CapEx that we want to achieve in order to sustain our growth in targeted segments, but also to make sure that our factories are working with a good level of services and very good level of operation. So we will probably have to increase our CapEx in 2022 and 2023 in order to compensate the CapEx that we have not engaged in the two recent years, which means that we will probably have CapEx of around €2.1 billion, €2.2 billion in 2022 and 2023, but that’s only a catch-up effect of the previous years. So now looking to – I would like to do before moving to the guidance, we don’t focus on the free Zoom. The first one is electric vehicle that we are seeing as a strong opportunity for the group, including for not only for our hydrogen joint venture, but also for our core tire business, because Michelin offers the best trade-off in terms of performance for an EV vehicle, taking into account vehicle range, trade life of the tires, but also the noise and the load performance because electric vehicles tend to be heavier than ICE vehicles. And that’s why we are – we have a strong leader in the different geography with OEMs in the United States with a lot of newcomers in this industry, but also in China and in Europe. So we partner with a lot of OEM involved in electrification and our OE BEV, so battery electrified vehicle market share will sustainably be twice as high as our total original equipment market share. Now, moving to a second topic, which is a tire roadway particle. Michelin has a considerable competitive advantage without compromising safety and other performance. And you have here on the left of this slide, the result of a study that has been published by ADAC, which is the German Automotive Association, which has more than 20 million members in Germany and some neighboring countries. And they did a study with a lot of different tire sizes to compare the abrasion and the particle emission per 1,000 of kilometer and per tire. And this study shows very clearly that Michelin has a strong competitive edge over its premium competitors. If you look at the numbers, for 1,000 kilometer, the tire is emitting per vehicle 90 grams of particles when the average of our premium competitor is at 125 grams, which is a huge difference, which is translating in a number of quantity of emission for the same service level, which is very different if you look at the entire vehicle park. So, of course, this performance is not delivered at the expense of safety or rolling resistance, which are extremely important for the drivers. And if you look at our offers, and particularly we three different range that has been launched in 2021, which is coming in 2022, each new generation of tire range, the Primacy, for example, we reduced the abrasion, the particle emission by 20%. The cost climate two is 13%, generating emission less than its predecessor. And the MICHELIN Pilot Sport 5 is also improving by 20% its performance. Last I would like to come back on the communication that we did during our Capital Market Day, we consist – which consists to valorize our externalities. And we have decided to mostly focus on negative externalities, and mostly CO2 emission, water consumption and COV consumptions. We have first decided to increase the CO2 cost pattern that we retain a figure of €58 per tonnes in April last year. In the meantime, the European market for CO2 quota have reached nearly €80, sometimes well above €80 per tonne. And in order to have current data internally, because we use €100 per tonne as a way to measure the performance of our capital expenditure. So when we are doing project, we include CO2 emission in the calculation of the ratability is a profitability of the investments. We retain €100, which is a way to make sure that internally, our teams will see the same figures. So it has of course, this increase in euro per tonne increase the overall value of our externalities to €506 million. And if you look at the different area, CO2 Scope 1 and 2, the Scope 3, excluding the separation disruptions, the water, the volatile organic components, we were able to reduce according to our target reviews to reduce our externality, that has been hedged by the impact of supply chain disruption in our – in 2021, which, at the end of day, we lend at similar level of externality at the end of 2021. But it doesn’t change our 2023 target, which is still to decrease these externalities to €467 million. Thanks to the CapEx, and we are engaging every year close to €125 million of CapEx just to reduce our CO2 emission in the factories and in the supply chain. Moving now to 2022 guidance, let’s look at the market evolution. So of course, after the very sharp rebound of 2021, market will probably come back to more normal growth rate. We expect the passenger car and light truck market to grow between 0% to 4% in 2022, betting on the fact that we think that original equipment market will probably gradually improve from the beginning of the second semester, and we’ll see a sharper growth in the last part of the year. The replacement market will, let’s say, grow at a normal level knowing that in almost every regions, dealers have rebuilt their inventories. The truck market should grow between 3% to 7%. If we exclude China between 1% and 5%, if we include China, the demand is very strong. A lot of OEMs have completed already their 2022 other books and replacement will remain strong due to the activity, the general activity. The specialty should go between 6% to 10%. We believe that mining tire will remain robust, but the operation will still be impacted by the sanitary crisis and the supply chain disruptions at least during the first half of the year. Off-Road will continue to grow as well as two wheels and we expect the aircraft to continue to grow, but with still very weak comparison. As far as the economics are concerned, we are expecting to grow in line with these market assumptions. We also expect the cost of raw material, custom duties, transportation and energy to be strongly negative, strongly negative means probably in the same range of the inflation that we are faced in 2021, which was I remind you €1.2 billion, and our target is to offset these effect with our price and mix impact. So with this, taking into account these assumptions, our segment operating income at, let’s say, December 2020 exchange rate should be at least €3.2 billion. So that’s our guidance for 2022. And we expect to generate a structural free cash flow above €1.2 billion, taking into account the fact that we have to increase our capital expenditures in order to catch up the investments that we have not been able to realize in the two previous years. Thank you for your attention. And now I will hand it over to Florent to coordinate the Q&A session.

