Description

• #1 European mkt share in Truck Tires which has very strong volume & pricing growth (15% sales, 15% profit)

• Demand for Trucks shows no sign of slowing and the European replacement truck tire market should have a multi-year phase where volumes can grow 5%+ per annum.

• Replacement truck tire demand in Europe is just off cyclically low levels.  In 2005, the European truck replacement market hit 10.9MM truck tires which was similar to 1998 volumes.  However, the European commercial vehicle market had increased 18% since 1998 to 29MM units.  In 2006 volumes grew 2.9% and in 2007 volumes are expected to be 5%

• The growth of the new truck volume over the past few years has enlarged the size of the total truck population increasing the addressable market for truck tires. Replacement volume is at a secular low % of total truck tire volume in Europe (although part of this is tires last longer than previously).

• Specialty Tires segment is fastest growing segment and is supply constrained (13% of revenue, 20% of profit) 

• Earthmoving Tires and other specialty tires are in an incredibly tight supply situation and the top line will grow as fast as Michelin can add capacity.  Michelin is expanding 2 of 4 existing earthmoving tire plants (20% capacity increase in each) and adding a facility in Campo Grande, Brazil this November

• Mining capital expenditures drive the purchase of earthmoving tires (5% of mining capex for tires)

• 40% of the world’s agricultural tires are sold as original equipment and high crop prices are creating strong demand for agricultural equipment and tires.

• Michelin is #1 in radial aircraft tires with 60% market share (military, regional, general aviation and commercial aircraft tires)

• Large restructuring and cost reduction opportunity with targeted cumulative savings of €1.5Bn-€1.7Bn by 2010

• 07-09E EPS doesn’t incorporate all of the savings which provides an upside opportunity. 

• €4.7Bn is total labor cost for Michelin and the company is targeting €700MM in savings.  The company is trying to reduce labor cost from 29% of sales to 20%-21% in line with competitors.  A combination of high cost employee attrition (4,000 employees/year) and plant closures in high cost regions and automation will be used to reduce 80,000 manufacturing employee headcount by 30%.

• Current environment for Tire pricing is strong with all players increasing prices 3-7% this year and more price increases already scheduled for early 2008

• Raw material pricing has been a headwind for the past few years.  Prices have been stable YTD and the industry is benefiting from price increases which should return profit margins to historical levels.

• With natural rubber representing 31% of tire raw materials, increases in natural rubber prices will impact daily trading.  Price increases in oil and oil derivatives impact natural rubber. 

• Government efforts to cool economic growth in China should ease demand pressure on pricing

• Low cost imports are 15% of North American passenger tire market and 10% of the European passenger market.  5 years ago imports were only 2-3%. 

• Low cost Imports are lower quality and are expected to  remain in the lower end of the market. 

• Execution risk of Michelin’s restructuring.  While all of the benefits are not in the stock, at least 1/3-1/2 could be baked into the stock price currently

• Excess capacity in the tire industry could lead to lower prices going forward. 

• Current capacity plans assume worldwide tire production capacity increases from 1.5Bn units in 2006 to 1.6Bn units in 2010 which represents a 1.6% CAGR from 2006-2010

• Michelin wants to increase rest of world volume from 16% of sales to 33% of sales eventually.  Acquisitions in Asia may be required.

Catalyst