COMPAGNIE GENERALE DES ETABLISSEMENTS MICHELIN SCA

Rating Action and Rationale

• EthiFinance Ratings upgrades Compagnie Générale des Etablissements Michelin SCA’s (’Michelin’) long-term rating from A- to A, maintaining a Stable outlook. Concurrently, we upgrade the company’s short-term rating from EF1 to EF1+. 
• Our ratings upgrade results mainly from a better improvement in credit metrics than anticipated in June 2023, especially on the interest coverage front (26.8x as of end-2023, vs 20.6x expected). Michelin’s deleveraging strategy has also led to a reduction in the EthiFinance Ratings-adjusted net leverage ratio to 1.1x as of end-2023 (vs 1.3x expected, similar to end-2022). We expect the interest coverage ratio to slightly increase by 2026 (end of our forecast period), on the back of a further reduction in total adjusted debt, combined with stable interest rates and Michelin’s fixed rate policy (75% of the group’s debt). However, the initiation of a €1bn buyback program over the 2024-26 period, is expected to limit further deleveraging. Consequently, the adjusted net leverage ratio is expected to stay broadly stable around 1.1x for the next few years. As a result of this improvement in credit metrics, Michelin’s financial risk profile has improved to AA-, compared to A+ in June 2023. Our ratings are also underpinned by Michelin’s leadership in the tyre market, providing the group with some leeway in dictating prices. Such a competitive advantage proved useful, despite the volume headwinds that tyre manufacturers faced over the past year in the aftermarket segment. Michelin’s sales growth was flattish for 2023 (-0.9% YoY) due to a continuous decline in volumes (-4.7% vs -2.0% in FY22), combined with a FX headwind (-2.9%) due to the depreciation of most foreign currencies against the Euro. Nonetheless, the price-mix effect and efficient cost pass-throughs mechanisms and effective plant management have once again limited a further revenue decline. On a positive note, the adjusted EBITDA margin has improved to 18.7% (vs 17.8% in FY22), on the back of some COGS reduction in proportion of total sales (72.0% in FY23 vs 73.6% in FY22). 
• However, our ratings are constrained by the tyre industry risk profile, which remains at BB owing to low demand growth in the aftermarket segment. At the group’s level, potential logistics disruptions in the Red Sea trade route, affecting approximately 4% of Michelin's total product flows (including both raw materials and finished goods), may slow production level at some factories, thereby impacting revenues. Additionally, Michelin's stagnant sales volumes pose a risk to profitability growth, especially given the minimal contribution of non-tyre activities (such as fleet services and high-tech materials) to total sales. This stood at roughly 5% in FY23, up from 4% in FY22. However, non-tyre businesses have been boosted by the major acquisition of FCG, a company specializing in fabrics and films. Michelin is strategically focusing on external growth within technological areas, expecting them to reach a contribution ranging between 20% and 30% by 2030. 
• According to our methodology, the auto component industry has medium-to-high ESG risks (sector heatmap score between 3.5 and 4), slightly constraining our industry assessment. Its impact on the climate is primarily tied to OEMs, but with a lighter production process generating low GHG emissions. The industry uses a lot of resources, mainly raw materials, thereby generating a significant amount of waste and pollution. In FY23, Michelin committed to a significant reduction of CO2 emissions and energy consumption, achieving a 21.9% reduction in its scope 1 and 2 emissions compared to 2021. From a 2010 baseline, the company has reduced its CO2 emissions by 44% and aims for a 50% reduction by 2030. This significant reduction in emissions is a key factor contributing to our positive ESG assessment of the company with a score ranging between 0 and 1, thereby offsetting the negative impact from our industry ESG assessment. 

Issuer Description

Based in France, Michelin is a first-rank French automotive supplier specializing in tyres. It designs, manufactures, and sells tyres for both light and heavy vehicles such as cars, trucks, aircraft, off-road machines, and motorbikes. Beyond its flagship “Michelin” brand (tier 1), the company offers also a set of more affordable brands (tier 2) such as Kleber and BFGoodrich. Michelin’s business operations extend into data-driven services for vehicle fleets, the creation of polymer-based high-tech materials, and pioneering efforts in hydrogen mobility through its partnership with Faurecia and Stellantis in the joint venture SYMBIO. The group has 125,000 employees spread across 123 factories and 9 R&D centres in 26 countries; its products are sold in 170 countries. Michelin’s revenues are mainly generated in the EU and North America, accounting respectively for c. 35% and 39% of FY23 revenues. 

For FY23, Michelin reported revenues of €28.3bn for adjusted EBITDA of €5.3bn, equivalent to an 18.7% margin. Michelin’s market capitalisation was €24.3bn as of 27th February, 2024.

Liquidity

We assess Michelin’s liquidity profile to be ‘Superior’ as the company can repay all its upcoming debt without refinancing for more than two years. 

Main Financial Figures

Credit Rating

Credit Metrics Expected Evolution (CMEE)

• Stable CMEE 

We expect Michelin’s credit metrics to remain steady and broadly unchanged over the next twelve months – as the tyre market is witnessing low demand, especially in the aftermarket segment. 

Rating Sensitivity

• List of ratings: 
  • LT Rating: A
  • ST Rating: EF1+

• Long-term rating positive factors (↑)

We could upgrade the current rating should credit metrics improve above our forecasts level. A trigger for such an upgrade could be an EthiFinance Ratings-adjusted net leverage ratio below 0.6x combined with an interest coverage ratio above 45x on a sustainable basis. Moreover, a rating upgrade could also depend on the tyre industry’s overall growth. 

The current short-term rating is already positioned in the highest category.

• Long-term rating negative factors (↓)

We could downgrade our long-term rating should Michelin’s credit metrics deteriorate, with an adjusted net leverage ratio around 1.5x, or if the interest coverage ratio falls below 20.0x on a sustainable basis. Additionally, a deterioration of the company’s ESG score to a level above 1, or a less cautious financial policy, such as undergoing significant debt-financed M&A, could be another catalyst for a potential rating downgrade.

A downgrade of our short-term rating could occur in the event of a CMEE change from Stable to Negative or/and a potential downgrade of the long-term rating to A-.