Ladies and gentlemen, welcome to the Michelin conference call. I'll now hand over to Mr. Yves Chapot, General Manager and Group CFO. Gentlemen, please go ahead.
Thank you, Sabrina. Good evening, everyone. Thank you for being available this evening for our Q3 revenue disclosure. I will first comment on the presentation that we have disseminated 45 minutes ago, along with our press release, and then answer to your questions. First, I want to emphasize on the fact that despite a very volatile environment, the group has delivered a 20.5% growth in revenue, 14% at constant exchange rates. We confirm our full year guidance on the segment operating income, and we lower our guidance on free cash flow, primarily to take into account the effect of inflation and the exchange rate on our working capital.
Markets have been globally oriented according to our mid-year forecast, taking account a very weak comparison basis as 2021 Q3 markets were probably the worst in terms of chip supplies for car makers and overall supply chain disruption. Q3 market has been positive for both SR1 and SR2, with a global 4% growth, with huge disparities according to the segment. Original equipment grew sharply in SR1, while replacement was slightly down, and of course, disparities between regions. Regarding SR3, mining is posting a steady double-digit growth during Q3. On the other end, we are seeing a sharp decrease in agriculture and construction markets. In this context, our sales at the end of September are up by 20.5%, including 6.5% of ForEx effect.
This performance is pulled by an overall good performance in Q3, +23.8%, including 8.9% ForEx effect. This performance has been achieved despite lower volumes, 2.6% on the quarter. During the third quarter, our volume losses is fully attributed to the Eastern European region. We post a strong price mix effect, 14.3% year-to-date, and 14.9% for the sole third quarter. Our non-tire businesses, although they represent today 5% of our overall group sales, have been growing by 22%, contributing by 1.1 points to the group sales growth. It is a clear demonstration of the validity of our strategy, consisting in growing around and beyond tires. We have of course reassessed market trends for the last quarter of 2022, and the evolution of external factors such as inflation.
We maintain our guidance on segment operating income, aiming to exceed EUR 3.2 billion at Iso ForEx, and we adjust our structural free cash flow guidance to EUR 700 million. The EUR 500 million discrepancy versus our previous estimation is primarily linked to the other inflation and raw materials in the working capital. This is a one-off effect. All together, we estimate that between raw materials that are included in the adjustment for structural free cash flow and other inflation, and on top of that, some ForEx effect, the impact of inflation of our working capital will be probably reaching around EUR 1 billion for the full year of 2022. Starting now, on page three on the market.
You can see that during the third quarter, market has evolved according to the forecast ranges we communicated at the end of July, both for SR1 and SR2. The selling market has been artificially boosted by inflows of Asian tires in Europe and North America, due mainly to the recovery of maritime supply chain. SR3 market have been more contrasted with the steady growth of mining tire demand on one hand, and the deterioration of agriculture and construction tire segment. Looking now at the bridge of our sales for the first nine months. You will see that at the end of the first nine months, we recorded a 20.5% growth in revenue, including 6.5% related to the ForEx, largely due to the USD Euro conversion rate.
The USD represent around $875 million among the EUR 1.1 billion of currency effect, which is 78% of our total currency exchange rate effect on sales, of course. The scope effect is due to the integration of Allopneus since January first. Volumes are down by 2.4%, largely due to the stop of our business in Russia and the outbreak of COVID in China, which has triggered lockdown in different provinces and cities, particularly during Q2 and Q3. Price effect represent 13.4%, due mostly to three causes.
First, the full effect of the price increase implemented during the first half of the year. Second, the effect of the raw material clause in our i-index business, and third, in this index business, the work done by our team to include other factors such, in these codes, such energy and transportation inflators. The mix effect is at 0.9% for the first year-to-date. I remind you that this effect was at 1.1% at the end of June. The decrease of this effect during the third quarter is due to a strong market mix effect in the first segment, where markets have been up by 23% during Q3 for SR1, when replacement markets were slightly decreasing by 1.5%.
