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Investing.com -- S&P Global Ratings has upgraded the long-term issuer credit rating and issue rating on the unsecured debt of French tire manufacturer Compagnie Generale des Etablissements Michelin (EPA:MICP) S.C.A. (Michelin) to ’A’ from ’A-’, with a stable outlook. The short-term issuer credit rating has also been improved to ’A-1’ from ’A-2’. The upgrade is based on Michelin’s anticipated strong credit metrics for 2025 and 2026, supported by resilient profitability and solid free operating cash flow (FOCF).
S&P Global Ratings expects Michelin to maintain a debt-to-EBITDA ratio of about 1.0x over the next two years, reflecting its track record of keeping leverage below 1.5x. The firm’s acquisition spending and shareholder distributions are expected to be covered by robust FOCF of €1.6 billion-€1.8 billion.
Michelin’s financial strength is further demonstrated by its cash conversion. Since 2021, the group has maintained annual FOCF before working capital effects of about €2 billion. This translates to a robust average FOCF-to-sales ratio of about 7.7% over the 2021-2024 period. S&P Global Ratings anticipates Michelin will continue to generate strong FOCF of about €1.6 billion in 2025 and €1.7 billion in 2026, despite slightly higher capital expenditure and restructuring cash outlays.
In 2024, Michelin expanded its business activities to include polymer composites, connected solutions, retail and distribution, and lifestyle. These new ventures, which represented about 17% of total group sales last year, are expected to contribute to Michelin’s long-term resilience and growth strategy. S&P Global Ratings predicts that Michelin will continue to spend moderately on acquisitions in 2025 and 2026, with most of these being self-funded through FOCF.
Michelin’s shareholder returns policy is well funded by its strong FOCF generation. The group plans to maintain a stable dividend payout ratio of about 50%, which is estimated to result in total distributions of about €1 billion per year in 2025 and 2026.
Despite soft market conditions, Michelin’s operating performance is expected to be supported by product mix effects. The group’s automotive division increased its share of tires sized 18 inches and above to about 65% in 2024, from about 50% in 2021 and 40% in 2019. As a result, S&P Global Ratings projects Michelin’s EBITDA margin will improve to 19.2% in 2025 and 19.6% in 2026, from 18.4% in 2024.
The stable outlook indicates that Michelin is expected to maintain a prudent financial policy and resilient operating performance through 2025-2026, with adjusted debt to EBITDA comfortably below 1.5x and FOCF to debt of at least 25%. A downgrade could occur if Michelin fails to sustain strong credit metrics. Conversely, an upgrade could be considered if Michelin commits to maintain a net cash position while maintaining EBITDA margins of 18%-20% and strong FOCF generation.
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