Ladies and gentlemen, welcome to the Michelin First Half twenty twenty one Results Conference Call. I now hand over to Mr. Florent Menigault, CEO and Leadership Manager Group Manager and CFO. Chelan, please go ahead.
Hello, ladies and gentlemen. Good morning and good evening to all of you. Thank you for being with us for this half year results. I am currently with Yves Chapo, and we will be with you for this next 1 hour and a half. Before everything, I would like to remind us with the strategic context in which we are operating.
In the slide that we are projecting to you, I just want to remind our strategy very quickly and our 2023 targets. Our strategy is based on growing with tires, around tires and beyond tires. The numbers that you see in the bubbles are from 2023, and I want to reemphasize the fact that we are still in a crisis mode. And that's why we have said that from 2023, we should be exiting this crisis mode and we should be operating in more normal conditions. We anticipate from 2023 a CAGR of 5% in terms of sales growth, a return on capital employed of in excess of 10.5 percent and the segment operating income at around 13.5%.
And I would you have the split between RS1, RS2 and RS3. That's the main elements of this the composition of this 13.5%. We thought it was important to remind ourselves of our strategic horizon, because it gives you a good insight about where our performance is compared with the strategic objective. If we move to the 1st semester, our results have been and our performance has been robust in a robust market recovery. However, tampered by a major disruption in the global supply chain, plus the fact that the COVID-nineteen is still there and with various variant around the world and which and it's creating a lot of perturbation in our operations.
In this context, the Michelin team's commitment helped deliver a 19.6% increase in sales and a solid SOI of €1,400,000,000 for the period. And I want to pay tribute to the Michelin teams because really not only they have to face this COVID-nineteen, but also major disruption in the upstream supply chain.
So this performance
has been with some details. So we had a 20.8% increase in tire volume, which has added around €1,200,000,000 to the segment operating income. And that's reflecting the market share gains in every segment, especially in 18 inches and larger tires and a sharp 4.6% increase in the non tire activity sales. It also shows in excess of EUR 100,000,000 EUR 126,000,000 increase from positive net price mix raw materials effect. And as a 1.4 percent gain from responsive price management and a 1% increase from favorable mix offsetting the rise in raw material procurement costs.
So not only we have disruption in the supply chain, but we are operating in a very strong inflationary environment. And as we have always expressed to other view, we will offset this inflationary wheat prices in due times. And we have had for this period an unfavorable currency effect stemming primarily from the U. S. Dollar weakness against the euro, which has impacted the SOI by EUR 150,000,000 negatively.
Our free cash flow excluding M and A came to a positive number despite a seasonality effect on our normal free cash flow, reflecting the SOI increase, low level of inventory and some and Yves will explain to you what we did in terms of CapEx expenses. The gearing stood at 27%, attesting the group financial position strength and as confirmed by the rating agencies. All of this led us to decide to raise our 2021 full year guidance with an SOI, segment operating income, at constant exchange rate in excess of €2,800,000,000 and a structural free cash flow in excess of €1,000,000,000 Now Yves will induce you to more details.
Good evening and good morning, ladies and gentlemen. So starting with the overall picture, Florent has, of course, shared with you some key strategic indicators relating to the profit dimension of our business model. I would like also to share with you how do we perform from a people and planet standpoint. In terms of diversity, we maintain a rate of 28.2% of women among the managers and supervisors. So we are stable versus end of 2020.
Related to safety, we have an indicator which has worsened. And TCR has worsened probably because our activities have been disrupted by the COVID-nineteen crisis and the way we are obliged to operate in such very volatile and difficult context. I will go back afterwards in detail about the financial KPIs. Now I move to the plummet KPIs. We have here retained 2 of them.
The quantity of CO2 emitted on the Scope 1 and Scope 2 at 2,800,000 tons, it's growing 12 months figures, which is 27% below the 2010 figures, which is a reference for the science based target. And the last one is the IMEC, which is the compounded KPI of our environmental performance in our factories, which includes, of course, CO2 emission, but also water consumptions or solvent emissions. And this indicator, which was at 100 in 20 19, stand at 93.1 at the end of the first semester. So before entering into the comment about our sales, some element of context. Of course, the first half of the year, we have seen a very strong demand compared to the first half of twenty.