Moving to the breakdown of our sales by business segment, I just would like to highlight beyond the comments written on this slide that SR1 is a segment which is the most exposed to Russia and China and has been the most affected by external factors. On the contrary, SR2 has benefited from both the strong resilience of transportation activities, particularly in North America, the rebound of original equipment outside China, which grew by 11.5% during the Q3, and the growth of our around tire businesses, mostly fleet management and telematics. SR3 sales have been boosted by a recovery in our mining tire sales according to our expectations, thanks to the improvement in maritime expeditions, particularly from our North American operations and a steady mining extraction activities.
This segment is impacted by a slowdown in our beyond road business line due to a decrease in construction and agricultural markets, but is also benefiting from our beyond tire segment growth, which is a material contributor to the group's growth. Before moving to the guidance, I would like to come back on two elements, which are explaining the strength of our business model and the resilience of our performance despite the accumulation of crisis and disruptions we are facing for the past 2.5 years. First, we have built over time a balanced portfolio of activities between, on one hand, low or very low cyclical activities such automotive replacement or two-wheel tires and our non-tire businesses. On the other hand, businesses that are more cyclical, such automotive, original equipment and specialty businesses.
This balance of portfolio of activity is comforted by a balanced geographical footprint, as you can see on the bottom right of this slide. The other element, the second element I wanted to share with you and to remind you is the improvement achieved in the shaping of our operation over time. Despite losing 15% or 14% of volume in 2020 and not fully recovering 2019 volume, we have achieved a better segment operating income at constant exchange rate in 2021 than in 2019. A strong reduction of our CapEx at a lower level of inventory have contributed to EUR 3.8 billion of free cash flow generation in the past two years. If you compare the second half with the years 2008 to 2010, you can see that we have improved our ability to absorb shocks and manage our businesses.
Moving to the full-year guidance, I will first come back on the market scenario and external factors before explaining why we maintain our segment operating income guidance while adjusting our free cash flow guidance. You have seen that during the third quarter, you have observed that both automotive and transportation market has been exceeding 2021 Q3 markets. Keep always in mind that 2021 second half Q3 markets have been very sluggish in Q3 due to carmaker chip shortage, labor force shortage in some regions and maritime shipping disruptions. These markets have partially rebound during the fourth quarter of 2021. Therefore, we anticipate that Q4 2022 markets will probably be weaker than in 2021, except for original equipment in SR1.
We are, at the same time, observing a timid start of the winter season in Europe and still some disruption in China, with diverse cities being locked down due to COVID-19 outbreaks. On the specialty side, we confirm that agriculture and construction tire market will remain very soft, while we still expect to benefit from steady mining activities. In this context, due to the consequence of our recent operation stops and of some COVID-19 outbreaks in China, and comforted by the confirmation by Chinese authorities of their zero-COVID policy. On the other hand, the priority given to high-value segment and the protection of our unit margin expect our volume to land slightly below the market trend.
We also expect all inflators, so raw material prices, transportation, energy and other, inflators included in the cost of goods sold to reach between EUR 2.5 billion-EUR 2.6 billion. Since our half year publication, it represent an additional increase between EUR 100 million-EUR 200 million that is fully due to the rise of energy prices, particularly in Europe during this summer and this fall. With the price increase implemented during the first half of the year and the application of quarterly adjustments on our index business, we should be able to generate a slightly positive price and mix effect over all these inflators. In this very challenging context, we are maintaining our segment operating guidance, aiming to generate more than EUR 3.2 billion for the full year of 2022 at constant exchange rate.
We have decided to lower our structural free cash flow guidance to EUR 700 million instead of EUR 1.2 billion, mostly because of a one-off impact of inflation and to some extent of Forex in our working capital. Beyond the effect of raw material prices, which is already captured in the structural free cash flow, and that we estimate around EUR 450 million, we are also facing the impact of other inflators, such as energy, labor costs and other manufacturing supplies in our inventories. We estimate all these elements along with the Forex effect in the working capital and other inventory increase, such as our company-owned distribution inventories at around EUR 400 million. The remaining gap between EUR 500 million and EUR 400 million is explained by lower sales volume, particularly during Q3 and Q4.
