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5. MICHELIN(Compagnie Generale des Establissements Michelin S.C.A.) Business Report FY ended Dec. 2015

MICHELIN
(Compagnie Generale des Establissements Michelin S.C.A.) Business Report FY ended Dec. 2015

*Before non recurring items.

Factors
1) Overall sales
-Net sales for FY 2015 stood at EUR 21,199 million for the year, up 8.4% from the EUR 19,553 million reported in FY 2014. The increase reflected the net impact of the following positive and negative factors:

• EUR 1,453 million or 7.4% increase from the currency effect, stemming primarily from the decline in the euro, against the US dollar, Chinese yuan, British pound, Thai baht and Canadian dollar.
• EUR 624 million increase from the 3.2% growth in volumes, which outpaced the market.
• The favorable effect of changes in scope for EUR 256 million reflecting the consolidation of Sascar, the Brazilian leader in digital fleet management, German wholesaler Ihle and Blackcircles.com, the UK's leading online tire retailer.
• The EUR 687 million or 3.4% negative effect of changes in the price mix.

2) Passenger car/Light truck tires & related distribution
-Net sales in the Passenger car/ Light truck tires & related distribution segment rose by 14.6% in FY 2015, to EUR 12,028 million from EUR 10,498 million the year before. This vigorous growth was accompanied by a sustained upmarket trend in the product mix, especially for the MICHELIN brand (up 6%) and for 17-inch and larger tires (up 13%), which was somewhat held back by higher sales of the other brands (up 10%). As falling commodity prices spurred more aggressive competition, the Group was able to continue leveraging the favorable effect of currency movements. The scope of consolidation now includes the net sales from Ihle and Blackcircles, which were acquired in 2015.

3) Truck tires & related distribution
-Net sales for FY 2015 in the Truck tires & related distribution segment amounted to EUR 6,229 million for the year, up 2.4% from FY 2014. This increase was due to the favorable currency effect, the consolidation, since the beginning of the year, of Sascar, and the slight increase in volumes sold (up 0.3% over the period), outpacing the global Truck tire market.

Reorganization in Europe

-In November 2015, the Company undertakes a reorganization plan of its activities in Europe. This will be accompanied by an investment of EUR 265 million to modernize production facilities and the logistics network in these countries. The continent accounts for 40% of the Group's business, has 40 production sites and more than 65,000 employees. (From a press release on November 3, 2015)


-Michelin Italy manufactures over 10% of the European production of tires and employs more than 4,000 employees. The Group has implemented a five-year strategic plan in Italy. This will be supported by an investment of EUR 180 million to significantly develop Italy's car, van and truck tire volumes by 2020 by reinforcing its Cuneo and Alessandria sites.

• The project plans to increase the Cuneo site's Passenger car & Light truck tire production by 20% by 2020.
• The Alessandria site will be specializing in the production of new truck tires with an objective of a 20% increase in production by 2020. The site's retread activity will cease in mid-2016.
• The Fossano site, specialized in semi-finished products, which employs 400 people, will close in late 2016.

-Created in 1905, Michelin Tyre PLC, the leading tire manufacturer in the country, now employs 2,500 people. In the UK, the Company will be refocusing its activity on growth segments of the Passenger car & Light truck tire, and retread markets. EUR 85 million will be invested in this strategy before 2020.

• The proposal to run down the truck tire factory in Ballymena by mid-2018 has been made. The factory currently employs 860 people.
• Michelin plans to invest EUR 69 million in its Dundee Plant, which manufactures car tires. The investment will increase production by 30% by 2020.

-The Pneu Laurent site in Oranienburg will cease operations, which are to move to the Avallon site in France by the end of 2016.

Recent Development Outside France

-In May 2015, the Company and the Barito Pacific Group have formed a joint venture to reinforce the ecological production of the raw material of the tire in Indonesia. The Company has invested USD 55 million in this company, in which it holds 47% of the shares. The partners will plant rubber trees over 88,000 hectares in the Sumatra, Borneo and Greater Mekong regions, which have been ravaged by deforestation.

New Products

CrossClimate summer tire certified for winter use
-In 2015, the MICHELIN CrossClimate, a summer tire certified for driving on snowy roads, was introduced after just three years in development. An immediate hit, with stronger-than-expected sales, the technology-packed tire features a new rubber compound, a tread pattern that guarantees grip and safety on dry, wet or snow-covered roads and EverGrip self-regenerating tread technology.

-In March 2015, the Company proceeded with the European market launch of the MICHELIN CrossClimate, the first summer tire certified for winter use. It combines summer and winter tire technologies that until now were thought to be incompatible. Since 65% of European drivers keep the same tires all year round, the MICHELIN CrossClimate tire accommodates this usage in optimal safety conditions. This innovative tire reached over 2 million sales in September 2015. The Frankfurt Motor Show confirmed the strong interest from both manufacturers and distributors; sales forecast are currently exceeding initial forecasts by 33%.

