Ladies and gentlemen, welcome to the Michelin Conference Call. The conference call will be conducted by Mr. Florent Menegaux, CEO, and Mr. Yves Chapot, General Manager and Group CFO. You are able to download the presentation from the Michelin corporate website. I now hand over to Mr. Florent Menegaux. Gentlemen, please go ahead.
Good afternoon to everyone. Thank you for joining us for this semester's result. Let me start by saying that I am very proud to confirm the resilience of Michelin, weathering one of the strongest and most intense crises in its history, and I want to take this opportunity to thank and to express all my gratitude to all our teams around the world that have done an outstanding job during this very difficult period, so let me tell you that during the crisis, we had one priority, which was to protect our people, and then we expressed also to everyone that we had to make sure that we will ensure the business continuity and conserve our cash to make sure that we could weather the storm in good condition.
Despite collapsing markets and a 20.6% contraction in sales, what you can see is that Michelin ensured a Segment Operating Income of €310 million positive, which I want to stress, which is better than what we anticipated when we entered into the crisis. We have had a robust financial position that is recognized by the rating agencies, and we've made strategic choices that are validated during the first half. Our global presence and diversified business base has contributed heavily in making sure that we would have a portfolio of activities that can help any other activity to weather difficulties in every market. And I want to stress the resilience of our specialty business with a very strong operating income at 15%, which I think is very good in such a period.
The key to recovery will for sure be conditioned by the fact that businesses that will survive in the future will have to have a positive contribution to the ecological transition, and the CO2 reduction pathways and objectives have been approved. The Michelin objective, of course, has been approved by the Science Based Targets initiative, and we have, in terms of governance, created a CSR governance within the Supervisory Board of Michelin. During the crisis, we took specific measures to make sure that our people could operate safely, so we were one of the first ones to close our operations where we were not in capacity to maintain the safety of our people.
But we were one of the first to restart production because we had the experience of what happened in China, and we have been very quick at implementing many different initiatives to make sure that our people will stay safe. During this period, we've also demonstrated strong support to communities. We gave masks, tires, different types of initiatives. But we also supported our weakest suppliers and our weakest customers that had difficulties. And I'm very proud of that. And you probably noticed as well that we have produced extensively a lot of healthcare products. Lastly, Michelin sees its CO2 emissions reduction targets validated by SBTi as introduced previously. And I want to stress two things. The first one is we have a path towards net zero emission in 2050.
And you see on your screen what would be the different steps that are going to ensure that we reach the 2050 targets on the Scope 1 and 2. And the second thing is, as I told you, we've introduced a new CSR Committee to make sure that we fulfill all our commitments in that matter. And I want to leave now the floor to Yves, who is going to detail you our results for the first half.
Good evening, ladies and gentlemen. Let me walk you through our first half results and our full year guidance, starting, of course, with the results and the market environment. We have decided to present you the segments month by month, at least for the two first segments of the global market and the market of three regions: Europe, North America, and China. You see that, of course, the market has been heavily impacted by the coronavirus crisis, first in China during the months of February and March, and then later on in Europe and North America, starting end of March and then expanding in April and May. Overall, the global passenger car and light truck tire market, both original equipment and replacement, has been impacted heavily, -24%. We can spread it between -34% for original equipment and -21% for replacement markets worldwide.
On the truck and bus side, the market has been overhauled by 18%. But you will immediately recognize that the Chinese market has recovered pretty well during the second quarter. And as it is the biggest market in this segment, it has also an overall positive impact on the market mix. Zooming between original equipment and replacement, OE has been down worldwide by -15% when replacement was negative by -19%. The specialty tires market has shown very contrasted trends, of course, according to the different business segments: agriculture, replacement, mining, and in some respects, two wheels. And the conveyor belt market has been pretty resilient, showing a slight decrease of the global markets, but still resilient. On the whole half, some markets such as, of course, the aircraft business, the agriculture, regional equipment, and the construction have been heavily impacted by the crisis.
