PARIS -- French tire maker Michelin lagged market forecasts with 2004 earnings on Tuesday due to a big exceptional charge and rising costs of rubber and steel.
Last year's net earnings were 60 percent higher, and Europe's biggest tire maker said it expected this year's operating performance to be at least as sturdy as that of 2004.
But investors were disappointed about its prediction of a faster increase in raw material costs and that the first half of 2005 was unlikely to be as robust as the first half of 2004, when Michelin saw an exceptionally strong rise in demand.
"For 2005, we envisage a level of operating profit at least as good as in 2004 despite an environment we expect to be more difficult than that of 2004, particularly due to new and sharp rises in (the price of) raw materials," CEO Edouard Michelin said in a statement.
He said in a news conference later: "Raw materials prices will continue to rise and at a faster pace than in 2004 -- it's a massive continued rise." The overall price of sourcing raw materials, particularly rubber and steel, is expected to rise around 13 percent on a constant currency basis in 2005, after an 11 percent increase in 2003, the company said.
This would trim around $534 million off operating profit in 2005.
"An explicit outlook for higher raw material headwinds is not, by itself, a surprise," Morgan Stanley analysts said in a note.
"However, it does bring to light that the company will need to retain announced price increases and/or achieve labor cost savings and operating leverage within a global tire market which is returning to more 'normal' levels of growth," they added.
Michelin reported net profit before minority interests of $707.9 million in 2004, up from $438 million in 2003. A Reuters poll had forecast net profit on average of $844 million.
Michelin said the net figure included a $275 million one-off charge, more than half of which had come from a provision for its planned disposal of its wheels business.
Operating profit rose 13.7 percent to $1.73 billion -- also below analysts' forecast of $1.76 billion -- on already reported sales of $20.94 billion.
That yielded an operating margin of 8.3 percent, up from 7.4 percent in 2003, as the company made good on its prediction for a "visible improvement" in profitability.
Michelin's cautious outlook still appeared positive when compared with warnings given by its rival Bridgestone last month. The Japanese tire maker said it could see a double-digit drop in operating profit in 2005 due to significant increases in raw material costs.