Compagnie Générale des Établissements Michelin Société en commandite par actions (OTCPK:MGDDF) Q2 2023 Earnings Call Transcript July 26, 2023 12:30 PM ET
Company Participants
Florent Menegaux – Chief Executive Officer
Yves Chapot – General Manager and Group CFO
Conference Call Participants
Michael Jacks – Bank of America
Sanjay Bhagwani – Citi
Jose Asumendi – JPMorgan
Ross MacDonald – Morgan Stanley
Philipp Koenig – Goldman Sachs
Thomas Besson – Kepler Cheuvreux
Giulio Pescatore – BNP Paribas
Steve Fernandes – Societe Generale
Pierre Quemener – Stifel
Martino De Ambroggi – Equita
Operator
Ladies and gentlemen, welcome to the Michelin Conference Call. [Operator Instructions] I will now hand over to Mr. Florent Menegaux, Chief Executive Officer, and Mr. Yves Chapot, General Manager and Group CFO. Gentlemen, please go ahead.
Florent Menegaux
Thank you. Good evening, good morning, and good afternoon to all. Yves and I are very pleased to welcome you to our Half Year Results.
So without further introduction, I will start directly by saying that Michelin has delivered sales growth of 5.9% in the first semester and has increased its segment operating income by 11.4% over the semester on adverse markets. The free cash flow before M&A reached EUR922 million. And I’m pleased to tell you that we have revised our guidance upwards on both segment operating income and free cash flow.
So if we enter into more details, the sales up by 5.9% to EUR14.1 billion. We are lifted by pricing discipline and the fast-growing non-tire sales. The tire markets were flat in passenger car and decreasing in trucks supported by OE, but penalized by the strong destocking from distribution and B2B fleets. The tire sales volumes were down by 3.7%, reflecting market dynamics and group’s priority on value accretive segments.
Our price-mix effect reached 9.4%, recognizing the value of our offers and we recorded net positive mix despite adverse OE/RT sales development. Our non-tire sales grew by 17% at constant exchange rate, fueling our group’s growth. The currency effect turned negative at minus 1%, due to the depreciation of most currencies against the euro.
Our segment operating income increased by 11.4% to EUR1.7 billion, reflecting our value steering, our value management of — and the value management has been offsetting the cost inflation and the negative impact of volumes. The Auto and Specialties segments have increased their performance. The road transportation is facing negative OE/RT mix. Their volumes were heavily impacted and the plant loading and the fixed cost absorption has suffered from that.
We had a strong price-mix effect, benefiting from sustained product mix enrichment and the pricing policy and lag effect of indexation clauses. The Specialty segment, the segment three, operating margin has been reaching 18.3%, coming back to where it used to be supported by a dynamic mining, aircraft and high-tech materials businesses.
Our free cash flow before acquisition reached EUR922 million driven by tight business steering. Of course, it benefited from our EBITDA, reaching EUR2.6 billion or 18.8% of our sales. The working capital has been benefiting from the tight inventory management and the cash recovery we carried over from the Q4 of 2022 and a positive cash generation from TBC, including the divestment of some company-owned retail network in the US.
The fourth point is, growth beyond mobility has been accelerating with the FCG, Flexible Composite Group, acquisition in line with our group ambition to become a key player in polymer composite solutions. As I was telling you, our 2023 guidance has been revised upwards with a segment operating income we forecast to be in excess of EUR3.4 billion at constant exchange rate, and our free cash flow before acquisition in excess of EUR2 billion.
If I now come back to the resilience of our business model, and I think sometimes we forget that we are not strictly an automotive supplier. Of course, it is true when we say we are an automotive supplier, but we cannot summarize our activities to this. We see on the chart you see on your screen that our dealings with auto OEMs only represent 9% of our revenue. The rest of our revenue is generated in various market segments with different cyclicalities.
Coming back on our strategy, Michelin in Motion 2030, we want to expand the reach of our know-how to other sectors. We see on the chart on the top right, the — our new activity, the polymer composite solution, and with our recent FCG acquisitions, we are — we will get to the final — when we will get the final approval of the regulatory authorities to acquire FCG, this overall sector, including FCG, will represent 5% of our revenue. And this segment is growing faster than the rest of the group. And the share of these activities is therefore going to grow within our revenue.
If I now move to conclude into our introduction, there, if you see on your screen, at the core of our strategy Michelin in Motion 2030, we want to leverage our deep-innovation capabilities that feed our group leadership in the chosen targeted end-market we operate in. So you see on the left, what are these deep-innovation capabilities, and on the right of the screen, where we operate. So on the tire businesses, we have seven core businesses ranging from passenger car, both with the OEMs and mainly on replacement, down to two-wheel or aircraft.
On the services to fleet, we have three main offer Michelin Connected Fleet, which offers a blend of different services — digital services to fleet. We have our Tire-as-a-Service operations where basically we lease our tire and we manage the tire on behalf of our customers. And then we have our recent new activity Watea by Michelin aiming at helping fleets to move to electric mobility. And then we have our third element, which correspond to our beyond tire activity, our polymer composite solutions. And you see there, we have four main businesses there, the sealing technologies, the belting solutions, the engineered fabrics and films, where FCG fits and the engineered polymer.
Let me now leave the mike to Yves, who is going to detail you our performance.
Yves Chapot
Good evening, ladies and gentlemen or good afternoon. Following Florent’s introduction, I will try to provide you some more details about our H1 performance and our full year guidance.
Let’s start with the 360 view on our performance during the first semester. And this performance is very solid across the board, either we speak about people or profit or planet. On the people side, we have further improved our diversity, particularly the gender diversity with now 29.7% of women in managerial positions. We have also improved our total case incident rate, so we improved the safety of our operations from our employees point of view, and it’s within a large scope of employees than in 2022.