In that very tough environment, we are relying on a portfolio of activity which is pretty well diversified, both from a geographical standpoint and from the business drivers that are behind our different activities, reminding that consumption-driven activities represent around 41% of our activity. Manufacturing, so let's say GDP-based businesses, 27%, commodities, 21%, and the pure original equipment, automotive, 11%. Ourselves, as Florent has already mentioned, have been declining by 20.6% during the semester, with a slight currency effect, minus 0.5%, but mostly, of course, the volume effect, which is minus 22.4%, a little bit compensated by the price mix effect, plus 1.9%, and we still have a little bit of scope of consolidation effect for EUR 51 million, plus 0.4%. Quarter- by- quarter, you see very clearly the heavy impact of the COVID-19 crisis on the Q2, where the volume was minus 32.5%.
As our global presence is stronger in Europe and North America, it was during this period that these regions have been under lockdown measures from the different governments. And you see a pretty stable price mix effect at 1.7% for Q2, and the currency effect that is coming negative, mostly due to emerging market currencies. So in this context, we have been able to generate still a positive segment operating income at EUR 310 million. And the waterfall from 2019 first half segment operating income and 2020 figures are mostly impacted by the volume effect, which is EUR 1.5 billion, of which you have, of course, the direct impact of the margin of the volume decline, but also our inability to absorb the fixed cost from our manufacturing organization. These amounts are partially offset by EUR 124 million in federal grants from the different governments.
We have a pretty resilient price mix raw material effect at EUR 261 million, of which EUR 217 million is price mix. The SG&A cost reduction is representing EUR 192 million, and we have isolated in our P&L the specific COVID-19 cost measures, which are mostly the supply and the manufacture of all the protection we have implemented during the semester, mostly masks and hydroalcoholic gel for EUR 77 million. Currency effect and other effects are pretty marginal at this stage. If now we look at the way this segment operating income has been generated by a business segment, so you will see obviously that both SR1 and SR2 have seen a similar sales decline around 22-23%. Their operating margin has been slightly negative, but let's say very close to zero.
Most of the contribution of the group is coming from the third segment, which is obviously generating a 40.7% operating margin, with a strong contribution, of course, from the mining activities, the conveyor belt activities, and in some aspect also our specialty polymers businesses and our two-wheel business and the agriculture replacement segment. Now, if I just want to take a little bit of step back for each of the segments, some key elements of performance and, let's say, more long-term drivers of the performance of each of these segments.
In SR1, what we want to highlight is the fact that we are strengthening our position in the electric vehicle segment because these products are much more demanding and are, let's say, raising the bar in terms of product performance by the question of the range, the reduction of the cockpit noise, and, of course, the torque generated by the electric engine and the heaviness of the batteries. We estimate that including hybrid and full electric vehicles, this market will represent around 12% of the market this year and should represent 30% of the global market in 2025, and Michelin is a leader in EV tires, and we are present in all the key segments of this market. Regarding SR2, we are deploying our strategy centered on value segments.
And our purpose is to provide the same services in terms of ton kilometers transported with less raw material, or in other ways, to maximize the usage of material. And for that purpose, we are launching the Michelin Agilis 3, which is generating the same performance with one kilogram less of material. And on the, let's say, traditional truck and buses activities, I would like to highlight the importance of retreading, which is a way both to use and reduce the materials we are putting on the road. By retreading tire, you are saving 50 kilograms of material. And regarding the specialty businesses, I just would like to highlight the segment that has been the most resilient during the semester. Overall, this segment has absorbed a 14% decline in sales, and we were able to maintain a pretty good level of operating margin at 15%.
Of course, as Florent has mentioned in his introduction, one of our priorities during the crisis was to protect the liquidity of the group and our financial position. We have been able to. Our free cash flow for the semester is slightly negative at EUR 351 million. And we have been able to partially offset the volume impact, which is behind the change in EBITDA, by the effort done on the trade working capital with a strong monitoring of our inventory, thanks to a weekly sales and operation process. And, of course, the measures that we have taken in other areas, such as the reduction, of course, of our SG&A, but the change in our capital expenditure, the program to decrease our CapEx by around 30% for the full year, which are starting already to generate EUR 120 million of savings during the first half.