Florent Menegaux: Thank you, Yves. So now the question-and-answer session is open. I think we have already people on the list for questions. So let’s start with the first question from RBC.

Operator: Yes, first question from Tom Narayan from RBC. Sir, please go ahead.

Tom Narayan: Hi, yes. Tom Narayan, RBC. Thanks for taking my questions. The first one is on the free cash flow guidance for 2022. Yeah, you generated €1.5 billion in 2021. The guidance is calling for above €1.2 billion, so despite higher volumes, higher operating income guidance in 2022 versus 2021. Is all of this lower free cash flow year-over-year coming from the higher CapEx that you called out? And what specifically is this CapEx for? Is it for like the non-tire businesses? And then my next question is on SR3 margins. For H2, I believe they came in at 11% in 2021, well below the H1 level of, I think, was 15%. I know you guys called out labor shortages, supply chain disruptions and raws. Could you comment maybe on why this was felt worse at S3 versus the other two segments? And maybe how we should think about SR3 margins in H1 2022? Thanks.

Florent Menegaux: So, free cash flow, Yves, you will answer, and I will take care of the SR3 margins.

Yves Chapot: Yeah. So the free cash flow is taking into account an increase of roughly €400 million to €500 million of CapEx to go from €1.7 million to €2.1 million, or €2.2 million, which is basically the impact of the CapEx that we are not able to spend in 2020 and 2021. So I remind you that we have nearly €700 million of under CapEx in 2020 and 2021. And this is mostly for our tire business, but also for our non-tire business. We have a lot of factories in the world that we need to maintain in good shape. And we have also some productivity – a lot of productivity, digital manufacturing, and also marginally some capacity increase in Mexico, in Thailand to operate. The second factor of – regarding the free cash flow is that we are expecting further growth as you see in raw material, but also we’re expecting our inventory to grow. At the end of 2021, we have nearly one tire among four, which were in transit, means so in a boat or in a container waiting in a port or in a truck. This figure was less than one-fifth in 2020. So we need also to rebuild our inventory. And there will be the impact of the raw material prices in our working capital.

Florent Menegaux: Yes, as far as the margin on SR3, yes, you’ve noticed that the second semester was rougher on this segment. Now, you have to remember that the segment three is more indexed towards contract business. And with indexed businesses and with on transportation, we have closures that have a yearly anniversary. So – and we have seen in the second semester, a very sharp increase in raw materials and logistics and especially in energy if we take Europe. So that explains one portion of that. Now if you look at the commitment and our capacity, and our projection in that segment, we should come back to the commitment we have made for 2023 for the segment three, within the next two years. It takes a while because we have a delay. So basically, if you take the – what we have landed to – for the year at 13% and you bridge the gap to 17%, half is due to the delay and half is due to the disruptions we have had. And as we have, for example, if I take the – we have a big supply base out of Sri Lanka, and the Colombo port has been closed for many weeks. So it has disrupted a lot of our supply chain. We had some labor issues in – we have less plans, for example, in mining tires. So labor shortages or absenteeism have a stronger impact in that business, but nothing that we cannot master in the long run. So for us, this is not structural, it is due to the exceptional circumstances we have been facing.

Tom Narayan: Okay, thank you. I’ll turn it over.

Operator: Thank you. Next question from Thomas Besson from Kepler Cheuvreux. Sir, please go ahead.