We have decided, on the other hand, not to cut our capital expenditure as this inflationary effect in the working capital is not due to be recurrent. After having cut EUR 600 million in CapEx in 2020, we do not want to jeopardize the group's future growth and our future improvement in efficiency, safety and productivity. I just want to remind again that we have generated EUR 3.8 billion structural free cash flow in 2020 and 2021, which was EUR 800 million above our initial expectations. Part of this 2020 and 2021 performance was due to CapEx reductions and lower inventories versus our normative level. We have been recovering this normative level in 2022.
Last, before moving to the Q&A session, I would like to remind you our upcoming meetings on February 13, 2023. We will disclose our 2022 full year results and our 2023 guidance. Considering the current financial market context, we have decided to postpone our intermediary capital markets day to update you on our Michelin in Motion strategy after our full year of 2022 release and our 2023 guidance. Assuming that, if we organize this meeting end of November, we'll have a lot of questions about 2023, and we prefer to wait February to share our 2023 guidance. This CMD, this intermediary CMD will be scheduled in March, April 2023. In early January, you will receive a save-the-date message. I'm now at the end of my presentation and I'm welcoming your question. Thank you very much for your attention.
Ladies and gentlemen, if you wish to ask a question, please press star and one on your phone keypad. Please ask your question in English. The first question is from Tom Narayan of RBC. Please go ahead.
Hi, Yves. Yes, Tom Narayan, RBC. Thanks for taking the questions. The first one is, how did Michelin's Q3 SR1 replacement volume performance in Europe and North America compare to the overall market? Just curious what drove this. I've been hearing from some peers about, I guess Asian tire inflows, particularly coming into Europe. Just curious if that's having an impact. Obviously a large peer talked about softening replacement market in H2. Then the second question on the reduced specialty market outlook, just wondering if you could comment a little more on the state of the Ag and construction markets that you called out. Just curious what is driving that softness and perhaps how long, you know, that may persist. Thanks.
Okay. Thank you, Tom. As far as Q3, SR1 is concerned, it's right, and I mentioned it, there was end of H1 and during the summer an inflow of Asian tires that we attribute mostly to the fact that maritime shipping line has been heavily disrupted. We are seeing that on our side because we export from some of these region, by the way. There was a sudden inflow that have probably in some way overwhelmed the inventory capacity of some dealers. It's probably one of the reason that we have seen this situation. There is some trade down effect in some regions, in Europe and to some extent in China.
We do not observe similar or same effect in North America, or at least with the same magnitude. For the time being, we are rather observing that this trade down is more between tier two and tier three, in that the tier one segment of the market is remaining overall globally resilient. In Europe of course, we have been impacted by Russia. Russia represents the Eastern European region used to represent 2.1% of our sales in 2021. Of course it weighs more on our overall European performance. In North America, in replacement, we have a pretty steady performance during the Q3.
As far as specialty outlook is concerned, it's really related to the situation of agriculture and construction businesses, both at OE but also at replacement. We observe, let's say, a drop in these markets during Q3. That's why we are relatively prudent regarding the prospect of this market for the last quarter. On the other end, as you know, specialty is a mix of very different activities. On the other end, we still expect to post a growth on the mining business during the fourth quarter.
Okay. Just a quick follow-up. On that specialty outlook, I mean, is there any kind of light at the end of the tunnel for construction replacement and ag, or is this just a kind of structural thing we can expect to continue for some time?
I think it's far too early to say. Agriculture, for example, has been traditionally a cyclical business. On one end, we are seeing a rise of agriculture commodity goods in terms of price, which gives some purchasing power to farmers. On the other end, it's triggering inflation and some challenge also from the input they have to purchase. For me, it's far too early to see if we are in a normal cycle or if it's a little bit abnormal situation.
Okay, thank you. I'll turn it over.
As far as construction is concerned, there is a lot of projects, maybe private projects might slow down a bit, but on the other end, we are seeing a lot of initiatives from public authorities to reinforce infrastructure projects. Here also we are seeing some mixed messages from the end market.
Got it. Thanks.
The next question is from Thomas Besson of Kepler Cheuvreux. Please go ahead.