The fact that we have put on hold our merger and acquisition program versus what we have done in 2019. At the end of June 2020, we had a pretty solid cash position. We are holding EUR 2.8 billion in cash and cash equivalent, of which EUR 1.4 billion is coming from our issuance of commercial paper out of a maximum program of EUR 3.1 billion. We have not been obliged to withdraw on our confirmed credit line. I remind you that we don't have any significant bond falling due before the first half of 2022. We have updated at the end of the semester the stress test that we have initiated at the end of March. We are pretty confident that the group has the financial means to pass the stress test conducted for the next 18 months.
In that context, our net debt has increased by EUR 326 million, mostly due to the free cash flow generation. And we are ending the semester with a EUR 5.5 billion net debt, which represents a gearing ratio of 45%. I just want to remind you that at the same period last year, this gearing ratio was at 54%. And during the semester, particularly during the month of May, all the rating agencies have confirmed our rating, both for short and long-term debt. So now, let me introduce you to our 2020 guidance. Starting with the markets, we have entered with this COVID-19 crisis in a period where markets are characterized by high volatility and very low visibility. So in this, let's say, unpredictable environment, our horizon of visibility, our firm visibility horizon, is now reduced to the couple of months ahead of us.
That's why we are issuing guidance based on the range of growth for the different markets. For the passenger car and light truck business, both OE and RT, we are betting on the range between minus 15% to minus 20% for the full year, after minus 24% for the first half. So it gives you approximately a minus 10% for the second half of 2020. We are betting on a pretty similar evolution of the market during the second semester for truck, with a range between minus 13% to minus 17%. OE continues to decline in global demand in a very uncertain environment. And we are seeing replacement markets still depressed in every market, maybe except China. The specialty markets are also showing a very contrasted picture between minus 13% to minus 17%. Mining is impacted by a lower demand in the global economy.
Some mines in some countries are closed, or the activity is impacted by the resurgence of the pandemic. The off-road side, the agriculture replacement markets are still very resilient, but are sharply down in OE and in infrastructure tires. Two-wheel is improving. And, of course, the aircraft demand, particularly for commercial and regional airlines, is collapsing. Our 2020 scenario is basically we are aiming to follow globally the market. So in terms of volume, our volume should be in line with the market, excluding, of course, the geo-mix effect, which is particularly important for SR2. We expect to have a cost impact of raw material prices and customs duties positive. And the impact on the second half should be higher than the impact we have known in the first half. Currency effect should be negative if we are based then on the June 2020 rates.
And we are expecting an overall net price mix raw material effect positive, probably in the same range than the first half effect, but with different components, probably a higher raw material tailwind. And a mix effect that should be probably less strong in the second half, mostly due to the market mix, particularly between replacement and original equipment. So in that context, we are expecting to generate for the full year a segment operating income at constant exchange rate above EUR 1.2 billion and structural free cash flow above EUR 500 million. Of course, this guidance is based on the hypothesis that there will be no major new systemic effect from the COVID-19. So having guided you through our first half results and our full year guidance, we are now opening the Q&A session, and Florent will take the question and we'll share the answers.
Thank you, Yves.
So let's start with the first question.
Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. The first question comes from Kai Mueller from Bank of America. Sir, please go ahead.
Hi. Thank you very much for taking my question. As the first one is, when we think about your volume forecast by end markets that you nicely put out, you obviously said the biggest difference is the truck market, which is obviously a geographical mix. When we put that all together, what do you think is a reasonable assumption on group volumes for you for this year?
You want to take this one?
I can take it. So you have seen the different range we have used by business segments.
We propose to you this range because, honestly, beyond the end of the month of August or beyond the end of the month of September, it's extremely difficult to put a figure on the market, particularly for the Q4. At this stage, if you take, let's say, the middle of the range and you include a ponderation, a mixed geographical mix ponderation for SR2, you should not fall too far from our assumptions.
Remember that we operate right now in an extremely highly volatile environment.
Yeah.
The follow-up of this question is, you know obviously your drop-through in the first half was 58% on volumes. When we think about the second half, do we expect a similar level, or should we expect an improvement from here?