And you see on the graph on the left side, of course, that the blue line is far above the green line, which was a 2020 figure. But you also see that this favorable comparison will disappear the further we go towards the end of the year. PCLT market has been overall growing at 26%, and truck tire market has grown by 24%. And all that has been achieved. This market has evolved in such a direction in a very volatile and disruptive environment.
We have mentioned the fact that the sanitary situation is far to be stabilized. At the time we are speaking, Southeast Asia is really in the middle of the storm with a strong outbreak of the pandemic there. We have been through a maritime shipping crisis, container crisis, the ever given crisis, the container boat was stuck in the Suez channel. We have truck driver shortage in North America, of course, in inflationary context regarding raw material, energy and some labor shortage in a lot of regions. Looking more precisely at our 3 main segment of activity.
So you have the 2nd phase of the market month by month for the 1st semester because obviously 2020 2021 shows a very contrasted pattern. Maybe the most important figure here is that P CLT market finally land at 4% below 2019. So we have not yet for passenger car tire and light truck business at the 2019 level. When truck tire market have been, let's say, have already catch up with the 2020, 2019 level, probably strongly pulled by the China OE market during the Q1 because of the China 6 norms. So in this context, our sales have grown by 19.6% or 25.5% if we exclude the currency exchange rate.
Currency has been highly negative. Florent mentioned U. S. Dollar, but Brazilian real, Argentinean money and Turkish lira has been also negative. The scope of consolidation has been neutral.
Volume effect or tire volume has grown by 22.8%, and pricemix is positive at 2.4% with the mix at 1% or price has been positive at 1.4%. And non tire activities has grown close to 5%, but their contribution to the overall group net sales is 0.3 point. So regarding the segment operating income. So a very sharp improvement, mostly driven, of course, by the volume effect, which is close to €1,200,000,000 You see a positive raw material pricemix effect of €126,000,000 The price effect is at €133,000,000 euros which cover the effect of raw material, taking into account that we have also some inflationary tendencies in other areas. And the next one, the first one I will mention is manufacturing and logistics performance, which is here negative by 24%, which is include €45,000,000 of increase in transportation cost and mostly the shipping cost of our not only our product, but also our raw material, which means that our overall manufacturing and logistics performance has improved by €20,000,000 over the semester, taking also in account that there is €12,000,000 of savings from our industrial competitive program in the volumes.
SG and A have, of course, increased versus first half of twenty twenty, but are still below far below 2019. Non tire has produced non tire activities have contributed positively to the SOI despite the fact that our experienced activity, which are related to tourism and restoration, have been severely impacted by the different measure restricting these activities. And we have also some miscellaneous positive effect for EUR 56,000,000 So at the end, we land at €1,400,000,000 of segment operating income. Looking at these figures segment per segment, you will observe, of course, the strong and sharp recovery of RS1 and RS2, which have been pulled by, let's say, favorable volume effect, more favorable than LS3. LS1 has also benefit from market share gains in 20 inches and above.
20 inches and above sales represent in volume today 50% of our Michelin brand sales over the 1st semester, which is an increase of 3 to 4 points versus last year. And of course, SR S1 has also benefited from the positive mix of OE RT, linked to the fact that our OE itself has been penalized by the semiconductor shortage. Aerospace 2 performance has also sharply improved with an operating margin at 9.9%, and this is mostly driven by the upturn in demand, a very responsive pricing management and the sustained expansion in our fleet management solutions. RS3 has a less favorable basis of comparison as in 2020. In fact, in the 1st semester, RS3 has been the main contributor to our segment operating income.
Our first half volumes were lifted by the sales in construction and agricultural tires, leading to a negative mix of activities. And the fact that our mining activities have been penalized by negative impact of raw material causes in the first half. From the second half of the year, these closes will turn favorable, and this segment should deliver better performance during the second half. Free cash flow is probably one of the most robust performance that the group has never done in its history, at least in its recent history, that's the first time that we record a positive free cash flow at the end of the 1st semester. Of course, strongly helped by the EBITDA improvement.