Thank you very much. Good evening, Yves. A few questions as well. Maybe could you first come back to your definition of structural free cash flow? I mean, I thought it was incorporating more of the changes in working capital, but visibly not anything linked with energy, wages or logistics. Just for clarity and the explanation of why this is a one-off. The second question would be on the ForEx effect we should expect for the full year on your adjusted EBITDA. It was a bit lower than expected in H1. Could you give us a direction for the full year?
Lastly, SR3 was the only positive segment in terms of volumes sequentially and in absolute terms in Q3. Could you confirm, despite the drop, the cut you've made for the outlook for SR3, how much visibility you have in the coming quarters for the overall volumes of SR3? So, is it a given that Q4 is a positive, H1 is a positive, or what kind of visibility do you have for this overall segment? Thank you.
Okay. Thank you, Thomas. Maybe regarding the structural free cash flow, it is a definition that has been elaborated in 2011, if I remember well, or 2010. At that time, the group was mostly sensitive to, let's say, in its working capital to the fluctuation of raw material. That's all we have lived with this concept for the past 11 years.
In fact, it's in the definition of structural free cash flow, we took the net free cash flow and we reintegrate in the free cash flow the impact of raw material inflation in the working capital. The news with that we have to deal with now is that if I look 2022, we'll have among the EUR 2.6 billion of inflation that we have in the cost during the year, we'll have probably, let's say 45% coming from raw material and 55% coming from other inflation, mostly from energy, transportation in some aspects, to labor cost and other manufacturing supplies. Of course, these costs are incorporated in the valorization of our inventory, in our cost of goods sold. They are waiting.
They will probably wait at the end of this year as much as the raw material effect, which is incorporated in the structural free cash flow. That's why we have made this precision and modify our guidance. Looking at the Forex, most of the Forex is due to the U.S. dollar. If I remember well, the average USD/Euro conversion rate for 2021 was at 1.13. At the end of September, the average conversion rate for the first nine months was at 1.06 or 1.07. You have basically between 5 and 7 points of, let's say, USD or Euro positive effect.
If you take for a full year, we estimate that $0.011 improvement versus euro is triggering EUR 30 million in segment operating income. I let you do the math. If this 0.6, let's say 0.7 cents is improvement of USD versus euro is confirmed, we are going to land somewhere around $200 million-$220 million in the ForEx effect on our EBIT. Regarding the SR3 volume, well, I will probably rebound on the answer I did to Tom previously.
You have to keep in mind that we are evolving in an environment with a very low visibility that has been exacerbated, of course, by the different crises and events that we have to deal with in the past two and a half years. We are, let's say, confident about our mining customer activity, and we believe that. Of course, we have seen a sharper growth during the second half of this year because in 2021, we underperformed versus the market because of operational challenges. 2023 for mining, we should come back at, let's say, a growth which is more correlated to the overall growth of the mining business.
In the past it has been, let's say, a single digit rate around 3%-5%, depending on the year. For the other segments, the beyond tire businesses such as our belts, coated fabrics, activities, seals are more resilient. If there is a slowdown, they will probably experience or see the consequence of the slowdown later in the cycle. Of course, we have the beyond road activity, which is mostly due to agriculture, construction and material handling, so logistics operations, which are partially correlated to some commodities, such as prices of agricultural goods, but also to public spending decisions and let's say overall international trade volumes. For the time being, we don't have enough visibility.
I don't have enough visibility to comment on what is going to be this market in 2023.
The next question is from Philip Koenig of Goldman Sachs. Please go ahead.
Yeah. Thank you very much for taking my question. I just want to come back on the volumes. You obviously mentioned that you saw a sudden influx of Asian imports coming into the market. Is that something that also affected your sell-in against your sellout? And is that potentially also affecting your finished goods inventory as we think about the free cash flow? My other question is just on the winter tire market. You made some quick remarks earlier, but I think October is always one of the key points of the selling season on the winter tire side. Maybe you can give some additional color how that has started so far. My last question is just on the pricing.
I think you didn't do another round of increases in Q3, so I guess most of the incremental price came from the indexation clauses. Do you expect further indexation clauses becoming active in the fourth quarter? Thank you very much.