Thomas Besson: Thank you very much. I’d like to come back a bit on those SR1 and SR3 to get some more granularity both on what you achieved in 2021 and where we should expect things to go in 2022. I mean, as mentioned earlier, SR3, H2 was the worst since the second half of 2009. And so I understand it’s going to be a progressive rebound. But can you maybe give us more detail on the segment that have affected you not effectively in mining, where profitability was crushed by the elements you mentioned. And on the SR1, where you had your second best semester in history. Can you talk about the sustainability of margins at this level? So for the first – that’s the first topic. The second one would be on whether you could give us or not any more granularity on what kind of businesses may be acquired to reinforce your non-tire activities. There’s been a lot of press reports on your involvement in recycling, in particular, I would like to know if this is something that could eventually become bigger and one of your substantial businesses later? And final question, you talked about the BEVs involvement in connection with Michelin’s business. Is it not to assume that the impact of BEVs on your margins is more like 23, 24, or is it already visible in your SR1 margins now?

Florent Menegaux: So I will take acquisitions and BEVs, SR1 and I will leave SR3 to Yves. So acquisitions and you’ve read many articles on our activities there. Of course, you understand that I cannot comment on our acquisitions. However, you’ve seen we have taken participation in different corporations that are involved in that Pyrowave and that are developing technology that could be interesting to recycle differently or create new raw materials out of recycled materials. So we are exploring various avenues. It’s a little bit early to talk to you a little bit more about those acquisitions. Unfortunately, we cannot for understandable reasons, give you more details. But yes, we – as we have said in the Capital Market Day, acquisitions are part of our strategy and our growth strategy. So we will see acquisitions in the future. At this stage, it is too early. As far as SR1 is concerned and the sustainability of our results, we have enjoyed in 2021 very favorable replacement and versus OE mix. And of course, as OE recaptures, this should rebalance slightly. However, we have been less than optimal in our production capacities and capabilities and productivity, et cetera, in the SR1 segment, which is somewhat has been compensated by more favorable replacement and OE mix. As far as the C diameter mix is concerned, we don’t see any reasons why we should not pursue this. So, product mix will continue in SR1. OE replacement mix will probably shuffle differently in – as soon as OE catch up, but it is not clear whether OE will catch up in 2022 or 2023. It’s not clear. We have no real signal that the situation is strongly improving, but that will be offset by a better productivity and more stable situation into our plants. So we are confident that in SR1, we will have – we will still enjoy strong margins for the future. As far as SR3?

Yves Chapot: Yeah, so, first of all, SR3, we maintain our long-term ambition, which is to have SR3 generating at least 17% segment operating margin. The – that you have to know that the SR3 was, as I said, mostly impacted – the most impacted by the inbound and outbound supply disruptions, because that less local to local business, we have, for example, two factories to produce mining tires in the world. And because it’s a specialty business, the other business lines also have less premises and they are – production location is more concentrated. So, this is the first reason why this business has suffered the most from the supply chain disruptions in both inbound and outbound. Second point, it has been mentioned by Florent. If you look at mining business, more than 80% of the sales indexed. So they are made of long-term or midterm contract with the raw material indexation clause that are playing with a lag of few months. And sometimes, for example, transportation cost or shipping costs are including in the clause, but they’re updated only once a year. So we also believe that the lag as being penalizing a lot these activities, don’t forget that for construction and agriculture, the market is such that you have a global balance 50-50 between original equipment and replacement. So here also, this is a business segment where you have a large part of the business that is indexed.

Florent Menegaux: The last portion of your question about BEVs, I think at this stage, this business is too small, so that we can really see a strong impact. However, when you look at the analytics of the business, we are still very positive in terms of the future for Michelin in that segment, because really, we have a very, very clear advantage with our competition, especially because we have been working for that for the past 20 years. We have already made most of the investment to manufacture these kind of tires.

Operator: Thank you Next question from Gabriel Adler from Citigroup. Sir, please go ahead.

Gabriel Adler: Hi, thanks for taking my questions. I’ve got two. My first is on CapEx. I just wanted to come back to trying to understand how much was the increase you mentioned is really catch-up effect. And how much of it is actually structural because of the diversification of the business? So if we were to look beyond 2023, do you see that €1.8 billion referenced on the slide is a normalized level of CapEx? Or do you think investments in non-tire business actually means that CapEx will be structurally higher for longer? And then my second question is just on dealer inventories. Maybe you could comment on what impact pre-buying from deal it’s had in volumes in the fourth quarter ahead of price increases coming through and what level of dealer inventory is that currently? Thank you.