We have, of course, an increase in the trade working capital, which include this close to €600,000,000 of trade working capital, include €200,000,000 of price effect in the working capital. And you also see that capital expenditure was a positive effect, mostly because we started to break down on the CapEx during the month of March, April last year. And at the same time, you will see afterwards that our GB started to have a positive impact on our free cash flow and our debt. At the end of the semester, we are holding nearly €4,000,000,000 in cash and cash equivalents, and we still have €2,500,000,000 of confirmed undrawn line of credit. And we have reduced, of course, the volume of commercial paper during the first half of the year.
So having said that, our debt has slightly increased over the semester, mostly because of the effect of the dividend. You will observe that our joint venture has a positive effect on our debt because of the positive contribution of some of our JVs. And we land at 27% of gearing ratio, which is a 1 point improvement versus the end of the year of last year. Our rating has been confirmed by all the rating agencies, both solicited and unsolicited. Moving now to the guidance.
I will start by the market scenario we have retained for 2021. So we have decided to narrow down the span of our market forecast for all our segments. Previously, our PCLT market forecast was in the range of 6% to 10%. So we believe that the market will land in the upper part of the range between 8% and 10%. We have a similar situation for truck and buses, where we believe that the market should land between 6% then be between 6% to 8% or 9% to 11% if we exclude China, where we have less far less exposure than the market weight of China.
And the specialty should also grow over the year between 10% to 12%. In the schemes in the second part of the slide, you will see that for the second half of the year, we have put a range of evolution of the markets. As it was mentioned by Florent, we are still the crisis is not finished. We have seen a lot of disruption in the supply chain, the global supply chain and not only in semiconductors, but for automotive industries. So that's why we maintain this range of evolution of the market.
And you see that versus 2020, which is a green line, in some months, 2021 market might be below 2020. So in this market scenarios, we believe that our market should land slightly above market as we have gained market share during the first half. We are strongly believing that we should be able to maintain our position in this market. Price, we also expect a net mix price raw material effect positive, knowing that most of the increase of the raw material should impact our group during the second half of the year. And we have anticipated this situation with two price increase, one already done in 1st March and one that March or 1st April and the second one that was implemented from the 1st July.
The cost impact of raw material, custom duties and transportation costs should be strongly negative. We also believe that currency should still be strongly negative, also most of the way has been done during the first half of the year as the comparison will be more favorable for the second half. And having said that, we have decided to upgrade our guidance from a segment operating income at constant exchange rate above €2,500,000,000 to SOI before at constant exchange rate above €2,800,000,000 We also have upgraded our structural free cash flow guidance from around €1,000,000,000 to above €1,000,000,000 So now I give the floor to Florent to open the Q and A session.
Thank you, Yves. And now we can receive all your questions.
Thank you.
Your first question from Tom Narayan from RBC. Please go ahead.
Yes. Tom Narayan, RBC. Thank you for taking the questions. In regards to the strong mix in the replacement market in H1 at SR1, just curious how sustainable this is? Should we see some margin pressure in H2 as OEM volumes come back?
In other words, should SR1 margins of H2 come in below H1's level?
And then if I could ask,
could you discuss the raw materials dynamic at SR3 and why H2 is better? I think you've talked about mining there. It seems like the opposite dynamic at SR1. Thank you.
Okay. Thank you. I will take the first part of the question and then Yves will answer the second part. So about the strong mix in passenger car and light truck and replacement, yes, we think it will be sustainable because the content of the sales of 18 inches and above in our sales is continuously increasing for the past decade. So I don't see why it should diminish.
And there
is still a very strong demand for our Michelin tires. And actually, right now, we have difficulties to supply all the demand. And when OE will restart, further, this should have no impact because actually it may increase the shortage on replacement. So far, we are preparing for the rebound in OE and we are replenishing as much as possible our inventories in order to face the rebound. So I touch wood, but it should be okay.