Okay, maybe I will start with the last one, the last part of your question. Depends on the contract. We have some contract with the half-year indexation adjustments, and we have some contract with the quarterly adjustments. There will be some adjustment due on some indexed businesses from the first of October, due to the application of the clause related to this contract with the quarterly adjustment. The volume balance between sell-in and sell-out in Europe and impact of import. From the outset, we have to deal with this inflow of Asian tires, which occupy a lot of our customer shelves during the summer.
It will make the transition with the next question, but we're also seeing, particularly in Europe, I mean, pretty mild weather, and a very slow start of the winter season. To come back on the free cash flow, the first question, we have decided to slow down some of our operations in order to make sure that we land the year at our expected level of inventory, both for finished goods and for raw material and semi-finished inventories. We are taking the appropriate measures in order to update our inventory level according, of course, to the future activity, but also to our yearly target. The winter season, as I said, the weather, I mean, we are in France, temperature over 25 degrees these days.
It's end of October. For sure, we are observing in all markets, but not only in France, that the case in Germany and in Northern Europe, a very soft start of the winter season. The winter season is pretty balanced between October and November. If it's snowing in two weeks, we can have a strong need for winter tires. We are relatively prudent about the outcome of this winter season in Europe.
Thank you very much.
The next question is from Christoph Laskawi of Deutsche Bank. Please go ahead.
Good evening, Christoph Laskawi from Deutsche Bank. Thank you for taking my question as well. I would like to come back a bit on the imports as well. You said those have taken space on the customer's shelf. Do you expect it to normalize in the coming one or two quarters? With that, say, market share developments are more or less small blip and come back to where they have been before. That will be the first one, and then the pricing effect of those inflows. Obviously in Q3, price mix was strong. You've kept your operating profit guidance unchanged despite cutting volumes. For 2022, probably not a thing.
In case we see higher inflows for a bit longer, could you comment on the pricing effect of those inflows? Thank you.
It's very difficult for me to comment on what is going to be the inflows in the coming quarters. As I said, these inflows were probably triggered by the fact that maritime shipping activities were normalized. We have seen also the costs of maritime transportation decreasing, although they are still way above 2019 level. Will they normalize or not? Honestly, I don't know. But what I know for sure is that it will have no effect on our pricing. We have if we have to deal with further inflation, and if we need to implement further price increase in order to protect our margin per unit, we will do it.
As I already mentioned, we have a policy which consists to look every quarter at our positioning versus future inflation. Of course, we look at our positioning versus our tier one competitors. We adjust our price if we consider that we need to adjust our price. I mean, the inflows of Asian tires will not have, let's say, an immediate effect on our pricing policy.
Thank you. Very clear.
The next question is from Jose Asumendi of JP Morgan. Please go ahead.
It's José. From JP Morgan. Just a couple of questions, please. You have, I think, fantastic data points, and I think very strong reach, and you understand very well the market. You mentioned also that you are looking to keep inventories low. You're looking also to, you know, maybe slow down a little bit the level of activity across the plant. Can you maybe just give some color of what you're seeing in the European market, in replacement? When you talk to your distributors as well, are you seeing consumers in general getting hit by inflation? Are you seeing maybe, you know, lower miles driven across SR1, SR2, or is the momentum still strong? First question.
Second, can you talk a little bit around your ability to generate efficiency gains to offset, you know, higher energy costs and, you know, additional costs in the second half, but maybe just kicking those efficiency gains that we talked about in the last meeting in London. You know, third one, can you please remind us where do we stand in terms of demand versus 2019 levels in replacement for SR1 and SR2? Have we hit actually again the 2019 levels, or are we still below 2019 levels roughly? Thank you.
Regarding the European market, I already comment that we are seeing a very timid start of the winter season, in particular in winterized market. As I mentioned earlier, we are also seeing some trade down, partially, particularly between tier two and tier three brands. We are clearly seeing that in the different European markets. Efficiency gains. We continue to work on productivity, digitalizing our operations. We have been sharing last week with the media the way we transform our manufacturing operation with the testimony of our Cuneo factory in Italy. There was a lot of example of digital manufacturing project.
