Michelin forced to raise prices on deflated profits

28th July 2006, Comments 0 comments

PARIS, July 28, 2006 (AFP) - Michelin tyres reported on Friday a 29-percent fall in net first-half profit and cut its target for profitability this year, highlighting a surge in raw materials costs.

PARIS, July 28, 2006 (AFP) - Michelin tyres reported on Friday a 29-percent fall in net first-half profit and cut its target for profitability this year, highlighting a surge in raw materials costs.

The company was increasing prices for its products but this had not been enough to match cost increases it said, warning that it expected the rise of raw materials costs to worsen in the second half.

The group put the total extra costs of raw materials this year at EUR 800 million, or an increase of 23 percent of such costs from 2005. Previously the company had estimated these extra costs at EUR 540 million.

Michelin, the biggest maker of tyres in the world said that net profit fell to EUR 276.1 million owing mainly to the cost of restructuring after the closure of a Canadian factory BFGoodrich at a cost of EUR 160 million.

Michelin also reported that operating profit had fallen by 29.4 percent to EUR 485.2 million.

The profits fall was bigger than analysts had expected. However, they had expected the announcement that the company was revising downwards its forecast for operating margin this year "given the current context and the outlook for continuing increases in the cost of raw materials and energy".

The company said it expected the operating margin now to be close to eight percent compared with a previous estimate that it would remain steady at 8.8 percent.

The price of shares in the group was showing a gain of 4.49 percent in initial trading on Friday to EUR 47.44.

"The massive increase in the cost of raw materials weighed on Michelin's operating performance," the company said, putting these cost increases at 21 percent of EUR 352 million from the equivalent figure last year.

The divisions serving the heavy goods vehicles market was particularly hit by a rise in the cost of natural rubber.

Energy and transportation costs had also risen strongly owing to the rise of oil prices, adding 62 million euros to costs.

The company was continuing a policy of raising prices but this had not compensated wholly for the cost increases.

Sales rose by 7.1 percent to EUR 8.02 billion, but by volume of units they rose by 0.9 percent, supported by demand in emerging markets but undermined by weak markets in north America.

The operating margin fell by 3.2 points to six percent of sales.

Michelin said that it expected the effects of high raw materials prices, notably for rubber, to "worsen in the second half".

It expected markets to evolve in the second half along the lines in the first half.

Markets for replacement tyres in north America were likely to remain "depressed" but would grow relatively firmly in Europe, and notably in eastern Europe.

Demand for tyres for new lorries in north America should remain dynamic or even accelerate because new anti-pollution standards were soon to come into effect.

Chief executive Michel Rollier said: "For two and a half years, repeated increases in the prices of raw materials have increased Michelin's costs by more than one billion euros".

This meant that the company had to "accelerate its programmes, already under way, for improving productivity and reducing costs".

Copyright AFP

Subject: French news

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