As far as pricing dynamics and raw material dynamics in SR3, particularly the Mining segment, you have to know that around 80%, 85% of our Mining business is made of long term contract, which means that these contracts include raw material closes adjustments. We believe that during the first half, these clauses has a negative effect, because it was based on the raw material prices of the second half of twenty twenty. Of course, prices have started to rise at the beginning of the year, and this rise has accelerated along the semester. So we'll start to have a positive effect of these raw material prices closes during the second half. And we already know that these indexations will represent around 6.2% on our prices for the just the mining segment from the 1st July.
Okay. Thank you.
I'm sorry, go ahead.
I just wanted to confirm, so we shouldn't anticipate H2 SR1 margins to come down. It sounds like you're saying that those trends, the replacement margin strength, etcetera, could continue in H2, just confirming that.
It could, provided we are able to supply. The uncertainty comes with our ability to operate our production facilities correctly. And back to our original comments, it is still very difficult. We are still in a crisis mode and COVID is still impairing our ability to run our capacities at the appropriate speed, plus the fact that in the free supply chain, we constantly have disruptions.
Okay. Thank you.
Next question
from Gabriel Sadler from Citi.
Good evening. It's Gabriel Ross from Citi. Thanks for taking my question. My first question is also on price mix and raw materials. Could you please help us understand your guidance for neutral pricemix formats in the second half?
Because I understand that the raw material headwind will rise at a group level, but initially not being increasing prices in Q3 in anticipation of this. And is the company capable of continuing to raise prices in Q3 to try and maintain the positive price mix real maps that we saw in the first half of the book of earnings? And then my second question is on volumes in the second half. Could you elaborate please on Slide 14, you show 2nd half volume range in SR1 could be below 2020 levels in the second half. Would you say this is just reflecting some caution because of limited visibility?
Or are you seeing any signs of a weaker volume environment in the second half that you're trying to convey on that side? Thank you.
Okay. I'll take the first part and your question and then even the second part. On the first part of the price mix, the momentum effect, what you need to understand is the wave of increase in raw materials is still to come in our accounts. So we have enjoyed some increase in the 1st semester, but nothing to compare in the 2nd semester. So of course, we are constantly adjusting our prices to match this increase.
But in the 2nd semester, it will be less favorable than in the 1st semester. So that's the main effect, plus the fact that as Yves mentioned, we still on the index contract, we are still we still have a timing difference between the time we can recognize in our pricing the raw material increases and the time we can have price increases. So that's why in the 2nd semester, it will be already a very strong achievement if we are able to pass this strong wave of cost increase in raw materials.
Maybe just to complete what Florent said on the first question. On the first half, the raw material effect on our segment operating income was minus EUR 100,000,000. We are expecting several 100,000,000 of raw material effect on the second half. And that's why we have implemented a price increase in the 1st July for all of our activities. And if necessary, we will implement additional price increase at the beginning of the fall.
As far as the volume effect on the SCR1, in fact, we first, the comparison basis versus the second half of last year is completely different. You remember that last year, one of the market which rebound sharply was SR1 market, both original equipment and replacement. Of course, original equipment is extremely volatile. We are making forecasts very closely with our teams are working very closely with OEM teams, but we are seeing from 1 week to another some OEMs canceling production because of shortage in raw material and particularly in the semiconductors chips. And on our side, we are also experiencing a lot of disruptions in the upstream supply chain.
Our supply chain teams are managing multiple crisis simultaneously. We have recently experimented crisis in the procurement of some textiles product. That's where I'll end the, let's say, the gap between different scenarios we have built for the second half for this market.
Okay. Understood. Could I just follow-up on the volume point? Because you also listed your guidance on growing volumes above the markets rather than in line. Could you maybe just comment on which areas of the business or which regions maybe in particular you're seeing that opportunity to win market share?
Okay. We don't disclose market share by regions. And however, we have a good dynamic due to the strong pool we have for the demand in Michelin tires, plus the fact that we have renewed our product portfolio as well in 2021. We have good launches. So that's why we still think we have good dynamic.
Plus the fact that there is also if you remember in 2020, there was a shortage in Michelin there was a strong reduction in the inventory of our dealers. And now they are replenishing their inventory, which is adding some share gains.
Got it. Brilliant. Thank you very much.
