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UPDATE 2-Michelin mulls cutbacks as prices weaken
April 22, 2013 / 4:56 PM / 5 years ago

UPDATE 2-Michelin mulls cutbacks as prices weaken

* Michelin mulls European cutbacks -CFO

* Q1 revenue falls 8.1 pct to 4.88 bln eur

* Company keeps full-year goals (Updates with CFO comment from first paragraph)

By Laurence Frost

PARIS, April 22 (Reuters) - Michelin will order a new round of European cutbacks unless the market picks up, the French tyremaker warned on Monday as it unveiled an 8.1 percent quarterly revenue decline driven in part by weaker pricing.

“If volumes stay at the level where they are today, that would imply some restructuring” in Europe, Chief Financial Officer Marc Henry told analysts and reporters, adding that possible cuts were “under scrutiny”.

The Michelin finance chief was speaking after the company said it had been forced to cut prices amid sluggish demand in its home region and weaker-than-expected growth elsewhere.

Michelin, which counts on its namesake brand’s high pricing to cover the fixed costs of its French plants, said a drop in the prices paid for its tyres accounted for one-third of the revenue decline to 4.88 billion euros ($6.36 billion).

Michelin is pushing a 2-billion-euro overseas expansion in emerging markets such as China to offset the weak economic outlook and saturated Western vehicle markets.

The quarterly sales slide partly reflects a “carefully managed price repositioning” in some product categories, Michelin said in a statement.

As well as “disappointing” levels of demand, the United States has also seen a “steep increase in Asian imports since customs duties were lifted last autumn”, the company added.

The worsening pricing and mix - a demand shift to cheaper tyre models - will wipe 300 million euros from full-year earnings, it predicted.

Michelin nonetheless reiterated its full-year goals, including stable operating profit - helped by a 550-million-euro gain from falling costs of its steel, oil derivatives and rubber inputs - as well as positive free cash flow and a 10 percent return on capital.

Weaker pricing is a concern despite the maintained guidance, Credit Suisse analyst David Arnold said in an emailed note.

“Whilst raw materials are now better than expected, another part of the (earnings forecast) is less robust, with price-mix the most obvious source,” Arnold said.

Investors may be less willing to pay for “earnings which are a consequence of temporary raw-material effects”, he said.

Michelin shares, which closed down 0.1 percent in Paris before the sales announcement, have fallen 16 percent so far this year.

Declining volumes also took their toll in the quarter, with European car tyre sales falling about 10 percent and sales to U.S. truckmakers dropping 12 percent, Michelin said.

The cooling-off in raw materials also translated to a 13 percent drop in revenue from specialty tyres for mining and farming vehicles, which had contributed a strong gain in sales and earnings last year.

Michelin said currency effects including the euro’s gain against the dollar accounted for 61 million euros in lost revenue, or about 14 percent of the year-on-year decline. ($1 = 0.7674 euros) (Reporting by Laurence Frost; Editing by James Regan/Mark Heinrich)

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