In the second half, we should have an improvement in the drop-through because our plants right now are operating at the max of the capacity that they can activate. We have to remember, for example, in the Americas that the COVID-19 is still very active. And therefore, here and there in our plants, sometimes we have to stop production in a workshop because we have a case of COVID. And therefore, we have to take all the people that were surrounding that person. So even though right now we could operate at 100% of our capacity, we do not because we have some here and there, especially in the Americas, the COVID-19 is still present. However, the drop-through will improve slightly.
Okay. Okay. And then on top of that, maybe just one quick comment around the latest trading.
We've heard from one of your peers that basically as soon as lockdowns have been lifted a month later, sales have really picked up quite well, almost at a prior level. Is that the same that you are seeing as well on the replacement side?
It's a very different picture depending on the geographies. Of course, what we have observed is that in the region where the government enforced, let's say, the stricter lockdown measures, after the lockdown, there was a peak in sales. So it was the case, for example, in Southern Europe. It was the case in China. China has been generating growth during the Q2. The big question, particularly for Europe, is the sustainability of this trend, let's say, beyond the month of August. And you have also to remember that June had a calendar effect with 22 open days versus last year.
Okay. That's very helpful.
Thank you very much.
Okay.
The next question comes from Gabriel Adler from Citigroup. Sir, please go ahead.
Thank you. My first question is also on your volume outlook, particularly given the positive trends that we saw in June and the trend that you've shown on your slide six of sequential improvement since the worst volumes in April. The volume outlook for SR1 of -15% to -20% does seem quite cautious. And then on SR3, the volume outlook seems to suggest no improvement in the second half compared to the first. So my question is just around whether you can provide some more color on the assumptions that you're making for volumes and whether you think that your outlook is cautious.
Secondly, my second question is on the competitive plan and whether we should expect the EUR 200 million of gross SG&A savings that were achieved in the first half to repeat in the second half and where that leaves you with regards to your competitiveness plan going forward.
Okay. For the first one on the volume, yes, we have to be cautious because, as we have explained, we have a huge volatility and a huge uncertainty going forward. We, of course, you say it's similar to the first semester. I would tell you that what happened in Q2 was extremely strong. Normally, Q3 and Q4 will be less impacting than what happened in Q2. Yeah. Do not project the Chinese market evolution, particularly on SR1, on the other region. Don't forget that China is a market in automotive that is still under-equipped.
So in 2020, we are benefiting from the original equipment market growth of the past year because the car park has increased in China. And China was one of the countries with, let's say, the most strict enforcement lockdown measures. And for the time being, they have not seen, let's say, a strong resurgence in the pandemic. As far as the cost reduction is concerned, yes, we have had exceptional circumstances. So therefore, we took some very important measures. In the third quarter and the fourth quarter, we have to also make sure that our activities, we are able to respond to the demand. So therefore, the savings will be less than what they have been in the first semester.
Okay. Thank you very much. If I could just follow up with one more on the U.S. tariffs that are being considered on passenger cars from Asia.
Could you give us some color on how meaningful an impact this could be on the pricing environment in the U.S. if it was passed?
The evolution of the trading environment around the world is evolving a lot. And it's a little bit difficult to assess what it will be in the future. So at this stage, for example, if I take Europe, what we have seen so far in Europe is that the measures that the European Commission is taking are more towards making sure that they ensure that there is a sort of equal rules of the game around countries, especially in terms of CO2 content, which is different from what has happened in the U.S. At this stage, we see no effect yet on the behavior of imports in North America.
We have to remember ourselves that in the previous measures, the exporters to the U.S. had taken the taxes out of their margins. So we didn't see a major effect at this stage.
Okay. Thank you very much.
The next question comes from Tom Narayan from RBC. Sir, please go ahead.
Hi. Yes. Thank you, Tom Narayan, RBC. Thanks for taking the question. Question on the 2020 free cash flow guidance. If I do my math right, I think it implies something like EUR 850 million free cash flow in H2. The operating income guidance is around a billion in H2. So if I take H1, EUR 745 million CapEx, it implies working capital could be a EUR 500 million to EUR 600 million source of cash in H2. So first question is, is that right? And if so, maybe what's driving that? Then I think you'd said that decreasing CapEx by 30% in 2020.
