The COVID-19 pandemic and lockdown policies led to an unprecedented slowdown in economic activity in the first half of the year, resulting in a steep plunge in tire demand in every geography and most of the business segments, the Michelin Group reported in its financial results for the first half of the year.
Worldwide, Michelin said its OE and replacement PLT tire sales contracted by 24% in number of tires sold. According to the company, the global replacement tire market ended the first half down a historic 21%. While demand declined by just 11% in the first quarter, it dropped by 30% in the second quarter with lockdowns ordered in Europe and North America.
Michelin said its North American replacement business saw a steep collapse in demand in April and May, for a total 33% drop in PLT tires in the second quarter. In a difficult economy, Michelin said consumers shifted to more “entry-level” tires in the North American market. In China, it experienced a 31% drop in sales in the first quarter yet rebounded with a 3% gain in PLT replacement tires in the second quarter.
Michelin’s global commercial replacement tire sales fell by 19% in the first half of 2020, with the first quarter down 18% and the second down 20%. After a stable first quarter (up 1%), COVID-19’s impact was partially offset in the second quarter (down 11%) by favorable prior-year comparatives, reflecting deep drawdowns of dealer inventory in 2019 after the massive buildup in late 2018 ahead of new import duties, the company said.
On the OE side, worldwide unit sales of OE tires collapsed 34% in the first half of 2020, with a steep downturn in the last two weeks of March, according to Michelin. The company said global tire demand was down 45% at the end of Q2 2020, after bottoming out at a 62% drop in April.
Despite challenges as a result of COVID-19, the Michelin Group reduced its capital expenditure budget by around 30% to support its innovation and efficiency projects. The group said tracking supply and demand on a weekly basis helped to keep inventory under control. Corporate overheads were reduced by €192 million ($226 million USD) through a variety of cost-saving measures. Michelin also supplied masks and safety equipment to its employees, customers and distributors
“After these recent months of unprecedented crisis, I want to express my immense pride in the remarkable engagement of our teams, which has enabled Michelin to fulfill its commitments to its customers, its communities and its partners,” said Florent Menegaux, managing chairman of the Michelin Group. “With this same determination, the group has undertaken all the measures needed to secure the sustainability of its operations and attenuate the financial impact of the economic slowdown. In this still very uncertain environment, the group pursues its competitiveness initiatives to maintain its leadership in the tire businesses and drive deployment of its growth strategy.”
To conserve cash, the group reduced its capital expenditure budget by around 30%, while maintaining its ability to support innovation and efficiency projects and lowered the recommended 2019 dividend payout by €330 million ($398 million). Tracking supply and demand on a weekly basis helped to keep inventory under control. Corporate overheads were reduced by €192 million ($152 million) through a variety of cost-saving measures. To meet its future cash needs, the group also has various sources on financing in place.
According to market stress tests published by the group in late April, Michelin confirmed it has all the financing mechanisms in place to reduce the negative impact of the coronavirus pandemic on segment operating income and free cash flow. According to its financial results, the group says it will be able to withstand any developments as the crisis unfolds, without having to draw down its €1.5 billion in confirmed lines of credit.
Outlook
Based on the trends observed to date, the group said it expects business to return to 2019 levels in the second half of 2022.
In 2020, after a first half shaped by the effects of the health crisis, Michelin predicts global tire demand to be impacted in the second half of the year by the economic recession as a result of the pandemic. Passenger car and Light truck tire markets are expected to decline by 15% to 20% over the year and Truck tire markets by between 13% and 17%, according to Michelin’s Q1 earnings. Given the relative resilience of certain segments, Michelin expects its specialty markets to contract by 13% to 17%.