On the profit side, I will zoom afterwards, but it means, all the indicators are green. And on the planet side, we have chosen to highlight two important KPIs. First, our Scope 1 and 2 CO2 emission, that has been reduced by 14% on a 12-month rolling basis. And our water consumptions, which has been reduced by 11% on the same period.
Moving now to the financial performance, I will start with the description of where the market stands during the first half of the year. So in 2023 — first half of 2023, the market has been very — have demonstrated very contrasted pattern depending on whether we speak about the business segments, the OE/RT market or the geographies.
In a nutshell, you see that over the semester, passenger car and light truck tire market has been overall flat, but with 9% increase in original equipment and a 2% decrease in replacement. And this 2% decrease has been mainly focused on Western Europe and the Americas when continents — regions of China has seen their market increasing. The passenger car, so passenger car is roughly in line or slightly better than what we expected, at least for the quarter.
Regarding truck, it’s another story. The market has shown lower performance than what we expected during the quarter. They were even below the ranges, the lower range that we shared with you at the beginning of the year. The market has been down by 4% overall with original equipment at plus 9% and replacement at zero, but with also very strong decrease in some markets such as Western Europe. And it’s mostly due in both case to a destocking, an activity that has been pretty resilient if we look at miles driven in the US, for example, for passenger car or fuel consumption in Europe, which is a good proxy of, let’s say, mobility.
On the truck side, we are seeing the final demand are slow, maybe a little bit more timid with, for example, ton and kilometers transported in the US at minus 0.8%, but not a massive evolution. But what we have seen mostly is a massive destocking, both at distributors and at fleets for the truck tire market. We consider that the destocking is nearly — is probably finished for passenger car and light truck tires will still probably continue till the end of the Q3 for truck tires.
So in these conditions, our revenue has been increasing by 5.9% reaching EUR14.1 billion. And you see that beside a very small scope effect due to the acquisition of CPS in our conveyor belt activity. Our volumes — our sales has been negatively impacted by the volume, minus 3.7%. In this volume, we must always keep in mind that Russia is accounting for 1.1%. So without Russia, the volume loss has been only 2.7%. An important price and mix effect, which is coming from mostly three drivers. The first one is a full-year effect of the increase — the price increase that we implemented during the first half of 2022. The second one is the increase — the price increase that we implemented 1st of January 2023. And the third one is the effect with a lag of the raw material cost adjustments for all our contracted businesses.
Non-tire grew by 17%, contributing to 0.8% at the group — of the group sales. And we have started to see a negative currency effect 1 point over the period.
Looking now at our segment operating income, so it raised by 11.4%, nearly twice the pace of our sales improvement and is reaching EUR1.7 billion. Our segment operating income increased by nearly 1 point at constant exchange rates, reaching 12.4% for the semester. It’s an improvement at constant exchange rate of EUR235 million, which has been only EUR170 million if we take into account — EUR174 million if we take into account the negative effect of the ForEx.
In volume, we have an important drop-through effect due to negative fixed cost absorption as our sales has been down by 3.7%, but our production has been gone down by nearly 10% over the semester. Raw material prices has continued to increase over the semester in our cost of goods sold, but is stabilizing at the end of the semester when other inflators like energy for the beginning of the semester, although operating cost or wages, labor cost are still increasing.
Our mix is impacted, which is EUR47 million, impacted by the negative OE and RT mix across all the segments. We still have a very positive product mix in the SR1 but we have a negative mix in all the segment, and particularly in the SR2, and to some extent in SR3.
And we should also note that our price effect include the compensations of the ForEx loss on currency such as the Turkish lira or Argentinean pesos for nearly EUR19 million. So the price-mix, raw material and manufacturing and logistics is extremely favorable over the semester. Non-tire business also contributing positively to the growth of our operating income.
Looking now at our performance segment by segment. SR1 performance has improved. The sales of SR1 are increasing by 6.4% with a volume effect of minus 2%, which is exactly the weight of Russia in our 2022 versus 2023 volume effect. So without Russia, SR1 sales has been volume wise flat. The operating income is improving by 10.7%, thanks to our market share gain in, let’s say, growing 19 in — 18-inch and above segment, which is now accounting for 55 — 59% of the Michelin brand sales on the semester, up by 5 point versus the first semester of 2022.
The second segment, the Transportation segment has seen its sales heavily penalized by the volumes minus 8%, mainly from replacement in Europe, heavily impacted by the destocking and also it’s penalized by the unfavorable market mix, and of course, fixed cost absorption — under absorptions, which are impacted directly the margins, the operating margin of the segment landing at 5% for the first half.
SR3 is in line with our expectation. I’ll remind you that we’re looking to generate an operating income above 17%. We are at 18.3% over the semester, an improvement of nearly 500 basis points versus last year. It’s supported by very dynamic sales in both mining, aircraft tire and our high-tech material businesses, including the conveyor belt, the sealing and belting, precision polymer activities.
Beyond road activities such as agriculture, construction, material handling are little bit more impacted by the destocking and the OE and RT mix as well. Our free cash flow is probably the record free cash flow for first semester at EUR922 million before acquisition. It’s first driven by a EUR200 million improvement in EBITDA. EBITDA, which reached 18.8% over the semester. Tight management of our working capital. Generally, the working capital tend to increase over the first semester. And of course, in line with our expectation, CapEx and the other elements of the free cash flow are in line with our forecast.
