Michelin Earnings Call Insights: European Volumes, Price Mix for Q4

On Monday, Michelin (ML) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

European Volumes

Rabih Freiha – Exane: I have three of them. The first one, I remember earlier in the year you had guided for price mix that was rather flattish in Q3 and negative in Q4. Given the strong number you posted in Q3, could you give us an update on your Q4 expectations? I mean are we looking for a slightly positive or flattish number?

Marc Henry – CFO: Flattish to slightly negative, because we will see the effects of the Earthmover price, raw material clauses prices to be more important in Q4 as the effect of the clauses are between July and August, so it increases along the third quarter and will be fully in the fourth one.

Rabih Freiha – Exane: My second question is on European volumes and replacement for (DLT). When are you expecting destocking to come to an end? Maybe a follow-up on this; do you feel that the upcoming implementation of (labeling) is impacting or causing delays in replacement selling?

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Marc Henry – CFO: Honestly, we don’t think so because the selling – basically, what dealers have been doing has been, they have been reducing their summer tire inventory, that’s the first thing. Second, they have seen also that tire manufacturers are quick to response to their needs, so they don’t need to inventory more tires. Third, of course, the inventory at dealer premises is increasing right now due to winter campaign still not started to sell out, where the selling of course largely increased. So, I would say, we saw a decrease in summer tire inventory, very clear, which we think should happen to come to an end. Of course, now we see a big increase of inventory for winter tires, which we will see in November and December – I mean end of October and November and December if the sellout is at the level as expected. Anyway, as we said, the selling is expected to be around 10% less than last year.

Rabih Freiha – Exane: So, if the winter tire season is not as good as expected could we go below the minus 5% you have set for the year or is it integrating this risk?

Marc Henry – CFO: No, it’s integrating the risk and also if we have, let’s say, poor winter, we will see more in – it’s kind of an effect on 2013 winter sales.

Rabih Freiha – Exane: Maybe housekeeping question to finish off. Could you tell us what tax rate to look for, for 2012?

Marc Henry – CFO: About what it is at the end of the Q3. So, it’s roughly 31%.

Price Mix for Q4

Kristina Church – Barclays Capital: Two questions for me. Firstly, I noticed that your mix was just slightly negative in Q3. I know you just gave an update with regards to price mix for Q4, but specifically, do you expect mix to return to positive or with the negative impact being price in Q4 and was it mainly product mix or segment mix that was negative in Q3? Then my second question is regarding your free cash flow guidance I was just wondering, I know historically you’ve given free cash flow ex the impact of raw materials and given your change in the raw materials tailwinds guidance how much of that has played through to your free cash flow guidance, i.e. what is the change the fact that raw materials have improved for you down to free cash flow?

Marc Henry – CFO: The first part, I think the mix in this I mean globally positive on the nine-year period, in the third quarter as far as I understand this mix is on zero. So, that means there is balance of the older mix effect, and so I don’t think the mix is negative for the third quarter in my knowledge. The second point of course the raw material tailwind that we see in the bottom line in our reporting results of course is also bringing a positive effect in this free cash flow as you mentioned. So the reduction of cost of raw material is bringing very clearly free cash flow effect as you mentioned.

Kristina Church – Barclays Capital: Could you quantify that effect in anyway given the change in your guidance for raw materials?

Marc Henry – CFO: I think the best way to quantify it is the ratio that we have given last year when we had an increase of free cash flow with an increase of cost of raw material is the same backward. So if you — because there is nothing specific it’s really linked to the increase. So you may do the calculation this way if you wish. So it’s very much linked to the increase last year. We had, I think I believe 35% increase for raw material and we had something like EUR740 million impacting in free cash flow. So, I have not done the math backwards, but it is very much similar.