Increasing competition in the Asian region is posing a threat to the earnings of tyre manufacturer Michelin, pulling its shares down.
“We’re encountering pressure on prices, especially in markets like China and Southeast Asian markets where the Chinese export,” Chief Financial Officer Marc Henry told reporters at the company’s results presentation in Paris.
Michelin, based in Clermont-Ferrand, central France, is pushing a 1.8 billion euro ($2 billion) expansion while struggling to defend its namesake brand’s higher prices against competition from mid-market and budget rivals.
Net income rose 13.3 % to 624 million euros ($691 million), while revenue advanced 8.5 % to 10.5 billion euros, beating the 10.3 billion average forecast in a Thomson Reuters poll of six analysts.
Michelin had predicted that lower raw material costs would more than offset the effect of weaker tyre pricing in 2015.
But price cuts wiped a bigger-than-expected 497 million euros off first-half sales, dwarfing the 228 million saving from cheaper rubber, steel and oil products used to make tyres.
For now the impact is cushioned by currency gains, which contributed 971 million euros to first-half sales as overseas revenue was translated into a weaker euro.
Falling prices are nonetheless likely to cut 2015 revenue by more than the expected 600 million euro raw-materials saving, Michelin warned on Tuesday, reversing the previous guidance.
Michelin shares fell as much as 6.8 % to 88.09 euros in mid-morning trading, heading for their biggest daily decline in four years.
“The downgraded net pricing guidance will be a focus for the market,” said Edouardo Spina, a London-based analyst with Exane BNP Paribas.
While the company maintained its 2015 targets, the task of meeting them is now tougher and “back-loaded” into the second half, Spina said. “It’s not very positive for the stock.”
The reiterated goals include a return on capital employed exceeding 11 %, free cash flow above 700 million euros and increase in full-year recurring operating income.
First-half operating income rose 8.9 % to 1.26 billion euros, broadly in line with the growth in sales, to hold the operating margin at 12 %.
Profitability improved for truck tyres – where North American demand surged in the first half – but declined in car tyres to a 10.8 % operating margin from 11.4 %.
In crisis-hit Latin American markets, the slump in demand for truck and car tyres accelerated in the second quarter.
Overall demand is “expected to remain on an upward trend in mature regions but more challenging in new markets”, Michelin said.