The free cash flow has been possibly — positively impacted by two, let’s say, non-recurring effect. First, EUR300 million slide from the Q4 2022 to the Q1 2023 as we have explained at the end of 2022 and the cash collected from TBC, including shareholder loan reimbursements plus payment from the proceeds generated from the company-owned retail network disposal to Mavis.
All that represent EUR256 million. So, even if we discount these two one-off effect, our free cash flow is positive at nearly EUR400 million over the semester, which is again a record-high performance. Does contribute, of course, to the fact that our debt is stable as we have nearly been able to finance our dividend through the free cash flow generated during the first semester.
We have EUR152 million of M&A, including two operations in our polymer composite division and EUR50 million coming from the fact that we sold our Russian subsidiary early June. And we have to abandon the, let’s say, intra-group loans, which is considered as a negative cash effect for the group.
Altogether, the event in Russia, besides, of course, the operating — the sales and the operating margin impact, adds cost to the group, nearly EUR200 million. EUR150 million were accounted in 2022 and EUR50 million during the first half of 2023. In this context, our gearing is stable — nearly stable versus the end of the year, improving by 3 point versus June 2022 and our rating agencies has been stable.
This slide to demonstrate the ability of the group to increase its margin and its cash generation across business cycles. We’ll have probably to be two consecutive years of negative volume effect while the group will be able to improve its performance both from the segment operating income and the free cash flow.
Before moving to the guidance, I would — just would like to maybe focus on our merger and acquisition portfolio management. Within our Michelin in Motion 2030 strategy, we are more and more actively managing our business portfolio, which is also a way to show and to demonstrate the group ability to create value around and beyond tires, although some of these activities have been sometimes acquired at a higher multiple than the group core multiple.
During the first half of the year, we have concluded, although the closing will happen in the — probably in the third or the fourth quarter, the acquisition of FCG, Flex Composite Group, which is going to help us to create the leader in engineering fabrics and films both in Europe and in North America.
We have acquired a company in simulation called Canopy Simulation, which is feeding the group artificial intelligence capabilities in engineering and development. We have acquired TRK, which is the Michelin Connected Fleet distribution company in Italy. And we have concluded the — a deal with Enviro and Antin around the development of a company, which is aiming to create the leader in tire recycling in Europe for pyrolysis in order to generate recycled oil and recycled carbon black in Europe.
On the other hand, besides, of course, the disposal of our Russian activities, we have seen the entrance in Symbio capital of Stellantis, which put valorization of Symbio at nearly EUR900 million in enterprise value, the disposal of the retail businesses of TBC for EUR525 million in the proceeds generated to its shareholders and the entrance of Credit Agricole in Watea which has been also a — which is also a way to boost Watea growth in the future, and also a recognition of the group know-hows in term of leveraging its know-how, in terms of understanding road usage and selling insights to fleets in order to improve their operations.
So now let’s move to our 2023 full year guidance that we have revised upward following first reassessments of the market. So regarding passenger car and light truck tires market, as I mentioned earlier, we consider that destocking is nearly achieved. Of course, looking forward, Q3 and Q4 will see different pattern because in Q3 last year, we’ve seen the rebound of, for example, the OE market in China, and then the cool down during the Q4 when the COVID-19 strike again. So we’ll have some comparisons basis that will be very different during the two coming quarter. But we are expecting overall that overall passenger car and light truck market should be either flat or slightly decreasing over the year. So between minus 3% and zero.
Truck tire outside China should continue to see a destocking on the replacement side at least till the end of the third quarter in the context of economic uncertainties. On the other hand, we see that, particularly in Europe, OEMs order book are still very robust and we should continue to see this slight unbalance between original equipment and replacement during the second half of the year. All in one, we consider that if we put aside China, we have revised downwards our overall market forecast, which include, of course, part of what has been done during — been achieved during Q2 to between minus 1% and minus 4%.
Specialties should be nearly flat plus. If we look overall, we still have to seen a strong demand in mining and aircraft — aircraft due to the recovery of the commercial market, particularly in the Western world. Mining is still holding very strong, although we have very high comparison basis for the second half of 2022. Beyond tire, we expect a slight growth in agriculture, but it will be offset by lower demand in material handling and construction with the same phenomenon of destocking in this segment, which is a bit the case also in two-wheels. After the COVID, there was a surge in demand in two-wheels both in OE and replacement. And for example, we are still seeing high level of inventory, for example, in bicycle, which is going to slightly depress the market for the year to go.
So in that context, we update our scenario. We consider that the volume will be probably lower than what we expected at the beginning of the year. I’ll remind you, H1 was at minus 3.7%. We consider that H2 will see an improvement, but will not fully compensate the impact of H1. Cost inflation, we consider it should be still — we should have still around EUR200 million of inflation over the year if we look at all inflation after nearly EUR560 million of inflation during the first half. It means that we’ll start to see some deflation or interim cost reduction in our cost of goods sold during the second year, but it might not fully compensate the inflation that we have seen during the first half. So overall, we should generate a positive mix between net price-mix and cost inflation factors.
Our CapEx are probably going to land at the lower end of the range that we shared with you at the beginning of the year of around EUR2.2 billion. And in this context, our segment operating income should, at a constant exchange rate, be above EUR3.4 billion, and our free cash flow, including FX should be above EUR2 billion. I must add that we expect to have– we have a EUR60 million negative ForEx effect during the first half of the year. This figure will probably increase during the second half. We do not have a crystal ball regarding currencies. But if we just take the currencies at the end of H1, and we use it as a reference for the second half, we should see a negative ForEx of nearly EUR200 million on our segment operating income during the second half of the year.
So thank you very much for your attention and we can now move to Q&A session.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Michael Jacks with Bank of America.
