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5. MICHELIN (Compagnie Generale des Establissements Michelin S.C.A.) Business Report FY ended Dec. 2016

MICHELIN (Compagnie Generale des Establissements Michelin S.C.A.) Business Report FY ended Dec. 2016

*Before non-recurring items.

Factors
1) Net Sales
-The Company’s net sales for the fiscal year ended December 31, 2016 decreased by 1.4% from the previous year to EUR 20,907 million. Despite EUR 440 million in growth due to increased sales volumes and an increase in sales of EUR 24 million from a business consolidation, net sales decreased due to a EUR 386 million loss from unfavorable price-mix effects and a EUR 370 million loss from negative currency effects.

2) Operating Income
-The Company’s operating income from recurring activities totaled EUR 2,692 million for the fiscal year ended December 31, 2016, an increase of 4.5% over the previous year. The increase in operating income was caused primarily by increased sales volumes and a favorable price mix, and was partially offset by increased production costs and overhead.

3) Passenger car and light truck tires
-Sales from the Company’s passenger car and light truck tires and distribution segment in the fiscal year ended December 31, 2016 increased 0.6% over the previous year to EUR 12,105 million. The segment saw growth in Michelin-branded tires, and tires that were 17 inches and larger.

4) Truck tires
-In the fiscal year ended December 31, 2016, the Company’s truck tires and distribution segment had sales of EUR 5,966 million, a decrease of 4.2% from the previous year. While sales volumes increased and raw material costs decreased during the fiscal year, pricing effects and strong sales of intermediate tires offset those gains and caused the segment’s decrease in sales.

Recent Developments

-The Company announced that its tires were featured on the Mission E electric concept by Porsche, the Artega Scalo, and the Thunder Power, which were displayed at the IAA Frankfurt Motor Show 2015. (From a press release on January 6, 2016)

Contracts

-The Company announced that its Michelin Primacy 3 tires have been selected as original equipment for Toyota C-HR. The tire sizes are 215/60R17 96H for the front and 225/50R18 95V for the rear. (From a press release on December 16, 2016)

-The Company announced that its Michelin Pilot Super Sport ZP tires with Run-Flat Technology have been selected as original equipment for the new Lexus LC500 and LC500h. The tire sizes of the LC500 and LC500h are 245/40RF21 for the front and 275/35RF21 for the rear. (From a press release on December 9, 2016)

-Nihon Michelin Tire Co., Ltd., a subsidiary of the Company, announced that its Michelin Pilot Sports 3 has been adopted as original equipment for the Mercedes-AMG S-Class, which is imported and marketed by Mercedes-Benz Japan. Michelin Acoustic Technology has been adopted for the frontal tires to reduce interior noise through the polyurethane foam affixed inside the treads. This is the first time that the Company has used this technology, as mass-market Pilot Sports 3 tires do not utilize the technology. (From an article in the Nikkan Jidosha Shimbun on September 7, 2016)

-The Company announced that the Michelin Pilot Sport Cup 2 tires will be the sole original equipment fitment on the new limited special model BMW M4 GTS. The tire sizes are 265/35 ZR 19 for the front and 285/30 ZR 20 for the rear. (From a press release on April 19, 2016)

-The Company announced that the Michelin Pilot Super Sport tire with size 235/35/19, will be fitted on the Ford Focus RS as standard equipment. The Michelin Pilot Sport Cup 2 tire in the same dimension will be available as an option. (From a press release on January 18, 2016)

Outlook

-For the fiscal year ending December 31, 2017, the Company expects that its sales volumes will match the rate of growth of the markets that the individual segments are involved with. In addition, the Company expects that its operating income will match or exceed its operating income from the fiscal year ended December 31, 2016 at constant exchange rates.

-The Company’s goal is to increase the net sales of its tire divisions by 20% during the time period starting from 2015 through 2020.

R&D Structure

-The Company has approximately 6,600 employees working in research and development.

-The Company's strategy for research and development is focused around three themes:

• The vehicle of the future, featuring concepts such as fuel-cell vehicles and autonomous vehicles.
• Mobility of the future, focusing on integrating tire solutions into intelligent transportation systems and trends such as ride- and car-sharing
• The reinvention of urban mobility.