How long could that be at depressed levels? Was that just a 2020 item? Presumably, you have a lot of initiatives that may require CapEx to ramp back up again. Thank you.
Okay. I will start with the second answer, and then Yves will talk to you about the cash. So in terms of investment, yes, we have reduced our investment, but to a degree that is manageable, especially that is protecting our future activities. So we've only postponed some investments that would have no effect on our trading activities in the future. You can expect that by 2021, we would go back to a level that is maxed at around EUR 1.8 billion. And Yves on the cash? Yeah. First, we have a working capital profile that is extremely imbalanced between H1 and H2.
If you look at our previous years, in fact, we have generally a negative profile till the month of August, and then we have a strong cash generation between September and November, so that's explaining the calculation that you did, and it's perfectly logical and coherent with what we have seen in the previous years. Again, 2020 is not completely, let's say, not a normal year, so we can have here or there some variance that will not be totally in line with what we have seen in the previous years, of course, but we are expecting positive free cash flow by at least EUR 500 million and with a strong contribution from working capital, particularly inventories, and maybe to give you some ideas, in the second semester, if the sales go back to normal, better level in Q3, of course, the cash will arrive in Q4.
But if the recovery goes higher in Q4, then the cash will come back in 2021. So you have to be in the cash assessment. That's why we've looked at it and said there are many assumptions behind. It depends on the speed of recovery and month by month, by the way.
Understood. Thank you. I'll turn it over.
The next question comes from Thomas Besson from Kepler Cheuvreux. Sir, please go ahead.
Thank you very much. It's Thomas Besson with Kepler Cheuvreux. I have a few questions as well, please. Can I start with a question on the specialty business? Is it possible to get a comment on the acquired businesses' contribution? Because I think you've done a small write-down and talk at least qualitatively of the weight of the mining tires in the H1 operating results from the specialty business as the first question.
And the second question, could you comment on whether you have overproduced or underproduced in H1? I think you started 2020 on the right foot. We've seen big volatility, big uncertainty, as you said. Is it fair to assume that you've continued to be very cautious on the level of production given the lack of visibility you have on H2? And small last question, if I may. Could you please give us an update on your sensitivity to the euro/dollar given the recent move and confirm that this recent move is one of the reasons for your relative caution on the guidance for adjusted EBIT for 2020? Thank you.
Thank you for these questions. I will take this question about overproduction, underproduction. You've certainly noticed that our inventory level at the end of June has been very low.
We have been very, very clear with all our teams that in this type of crisis, cash was king. And therefore, we have tightly managed our production level to make sure that we would not take any risk. And by the way, our inventory level has been very well managed. So if everything had to be said, I think we've tightly managed inventory and production at the same time. So we are not either underproduced or overproduced. We just produce what we needed to produce. In terms of acquisitions and the weight of mining, Yves? Yeah. So on acquisition, we just, and you will see that in our financial report, we just have impaired one small acquisition that we did in the past, Tablet Hotels, which has been, of course, heavily impacted by the crisis because of, particularly with their strong, let's say, position in Europe and North America.
The mining business weight, we have always said it represents roughly around 40% of the SR3. So it does not change dramatically. Regarding the update of the euro/dollar position, we have a sales ROS drop-through, which is around 40%-50% with the USD. And that's, let's say, another reason for the fact that we were cautious on our guidance. And maybe just to complete with Florent's comment about the inventories, we have seen a drop of volume of 22.4%. Our drop of production was close to 30%. So we have managed very tightly our inventory during the semester.
Okay. Thank you. Maybe if I may just, my question was probably not sufficiently clear. I was referring, Yves, to the large acquired business in the specialty and the impact, so Fenner. And so specialty enlarged, how did that effectively impact the resilience?
So do we have more elements to effectively support a more resilient business, or is it still largely hanging on the mining business? That was more my question.