Michael Jacks
Hi, good evening. Florent, Yves. Thanks for taking my questions. I have two. The first one is on indexation. When should we expect to see the first major impacts of the lower raw mat costs? And is the timing going to be different between SR1, SR2 and SR3? Could you perhaps just provide a little bit of steer on the potential magnitude of the indexation adjustments that are needed at current spot raw material prices? And could you also then please remind us what proportion of total group sales are indexed? And then one additional question, please, just on the employee bonus effects for 2023. Can you just remind us how that will impact the bridge in the second half of the year and whether or not it’s included in the cost inflation guide or in SG&A? Thank you.
Florent Menegaux
Yeah, I will take a portion of the question, and then Yves will complete. So as far as the bonuses — management bonuses are concerned, we have raised the bonus provision because we anticipate our results to be better than what we had envisioned previously. And it will — now — so we have upgraded, of course, our forecast including better provision for management — and sorry, general bonuses indexed on the group. As far as the indexation clauses between SR1, SR2 and SR3, they vary a lot. We have — business by business, everyone has contracts. It varies from quarterly review to semester review to yearly review. It depends. But on average you can consider that it takes six months before it applies. Now due to our forecast, we anticipate that in the second semester, the impact of index close and all of that has been included in our forecast, of course, will be — not major, and it will — it will be more significant in the first semester of 2024. And maybe about the proportion, Yves?
Yves Chapot
Yeah, so overall, our index business represents around 30% of our sales. It’s slightly below that for SR1 and SR2, and there is a higher exposure to index business in SR3. You can consider that it’s around 60% to 70% indexed in SR3. And of course, as Florent mentioned, we have different kind of clauses and reference depending on the contracts. So generally there is a lag between six to nine months depending on the contract. We are expecting a neutral or slightly negative impact on the Q3 and a little bit more negative on the Q4. But overall, we are not speaking about a huge amount for the second half.
Florent Menegaux
And everything is included in our guidance.
Michael Jacks
That’s clear. Thank you. Just a technical question and just on the bonus effect, is that included in the cost guidance of EUR200 million or does that sit in SG&A?
Yves Chapot
Yeah. It’s included in the guidance of segment operating income.
Michael Jacks
Very clear. Thank you very much.
Operator
The next question is from Sanjay Bhagwani of Citi.
Sanjay Bhagwani
Hello, thank you very much for taking my question also. I’ve got three questions as well, like, two of them are actually follow up to Mike’s question. So my first one is on the volume drop-through. I think you mentioned that the reason why this is higher in first half is because the production dropped more particularly in SR2 than the sales. So could you maybe provide some color on, will this actually be normalizing by end of the year? So should we maybe think more of like, let’s say, for the full year volume drop-through of 40% to 45% or — any colors on that would be helpful?
Then, my second — sorry. My second question is on to Mike’s — follow-up to Mike’s question, on the other line item. So is it fair to say that now you are going to be achieving more than what you had targeted. So that headwind from the other line item could be more for the full year? And yeah, any more color on that will be very helpful. And finally on pricing for the full year. So, if I understood it correctly, index portion, not a big impact in H2 of this lower raw material cost. And can you please maybe confirm that the replace — the pricing messages on the replacement tires have not changed much as well? So maybe just trying to ascertain maybe large part of these reduced cost inflation guidance directly flows into the earnings. Those are my questions.
Florent Menegaux
Okay. I will start with the pricing and the pricing volume ongoing question. And then Yves will answer on the drop-through and the other line item. So on the pricing and volume, the market is now under heavy destocking. There is no point of trying to push some additional volume into inventories at this period of time. So we have no intention to change our pricing policy and everything is included in our forecast. We just want to make sure that we valorize the quality of our product and service offerings, rather than trying to chase volume, all of that.
What we foresee in term of volume in the second semester is that the destocking in passenger car is probably — that the inventory level in passenger car are probably at the adequate level except in Europe, in winter, where there is still excess inventory in winter tires in Europe. But in the rest of the world, it’s at appropriate level. We anticipate still in term of volume some destocking in Q3 in truck tires overall, because we have to remember that there are three layers of inventories in the truck sector, at the dealership, in the fleet and also in the equipment that are idle when the economy is down. And so it takes more times in truck to absorb the excess inventory. And then, again, in pricing, we think we’re priced dynamically according to the value of our products.
Now for the drop-through, maybe Yves, on the other line items.
Yves Chapot
So regarding the drop-through first, of course, if you look at the two bridges, you’ll see 66% drop-through. In reality, the drop-through is 52% on the first half of the year, because our inventory, as in also our own company-owned distribution companies has been also destocking during the first half. So the sell-out were better than the group sell-in. So it means that our manufacturer’s sales has been slightly decreasing more than the 3.7% which has been partially compensated by the distribution sell-out performance. And this 50% should become around 45% on the second half. Last year, we had a peak of inventory during the summer and we had to slow down sharply our operations and our production during the second half as we have in — from a manufacturing standpoint in a healthier situation at the end of H1, we should not have this such effect in the second half.
Regarding the other line items, in fact, in the other line items, we include the movement as we did last year and the year before regarding the bonuses in order not to destock the way we can read the performance in term of manufacturing or SG&A. So we should see similar or slightly bigger effect on the second half regarding the first half because last year, we underperformed our objective. So it penalized the second half provision that we allocated for the digital. But that’s — in fact, overall, our forecast include — when we build our forecast, we build our guidance, it include the impact of bonuses of this kind of effect on our overall performance.
Sanjay Bhagwani
Thank you, guys. That’s really helpful. So just to confirm, it’s for H2, the other line item are similar or just slightly more, is that correct?