BFGoodrich all-terrain tires
-In June 2015, the All-Terrain, BFGoodrich has released a new generation of all-terrain tires, the BFGoodrich All-Terrain T/A KO2. A heavy-duty tire with more grip, more robustness and better durability, available in Europe from July 1. Built on technologies tested in race conditions, in particular on the course of the famous Mexican Baja, the BFGoodrich All-Terrain T/A KO2 tire is the first all-terrain consumer tire to integrate CoreGard technology. Having proven itself and won awards at rallies, this technology provides unmatched protection against damage to the sidewalls.

-The renewal of the KO2 and COMP-2 lines will enable the BFGoodrich brand to win back market share, while the new intermediate truck tire ranges introduced in North America, South America, the Africa/Middle East region and Southeast Asia are getting off to a favorable start.

SIAMTYRE Highway Radial for heavy-duty trucks
-In March 2015, SIAMTYRE entered the value-for-money segment of the tire market in Southeast Asia with the launch of SIAMTYRE Highway Radial. With this new product, the company combines
radial technology to ensure longer tire life, safer handling and better fuel economy than the average bias tires. Since it was created in Thailand in 1987, SIAMTYRE has been a local brand internationally recognized for its products quality and reliability.

Uniroyal launches truck tires in Canada
-In April 2015, Uniroyal has announced the launch of six truck tires on the Canadian market. The new range of tires offers an affordable solution for every position and for every application, from long-distance and regional transport to road/off-road travel. Two of the tires, the RS20 and the LS24 meet the requirements of the Environmental Protection Agency (EPA) for their outstanding
fuel efficiency, and thus enjoy SmartWay approval.

X One high-value truck and bus tires
-In September 2015, Nihon Michelin Tire Co., Ltd. plans to quintuple sales of its X One high-value truck and bus tires by 2017 from the current level. The X One tires are wide single tires that can be fitted on trucks and trailers instead of dual rear tires. In 2016, the Company will introduce a new series of the X One tires and promote the tire's weight saving merit, which can increase trucks' load capacity, to delivery companies and truck users. (From an article in the Nikkan Jidosha Shimbun on September 15, 2015)

Contracts

Pilot Super Sport tires
-In September 2015, the new MICHELIN Acoustic technology proposed in the MICHELIN Pilot Sport 3 tires reduces the rolling noise generated by the tire inside the car, i.e. a reduction of the overall sound level of 15 to 20%, thus offering passengers a more pleasant environment while retaining all of the tire’s performance characteristics. The application of a polyurethane foam on the inside of the tire helps to absorb the noise generated by the tire making contact with the roughness and irregularities of the road surface. Although in the progress of being launched for industrial production, 5,000 MICHELIN Pilot Sport 3 Acoustic tires have already been supplied to Mercedes AMG, which has chosen them as original equipment on its "S-Class" Sedan and Coupe in Europe.

-In May 2015, the Company announced that BMW has chosen the MICHELIN Pilot Super Sport tires as the sole 21-inch fitment for its new "X5 M" and "X6 M" models. The 285/35ZR21 105Y front and 325/30ZR21 108Y rear ultra-high-performance tires feature a number of Michelin technologies including multi-compound tread and Variable Contact Patch 2.0. (From a press release on May 20, 2015)

-In May 2015, the Company announced that Porsche AG will equip its new 911 GT3 RS with MICHELIN Pilot Sport Cup 2 ultra-high-performance tires in 265/35 ZR20 front and 325/30 ZR21 rear sizes. (From a press release on May 20, 2015)

Energy Saver tires
-In March 2015, the 2015 Ford Focus Electric will not only be connected to the road by its MICHELIN Energy Saver tires but also to the digital world by the MICHELIN guides that are pre-loaded onto its SYNC2 in-car connectivity system. Every Ford "Focus Electric" that rolls off the production line will be fitted with 215/55 R 17 MICHELIN Energy Saver tires to offer drivers the optimum combination of safety, comfort and handling, plus the benefit of low rolling resistance to maximize battery life, and therefore driving range.

-In May 2015, the Company announced that the new Peugeot "208 1.6L BlueHDi" has been equipped with MICHELIN Energy Saver + tires as standard. The Company also supplies low-resistance tires for Peugeot "208", "308", "508", "2008", "3008" and "5008" vehicles in the form of the MICHELIN Energy Saver + and MICHELIN Primacy. (From a press release on May 5, 2015)

KLEBER tire for SUVs and crossovers
-In October 2015, KLEBER has launched its very first tire for SUVs and Crossovers. Produced in three plants in Europe (in Cholet and Roanne in France and Olsztyn in Poland), this new all-season tire has been designed to overcome the obstacles of everyday life safely. With its reinforced casing capable of absorbing urban obstacles and grooves that evacuate water, it reduces the risk of aquaplaning. It has a very good lifespan thanks to optimal distribution of rigidities which ensure slow and regular tire wear and excellent traction on all types of surface. Its 3PMSF* and M+S** markings make it an ideal tire for all seasons, approved for summer and for winter, without having to change tires. In short, a robust, practical and affordable tire, available in 18 dimensions. More than enough to convince owners of SUVs and crossovers, such as the Nissan "Qashqai", Volkswagen "Tiguan", Toyota "RAV4" or SKODA "Yeti".

