Michelin Sticks to 2015 Targets as Tire Pricing to Match Costs

Feb 11, 2014 4:13 am ET

Feb. 11 (Bloomberg) -- Michelin & Cie., Europe’s largest tiremaker, is sticking with earnings targets for 2015 as it predicts volume will rise this year and first-half spending on supplies such as rubber will decline.

Michelin rose to a four-month high after pledging to maintain “margin discipline, which preserves a positive balance between pricing policy and raw-materials costs.” The manufacturer will probably achieve its 1 billion-euro ($1.37 billion) cost-savings goal for 2016, Chief Executive Officer Jean-Dominique Senard told journalists in Paris today.

The tiremaker is adding factories in emerging markets such as Brazil, China and India, as well as in the U.S., where demand for cars is forecast to rise. At the same time it’s reducing costs in Europe, including cutting jobs in France, as the region’s automotive sales linger at a two-decade low. Michelin, which slashed net debt 87 percent last year, plans to raise operating profit to 2.9 billion euros by next year.

“The group doesn’t have any debt now,” Senard said. “It’s a historic event. This gives us greater flexibility,” and the company is open to acquisitions, “probably in Asia.”

Michelin rose as much as 2.2 percent to 82.78 euros, the highest intraday price since Oct. 22, and was trading up 1.7 percent at 10:10 a.m. in Paris. The stock has gained 13 percent in the past year, valuing the company at 15.3 billion euros.

Dividend Raised

Operating profit excluding one-time items dropped 7.8 percent last year to 2.23 billion euros, Michelin said in a statement today. Sales fell 5.7 percent to 20.2 billion euros. The company plans to raise the dividend 4.1 percent to 2.50 euros a share.

Michelin’s planned payout “reflects the strength of its balance sheet and, we think, some confidence on targets,” Philip Watkins and Avinash Mundhra, London-based analysts at Citigroup Inc., said today in a research report. “This is an important point,” as Michelin “has often been criticized for its cash flow in the past.”

Structural free cash flow, excluding one-time effects and raw-material costs, increased 25 percent to 749 million euros, and the return on capital employed totaled 11.9 percent.

Declines in spending on raw materials will generate a 300 million-euro gain in the first half of this year, Senard said. Structural free cash flow will exceed 500 million euros in 2014, and return on capital employed will be maintained at more than 11 percent, the company said. Michelin is basing its 2015 targets on average exchange rates for 2012, the CEO said.

Currency Effects

Earnings last year were reduced by 230 million euros because of the euro’s gains against currencies such as the Brazilian real and South African rand. That was less than the 250 million-euro cut that Michelin forecast in October. Including a gain of 405 million euros from raw-material price declines, free cash flow rose 7.3 percent to 1.15 billion euros.

Michelin said it plans to sell 3 percent more tires this year, in line with the global industry.

About 59 percent of Michelin’s workers are employed in Europe. The manufacturer said on June 10 that it would end production of heavy-truck tires at a factory in Joue-les-Tours, about 250 kilometers (155 miles) southwest of Paris, by the end of 2015. About 730 of the plant’s 930 employees will lose their jobs. The company’s full-time workforce amounted to 105,700 at the end of 2013, Michelin said today.

--With assistance from Dorothee Tschampa in Frankfurt. Editors: Tom Lavell, Chad Thomas