Yves Chapot
Higher than the first half, yes.
Sanjay Bhagwani
Thanks, [Technical Difficulty].
Operator
The next question is from Jose Asumendi of JPMorgan.
Jose Asumendi
Hi. Jose from JPMorgan. A few questions, please. The first one, I wanted to navigate a little bit away from the — from the profit bridge discussion that we always end up having. I was just wondering if you could talk a little bit around the capacity expansion actions you are taking in China? If you could just take us a little bit through where you’re expanding capacity, where you are trimming capacity in SR1 or SR2 on a global basis? That’ll be the first one.
Second, I’d love to hear a bit more around when you plan to give us an update with regards to the margin targets. You’re making good progress in SR1 and SR3. SR2 will come over time. But when do you expect to revisit again the margin targets? Is it a 2023 discussion or is it a bit more like 2024? And then finally, back to the bridge, I just wanted to confirm, in your guidance for ’23, are you expecting a positive or a negative volume contribution in the second half of the year? Thank you.
Florent Menegaux
Okay. So as far as the capacity expansion is, we have to be very clear. There is no capacity expansion in truck and that was our policy for a few years now. In passenger car, we expand capacities mainly in Asia and in North America where our markets are very good and where we — today, we are net importers and we want to — in a local to local strategy, we want to make sure that our capacities are located where the markets are. And when we put new capacity, it’s, first of all, with 100% electric curing for the environment and also it’s in 18-inch, 19-inch and above capabilities, so that we make sure that we can chase the mix.
So — and then we also have expansion. We have announced a new expansion in truck tires for agricultural in North America and we have — and right now, we are having some productivity improvement, which may lead to marginal capacities everywhere around the world. As far as the margin targets for where they will be, we will have — we had made a commitment for 20 — for three years from 2022, 2023. So in 2024, we will have a Capital Market Day, where we will discuss together our new commitments for the year to come and we will rewind where we — what we have been achieving. So it will be done in 2024. And maybe for the last question?
Yves Chapot
Yeah, the volume effects will still be negative in the second half, less than the first half, hopefully, but we are still betting on negative volume effect. You see that our overall volume range is range is now between minus 2% and minus 4%. We’re at minus 3.7% on the first half. If we want to land, let’s say, just in the middle of the range, you can assume that we should be slightly around 2% — minus 2% during the second half.
Jose Asumendi
Very clear. Thank you very much.
Operator
[Operator Instructions] The next question comes from Ross MacDonald of Morgan Stanley.
Ross MacDonald
Yes, thanks. Good evening. Thanks for taking my question. It’s Ross MacDonald at Morgan Stanley. Three questions, if I may. Firstly, just on the EBIT guidance for 2023, over EUR3.4 billion and the over EUR2 billion free cash flow guidance. Can I just check the assumptions you’re making underlying that guidance, is this based on minus 4% volumes, but with the implicit assumption that there is no price cuts in the second half? I think if I understand your previous comments correctly, you’re saying we should assume no SR1 price cuts with this new guidance.
Secondly, on the free cash flow outlook, specifically, if we assume that you hit this EUR2 billion free cash flow target, can I check if you have any short-term plans to return some of that extra cash to shareholders potentially via a share buyback program? And then lastly on asset disposals, obviously, some of the first half free cash flow beat is helped by asset disposals. Could you maybe comment on how you’re thinking about your retail portfolio after that transaction, whether that’s been right-sized at this point or is there scope for more disposals in future? Thank you.
Florent Menegaux
Okay. I will take some part, and Yves will take other parts of your question. First, as far as returning to shareholders, we have a policy there where we have been very explicit. We favor dividends and we are gradually increasing the dividend policy. We will have that discussion after the year-end of 2023 to see how do we allocate cash depending on where we are and how we — how our strategy is developing. As far as — in our guidance, in our EBIT guidance and the cash flow guidance, we have included every — all the assumptions whether our pricing policy, the indexation clause, the additional bonus, we have put everything in it. So — but we won’t go into details about how we are going to manage.
But basically we have been very clear in the beginning, saying that in terms of pricing policy, we don’t see — in heavy destocking environment, why we should try to outsmart others in selling where we would just displace inventories without probably structurally gaining anything. So at this stage, we don’t — we have a dynamic pricing policy that has proven very efficient and we will continue on that policy. Maybe, Yves, if you can comment on the rest.
Yves Chapot
Yeah, maybe on the — so regarding — there was some asset disposal in our JV in North America. Just to give you a little bit of background, we entered into this JV with Sumitomo Corporation in 2018. At that time, we injected a little bit more than EUR600 million in the JV, because most of the asset was coming from our partner. And the aim of the JV was to build the second largest wholesaler in the US market. That we have done that. And the JV is still owning this asset, which is called NTW. Part of that, this JV is also operating two franchise, very successful franchise programs, one is Midas and the other one is Big O. And last, the JV is also operating wholesales in Mexico and having some import activities in the North American market.
And from the beginning, we knew that we wanted to dispose of the retail — the companion owned retail activities, which were diluted from a ROCE standpoint. And simply, we have not been able to achieve it earlier, because in the meantime, we had three — two years, 2.5 year with COVID-19 and a lot of, let’s say, external events. It has been made possible, so it’s a project that has taken nearly one year. It has been achieved during the second half. And though, basically, we get back nearly — at the end of the semester, we get back nearly 60%, 60% of the cash that we injected in 2018, we still have on top of that the assets, which is key for our market access in the North American — in the US market, which is for us, our most important market in term of size.
