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Rating action

Scope Ratings GmbH (Scope) has today affirmed the existing subscription rating and for the first time published its issuer rating of A/Stable on Compagnie Générale des Etablissements Michelin SCA (Michelin). Concurrently, the S-1 short-term debt rating and A senior unsecured debt rating have also been affirmed.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: A-. Michelin’s business risk profile reflects its leading position as a premium tyre manufacturer. Its market share in the global tyre market has been stable at around 14%-15% in recent years, and Scope does not expect it to deteriorate. The company is exposed to a number of cyclical - yet uncorrelated - end-market industries such as automotive, mining, construction and aviation. However, this exposure is counterbalanced by Michelin’s significant share of sales in the replacement market, with a low dependence on original equipment sales, as well as an increasing share of the non-tyre business to 16% of sales. Michelin’s global presence and wide product range of tyres contribute to diversification. Additionally, Michelin benefits from stable profitability of around 17%-20% (EBITDA margin) in normal years, global brand recognition and solid know-how in the development of innovative products (ESG factor: credit positive), which is especially relevant for the premium segments.

In 2023, Michelin announced the decision to wind down production in some of its manufacturing sites in the United States and Germany by the end of 2025. This resulted in unusually high related provisions of around EUR 0.6bn, limiting profitability in the short term. Nevertheless, Michelin still managed to post an improving Scope-adjusted EBITDA of EUR 5.1bn in 2023 (2022: EUR 5.0bn) with an EBITDA margin slightly above 18% (+70 bps YoY) thanks to easing raw material cost inflation and pricing initiatives. Despite a small low-single-digit revenue decline to close to EUR 28bn envisaged for 2024 (Q1 sales were down -4.6% YoY), which is partly a reflection of Michelin’s selective approach, Scope expects the Scope-adjusted EBITDA margin to gradually improve to around 19% in the coming years. This should be achieved thanks to an improving product mix and the impact from restructuring initiatives, despite currently weak market demand for most products and a negative pricing effect from indexed businesses.

Financial risk profile: A+. The assessment is driven by strong credit metrics, including Scope-adjusted debt/EBITDA* of 0.9x in 2023, a moderate improvement from 1.1x in 2022, supported by a debt reduction of around EUR 1.1bn. This was mainly achieved due to working capital releases of around EUR 1.0bn, reflecting the partial reversal of the huge EUR 2.0bn increase recorded in 2022, while capex rose to EUR 2.2bn. In 2023, the group also spent more on acquisitions – around EUR 0.7bn net of disposals. The main deal was the acquisition of Flex Company Group (around EUR 200m in sales in 2022), a small specialist producer of engineered fabrics and films, to reinforce the Polymer Composite Solutions business.

Scope believes that credit metrics should be stable going forward, also thanks to improving profitability. Scope expects debt/EBITDA to remain at around 1.0x and free operating cash flow/debt to average close to 30% amid a normalisation of net working capital needs. Capital expenditure will likely be maintained at a similar level of around 8% of revenues, ranging between EUR 2.3bn to EUR 2.4bn per year. In February 2024, Michelin announced a EUR 1.0bn share buy-back programme for the 2024-2026 period, as there is no interest in further deleveraging. Scope’s rating case assumes the absence of significant acquisitions, but rather bolt-on deals of up to EUR 350m per year as well as dividends of EUR 0.9bn to EUR 1.1bn per year. A new dividend policy announced in 2021 has increased the payout ratio from 35% to close to 50% of net income.

Liquidity: adequate. Michelin’s liquidity profile remains solid, as indicated by projected liquidity ratios consistently above 200% and the backloaded distribution of debt maturities over time. Scope believes that the EUR 1.0bn bonds issued in May 2024 can be seen as an early refinancing of the EUR 750m bond maturing in September 2025.

Supplementary rating drivers: credit-neutral. Scope has made no adjustments related to financial policy, peer group considerations, parent support, or governance and structure.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s expectation that Michelin will maintain a Scope-adjusted debt/EBITDA ratio at or just below 1.0x in the absence of a significant acquisition.

The upside scenario for the ratings and Outlooks is:

• Scope-adjusted debt/EBITDA improving to well below 1.0x on a sustained basis. This could happen if deleveraging exceeded Scope’s expectations, e.g. if management focused more on deleveraging than on acquisitions, dividends and share buybacks.

The downside scenario for the ratings and Outlooks is:

• Scope-adjusted debt/EBITDA deteriorating to above 2.0x on a sustained basis. This could happen in the case of sizeable debt-financed acquisitions and/or a deterioration in trading conditions beyond Scope’s 2024-26 forecasts.

Debt ratings

Compagnie Générale des Établissements Michelin SCA is the group’s parent and currently the sole entity issuing bonds and commercial paper. Despite the absence of a formal explicit guarantee, Scope assumes a strong implicit guarantee from Michelin for its main subsidiaries, Compagnie Financière Michelin SAS and Compagnie Financière Michelin Suisse SA, based on name identity, full ownership, and operational integration. Consequently, Scope aligns the long-term issuer ratings and short-term debt ratings of these subsidiaries with those of Michelin.

The senior unsecured debt rating stands at A, the same level as the issuer rating.

Michelin’s short-term debt rating is affirmed at S-1. It reflects robust liquidity from internal and external sources, as well as its good standing in public and private debt markets and its established banking relationships. This is reflected, among other things, in the broad mix of committed long-term credit lines from various banks.

Environmental, social and governance (ESG) factors

Scope considers product innovation as a positive ESG factor that strengthens the competitive position of the issuer. Michelin possesses solid expertise in developing innovative products, which, along with its strong brand recognition and reputation, enables it to remain a leading player in the evolving premium tyre segment. In Scope’s view, the company is well positioned to benefit from megatrends such as electrification, connectivity, and greener products. This is due to its substantial investments in tyres for electric vehicles, which require specialised engineering, as well as in recycling technologies and connected mobility solutions.

All rating actions and rated entities

Compagnie Générale des Etablissements Michelin SCA

Issuer rating: A/Stable, affirmation and conversion into public rating

Senior unsecured debt rating: A, affirmation and conversion into public rating

Short-term debt rating: S-1, affirmation and conversion into public rating

Compagnie Financière Michelin SAS

Issuer rating: A/Stable, affirmation and conversion into public rating

Short-term debt rating: S-1, affirmation and conversion into public rating

Compagnie Financière Michelin Suisse SA

Issuer rating: A/Stable, affirmation and conversion into public rating

Short-term debt rating: S-1, affirmation and conversion into public rating

*All credit metrics refer to Scope-adjusted figures
  
Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlooks, (General Corporate Rating Methodology, 16 October 2023; European Automotive Suppliers Rating Methodology, 6 February 2024), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.
 
Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Eugenio Piliego, Senior Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Compagnie Générale des Etablissements Michelin Credit Ratings/Outlook were first released by Scope Ratings on 28 November 2018. The Credit Ratings/Outlook were last updated on 29 April 2024.
The Compagnie Financière Michelin Credit Ratings/Outlook were first released by Scope Ratings on 28 November 2018. The Credit Ratings/Outlook were last updated on 29 April 2024.
The Compagnie Financière Michelin Suisse SAS Credit Ratings/Outlook were first released by Scope Ratings on 9 June 2021. The Credit Ratings/Outlook were last updated on 29 April 2024.
 
Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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