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Michelin Sticks to Forecast as Raw Materials Boost Tiremaker

Oct. 19, 2016
The demand for passenger car and truck tires was flat to slightly down in Europe and North America, while there was strong growth in China and a contraction in South America.

Michelin & Cie., Europe’s biggest tiremaker, stuck to its full-year earnings forecast as an increase in its prices and cheaper raw materials make up for slowing growth in Europe and North America.

Operating income from recurring activities, excluding currency effects, will increase in 2016, the Clermont-Ferrand, France-based manufacturer said in a statement on Wednesday. Structural free cash flow will exceed 800 million euros ($877 million), Michelin said, reiterating an earlier forecast. Third-quarter revenue fell 2.5% to 5.18 billion euros.

Chief Financial Officer Marc Henry told analysts on a call that he sees Michelin’s profit and margin targets being met “with probably a little less volume than what the consensus expects so far, and a bit more pricing.” The tiremaker reiterated a forecast that volume growth will exceed industry-wide gains in markets where it operates in 2016 and 2017. Volumes increased 1.4% since the beginning of the year, Michelin said.

The company sees the effect of higher prices and lower commodity costs adding more than 150 million euros to operating income this year. In the first nine months of 2016, demand for passenger car and truck tires was flat to slightly down in Europe and North America, while emerging markets were divided between strong growth in China and a contraction in South America.

Regional Markets

Chinese auto-sales growth has been accelerating this year, to 15% in September from 6.8 percent in March, propelled in part by a tax incentive that’s set to expire. In contrast, the U.S. market’s expansion has been slowing, and metal miners in some countries including China scaled back production in response to gluts, though there have been recent signs of a potential recovery.

Michelin is facing a fall in demand in Brazil, where it acquired Levorin, a family-owned maker of tires for bicycles and motorcycles, in August. The French company is building a plant in Leon, Mexico, to make premium tires for cars and light trucks for the American market. Production will start at the end of 2018, according to an investor presentation.

During the rest of the year, “the market will be shaped by some slowdown in mature markets, even though we will see probably a little bit of a revival in the winter tire market in Europe,” Henry said. He also said the decline in demand for specialty tires from customers in the mining industry could be halted by the end of the year.

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