MICHELIN X Line Energy tires for rolling resistance
-In November 2015, the Company announced that its new MICHELIN X Line Energy Front (385/55R22.5) and MICHELIN X Line Energy Drive (315/70R22.5) tires are available at customer request for the new Mercedes-Benz "Actros" trucks to be shipped as from January 2016. These fitments with a triple-A rating for rolling resistance will enable them to save 1 liter of fuel every 100 km (for 2.66 kg fewer CO2 emissions over the same distance), compared to MICHELIN X Line Energy BBA-rated tires. (From a press release on November 20, 2015)

R&D Structure

-The Company has an annual R&D budget of more than EUR 700 million, 6,000 employees and a patent portfolio that has tripled in 10 years.

-The Company is exploring three pathways forward:
1) The vehicle of the future, with fuel-cell and autonomous car projects.
2) The mobility of the future, with the integration of tire solutions into tomorrow's intelligent transportation systems (ITS) and support for emerging usage trends like car-pooling and car-sharing.
3) The reinvention of urban mobility, which is a major concern given that 60% of the world's population is projected to live in cities by 2030.

Technological Alliance

Major 3D Metal Printing Player
-In September 2015, The Company and the global leader of high added value machines Fives are joining forces to create FIVES MICHELIN ADDITIVE SOLUTIONS. The joint-venture, based in Clermont-Ferrand, France, will be dedicated to developing and marketing industrial machines and production Shops on a global scale via “metal additive manufacturing” technology – commonly known as metal 3D printing. FIVES MICHELIN ADDITIVE SOLUTIONS will be 50% owned by Fives and 50% by Michelin. The market for metal additive manufacturing in 2014 was already worth more than EUR 600 million. MICHELIN ADDITIVE SOLUTIONS will serve various industry verticals such as automotive, aerospace or healthcare.

R&D Facilities

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

-In 2015, with the inauguration of the new Urbalad building, the Company launched the upgrade to the Ladoux worldwide research center in Ladoux (France), which celebrated its 50th anniversary. By 2018, some EUR 270 million will have been invested to boost the center's innovation potential.

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.

-EUR 90 million in new investment by 2020 in Clermont-Ferrand

• In the context of its industrial competitiveness strategy launched in France in 2013, the Company would like to consolidate the positioning of its Clermont-Ferrand sites on activities with high technological content and high added value, in particular by exploiting synergies with its global research and development centre in Ladoux, near Clermont-Ferrand.„
• The Combaude site will specialize in the role of supporting the development of new products. Its industrial and technical innovation missions will be strengthened, particularly as regards the design of curing moulds and high technology textile reinforcements, and the development of specific tools for manufacturing processes. It will also continue to operate its logistics activities.
• „„The Cataroux site will benefit from major investment to finance new production processes to develop the production of racing tyres and their components, and also to strengthen its industrial missions in support of research and development activities.
• „„The Gravanches site, which manufactures high performance car and van tyres using the most innovative processes, will receive investment to further increase the highly technical nature of its products.

-Reorganization of Engineering by the end of 2018

• Michelin Group Engineering has 2,400 employees worldwide, 1,100 in France, with 970 in Clermont-Ferrand.
• The Company is reorganizing Engineering by creating a Manufacturing Engineering (ME) entity, the global management of which will be located on the Carmes site in Clermont-Ferrand. This new organization aims to improve the development and deployment of the Group's industrial processes. The teams located in Clermont-Ferrand will focus on the global management of the activity, the coordination of developments in processes and the development of the most innovative projects in conjunction with the global Technology Center in Ladoux.
• The reorganization will result in 164 job cuts by the end of 2018, all based in Clermont-Ferrand, but without any compulsory redundancies.

-In 2015, three new high-capacity plants are currently ramping up production:

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

-Projects to increase capacity, improve productivity or refresh product lines in:

• Passenger car and Light truck tires: Roanne (France), Shenyang (China), Pirot (Serbia) and Indonesia
• Truck tires: Tours and La Roche-sur-Yon (France), Shenyang (China) and Thailand

-In 2015, a reorganization plan was deployed for operations in Europe, supported by EUR 265 million in capital projects.
>>> Reorganization in Europe

-By 2018, the Company's competitiveness strategy, combined with the productivity of the plants in emerging markets and the ramp-up of the new mega-plants, is expected to increase average capacity of the passenger car and truck tire facilities to 96,000 tonnes. By 2020, they are expected to be producing an aggregate 400,000 tonnes a year.