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Analyst says tiremaker wanted to avoid labor woes as it shut French factory, cut jobs, reduced costs
By By Laurence Frost
Bloomberg News
Published on Thursday, Feb 21, 2008
By Laurence Frost
Bloomberg News
Michelin & Cie., the world's second-largest tiremaker, took an accounting charge to change the perception of improved margins and avoid inflaming labor tensions as it shut a French factory, Merrill Lynch analyst Thomas Besson said Wednesday in a note to investors.
''Michelin can't report blow-out numbers'' while cutting jobs and asking workers to reduce costs, London-based Besson said in the note. ''They had every interest in lowering their reported margin.'' The analyst rates the stock ''buy.''
Michelin booked a recurring charge in the second half for the $109 million one-time cost of a law requiring employers to make social security contributions on early-retirement packages. That accounting decision caused the operating margin to shrink from the first half and swung the full-year figure below 10 percent of sales, a target Clermont Ferrand, France-based Michelin had set for 2010.
''It's rather surprising that they didn't categorize this as a one-time cost,'' said Pascal Simons, a Paris-based accountant who sits on an accounting-standards working group at France's National Auditors' Association. Michelin broke no rules because the nature and size of the charge were spelled out, he said.
Michelin's head of investor relations, Christophe Mazel, said that while there had been ''some discussions'' about how to book the charge, labor politics ''really weren't a factor.''
The company released results Friday amid a protest over closure of a factory in Toul, eastern France, that got President Nicolas Sarkozy's attention.
''They're playing down the results internally,'' said Pierre-Yves Quemener, a Paris-based analyst with Landsbanki Kepler, who also recommends buying the shares.
As the results were announced, striking Michelin workers were blockading their plant with burning tires and holding two managers hostage to protest its closure.
The plan to shut the factory prompted top-level political intervention ahead of March municipal elections across France. Sarkozy visited the plant earlier this month and criticized the closure.
Michelin reached an agreement with unions on Sunday. It's offering each of the plant's 826 workers a payoff of $3,530 for every year spent with the company, on top of normal severance pay and unemployment benefit, if they turn down two job offers at Michelin's other French plants.
The tiremaker told analysts its 2007 operating margin would have been 10.2 percent instead of 9.8 percent had it booked the social-security charge as a one-time cost.
''Reporting a 9.8 percent margin appears strategically wise as it looks as if the minimum target hasn't been reached yet,'' said Merrill's Besson.
Michelin said the charge was recorded as a recurring cost because the company had not had time last year to inform the markets about the impact of the law, voted in late December.
''I don't find that very convincing,'' Kepler's Quemener said. ''This has nothing whatsoever to do with recurrent spending.''
Michelin shares dropped 2.8 percent Friday, when results were announced. They have declined 23 percent this year.
''Whether it's in 2007 or in 2008, they're going to hit their target well in advance,'' said Michael Tyndall, an analyst with Nomura Securities in London, who has a ''neutral'' rating on Michelin. ''If the 10 percent was an issue for them in terms of placating workers, then by bringing in the charge they may have deferred it for a few months.''
Michelin North America operations produce BFGoodrich and Uniroyal brand tires.
Get the full article here.
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