For sure we continue to work on this project, and that's why we don't want to jeopardize this project by cutting our CapEx. On the other end, in the past we used to, thanks to all these efforts, we used to edge and sometimes to beat inflation. When inflation was in a range of 1.5%-2%. When you are facing such a level of inflation, let's say non-raw material tires inflation will exceed EUR 1 billion in 2022. You cannot match that by your productivity improvement.
We continue to work on improving our productivity, improving our operations in order to make sure that when inflation will come back at, let's say, more normalized level, this progress will be easier to be, let's say, visible in our operations. Regarding the demand of 2022 versus 2019. If I start by SR1 first, I think in 2019 original equipment, the OE market was at 90 million vehicles. I remember well that the highest point of the original equipment market was in 2017 at nearly 94 million-95 million vehicles. 90 million vehicles in 2019, and the estimation for 2022 is around 81 million.
We are far, although in the second half, the OE market will grow, we are far away from 2019 level. On replacement, I believe we are still below 2019. I don't have the exact figure, but we should land slightly below 2019 for SR1. For SR2, I believe that original equipment is probably back to 2019 level, and replacement should be in 2022, nearly at 2019 level. Despite all the, let's say, the distribution, including what is happening in Eastern Europe. That's roughly what I can share with you related to 2022 versus 2019. Overall, what we can say, if we consolidate the two segments, particularly because of SR1, we are probably in 2022 still below 2019 volumes.
Great. Very clear. Thank you.
The next question is from Martino De Ambroggi of Equita. Please go ahead, sir.
Thank you. Just a couple of confirmation double checks. The first is on the price mix. You guided for EUR 2.5-EUR 2.6 billion inflation all inclusive, and you already achieved the price mix positive by almost EUR 2.5 billion. You are guiding for slightly positive balance between the two figures. Am I right in estimating a price mix in Q4 in the region of 6%-7%, if not lower? Just to double check this. The second double check is on CapEx because you mentioned that you don't want to jeopardize the investments, but probably if I don't miss it, you didn't quantify the CapEx and it was EUR 1.9 billion, if I'm right.
Third question, sorry to go back to SR3, specifically on construction equipment and agriculture, but could you elaborate on the splitting of original equipment and aftermarket for these two businesses, please?
Okay, I will start with this last question. For construction and agriculture, you can roughly consider that, OE and replacement are evolving in a range of 40%-50%. Sometimes OE is higher than replacement. It's 55%, replacement's 45%, and sometimes it's on the way. Basically, it's an average in the long run, 50/50.
Sorry, Yves, I was referring to the trend, the downward trend, is mainly due to original equipment or aftermarket in these two businesses.
It's due to both as far as I'm aware. Yeah, it's, yeah, I think it's due to both.
Okay.
Regarding price mix, yes, we have already recorded in our sales a strong price mix. We believe that we should continue to have a positive price effect on the Q4, although it will gradually decrease on the replacement side because the last price increase we implemented was at the end of the first semester. Last year, we increased price on replacement on first of October. We should have also a mix effect. If you look in the presentation in the appendix, you will see that the mix effect for Q3 was only 0.6 point versus 1.1 point end of June, which created 0.9 end of September.
Overall price mix, which will exceed the consolidation of annual inflation. Keep in mind that when we present our segment operating bridge, we always compare price with the cost of goods sold, but we have also inflation in SG&A, and we want to hedge the effect of inflation in SG&A as well.
The next question is from Giulio Pescatore of BNP Paribas Exane. Please go ahead.
Hi. Thanks for taking my question. The first one, I would like to go back on the free cash flow point, if I may. Just trying to understand here what changed versus H1, because you did confirm the guidance in H1 and back then, I mean, the impact of energy, logistics and wages, maybe was not known to this current extent, but it was already certainly known. I mean, we discussed it on the last call. Just trying to bridge why were you in a position to confirm the guidance in H1 and what changed today? Is it decisions around CapEx? Can you maybe just elaborate on that? Then second question on OE. Can you just maybe comment on the willingness of your OE partners to compensate you for energy and logistics and other inflators compared to raw material?