So we simply, let’s say, deploy our strategy. We earlier said that we were not contemplating further investing in company-owned retail, actually in-store and in brick-and-mortar retail activities. If — we might have some other disbursements in the future, but it will be highly connected to the strategy, and what I describe as more active management of our business portfolio in order to move towards, let’s say, a higher value or more performing business segments.
Ross MacDonald
Thank you.
Yves Chapot
And maybe the last question, so in the EBIT guidance, so Florent mentioned the price and we have no planned price cuts across the board, and particularly in SR1. There will be some mechanical effect of some raw material clause, particularly in the — at the end of the semester and we indicate you a range regarding the volumes. Generally at this stage of the year, you can try to — you can bet on the middle of the range till we give you a little bit more indication in the future.
Florent Menegaux
But again, everything is included in our forecast.
Ross MacDonald
Thank you. Thanks, again.
Operator
The next question is from Philipp Koenig of Goldman Sachs.
Philipp Koenig
Hey, guys, and thank you for taking my questions. I just wanted to come back to the EUR3.4 billion on the new SOI guidance. It does — at the lower end, it does still imply a lower SOI in the second half than in the first half where you did EUR1.75 billion of segment operating income. If I think about what you’ve sort of laid out throughout this call, it seems like volumes are getting better, inventories are at more normalized levels, pricing seems to be holding up or you’re trying to keep prices stable in the replacement market and there is deflation when it comes to your costs.
So is it fair to say that the EUR3.4 billion is a fairly conservative assumption and there’s not really any reason why the second half SOI could actually be better than the first half, if we exclude the FX? Then, my second question is on the working capital. Obviously, you’ve seen an improvement in the inventories in the first half. But if we think about the full year, do you expect working capital to be a tailwind compared to 2022? And then my last question is just coming back to the price-mix, very simple, for the second half, do you expect price-mix to be positive, neutral or maybe a slight negative? Thank you very much.
Florent Menegaux
Okay. So on the EBIT, theoretically, you’re right. H2 is normally, in term of seasonality, better than H1. Now, we operate for the past three years in a very, very perturbated environment. So at this stage, we’ve taken our best assumption is, we say, we should be in excess of EUR3.4 billion in term of EBIT. I’m sure you can make your assumption. We think that — that’s why we say it’s strictly above EUR3.4 billion.
Philipp Koenig
At fixed…
Florent Menegaux
At constant exchange rate, because the dollar is weakening against the euro right now. As far as the working capital, we still — we continue with our tight inventory management. Depending about how the market destocking will — the speed at which it will adjust, we may have better sales or not, but it’s very difficult to assess at this stage, especially in the truck tires. So that’s why we’ve taken down cash flow as well, the best estimate as what we think we can achieve seen from today. And maybe Yves, want to?
Yves Chapot
To come back on the SOI guidance H1– H2 versus H1, at historical exchange rate, don’t forget that last year we had a complete different pattern with a very low — relatively low H1 performance and very high H2. So we have to — when you look at the progress year-on-year, you have to look at that. And at historical exchange rate, H2 should be better than H1. And of course, there will be the impact of the ForEx during the second half.
Working capital should continue to improve, at least in value in the second half. When you look at working capital, you look at the balance sheet, so you look at the landing at the end of the year or the semester. Volume-wise, we might land not too far from the volume we had in end of 2022, at least in finished product, because we had better sales in H4 last year than what we expected. But value-wise, we should see the impact of the raw material clause on the value of our inventories.
And the price-mix effect in H2 will be slightly better than what we have had in the first semester. It depends on the index close, which are going to affect the price. We consider that price should be nearly neutral over the second half. The mix, product mix will continue to be the same. We are also expecting, let’s say, less negative OE and RT mix, and we should benefit from the effect of a decrease in the cost of goods sold, particularly in terms of raw material transportation and in some aspect, energy, although it’s a little bit more tricky to forecast when at the same time, we are still seeing some inflators, for example, on the labor cost side.
Philipp Koenig
Thank you very much.
Operator
[Operator Instructions] The next question is from Thomas Besson of Kepler Cheuvreux.
Thomas Besson
Thank you. I have two themes then, please. First on M&A. Could you update us on whether you plan several mid-size deals like the one you just announced or eventually prefer to go for a more transformational larger deal and whether you effectively commit to the amount that have been discussed so of our EUR5 billion to EUR10 billion maximum budget, and therefore, totally rule out any potential rights issue for acquisitions? And finally on that topic, is it reasonable to assume that you’re going to concentrate acquisitions slightly over ’23, ’25 to increase your chances to meet your 2030 ambitions in terms of proportion of revenues outside that?
And then, so the second topic, I’d like to discuss much more simple. You’re still showing SR3 including SR4, despite the growth of this future SR4. Could you just give us a slightly more detailed view about how much it accounts in terms of revenues and margins? Whether it’s really different or not? And whether you will separate that after your CMD in 2024 or whether we have to wait until it accounts for more than 10% of group revenues? Thank you.
Florent Menegaux
To the second question, I think you have, in your question, there is the answer. We’ve been very clearly saying that, we will split segment four — if it’s significant in terms of — if it’s meaningful basically. So if it’s above 10% of the Group revenue, that’s when we will issue segment four.
Yves Chapot
10% of the group revenue is IFRS standard. Then afterwards it’s — if when they were about 8.8% or 9.3%, we might decide to — then it’s a management decision to publish a separate segment. Okay. And then in your question, the segment four that is embedded in segment three has similar margin as the average segment three. So roughly, it’s — within segment three, you have different activities, and some are more accretive than others. The one on this, what you call, segment four, are accretive compared to others within segment three.
