French tyre maker Michelin posted a 13 percent rise in annual profit on February 16 as a weaker euro helped offset competition from Chinese brands, and set higher profitability targets, sending its shares up 3 percent in early trade. Michelin, based in Clermont-Ferrand, central France, is pushing an overseas expansion strategy while cutting costs and struggling to defend its namesake brand's higher prices against mid-market and budget rivals.
Belt-tightening measures delivered 261 million euros ($292 million) in savings last year, it said, and pledged to increase sales volume and operating income in 2016 as demand expands in Europe and North America, while remaining broadly flat in emerging markets.
It also set higher medium-term goals for car and truck tyres, targeting respective margins of 11-15 percent and 9-13 percent for 2016-2020.
The car tyre goal improves on a previous 10-12 percent target range and represents a "significant positive", Morgan Stanley analyst Victoria Greer said in a note to investors, which repeated an "equal weight" rating. "But we look for more clarity on how this could be achieved."
For the specialty division, where traditionally high margins have been challenged by a slump in demand for outsize mining equipment tyres, Michelin weakened its target range to 17-24 percent from 20-24 percent.
Net income rose to 1.17 billion euros in 2015 on revenue of 21.1 billion, up 8.4 percent. The results were broadly in line with expectations, based on an Inquiry Financial poll of eight analyst estimates, though Kepler analyst Thomas Besson said the results had topped forecasts.
Repeating a "buy" rating, Besson said in a note: "The outlook is encouraging both for 2016 ... but also mid-term with new margin range targets by division implying (around) 13.5 percent group margin at mid-point."
Car tyre demand improved in the fourth quarter, Michelin said, while truck tyre sales weakened in Asia and North America.
Currency effects accounted for most of the sales gain, lifting the value of foreign sales converted into a weaker euro,
while price cuts pared 715 million euros from the top line.
"The decline in raw-material prices is bringing deflationary pressure in certain markets," Chief Financial Officer Marc Henry said. "Chinese brands are moving in with extremely low prices on all global markets."
Recurring operating income rose 19 percent to 2.58 billion euros, or 12.2 percent of sales, compared with an 11.1 percent margin a year earlier. Positive free cash flow rose by a third to 965 million euros before acquisitions and disposals.
Restructuring claimed most of Michelin's 370 million euros in non-recurring costs, which more than doubled last year.