Is it the same or you're finding a bit of friction on some of those cost vectors? Then the third one just on energy costs. I mean, we haven't touched upon it too much on this call, but I guess it's still very topical. Do you have a rough idea now, end of October of the general headwind we should expect for 2023 on energy costs? Thank you.
Regarding free cash flow, we have probably underestimated in the past the effect of this other inflators in the working capital. Part of it was already included in the figure at the end of June. In fact, as we try to purchase particularly energy ahead, but we have seen a sharp increase of energy during the summer and particularly the month of August, plus some labor cost increase and other inflation in spare parts. The inventories at our company-owned distribution companies has also been inflated by at least including the tires they bought from our competitors. That's overall the main reason why we adjust the free cash flow. Again, it's a one-off effect.
If inflation starts to, let's say, soften a bit, we should not have this effect in the future. Regarding original equipment, our teams has done a great job to pass these other inflation and to negotiate with our OEM customers to integrate these other factor of inflation, particularly such energy and transportation in our contract. Overall, it has been of course a long negotiation. Some of the negotiation have started at the end of last year and during the last quarter of 2021. But overall, we have been able to have most of our OEM customers accepting these clauses, you know, in September of 2022. It has started to.
We start to see that in our OE business price effect from September onward. It has been long negotiation, but successful. We are very determined to make sure that we are able to pass inflation because we cannot bear such inflation and we need to pass it to our customers, whoever they are, replacement or original equipment customers. Energy costs. Well, of course, we are trying to assess what will be the inflation in 2023. Well, for the time, like, I believe it's a bit too early to share it with you. I already mentioned that inflation, energy should account for around EUR 500 million in our inflation in 2022.
If energy prices stay at the current level, we might have an additional EUR 200 million effect in 2023. It's far too early. Things have time to change. I mean, energy markets now are softening these days. 2023 reality will be very different from the figure I can share with you at this moment.
Understood. Thank you.
Thank you, Giulio.
The next question is from Sanjay Bhagwani of Citi. Please go ahead.
Hi. Thank you very much for taking my question as well. I have got a couple of questions. Maybe to begin with, I understand that, for 2023, you do not have much visibility on the market, but if you could maybe describe, let's say, how the resilience of the business has changed versus 2007-2008 crisis. Could the top line and bottom line be more resilient this time around? That is my first question, and I can just follow up to the next one after that, if that is okay.
Yeah, there is a very bad quality of sound on your side, Sanjay. I will try to answer first with the question I have understood. That's true that the visibility and the volatility in the market has increased sharply over the past two-three years because of course, the consequence of the different crisis, but also because our overall supply chain has been much less agile than it was before 2020.
What we are doing to be more resilient is to have our teams empowered to manage this crisis, make sure that the decision is made at the right level by the teams in order to trust their good judgment and their ability to cope with this crisis. If I take, for example, the way our team in the supply chain, purchasing and research and manufacturing, have been able to resource our carbon black following the Russian attack on Ukraine, it has been done, at least on the contractual basis, in very short time, in a few weeks. Then, of course, the execution takes some months to ship the product.
It's primarily, let's say, more a human being relying on good sense and competencies.
Thank you. Can you hear me now any better?
It's still a bit difficult, but try to ask your second question, Sanjay.
I'm sorry. Yeah. I think my question is, compared to the 2007/2008 crisis, how do you see the businesses now? Is it more resilient? I understand that you mentioned that now in terms of like managing the supply chain bottlenecks, you have got much more efficient. Is there anything else we should keep in mind as well? For example, the breakeven for now is lower than what used to be back in 2007/2008, or let's say the mix is better and more resilient. Any such structural changes in the business versus the 2007 and 2008 crisis we should be aware of?
Yeah, of course. You have seen in the slide I presented with the historical performance related to free cash flow and segment operating income. You see clearly that look in 2020 with similar, let's say, the same drop in volume in percentage volume than in 2009. We had basically an operating income which was more than twice the level of 2009. It means that we have lowered our breakeven point. We have been also probably very reactive in adjusting our activities and improving, let's say, the overall flexibility. There was a lot of progress done in the past 10 years in the way we manage our operations, in the way our factories are managing their operations.