R&D Facilities

• Research Center: Ladoux (France), Ota (Japan) and Greenville (U.S.)
• Testing plant: Almeria (Spain)

-On September 16, 2016, the Company inaugurated its new research and development center in Ladoux, France. The center is expected to be fully operational in 2018, and will employ approximately 1,700 engineers and technicians. The Company will invest approximately EUR 270 million in the new research and development center through 2018. (From a press release on September 16, 2016)

Organization of activities in Clermont-Ferrand
-On March 1, 2016, the Company announced a series of decisions that adapt its industrial and service activities in Clermont-Ferrand, France, with the aim of strengthening the Group's decision-making centre, along with its research and development activities and high-tech products.

-During 2016, the Clermont-Ferrand facility underwent a reorganization of engineering operations and a closure of its retreading unit. The Company also invested EUR 90 million to install advanced equipment and implement new processes at its facilities in Cataroux, La Combaude and Gravanches.

Product Development

Michelin X-Guard radial truck tire
-The Company launched the Michelin X-Guard radial truck tire that is exclusively designed, engineered and made for India. Targeted at the price-sensitive general goods carriers and medium/long haul transporters, the tire is the Company’s entry into the mass market segment of commercial vehicle tires in India. The Company used its patented Infinicoil and Regenion technologies to design this tire. Limited quantities of the new product will be launched in eight states over the coming year, before expanding it to the entire country. Michelin X-Guard comes with unique technologically advanced features which provide improved performance, fuel efficiency and safety. Latest material solutions and 3-D printing technologies have enabled the Company to produce a tire that is 18% lighter, yet delivers robustness and increased performance on tire mileage and fuel efficiency. (From a press release on October 5, 2016)

Tires displayed at 2016 Paris Motor Show
-The Company displayed two of its newest tires at the 2016 Paris Motor Show. The Michelin CrossClimate+ offers strong performance in both winter and summer conditions while maintaining a long lifespan. The Michelin Pilot Sport4S provides improved braking distance on both dry and wet surfaces and a longer lifespan than other tires in the segment. (From a press release on September 29, 2016)

Michelin Pilot Sports 3 tire with Michelin Acoustic Technology
-The Michelin Pilot Sports 3 tire, used in the Mercedes-AMG S-Class, features Michelin Acoustic Technology in its front tires. Michelin Acoustic Technology reduces interior noise by affixing polyurethane foam inside the treads. The use of Michelin Acoustic Technology for the Mercedes-AMG S-Class represents the first time that the Company has employed the technology. (From an article in the Nikkan Jidosha Shimbun on September 7, 2016)

Michelin Pilot Sport 4 tire
-The Company launched the Michelin Pilot Sport 4 tire by utilizing more than 3,000 vehicles in Europe equipped with electronic sensors to collect data on usage, temperature conditions and driving habits. With information from over 38 million kilometers of travel, the Pilot Sport 4 sets a new benchmark of quality for premium and sports sedans. (From a press release on January 12, 2016)

Patents

-As of December 31, 2016, the Company has more than 2,000 active patents.

-During the fiscal year ended December 31, 2016, the Company completed or continued the following investment projects:

• Projects to increase capacity, improve productivity or refresh product lines for the Passenger car and Light truck tire segments in facilities located in Leon, Mexico; Roanne, France; Shenyang, China; Pirot, Serbia; and Indonesia.
• Projects to increase capacity, improve productivity or refresh product lines for the Truck tire segments in facilities located in Romania, Thailand and France.

-In 2016, three new high-capacity plants continued to ramp up tire production. The three listed plants are expected to produce a combined total of 400,000 tonnes of tires a year by 2020.

• Itatiaia in Brazil for passenger car and light truck tires
• Chennai in India for truck tires
• Shenyang 2 in China, which are designed to significantly increase passenger car and truck tire production capacity.

-In 2016, the Company continued its European reorganization plan which it started in 2015 to improve the competitiveness of its production plants. The plan involved the investment of EUR 265 million to upgrade manufacturing facilities and supply chains in the UK and Italy as well as the termination of operations at the Pneu Laruent plant in Germany.

-By 2018, the Company expects to increase the average production capacity of its leading tire facilities for the Passenger car and Light truck and Truck segments to 96,000 tonnes per year.

Investments outside France

-The Company announced plans to build a production facility in the center of Mexico to manufacture high-end tires for passenger cars and light trucks. The first tires are expected to be produced in the fourth quarter of 2018. The new plant in Leon, Guanajuato state is the Company's 21st in North America and 69th worldwide. The construction of the 142,000-square-meter plant, which represents an investment of EUR 450 million, is expected to begin in the second half of 2016. Once completed, the Leon plant will be ramped up gradually. During the initial production phase, it is expected to manufacture four to five million tires a year for both customers with plants in the region and for the North American market. (From a press release on July 4, 2016)