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Michelin posts sales increase, income decrease in 2006 vs. 2005

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Groupe Michelin posted net income of 573 million euros on net sales of 16.4 billion euros for its fiscal 2006 ended Dec. 31, 2007. That compares with income of 889 million euros on sales of 15.6 billion euros for 2005.

Michelin says the 35.5% decrease in net income reflects "large non-recurring restructuring and industrial plant closure charges." It credits the 5.1% year-to-year increase in net sales to "continuing strong positive price-mix effect" and a 0.7% increase in volume.

Based on the exchange rate as of Friday, Dec. 29, 2006, Michelin posted net income of $756.4 million on net sales of $21.6 billion.

"In 2006, for the fourth year in a row, Michelin had to cope with continued external cost inflation: raw materials, energy and logistics in particular," says Managing Partner Michel Rollier. "The Groupe's pricing policy made it possible to preserve a high level of operating income, a level that we intend to raise further in the future.

"To this end, it is more necessary than ever to bring the Groupe's entire cost structure down and to push sales volume growth through increasingly competitive product offerings. In 2007, markets are globally expected to grow while external costs should show more favorable trends than in the past. Michelin's net sales and operating margin should therefore post a tangible increase compared to 2006, in line with the objectives the Groupe has set for 2010."

(Michelin's cost burden in 2006 compared to 2005 was 824 million euros greater; raw material cost alone accounted for 740 million euros of that.)

Other financial highlights released by Michelin, in millions of euros when appropriate, include the following (the change from 2005 is in parentheses).

* operating income before non-recurring income and expenses: 1,338 (-2.2%);

* operating margin before non-recurring income and expenses: 8.2% (down from 8.8%);

* operating income: 1,118 (-29%);

* operating margin: 6.8% (down from 10.1%);

* net income attributable to shareholders: 572 (-35.7%);

* net financial debt: 4,178 (+2.3%);

2006 overview, per Michelin

Overall, tire replacement markets recorded satisfactory growth, with the exception of North American passenger car and light truck and truck markets, which were particularly hit by high fuel prices. In Europe, a turnaround was noted in the truck tire markets, especially in the Eastern countries. Emerging markets were especially strong.

In original equipment, truck tire market growth continued to accelerate worldwide, with the exception of Brazil, where truck manufacturers' exports suffered from a high Brazilian real relative to the U.S. dollar. The performance of passenger car and light truck markets in Europe and North America was disappointing, highlighting the challenging environment faced by most OEMs in these markets.

Segment information, excerpted

1. Passenger car and light truck and related distribution: 9 billion euros, 55% of the total.

2. Truck and related distribution: 5.4 billion euros, 33% of the total.

3. Specialty businesses: 2 billion euros, 12% of the total.

In North America, the replacement market dropped "a significant" 3.7% compared to 2005 (a 3.8% drop in the U.S. and 6.3% drop in Canada more than offset a 0.7% increase in Mexico). Unit sales prices posted "substantial" growth, driven by favorable brand and segment mixes and by the year's price increases.

At original equipment, the market dropped sharply, "reflecting the challenges faced by the U.S. automotive industry," according to Michelin. Group sales also were down.

As was the case in Europe, the Groupe was able to lessen the impact of "very substantial" raw material cost increases through price adjustments.

Outlook for 2007, per Michelin

In 2007, tire market growth should be positive worldwide, with the exception of North America's truck tire markets, which should trend downward due to purchasing prior to implementation of new anti-pollution standards and from a somewhat more subdued economic environment.

With approximately 3% expected growth, replacement markets in Europe should benefit from a more supportive economic context. The developed countries' passenger car and light truck original equipment markets should remain stable. Emerging countries in Asia, South America, Africa and the Middle-East should continue on their dynamic growth trends.

Following unprecedented inflationary trends in 2006, raw material prices are expected to stabilize at a high level in 2007, with a limited impact on the Groupe's income statement.

In this context, Michelin's net sales and operating margin should post a tangible increase compared to 2006, in line with the Groupe's 2010 objectives.

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