Now, as far as M&A, we are very happy to have concluded FCG and that our focus now is to as soon as we get the authorization then integrate that activity. We are very active in term of M&A. And what we’ve been saying constantly, it is true that we have a strategy Michelin in Motion by 2030. We have said, we think that this activity should represent between — this new activity should represent between 20% and 30%, and if you do the math, we will need to do some acquisitions. And it ranges between EUR5 billion and EUR10 billion, which may occur between now and 2030.
And then it may be different avenues towards achieving our strategy. There is an avenue where we make bigger deals and an avenue where we make some smaller deals. There is so much volatility in the capacity to conclude deals. That — we cannot be more explicit than that. But we confirm the fact that yes, we will need to, in order to achieve our objective by 2030, to do some deals amounting between EUR5 billion and EUR10 billion, and lot of them will be financed through cash anyway.
Thomas Besson
Thank you very much.
Operator
The next question is from Giulio Pescatore of BNP Paribas.
Giulio Pescatore
Hi, thanks for taking my question. Just two for me. One on the guidance and one maybe a bit more long-term. So on the guidance, I’m just trying to reconcile the moving parts here. So your cost inflation improved at the midpoint by more than EUR400 million, EUR450 million, right? But your SOI guidance only increased by EUR200 million. Now, I understand the deterioration of volumes. But what are the other moving parts that we should consider?
And then the second question, more long-term on the outlook for China. I mean, China, in terms of replacement market, is still the — pretty much the ongoing tire market globally. How competitive is the Michelin brand in the market with the consumer? Is the brand awareness similar to other regions? And are Chinese customers careful — as careful as the European and North America ones in terms of tire quality? How does that compare to other regions? Thank you very much.
Florent Menegaux
So first on China. Our brand equity in China is as strong as what it is in France, to give you an idea. So the Michelin brand in China is very, very strong. We — now the markets are what they are. But in passenger car we have no issue related to our brand. Our brand awareness, we are far above any other of our competition there. So — and we are — we have a strong expansion plan in passenger car. In truck tires, we — in business to business, it is a different story. Even though our brand equity is very strong, in business to business, we face a huge overcapacity built in China in a very immature transportation market in China. So there, we — it’s more difficult. But in passenger car, you can be sure that we have very strong foundations for our growth in China. And, Yves, on the guidance?
Yves Chapot
On the guidance, of course, will have cost inflation improvement on the second half, which will be partially offset by the volume effect by a little bit of SG&A increase and the category others, which are the provision under the bonuses or deferred payment to employees. And on top of that, don’t forget that in the first half, we have a huge price effect and that price effect should nearly be zero on the second half between still some effect of increase compensated by the fact that raw material cost adjustments will play negatively over the semester.
Florent Menegaux
And we will have a comparison basis that would be less favorable than H1 ’23 versus H1 ’22 and we had a stronger H2 ’22 that we will compare that to a stronger H2 ’22.
Yves Chapot
Yeah, don’t forget that last year, H1 was EUR1.53 billion when H2 was EUR1.86 billion, so we generated EUR300 million more EBIT SOI in the second half than in the first half. It was particularly striking under SR3 performance, which has started to turn around during the second half. So we don’t compare — when we compare the two semesters versus last year, we don’t compare on the same comparison basis.
Giulio Pescatore
Okay. Thank you very much. Can I just squeeze in one quick one? What percentage of your sales is winter tire, just as a reminder? Thank you.
Florent Menegaux
We don’t catch the question. What is the percentage of? Can you repeat the question?
Giulio Pescatore
Yeah, the winter segment, how large it is in percentage of sales?
Florent Menegaux
I don’t know in top of my mind, because especially now…
Yves Chapot
It’s around — I think in Europe, it’s probably around 20% — 20% of our overall sales. We are over-indexed in all seasons and under-indexed on the market on the pure winter tires, especially in Europe, I don’t have the figures including Asia and US.
Florent Menegaux
Because with our cross-climate offer, we have redefined the category in Europe. So —
Giulio Pescatore
Okay, thank you.
Florent Menegaux
Thank you.
Operator
The next question is from Steve Fernandes of Societe Generale.
Steve Fernandes
Hi, Steve Fernandes from SocGen. Thanks for taking my question. I think I’ve got most of the answers I want. Just two kind of more long-term ones. I mean, if I scroll to the latter slides in your pack, it looks like your BEV share has come down from 3.5% in kind of premium BEVs down to three times your market share. So could you just talk about the competitive landscape for BEV tires and how you think your market share could evolve as the market grows in size? And then secondly, kind of more longer-term as well, could you talk about the potential opportunity for you in terms of the Euro 7 proposals that were made towards the end of last year in terms of possible wear on tires? Thank you.
Florent Menegaux
Yes. So as far as BEV are concerned, we’ve said, we’ve been very explicit in the beginning that our share will over time diminish as the BEV share amongst all vehicle increases, because we do not operate on every BEV electric vehicles. We select the vehicles where we want to be. And so — as the offer by many OEMs in the world are increasing, they’re reaching segment type of cars that we don’t really want to be in it. It doesn’t change the technical — the dynamic, we have. We have a very competitive offer. In OEMs, we choose to play on with certain type of cars versus others. So that’s why structurally our share will diminish, but it is still well above our average share in the market, and that’s true in every market we operate from China to the US or in Europe is the same, same dynamics.
Now as far as Euro 7 is concerned, yes, we — there is a package inside Euro 7 regarding the particles emitted through tires, it’s called tire abrasion. And we’ve been very much in favor of this pack because we, as Michelin, we think that for the society, it is very important that every gram of material delivers maximum performance. And amongst tires, you have very wide variety of performances as far as tire abrasion are concerned. But I want to reassure you that Michelin tire abrasion is by far the best in the market from anyone. And yes, we are expecting Euro 7 to be in effect by the end of this year, and impacting 2024.