Okay. Next question?
Next question is from Victoria Greer from Morgan Stanley. Please go ahead.
Good evening. Two questions, please. And yes, firstly, could you just talk a bit about what you're seeing in the dealer inventories? My sort of rough guesses on where sell out versus sell in might have been makes it look as if maybe the last very strong few months we've had in North America maybe mean that the dealer inventories are a bit closer to rebuilds there, but probably still quite low in Europe. So could you comment a bit on that please and also talk about the dynamics for imports in both regions?
And the second thing, could you talk a bit about where your production is?
You mentioned earlier that it's a bit
constrained by a number of
things right now. Is? You mentioned earlier that it's a bit constrained by a number of things right now. Could you maybe give us some numbers around that maybe versus 2019 or versus a normal level? And in talking about that production level, could you help us think about a drop through for volumes for the second half?
Thanks.
Okay. I will start and then Yves will complement. So as far as dealer inventories are concerned, what we see is that Europe has caught the level of inventory. So we are almost back to where they should be. We are the leaders have not replenished their inventory.
It's in North America, basically. In other parts of the world, the level of inventory are okay compared to what we think they should be. So in North America, it's still lagging behind. The imports, again, they are also touched by the upstream supply chain issues. So we see here and there a strong situation as far as imports are concerned.
So it's very difficult to read at this stage at nothing. As far as production is concerned and if you take 100% base for 2019, we are still below passenger car and light truck in segment 1, segment 2 and segment 3 compared to 100 production in 2019. I think that's the bulk. And then Yves, if you want to comment.
Just to complement on the drop through, we expect the drop through in the second half to be in, let's say, similar range than during the first half, so between EUR 100,000,000 EUR 110,000,000 per point of growth.
Next question from Thomas Besson from Kepler Cheuvreux.
Thank you very much. Mr. Besson, Kepler Cheuvreux. Three quick questions, please. Firstly, could you confirm that the pricing environment remains very strong in those regions at this point?
2nd question, your net financial charge was unusually low in H1. Is that something that we can anticipate to continue or was it just linked with a few gains that are not going to repeat? And finally, I'd like to come back to potential M and A opportunity and to have a comment on where you stand on the potential opportunities that you've disclosed during the Capital non target. Are there any operation that we should anticipate for 2021? Thank you.
Thank you. So I will take the pricing environment and I will let Yves would like to be on the question 2 and question 3. So the pricing environment is so far neutral. So it means that every price increase we have passed have been followed by competition in every segment with the exception of China. In China, we've passed the first price increase.
And the second one, we did not pass it because our competitive was not adequate there. So now as far as the rest of the year, our competition should see the inflationary pressure the same way as us. What they would do is down to them. But as I told you, we will pursue the price increases required by the cost of raw materials, whether it's through the index closures contract. So or we would push the price increase to offset raw materials.
Regarding your second question about the net financial costs, it's very positive on the first half. It will remain normally positive on the second half, maybe in less than in a less favorable way than in the first half, mostly because thanks to particularly the bonds that we issue during the second half of last year, we have lowered down our interest costs. If we look, our overall interest cost has been going down from 3.4 percent during the first half of twenty twenty to 2.4% during the first half of twenty twenty one. Keep in mind also that in 2020, after the outbreak of the COVID-nineteen, there was a sharp rise in the spread, including for short term debt. So it should be favorable, but probably less favorable during the second half.
Regarding merger and acquisition, of course, we are looking actively and particularly in the area where we intend to grow at different opportunities. Keep in mind that due to the, let's say, movement restriction, some deals are probably more difficult to implement than before the crisis. So may take a bit more time. And we are also very cautious about the quality of the assets that we might acquire and the price we might pay for. As Florent has mentioned you at the beginning of the presentation, in our 2030 road map, we have set growth target.
We have also set the return of capital employed target above 10.5%, which is in average 3 point above our weighted average cost of capital.
Next question from Jose Asumendi from JPMorgan.
Thank you very much. Jose Asumendi, JPMorgan.