Florent Menegaux: So regarding the CapEx, I’m not sure if we capture your question. But of course, as I said, we understand roughly €7 million of CapEx in 2020 and 2021. In 2020, it was deliberate. We freeze CapEx during the free last quarter of the year, in order to safeguard our liquidity. And in 2021, we of course, resumed our CapEx, but we are not able to completely catch-up because also of supply chain challenges. Having said that, so the catch-up that is going to happen in 2022 and 2023 is really to catch-up over the project that has not been delivered in the past few years. And absolutely not due to the increase of CapEx in non-tire business. Non-tire businesses, and particularly the flexible composite part of it, are generally less capital intensive than the tire business. So it’s really primarily due to the core activity of the group, which is a tire business.

Yves Chapot: And we may see on top of that some raw metal increase affecting the investment, but that will be a margin. So there will be – it might be slight price components in the CapEx – in some CapEx…

Florent Menegaux: Mainly, catch-up.

Yves Chapot: For example, all the equipment that needs microchips are impacted by the crisis that is affecting OEMs and it translates either in shortage, either in price increase for capital expenditure. Inventories, as I say, that grew in 2021. And if you look at the growth of inventory, you have close to €500 million, which is due to the price effect, which is the increase of the raw material, which is translated in both raw materials, semi-finished and finished product still at the end of the year. And as we believe that inflation will continue at least during the first half of 2022, we can bet on the fact that we will have also an increase in inventory, which will be both due to the need to rebuild our inventory. We are not yet at the satisfactory service level in terms of supply chain, in terms of service to our customers, at the same times, we might have this inflation effect in the value of our inventory.

Gabriel Adler: Okay. Maybe I could just clarify. My second question was more around the dealer network and the inventory at the dealer level, given those seem to come pre-buying by dealers ahead of the latest round of price increases? Are you seeing normal inventory levels at your dealers or inventory levels a bit high at the moment in the SR1 business?

Florent Menegaux: For SR1 and SR2, where we are monitoring very closely the inventory level, they are mostly at the normative level. We even observe a shortage of inventory for some particular premium or high-end segments for some dealers, both in Europe and North America, mostly inventories dealers have rebuilt their inventories, but still with some shortage in some business segment. And the strong winter, we have had in Europe has flushed the excess inventory in winter. So we are back to normal level everywhere.

Gabriel Adler: Okay, great. Thank you very much.

Operator: Thank you. Next question from Giulio Pescatore from BNP Paribas. Sir, please go ahead.

Giulio Pescatore: Hi, thanks for taking my question. The first one, going back to your slide on electric vehicles. So are you willing to share how much is your market share today in this market? And in the past, I think you mentioned that loyalty rates in this segment are very high. Is that still the case? I know it’s still in its infancy. What are you seeing? Are you seeing any trends there? Then the second question, so to go back on the CapEx. I know we talked about it a lot. But I’m just trying to understand, can you remind us of what caused the delays in 2021? Because it just feels like a lot of those factors that might have caused the delays in 2021 are still present in 2022. So what gives you confidence that this year you’re going to be able to spend €400 million to €500 million more? And then the last question on the high-value market. You mentioned you’re gaining market share. Are the market share more limited today’s EV segment also 19 inches and above another segment. Thank you.

Florent Menegaux: So as far as EV vehicles are concerned, yes, we have two times more market share than traditionally. As far as the royalty rate, at this stage, it is – it depends on – it varies from geographies to geographies, but yes, generally, we see better loyalty on this type of vehicle, especially flak tires because sometimes we have special markings on the tires that have been set for specific electric vehicles. And for this we have normally higher loyalty. Now also, it is known in the market that Michelin tire is very performing on electric vehicles. So not only the loyalty on the vehicle is higher, but the Michelin loyalty is higher as well. So that’s why we are confident that the electrification of the vehicle part will be beneficial to Michelin. As far as the CapEx – could you repeat the question on the CapEx, please?

Giulio Pescatore: Yeah. So my point was, what were the delays – what caused the delays last year? And because it seems to me that a lot of what caused the delays last year, a lot of those factors are still present in 2022. So what gives you confidence that this year, you’re going to be able to spend €400 million to €500 million more than last year?

Florent Menegaux: So the delay, there was almost no delay in 2021. We’ve reached what we wanted to reach in 2021. The delay is more for 2020 because in 2020, we had to slow down sharply as we were moving into unknown territories by – we took the decision to slow down slightly our investments and that the catch-up is more towards 2020 and towards 2021.

