PARIS -- France's Michelin eked out a higher operating margin in the first half, beating expectations, as a better mix of prices offset a weaker global market and rising costs of materials such as rubber and steel.
The world's largest tire maker said on Friday its operating margin crept up 0.1 percentage point in the first half to 9.2 percent, above an expected 8.8 percent, and predicted its margin before special items would improve in the full year.
The operating result was boosted by 29 million euros due to higher stocks of finished products, to which Michelin attributes part of its fixed costs, and Finance Director Michel Rollier said this effect would be reversed in the second half.
The stock effect made up 0.4 points of the margin, and the operating margin would have been 8.8 percent -- in line with consensus -- when this effect is stripped out.
It was the second positive surprise from the tire industry after Germany's Continental AG posted a strong second-quarter profit while maintaining its full-year profit forecast on Tuesday.
"We now expect to improve our operating results for 2005 compared to 2004, while previously we said we would be able to match it," Rollier said.
Michelin, however, said the global market was in retreat compared with a buoyant first half of 2004 and singled out an eight percent drop in demand in the European truck sector -- apparently reflecting sluggish economic activity in the region for much of the year.
"There is less tire wear because of the economic situation -- less activity means less transport," Rollier said. Michelin now expects the European truck replacement tire market to decline by 3 percent in 2005 instead of a 1 percent rise.
Michelin, caught up in a boom in world commodity prices, predicted its raw material costs would rise 14 to 15 percent in 2005, against initial hopes of containing it to 13 percent.
Full-year raw material costs are seen at 400-450 million euros, while the recovering dollar could add to this.
"In this context, Michelin reaffirms its policy of increasing prices," it said in a statement.
Michelin said first-half sales rose 0.1 percent to 7.49 billion euros ($9.24 billion) while operating income grew 0.7 percent to 687 million euros, above a median forecast from 13 analysts of 658 million euros.
The consensus was compiled and distributed by Michelin.
Net attributable profit rose 8.9 percent to 389 million euros. Analysts were looking for a bottom-line figure of 318 million to 374 million euros, according to the consensus data.
The price mix -- the effect of price increases as well of more sales of higher-margin types of tyre -- boosted first-half net sales by 5.1 percent while volume was down 3.6 percent and currency swings ate up 1 percent of turnover.
"The surprise was all due to the speciality activities division," said sector analyst Adam Jonas at Morgan Stanley.
Michelin's Rollier noted good demand for very large tires used in the mining industry.
Michelin, whose image took a battering at the U.S. Formula 1 Grand Prix in June when its client teams withdrew over safety concerns, said it had paid 12 million euros to reimburse tickets for the Indianapolis race.
Free cash flow in the first half 2005 was a negative 510 million euros compared with a negative 75 million in the first half of 2004, due to deferred pension-fund payments and other factors including inventory changes, Michelin said.
"Taking into account that cash flow is expected to be similar to that of last year, and after the capital expenditures programs confirmed at 1.3 billion euros, the free cash flow will rebound significantly in the second half," it said.
Michelin is bigger than Japan's Bridgestone Corp and U.S. group Goodyear Tire & Rubber.