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Michelin Warns on China Virus After Cutting 2020 Profit Outlook

Michelin warned sales in China are expected to drop this month due to the coronavirus epidemic, adding to the gloomy market outlook that led Europe’s biggest tiremaker to slash its forecast for 2020 profit.

The shares dropped as much as 4% on Feb.11 after the company said operating profit and cash flow this year would be lower than previously predicted.

While Michelin resumed operations at Chinese factories because inventory was low, it’s being “very prudent” about predicting the consequences of the outbreak on sales and supply chains, Chief Financial Officer Yves Chapot said in a Bloomberg TV interview. Sales in China make up just 5% of the total, he said.

Cie. Generale des Etablissements Michelin is the latest European car-related company to warn of the possible knock-on effects of the health crisis in China that has killed more than 1,000 people and crippled parts of the country’s manufacturing capacity. Fiat Chrysler Automobiles NV last week said it may have to temporarily shut a European plant while a Chinese car-parts supplier to PSA Group has declared “force majeure” due to the virus.

Read more: China Starts Giving ‘Force Majeure’ Slips to Virus-Hit Companies

Sales in China are likely to fall in February, Michelin’s Chapot said. “For the time being we have no specific warning or concern about our supplies.”

Even before predicting the effects on business of the virus, the French tiremaker -- which publishes the famed restaurant guide -- expects weaker overall demand from car, light truck and mining markets and has adjusted its forecasts accordingly.

So-called segment operating income will be “slightly down” from 3.01 billion euros ($3.3 billion) in 2019, according to an earnings statement. Free cash flow will be more than 1.5 billion euros, although that excludes the effects of the coronavirus, it said.

The company had previously set a 2020 operating income target of 3.7 billion euros excluding currency swings and more than 1.7 billion euros in free cash flow.

Vehicle Slump

Passenger and light truck tire markets “are expected to decline slightly” in 2020, while demand for replacement tires will be flat and there will be a “sustained contraction” in demand for original equipment, or for new vehicles.

The company said the market for original equipment fell 6% in 2019 while that for replacement tires was flat.

The European Automobile Manufacturers Association has forecast car registrations will likely drop 2% in 2020, following a 1.2% gain last year. China saw its second annual fall in 2019, and with the coronavirus epidemic spreading in the car-making region of Hubei, the industry is bracing for tough months ahead amid supply chain disruption and possible slower sales in the world’s largest autos market.