(News Bulletin 247) – The bibendum group generated cash significantly higher than expectations, which allowed it to announce a share buyback program of a maximum of 1 billion euros over the period 2024-2026.

First publication of the week on the CAC 40 side, Michelin responded well to the market’s call. The bibendum group delivered its annual results on Monday evening after the close of the Paris Stock Exchange. These accounts largely satisfied investors.

Around 10:45 a.m., the action of the limited liability company jumped 6.6% and marked the strongest increase in a sluggish CAC 40 (-0.16%).

Michelin disappointed in 2022 with its cash generation. The Clermont-based company had then burned 180 million euros in cash.

The 2023 financial year, however, looked much better for this key indicator. “We had maintained, from the start, that 2023 should be a cash-generating year, and this quite disproportionately compared to the group’s norm, after a weak year 2022 (with a slight cash consumption), recalls on this Stifel point.

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Cash generation exceeds expectations

Michelin had indicated that it was targeting free cash flow before acquisitions of more than 2.3 billion euros in 2023, compared to a disbursement of 104 million euros in 2022. For their part, analysts expected a little better, counting on cash -free flow before acquisitions of 2.6 billion euros, according to a consensus cited by HSBC.

In the end, the bibendum replenished its cash flow faster than everyone expected. Free cash flow before acquisitions stood at 3 billion euros and free cash flow at 2.34 billion euros. “The cash flow did not disappoint,” summarizes Stifel.

Michelin’s cash generation benefited from a significant improvement (€985 million over the year) in working capital requirements, mainly due to a drop in inventories. The group was also supported by a positive contribution from its joint ventures (205 million euros), notably TBC, a tire distribution company in the United States operated jointly with the Japanese Sumitomo.

The improvement in Michelin’s cash generation is also explained by its better profitability, which underlines the group’s ability to cope with the decline in volumes by moving upmarket.

The gross operating profit (Ebitda) of the sectors – an alternative measure of profitability put forward by Michelin – increased by 4.3% to 5.48 billion euros. However, it is from this line of the income statement that the group then calculates its cash flow.

More broadly, the operating income of the sectors stood at a record of 3.57 billion euros, up 5.2% over one year and 4% higher than consensus expectations, notes Stifel. The corresponding margin increased from 11.9% in 2022 to 12.6%.

A positive “price mix”

Michelin managed to improve its margin despite sluggish sales. Over the whole of 2023, they fell by 0.9% based on published data and increased by 2% excluding negative exchange rate effects.

The tire manufacturer suffered an unfavorable volume effect of 4.7% due to inventory reductions across all of its activities. “The uncertain economic context and the sharp rise in interest rates have in fact encouraged distributors and professional customers to significantly destock and reduce their normative stock level,” explains Michelin.

However, the company more than offset this unfavorable impact with a positive “price/mix” effect, that is to say both its ability to drive prices upwards and to direct its sales towards specific products and regions. with higher prices. “The very positive mix effect (337 million euros) reflects the priority given to the Michelin brand to offers with high added value, as well as the growth in sales of 18-inch and above passenger tires”, that is to say, i.e. large tires for ordinary automobiles.

Note that sales excluding tires (gastronomy, conveyors) increased by 10%, bringing 0.5 points of overall growth.

This price-mix effect also made it possible to increase operating income, with a positive impact of 1.46 billion euros over the year, eclipsing the unfavorable effects, such as those coming from volumes (-702 million euros).

These better than expected results coupled with strong cash generation allow the group to improve its shareholder return. The company will propose a dividend of 1.35 euros per share, up 8% over one year. Above all, Michelin announced a share buyback program for a maximum of 1 billion euros for the period 2024-2026.

“Although the distribution of the amount over three years is not a massive program in itself, we clearly view the announcement as positive and supportive of the group’s action,” writes Deutsche Bank.

Caution in 2024

The group’s outlook, described as “cautious” by Stifel, nevertheless slightly qualifies the picture of this otherwise very good publication. For 2024, Michelin has indicated that it expects sector operating income of more than 3.5 billion euros excluding currency effects and free cash flow before acquisitions of more than 1.5 billion euros. UBS notes that analysts expected on average, for 2024, an operating profit of the sectors of 3.59 billion euros and a cash flow before acquisitions of 1.9 billion euros.

Above all, Michelin does not see its tire sales volumes recovering, counting at best on stability and at worst on a drop of 2%. Which would constitute a third year of decline in a row.

“2024 is an uncertain year. This year 2024 concerns us because the uncertain economic context in Europe will probably be difficult, in the United States it (this context, Editor’s note) is not very clear while South Asia -East is slowing down, with China recovering less quickly than expected,” Florent Menegaux, president of Michelin management, said on BFM Business on Tuesday. During a conference with analysts, the leader also pointed to uncertainties linked to the general elections in India.

“Michelin has been struggling with a lack of volume growth for years. 2024 should be a more balanced year (…) but this does not imply that overall volumes should increase because the macroeconomics are not helping at all,” explains Stifel. The bank notes that truck tire activity has already returned to its 2019 level and fears that the “consumer” segment will show “fatigue” because prices have increased continuously since 2017.

“Any further price increases would likely continue to come at the expense of volumes, in our view. We are not saying that volumes will not grow, we are simply reminding our readers that this is beyond the group’s control. Therefore, we have difficult to identify an argument in favor of a re-rating (an improvement in the stock’s market multiples) at this stage”, asserts Stifel.

“Regarding the outlook, management has allowed for a margin of error and adopted a conservative stance,” supports Deutsche Bank.