Giulio Pescatore: Okay, that makes sense. Thank you. And then the last one on the high-value markets?

Florent Menegaux: So the market share that – we were gaining market share both in 18-inch and above and 19-inch and above.

Giulio Pescatore: Okay, thank you.

Operator: Thank you. Next question from Michael Foundoukidis from ODDO BHF. Sir, please go ahead.

Michael Foundoukidis: Yes, good evening. Two questions from my side. First one, do you really see or expect to see this year any trading down from Tier 1 to Tier 3 in both passenger and truck segments following the significant price increase you are implementing? And how should we see this for Michelin? And second question, maybe coming back on your previous comments on indexation clauses. Could you confirm that they’re still mostly only cover raw materials? Or you are able to increasingly or maybe more rapidly integrate, so costs like logistics and maybe wages, et cetera. And if not the case, are you able to have separate discussions, let’s say, with your old clients? And if so, what should we expect from these discussions and when? Thank you.

Yves Chapot: So I will take the second part of the question, and Yves if I didn’t understand the thing. So please, when you ask a question, if you could speak slowly and not too close to the mic, because we have a very – it’s very difficult for us to understand what you say. So if I understood correctly your – the last part of your question, but no, I forgot it. So I will start with the first part and I will. So due to the price increase, we have not observed any shift from Tier 1 to Tier 2, or Tier 2 to Tier 3. We have don’t forget that for Tier 3 and Tier 2 that are important, for example, in North America and Europe, from Asia to Europe and North America from Asia, they have been even more impacted by both the supply chain issues and the impact of the raw material and shipping cost. So in this context, we are rather observe a resilient premium Tier 1 segment, both for passenger car tire and truck tire, and even a slight transfer from Tier 3 to Tier two. So we have rather seen the market enriching from that standpoint, rather than commoditizing. And in front of, let’s say, higher tire prices contribute also look for the value of what they purchase, particularly because the price hike for Tier 1, Tier 2, and Tier 3 has been even a decent percentage, even sometimes higher than for Tier 1.

Yves Chapot: Okay. So if I understood correctly, the second part of your question, I think it relates to whether we are able to cover all costs or not. So our commitment is to offset all the rising inflationary factors on our costs to the market because we – of course, we have every year yearly productivity programs that can only offset a small portion of it. Now we are confident also in the index business that has just – it’s just a question of time before we are able to offset all these costs.

Michael Foundoukidis: Okay. And maybe just could you clarify the time? I mean, should we expect that more in H2 than in H1, or…?

Florent Menegaux: It will take – it depends. If the inflation continues to rise, we will still be six months, depends on the anniversary. So it can be three months, sometimes six months. And as I told you in terms of transportation, it’s an early discussion. So – and it’s in the contract, but it’s a early discussion. So, as inflation – when deflation slows down, I will be able to answer your question more precisely.

Michael Foundoukidis: Okay, thank you.

Operator: Thank you. Next question from Jose Asumendi from JPMorgan. Sir, please go ahead.

Jose Asumendi: Thank you. It’s Jose from JPMorgan. A few questions, please. The first one on your 2023 targets, you mentioned in the release that the deliver savings will not be enough to offset rising costs. So I’ll be interested to learn a little bit more, what are you doing within the business to improve earnings and still be able to hit those margin targets? That is the first question. And then a few housekeeping questions, please. Can you comment on the expected operating leverage overall for the business in 2022? What can improve this operating leverage? Second, what is the share of 18-inch within replacement within SR1 currently? And final one, very simple one. Overall, the business for 2022 as we think about the first half and the second half, how do you expect the seasonality between the first half and the second half? Do you expect a stronger second half versus the first half? Thank you.