Our factories are more flexible than they were 10 years ago, so they can switch easily to, from one to another. Of course, the situation might be different from one site to another, but overall, the group has improved a lot regarding, let's say, operational excellence and flexibility.
Thank you. That is very, very helpful actually. Coming back on the trading down of tier two and tier three tires. I think you mentioned that right now what you see is it's more of a trade down between tier two and tier three, and tier one is still robust. Could you maybe provide some color how this was in the previous crisis, if you have it on the top of your head, like in previous crisis also, was it the same case?
Yes. What we have observed over time on a long period is that, if I take the North American market, which is probably the most mature one, the share of tier one in the market has been overall pretty stable in the past 12-15 years. Of course, there was a lot of movement under that between Tier 3 and Tier 2 . Tier 3 being mostly brands that are imported and tier two being sometimes a secondary brand of tier one players or brands that are produced in the region. That's basically what I can share with you about the evolution between tier one and the other price tier in this story.
Thank you. That is very, very helpful. Actually, my last question is just to come back on the free cash flow guidance. If I understood this correctly, this underestimation for these non-raw material related inflation was only at the working capital level and not at the overall total cost level, right? That is why you are just adjusting the working capital. Sorry, the free cash flow guidance. Is that right?
Yes.
-understanding?
Yeah, it's the right understanding, Sanjay.
The last question is from Pierre-Yves Quéméner of Stifel. Please go ahead.
Yes. Good evening. I hope the quality of sound is good. Good evening, Yves. Good evening, team.
It's okay. Thank you, Pierre.
I've got two clarifications on free cash flow and one general question on 2023. The new guidance of structural free cash flow of EUR 0.7 billion for the full year, does that imply that the reported free cash flow should be negative at the end of full year 2022? That would be my first question. Under the previous guidance, EUR 1.2 billion structural implied that reported would be in the region of EUR 0.7-EUR 0.8 billion after restatement or including the full effect of working capital. Just to be clear about what could the reported free cash flow look like.
The reported, as I mentioned, the effect of raw material that we adjust in the structural free cash flow should be around EUR 400 million-EUR 450 million. If you take out EUR 400 million-EUR 700 million, the net reported free cash flow should be around EUR 300 million.
Okay. Still positive. You don't adjust for EUR 1 billion, but only for.
Yes.
Okay.
Yes.
That's very helpful. That being said, into next year, there is no kind of reversal of that one-off? Do we have to factor in, at the working cap level, EUR half a billion of positive tailwind or a better starting point, for calculating our free cash flow in 2023?
There will be a reverse one-off if we are seeing raw material, energy and
Okay.
Let's say, hyperinflation factors decreasing.
Okay. Okay. Only in that case. Very clear.
Yes.
Last, a general question. Just trying it, I'm not sure you're gonna address that, but if we enter into 2023 with a possible recession, with a still increasing, at least at the beginning of, other inflators, not only energy, but also labor, I think you are currently in negotiation with the unions in some regions of the world, is it still reasonable to assume that Michelin segment operating income could improve? Next year is the most likely scenario, or should we more expect, at best a flat, absolute number or a slight decline? Thanks very much.
Okay, thank you, Pierre-Yves Quéméner. In fact, your last question give me an opportunity for the conclusion. To answer this question, I will, I suggest that you attend to the meeting on February 13, 2023, when we will disclose our full year results and our 2023 guidance. It's still far too early to comment on 2023. By the way, if we achieve 2022 results as our guidance on segment operating income is confirmed, we'll be already in 2022 above the amount that we have fixed for our segment operating income for 2023 at our capital market day last year.
For the time being, give us the credit to try to achieve what we are committed to achieve for 2022, and we'll see what 2023 will be in on February 13 next year.
Okay, that's very clear.
Very much.
That's very positive.
Yes.
Thanks.
Thank you very much. Thank you. So ladies and gentlemen, thank you for your attention and your question. Of course, we'll be very pleased to have you in February next year to comment on our full year results. I will be of course with Florent and Ingo during this full year results. Thank you very much. Bye-bye.
Ladies and gentlemen, this concludes today's Michelin conference call. Thank you for your participation. You may now disconnect.