Just a couple of questions. The first one, can you comment a little bit more around the SSAS 3 dynamics and compare first half and second half, how do you expect the individual divisions within ESAL3 to perform? And should we expect higher margins in the second half versus the first half or similar margins if we compare the second half versus the first half within ESSA-three? That would be the first question. The second question, please, if you could comment a little bit more around cash flow for the second half, a little bit the dynamics that you're seeing on working capital and CapEx for the second half as well?
Thank you.
Thank you. I will start and then Yves will finish the question. So the first one is comparison. So if you remember, the 1st semester 2020, the SR3 was still very active. So we are comparing against an activity that did not slow down in the same way as the other activities.
So that's why in the 1st semester of 2021, you look at a volume growth that is lower than what has happened in SR1 or SR2. Then again, in terms of the pricing environment, especially if you look at mining, most of the contracts are indexed. And therefore, there is a lag between the time you recognize the cost of raw materials in your prices. And that explains that's also why in the beginning of the year, we had to decrease prices because we were comparing with raw materials that were decreasing in the same period on the contract on index contract. So yes, in this we also had in the 1st semester a mix between amongst SR3, we have beyond road activities, we're growing at a faster pace in comparison that the mining activities.
That also explains why we had a mix effect in SR3 that has impacted the margin. But we expect in the 2nd semester to have higher margins in SR3 in the 2nd semester.
I will take the question regarding the free cash flow. So let's first come back to the H1. I mentioned it's the first time in the recent history of the group that we generate a positive free cash flow in H1 for different reasons. One being that, of course, our inventories, our working capital has increased, but not at the pace we are expected, particularly because we are living in a very disrupted environment from a supply chain standpoint. In the second half of the year, so generally and you know the group has you have seen through the curve about the market evolution for SR1 and SR2 that we share with you for the first time.
You see that we have a pretty seasonalized business with strong amount of sales, let's say, between August July, August in North America till October, November depending on the regions. So we are cashing out a lot during the last month of the year. There is nevertheless 2, let's say, unknown factors, which will be our ability to rebuild our inventory at a normative level. If pandemic or other supply chain disruptions secure during the second half. And for sure, we know also that in the working capital, we'll have a stronger price effect, knowing that we have already €200,000,000 of price effect in our working capital at the end of June.
So mechanically, mathematically, it should be higher at the end of the year. The second unknown factor is also our ability to spend the capital expenditure that we have planned. We mentioned the disruption of supply chain. It's not only occurring in our production activity, but also in our investment activities. We are struggling even sometimes to procure some basic materials.
And our team, both in procurement, purchasing, are really striving to make sure that our factories will get the necessary items to deliver their investment plan. So that's basically the 2 unknown factors. Besides that, we believe that our joint venture will continue to positively contribute to our free cash flow during the second half. Some JVs are, let's say, consuming cash and it's normal because they are at, let's say, in a growing phase. Some are delivering cash, thanks to the maturity of their business and the work that has been done by the team of these companies in the recent years.
And
thank
you, Yves. And maybe one add on I forgot to mention in SR3 is that the mining volumes should increase in the 2nd semester compared to the 1st semester.
That's super helpful. I have just one quick follow-up.
Do you really see a big
strong operating leverage in the business in the first half? Or are you expecting that to accelerate in the second half as a result of having taken out capacity in the European business in the last 12 to 18 months and then finally seeing volumes rebounding stronger in the second half of the year? Is this the right assumption? I have the impression that maybe the operating leverage was not as strong as what I was expecting initially.
Okay.
No, the drop through was in line with our forecast. We knew very well what will be the impact of the consequence the positive consequences of the measures we took to improve our overall competitiveness, both for Manufacturing and G and A. Regarding manufacturing, we have always said that we'll have a drop through in the range of €100,000,000 to €110,000,000 per point of growth, and we were in line with this figure during the first half. And we will
be in line for the full year.
Understood. Thank you, gentlemen. Thank you.
Thank you. Next question from Christoph Leggercari from Deutsche Bank.
Hi, good evening. It's Christoph Lachari from Deutsche Bank. Thank you for taking my question. It's really only 2 follow ups to other questions that have already been asked. The first one will be on pricing.