Florent Menegaux: So, I will take the first part of your question and Yves, if you can take the last part. So, as far as labor savings, yes, you will notice that our productivity achievements cannot offset strong inflationary pressures. So the main leverage we are using to offset this is basically keeping all the mix to us basically, and not racing, some mix into our prices. Basically, in normal times, sometimes we do that, but we have put a freeze to this for as long as we have this kind of market conditions. Now, of course, we continue all the time to look at competitivity measures, structural and that can happen some from time to time. So competitivity is still on top of our agenda. And of course, I cannot disclose too much, but we are pursuing that and in a commitment 2023, I think, all of that can be managed. The last portion is a lot of the productivity yet is not shown in our industrial performance, because we are suboptimal due to the absenteeism, the COVID cases, et cetera. And our plants are not able to run totally at full speed. So, that will be very beneficial in the – as soon as we are out of the sanitary crisis and that we have been able to master the labor shortages. So that’s why we are confident that in 2023 we can achieve that. The operating leverage in 2022 is again, very close to what we did in 2021 being very reactive. We have said that every quarter, we look at our pricing position. We look also at our logistics or supply chain all the time to make sure that we are – our operational excellence is at the top. So that’s the main operational leverage we will be using in 2022 like we did in 2021. We operate in almost daily crisis sale mode, and it paid dividend in 2021. I’m sure in 2022, our associates will do wonders.

Yves Chapot: Maybe the – to complete on Florent’s answer on the operating leverage. In 2021, we have €117 million per point of growth rate. You can expect a similar another €15 million per growth rate – a point of growth rate in 2022. Our market share, so we don’t disclose market share by market. But overall, if you look at the Michelin brand, original equipment plus replacement, the share of 18-inch and above sales reached 51% in 2021, which is 4% improvement, 4 point improvement versus the previous year. Your last question was a short one, and I will give you a short answer. We don’t give guidance per quart – per semester. We have overall guidance for the year. Of course, inflation is due to be, let’s say, probably sharper in the first half than in the second half. But as we had already the opportunity to mention, we have asked our business units to steer their price position backward per quarter. So to start the quarter, with the right level of pricing in order to hedge their inflators for the quarter, which is coming. And that’s because basically, I think nobody’s able to say what will be the price of Brent or the price of natural rubber, or the butadiene in October or even in August. But for sure, at the end of the quarter, we know pretty well what will be our cost of goods sold for the coming quarter.

Jose Asumendi: Thank you very much. Thank you

Operator: Thank you. Next question from Martino De Ambroggi from Equita. Sir, please go ahead.

Martino De Ambroggi: Thank you. Good evening, everybody. Quick question on prices. Based on the current visibility, what are the – what is the amount of price increases factored in your guidance? And how much was already implemented so far? And the second question is just a double check on a previous question on the profitability by division. Am I right in assuming that 14% return on sales for the car business is roughly sustainable also for this year? And the same question is also for trucks, the 9-plus percent. Thank you.

Florent Menegaux: Okay. So if I take the guidelines for the pricing, we anticipate, as Yves mentioned in the presentation that we anticipate that the inflation and cost for 2022 will be roughly the same magnitude of 2021 Seen from today, again, we operate in a very volatile and unchanging environment. But our commitment stays, we will have set everything in 2021 – in 2022. So that’s why we have said in terms of price, mix, raw material, industrial costs, et cetera, to be neutral. That’s our target for 2022. And, of course, it requires a lot of steering. As far as the profitability per segment, again, what you’ve seen in 2021, is you’ve seen a slightly different mix in terms of segment one versus segment three. It will vary slightly. That’s also why Michelin is very suited, because we constantly have offsetting businesses with overall progressing. So that’s why we don’t project too much about segment by segment, we look at the overall profitability. But I am sure that segment three will progress in 2022.

Martino De Ambroggi: Okay, thank you.

Operator: Thank you. Next question from Philipp Konig from Goldman Sachs. Sir, please go ahead.

Philipp Konig: Yeah, thank you for taking my question. I just want to come back on the price mix against all the inflators. You obviously mentioned that you want to have a neutral effect this year. But if we look at the second half, it was a slight negative. So just coming back, does that imply for the round of price increases later this year in any of your segments? Then my second question is you spoke about M&A investments earlier. On the other hand, is there anything on divestment? And is there any part of your business that you’re no longer viewing as core to your strategy or is not profitable enough for in comparison to the rest of the segments, which you may or may not divest? And then my last question is just quickly, what’s your view on forex for 2022? Thank you.

Florent Menegaux: Okay. Yves, maybe.

