Michelin Sees Earnings Held Back by Raw-Material Cost Deals

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Michelin & Cie., Europe’s biggest tiremaker, said second-half profit growth will be held back by agreements restricting its ability to pass raw-material cost increases to customers. The stock fell the most in more than 3 1/2 years.

First-half operating profit before one-time gains or costs rose 8.9 percent to 1.26 billion euros ($1.4 billion), as currency effects and lower raw-material costs more than offset lower product prices, Michelin said Tuesday in a statement. The company reiterated a forecast that full-year earnings excluding foreign-exchange movements will rise, even with a “negative net effect” of deals limiting what Michelin can charge carmakers.

“It’s not good enough for investors,” who “want a good quality growth,” said Jose Asumendi, a London-based analyst at JPMorgan Chase & Co. “The market is doubting Michelin will be able to achieve its targets in the light of their changed outlook for price mix and raw materials.”

The euro is trading close to a 12-year low against the dollar, increasing the value of sales converted into the Clermont-Ferrand, France-based company’s home currency. Rubber prices have fluctuated for the past year and are currently down from a 16-month high reached in June. Michelin said tire prices in the six-month period were under pressure in emerging markets, while sales growth was stronger at cheaper brands than at premium divisions.

Michelin fell as much as 7.1 percent, the steepest intraday drop since November 2011, and was trading down 6.1 percent at 88.74 euros as of 11:08 a.m. in Paris in the day’s worst performance on France’s benchmark CAC 40 index. That pared the stock’s gain this year to 18 percent, valuing the company at 16.6 billion euros.

Pricing Effect

Product pricing hurt first-half operating profit by 426 million euros while currency effects added 302 million euros, Michelin said. Indexation clauses, or agreements limiting the link between tire prices and raw-material costs, accounted for about one-third of the negative pricing effect. Revenue in the period rose 8.5 percent to 10.5 billion euros, and the operating margin held steady at 12 percent of sales.

Chief Executive Officer Jean-Dominique Senard told journalists that the company is raising its tire-sales forecast and now expects deliveries to grow faster than the industry average, rather than matching it. He also increased the target for structural free cash flow in 2015, saying the figure will exceed an earlier goal of about 700 million euros. Michelin is sticking to plans for a return on capital employed exceeding 11 percent and capital spending totaling 1.8 billion euros.

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