Michelin’s IDR upgraded to ’A’ by Fitch with stable outlook

Investing.com -- Fitch Ratings has upgraded the Long Term Issuer Default Rating (IDR) of Compagnie Generale des Etablissements Michelin (EPA:MICP) (Michelin) from ’A-’ to ’A’. The outlook for the company remains stable. This upgrade is attributed to Michelin’s strong free cash flow (FCF) generation, even in the face of challenging end-markets.

Michelin’s restructuring measures and improved working-capital management are cited as the main drivers of a structural shift in FCF margins to 3% on a sustained basis. This figure was the positive rating sensitivity and supports the upgrade along with Michelin’s strong financial structure and flexibility.

The company’s business profile is considered one of the strongest among its peers, with revenue mainly stemming from replacement demand. Its diversified footprint helps to mitigate threats from tariff wars and industry cycles, further supporting the stable outlook.

Fitch also upgraded the senior unsecured rating of Michelin’s EUR15 billion EMTN programme to ’A’ from ’A-’ and simultaneously withdrew the rating for commercial reasons. The rating agency will continue to rate Michelin’s senior unsecured notes, including those under its euro medium-term note (EMTN) programme.

After a significant FCF deficit in 2022, driven by high net working capital needs, Michelin’s FCF rebounded strongly above 3% of revenues in the past 24 months. This rebound was driven by improving profitability and working-capital management. Fitch expects this shift to be resilient even in an environment where automotive and other end-markets face slowing demand and destocking.

Michelin’s exposure to potential tariff increases remains limited compared with many peers, as about 70% of its US sales are produced locally. However, it could face short-term cost pressures from potential raw-material tariffs.

Michelin has one of the lowest EBITDA gross and net leverage among its peers, at 1.2x and 0.6x, respectively, at the end of 2024. The group has a long record of maintaining a strong capital structure and robust financial flexibility.

Michelin is expected to remain active in mergers and acquisitions, with the aim to achieve above a 20% share of non-tires sales by 2030. The company’s growth plan will also be fueled by organic growth.

EU antitrust authorities are currently investigating Michelin and other major tires manufacturers for possibly forming a cartel of replacement tires in the European Economic Area. The investigation is in its early stages, so potential fines for Michelin are not yet quantifiable.

Michelin’s business benefits from rising demand for higher rim tires, driven by the growing popularity of SUVs. It also has a strong market position in battery electric vehicles tires, which require specialist engineering.

Fitch views the legal, operational, and strategic connections between Michelin and wholly owned subsidiary Compagnie Financiere Michelin SAS (CFM) as strong, leading to their equal ratings.

Michelin’s strong business profile is supported by the group’s positioning in the tires industry, which is less volatile and cyclical than other segments of the auto supply industry. The group plans to further expand its tires and non-tires businesses, via organic growth and M&As to further increase diversification, reduce cyclicality, and improve profitability.

Michelin’s liquidity position is backed by its cash-generative business model, sound cash balance, and undrawn committed credit facilities. At the end of 2024, the group reported Fitch-adjusted cash of EUR3.4 billion and a EUR2.5 billion revolving credit facility (RCF) maturing in 2029.

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