Yves Chapot: Yeah. So you’re right, the second half was probably in 2021 was more challenging, because we have seen, let’s say, unpredicted price hike, particularly in Europe of energy in the last two months of the year. But to gain you have this, so it’s as, let’s say, a wider lag effect that we are generally facing during the other years. If you look at the curve of our raw material cost evolution, semester by semester, you see very clearly. So that’s why we are pretty confident that we have – we will recuperate part of that through the clothes that are going to be into play for the index business. And as far as our pricing policy, we have already increased price, 1st of January 2022. And our North American regions have already announced another price increase 1st of April. So we are going to, as I said, we manage our price positioning quarter-by-quarter in order to hedge inflators. Regarding investments, or M&A, I will not add about what Florent said. These investments, it might happen from time to time. But let’s say, the group as an organization based on these three business segments, we are building the high tech material activities, which will probably need to grow through M&A as well as our services in solution businesses. And in the past, it does happen from time to time that we were these investing in assets that we consider less strategic, both in terms of economical contribution, but in terms of back in our overall value chain. So that’s why we have at this stage, no, let’s say, major divestment plan. As far as Forex is concerned, our policies, we publish the impact of the Forex on our activity. You know basically, that’s $0.01 of variation between USD and Euro is impacting by around €30 million, our P&L. But we build our budget with the last known Forex. So basically, 2021, 2022 budget has been built by with 2021 December forex. And we are dated month after year, month after month during the year.

Philipp Konig: Maybe an additional comment on the pricing dynamics, again, the price increase we had in the 1st of January we decided on it with our businesses around late October, because of the situation we were foreseeing. And as you mentioned, we have seen a steep increase in Europe in energy cost in – especially December. So of course, we are reevaluating constantly. And as we told you, every quarter is a new quarter for us.

Philipp Konig: Thank you.

Operator: Thank you. And next question from Edoardo Spina from HSBC. Sir, please go ahead.

Edoardo Spina: Good evening. Thanks for taking my two questions. The first one is on the pace of CapEx spending in 2022. If you could share whether you already started to spend at this higher rates in the first quarter, or you are waiting for the next few months? And the second question is on the net debt levels and what plans you have for the next 12 months as far as the use of cash. I was wondering if M&A in the known tire business is the only option you have on the table or if they’re considering M&A tires, activities, or even higher dividends or share buybacks issued in default? Thank you.

Yves Chapot: So regarding the CapEx spending, it’s, let’s say, it’s a yearly program. The CapEx we are engaging, of course, there is a small CapEx that can be mobilized within weeks or months. But the most important ones are project that are sometimes multi years project and that you cannot engage within a few days or a few weeks. It’s the set of engineering studies, implementation studies and then purchase order and it’s a very rigorous process. So basically, generally, the CapEx are ramping pretty smoothly. We have a seasonality with more CapEx during the second half and the first half, but because really the factories tend to immobilize new assets during the second half. But that’s – I mean, the seasonality should be the same in 2022, than in the previous years. As far as net debt level, with the proposed dividend mentioned by Florent during his introduction at €4.5 per share, it means nearly €800 million dividends, plus we have nearly €900 million of bonds repayment. Most of them has been already repaid in January, and the second part is coming in May. So, that’s basically the way we are going to handle our cash. And as we say in the past, we prefer to keep some margin of another for potential M&A. And don’t forget that, within a year between the highest month and the lowest months, we can see working capital variation up to €1.2 billion, €1.3 billion. That’s why we need to have – that’s why we have treasury components in our cash management in order to access to commercial papers and finance the group, along with the variation of this working capital.

Florent Menegaux: Yeah, and on top of the dividend, we also have a small portion of share buybacks to avoid the dilution. So – but our intention is to stay close to what we have said during our Capital Market Day. We are on our journey to distribute more dividends, and that’s what we’re doing in 2022 for 2021 results.

Edoardo Spina: Thank you very much. Sorry, may I follow-up with the third question very quickly. You may have seen what happened to one of your key competitors in the U.S. And my question is more about the competitive environment considering that the share price was under severe pressure. Do you think there is any risk that some new entrants or other competitor will jump to the opportunity maybe to help them as a financially and therefore create a bigger group? Or do you have that option at all?

Florent Menegaux: We – first, we do not comment on our competitors. The second thing is we drive our business based on what we think is right. We don’t pay too much attention to what is happening on our side basically. So really, we price what we think is fair to the market, to our customers. And so far, it’s been okay, we don’t look too much about the competitive environment. Actually, if you looked at what has happened over the past years, the price gap between Michelin and competition has widened, especially the premium competitors and the Michelin share is still strong.

Florent Menegaux: So thank you. I think it was the last question. So thank you all for the interest you have in Michelin. And we will see you at our quarter revenue announcements and then in the first half of 2022. Thank you very much. Good evening and good afternoon. Thank you very much.