You said you will be ready to implement further price hikes in fall. Due to the inventory situation and the overall market dynamics, has the ability to essentially decrease the time from the announcements to the enforcement been improving? So a shorter time from when you announced it to when you see it in the P and L. And then also the gross versus net impact, could you share a comment on that? Is the net potentially higher now in this environment than it was previously?
And the second question would be more on the supply chain. Obviously, we see the increasing cost from logistics. Are there any issues inside the supply chain where you have challenges to source material as well? Or is it really only shipping the stuff to where it's needed? Okay.
I would start with on the pricing. And so the delay in the price increase between the announcement and the time it's effective depends on the commercial terms of our contracts with dealers. So it varies from region to region. But believe me, we have set instruction to everyone to be at the maximum speed possible everywhere. So we look at the evolution of raw material prices and the logistic costs, but we also have energy inflation.
So we have many inputs to inflationary costs right now. So we are watching this. And when our price increase or preceding price increases are not sufficient to cover the coming our forecast cost, then we trigger new price increases. So that's the and we have zero price cover allowed anymore. So when the debt is effective, it goes into the market.
So between the growth and the net impact, we are striving to get as much as possible a positive net impact. But there is a time delay in this inflationary period between our ability overall to pass price increases and the rise in the cost of raw materials and all the inputs of cost increases, again, energy, transportation and logistic costs, etcetera. So that's the bulk. In terms of supply chain?
So in terms of supply chain, we have experimented mostly first shipping challenges, so shortage in boats, in containers that has lead us to lead our teams to imagine different way to source, to ship some goods, some goods that we some raw materials that we directly ship by containers. We try to ship it by bulk or so it requires a lot of agility from our teams, both in the central supply chain teams in the factories to find some raw materials. And from time to time, in some categories of raw materials, as, let's say, the overall industries are impacted by the crisis, by these disruptions, our teams have been obliged to find a different sourcing. Of course, respecting our internal qualification requirements from the quality standpoint.
But the supply chain didn't cause you to stop production because parts or raw mitts haven't been where they should be at this point in time? Or did you see minus stoppages?
We had some stop of production during the Q1, particularly because of the supply of natural rubber, but it was limited for to a few days and mostly in Europe. We did not experiment stop of production during the second quarter So far, so far, so far.
Because again, the upstream supply chain is really in difficulty. So, so far, our teams have done an outstanding job. But we have crisis sales everywhere. So far, so good.
Understood. Very clear. Thanks a lot.
Next question from Edmaro dos Spina from HSBC.
The first is on the effect of, let's say, the COVID inefficiencies. I think looking back at the last year, there was about more than €500,000,000 of net kind of cost in your EBIT. So I was wondering if you already recovered part of this headwind or if you still expect this to become a tailwind at some point in the future? And the other question is on the dealer inventory. Thank you for your update.
I wanted to ask if you already factored in future price increases in case raw material prices keep growing. Do you think that may convince dealers to increase their inventory level further? And with that, if I may ask a comment about the sellout rate to complete the fixture for the Q1 results too? Thank you very much.
Okay. So as far as COVID inefficiencies and potential in Tel Aviv, we still have some COVID inefficiencies in terms of production rate and in terms of productivity, in terms of inefficient additional costs. We still have some additional costs in running our operations. So that these additional costs will stop at some point. But today, it's very difficult to forecast when this crisis is going to end.
As far as dealer inventory and the pricing, again, I think we are in an inflationary period in front of us. And as I told you, we are going to raise our prices. So we are not trying to pull a sell in effect with the dealers. That's not what we are trying to achieve. We are just trying to offset systematically the cost of raw materials and all the inflationary cost that we have by raising our prices.
So to make sure that we pass on to the market those cost increases. So that's the strategy. Now whether this has a selling effect at the dealers, so far we have not seen, especially because we are still trying to replenish inventory to the appropriate level. So we are not yet reached a situation where dealers will take inventory just for playing price increases.