Steve Fernandes
Thank you. That’s very clear.
Operator
The next question is from Pierre Quemener of Stifel.
Pierre Quemener
Yes, good evening. Thanks for taking my two questions. It’s very quick clarification regarding Slide 9 on the bridge. First one is on the currency. The negative effect in H1 was EUR61 million. Yves, you mentioned the number of EUR200 million. Is it for the full year or for H2 alone, which would lead to the total negative impact of currency on segment operating income to roughly EUR260 million for the full year? So is it EUR200 million for the full year or EUR200 million for H2? That would be the first question.
Yves Chapot
So as I said, we don’t have — we are not expert in ForEx. So the method we use when we build our own forecast consist us taking last rate of the previous period and use it as a reference for the year to go. So, if we take the rate at the end of June 2022 — 2023 and we apply these rates on our hypothesis — business hypothesis on the second half, we will have a negative ForEx on the second half of EUR200 million…
Pierre Quemener
Very clear.
Yves Chapot
…which is a clear effect of EUR260 million negative. Don’t forget that last year in the — at some moment in the Q3, the dollar were nearly at par with euro.
Pierre Quemener
No, that’s very clear. And I’m not an expert as well on the FX. The other one is on the bucket other, in the first half, negative by EUR69 million. In that number, is there any additional provisioning if compared to the first half of ’22 regarding bonus payments? Whatever the amount has been in 2022, is there an additional provisioning on top of what has been done in 2022 — in the first half of 2022 in that bucket?
Yves Chapot
Mostly. So first you have to know that in Michelin, all employees — of course, it depends on the company — has joined the group just two, three years ago, it might not be the case. But generally, all employees are entitled to a group bonus. It’s part of our — the way we want to share the value between our different stakeholders and it’s highly valuable. So when we underperform, it’s really a valuable system. So in the first half, the effect that you have is mostly due to this — in the other column is mostly due to this bonus provision update versus last year when we knew already at the end of the semester that we were going to be challenged, particularly on one of the KPIs, which was the free cash flow. So the — of course, we are updating this hypothesis till the last — the last months of the year. But at the end of H1, it’s the main effect that you can find in the other effect. There is, of course, always some miscellaneous effect that you will find in this current, but mostly is the impact of the bonus provisions.
Pierre Quemener
Okay. And the way Michelin works regarding the bonus scheme is that you provision in the beginning of the year, assuming that you will reach your target, and if you don’t just last — just like last year, you just revalue the provisioning and don’t pay, but in H1…
Yves Chapot
Yeah, when we build our budget, we consider that we will achieve it. So we take the, let’s say, the bonus which correspond to just the achievement of the target. No more, no less. And then within the year, generally starting in June, sometimes later because the jury is sometimes out for a longer time, we adjust the provision depending on the — on our expectations and our re-forecast, which is fully included in our guidance. And the bonuses are paid during the first half of the following year.
Pierre Quemener
Okay. Very clear. Thank you.
Operator
The final question…
Florent Menegaux
The last question?
Operator
Yes, sir. The final question is from Martino De Ambroggi of Equita.
Martino De Ambroggi
Thank you. Very, very quickly, you mentioned on prices that you expect the — most of the negative effect coming in first half ’24. Were you referring just to the automatic clauses or not? And in any case, I suppose the rest of the business will follow very, very quickly. And the second is on the inflation costs, because at the beginning of the year, it was a scary issue [EUR601.2 million] (ph) negative impact. Now only EUR200 million. Could you help us in summarizing what — significantly what drove such a significant improvement?
Florent Menegaux
So I will start with index clauses, and on inflation, Yves will give you some answers. On the prices, there is no correlation between index clauses and our pricing policy on replacement markets. The market, we have — the index clauses are with customers where we have large volumes, long-term commitments, and it’s just to make sure that we have no mean of offsetting larger fluctuation in logistics — in input costs, basically with our logistics whether labor or whether material. So we have — those index clauses have their life and our pricing policy on replacement has other lives. So there is no correlation and we have no intention to change this time. So — and what we were saying was only referring to the index clauses.
Yves Chapot
And for the — regarding the inflators, in fact, you have seen in the bridge — in the first half bridge, that we have a negative raw material effect during first half of EUR260 million and a negative effect coming from other inflators, in — particularly in manufacturing, including transportation and energy or other elements. Overall, we will have — mostly at the end of the year, we should have a nearly neutral for the full year raw material effect, so the raw material effect on the second half should fully hedge the negative effect of raw material in the first half. But we still have some inflators on wages.
Transportation should also contribute positively. And energy — for energy, it’s — we’re hedging part of the energy we purchased particularly in Europe, but we are not completely immune from sudden rise of energy prices as we have seen, for example, in August, September 2022. But overall, it will be slightly — with the current hypothesis, we are betting on a slightly positive effect on energy versus last year. But don’t forget that last year, the second half has been the worst from the energy standpoint, particularly in Europe. And then we’ll have other inflators such as labor cost and — some that are direct labor cost, but also the labor cost that we purchased for services that are impacting our cost structure.
Florent Menegaux
Thank you, Yves. And this concludes our semester review with you. We will meet you in October to discuss our third quarter revenue. Thank you very much. See you soon.
Yves Chapot
Thank you very much. Bye-bye.
Operator
Ladies and gentlemen, this concludes today’s Michelin conference call. Thank you for participating. You may now disconnect your telephones.