Maybe we can add the fact that we speak about dealers inventory, but vehicle inventories at OEMs is in some region at a very low rate. I think we are close to 25 days, 24 days in for SR1 for passenger car OEMs when it was at 60 days before the crisis. So as Florent mentioned in the presentation, we have very contrasted situation with basically Asia, where we are already at, let's say, normative level of inventories Europe, which is also catching up, but in some segment probably in SR2, we have not yet completely recovered and North America, where we are still below the normal rate of inventories.
Thank you. Next question?
Thank you. And last question from Michael Jask from Bank of America. Please go ahead.
Hi, good evening. Thanks for taking my questions and congratulations on the strong first half results. I've got 3 quick questions, if I may. The first one, and I apologize that you've touched on this already, relates to sales and marketing expenses, which came quite a lot lower versus the pre COVID levels by around $131,000,000 in the first half. Can you please comment on the key drivers here and on the sustainability of this year going forward?
That's the first question. The second question, just going back on cash flow generation, can you please comment on the low levels of CapEx, which seems to be around the lowest levels we've seen in the last decade and perhaps also flow through into the lower depreciation and amortization charge? You alluded to procurement constraints on capital items. So can you please give us a sense for how much CapEx you would have spent absent the shortages and what we should expect for next year? And then finally, more of a sort of longer term structural question, we've seen the EU bringing forward ambitions for carbon neutrality with its Fit for 15 5 proposals, which will likely result in faster EV penetration.
Now the upside here is clearly better replacement market growth, but I guess the flip side, I suppose, could be higher tire emissions. Can you comment on what sort of level of focus is going into the latter dynamic at the moment and whether you see any potential regulatory risks on the horizon in the near term there? Thank you.
Okay. I will start with your question on cash generation and the CapEx levels, and then I will leave Yves to answer sales and marketing. And then on carbon neutrality, we will both give you some insight. On the cash generation and CapEx, we had set the level entering 2021. And as Yves mentioned, we are right now experiencing difficulties in supplying some basic elements to be able to spend the necessary CapEx.
So this is not structural. This is more linked to the situation. Therefore, we should return to the expected level as soon as it is possible. So it means that every diminution arising in 2021 will be put back in 2022, because we need those investments. We have those investments are necessary to sustain to support our growth.
So regarding marketing and, let's say, commercial expenses, they have slightly increased versus 2020. You have probably noticed that we are now live with our new brand campaign probably in most of the regions in the world, while last year, the campaign was limited to, let's say, a limited number of countries. Keep in mind that some activities are still penalized by the restriction of mobility during the first half. Of course, motorsport activities has resumed, but not exactly at the same pace that 2019. So on the long run, of course, some of these savings will be kept because we have learned, for example, to visit customer both to have a mix of both physical and virtual visit.
But of course, we expect to resume some activities that are currently penalized by the sanitary situation.
If I look at carbon neutrality ambition
Okay. So regarding carbon neutrality and the EV expansion, so we have always said that we believe that tire for an electric vehicle is a Michelin tire. We have a market share for regional equipment with electric vehicle, which is higher than for internal combustion engine vehicles. And the range is going from 1.5 times, if you include all EV vehicles, so including hybrid, to 3 times higher if you keep only speak only of purely BEV, battery electric vehicles. And we are expecting this to be to continue to be favorable on the replacement market as these vehicles are heavier and have a higher torque than internal combustion engine and are more demanding as far as some other performance such interior noise
and of course range, so rolling resistance are concerned. And just to add on what Yves just mentioned, our commitment is on scope 1, scope 2 and the upstream of scope 3, which means all the transportation costs of our product, but not on the usage of our product because of the reasons you mentioned. There's no way we can if the vehicle is changed, we cannot offset this. So that's why our commitment is scope 1, scope 2 and upstream scope 3. And of course, we have low running resistance tires.
And as Yves mentioned, for the world, it's much better to have electric vehicles on machine tires than on any other tires.
Okay. Clear. Thank you very much.
Thank you. That was the last question. No
more questions. So, Steve and I would like to thank you for participating in this first half semester results. And the next meeting is for the next quarter sales. And we wish you all the best and stay safe and see you soon. Thank you very much.
Bye. Thank you, ladies and gentlemen. This concludes today's conference call.
Thank you. All the participation may now disconnect your lines.