For example, if I take Fenner, the conveyor belt division, the medical division of Fenner, and some of what we call the advanced engineering product of Fenner have been pretty resilient during the crisis. So it was the first major acquisition in this segment. Regarding Camso, Camso is, of course, centered on OHT. So we have the overall Camso activities that probably have been a bit more resilient than the Michelin One, the historical Michelin One. But the overall, let's say, OHT business has seen original equipment in agro sharply down.
But at the same time, good behavior of the replacement market with, in some regions, we have been able to grow in the second quarter in the replacement market for agro tires. And of course, in terms of material handling, it was down, and construction has been down. But as soon as these things will recover, we are confident that they will be strong. So we are actually very pleased with these acquisitions. And the integration is going very nicely. And the synergies we wanted to extract are there.
Perfect. Thank you very much.
The next question comes from Martino De Ambroggi from EQUITA. Sir, please go ahead.
Thank you. Good evening, everybody. The first question is on the prices. In such a volume environment, what is the pricing evolution in each and every segment? If you could elaborate a little bit on this.
Be very clear.
We have had several times that question. It's very clear. This is not a period where you play on prices. This is a period where you maintain what you have. So we've been very strict on this. What you may see is we have some index contracts. And when the raw materials evolve, we have to adjust mechanically those index contracts. But on the rest of the activities, we don't play on price. We don't play on price. And you are seeing that in the bridge, in our sales bridge, where among 1.9% positive price mix effect, the mix is represented 1.6%. So you have still a positive price effect despite the fact that in some of our businesses, such for example, the original equipment or some long-term mining contract, we have raw material adjustment clauses that we have applied, of course, during the semester.
It means that we have been able to more than compensate on the other segments of the market, the impact of this raw material prices adjustment, but again, covering around 30% of our global activities.
Okay. Okay. Very clear. For the car division, could you elaborate on the split between above 18 inches and below 18 inches in terms of trend and in terms of prices? And if I remember correctly, in the previous call, you mentioned you gained 200 basis points of market share in this field. Obviously, this is a maybe not meaningful quarter, but is it something you can confirm going forward?
Plus, it is continuing. And it is due to the original equipment content of the vehicles that have been produced in the past. We continue to see that trend with the vehicle manufacturers, and replacement is just following.
So we have no indication of a change of this. Maybe so in 2020, first half, 18-inch and above tires represent 46% of our volume for the Michelin brand, overall original equipment plus replacement. And what is important to understand from a price standpoint is that this is a segment where we have the highest loyalty rate between original equipment and replacement.
Okay. Very last on the guidance for the full year. You are guiding EUR 1.2 billion. How much of COVID costs are factored in? Should we add something in the second half?
In total, we factored EUR 90 million, of which EUR 77 million have been shown in the first semester.
Okay. Thank you.
The next question comes from Henning Cosman from HSBC. Sir, please go ahead.
Hi. Thanks, Florent. Good evening. I'm calling from HSBC. I understand you want to be careful on your group volume guidance.
So I don't want to focus so much on the actual guidance, but rather what you say about the sort of implied effect on the full-year guidance. Because if I sort of apply 16%-17% or so volume decline at around EUR 130 million that I suppose we're talking about with a slightly better drop-through in the second half, if I do my calculations correctly here, that doesn't really leave anything at all in the EBIT bridge for the second half for all the other items excluding volume, which appears to be in some sort of contrast to what you actually say on the slide when you talk about the price mix raw material being positive. So I just wanted to see if I'm misunderstanding something there. That's my first question, please.
Yeah. Yeah. Thank you for your question.
I think you've seen that we've seen strictly in excess of EUR 1.2 billion. I think that leaves you a lot of numbers after that. Yeah. Maybe any interest to mention regarding other drivers? For SG&A, we have been able to sharply cut our costs during the first half. As an example, all the motorsport activity was frozen from the end of February till the end of June, and they have just resumed a few weeks ago. So we are not going to see that again in the second half. The second is that we have been also prudent in our forecast with the fact that for the time being, we have not seen a lot of bankruptcies or companies that are going in trouble with the crisis.
And we have factored a certain amount of potential bad debt on the second half, which will partially offset some of the saving we achieved on SG&A during the first half. Again, it's extremely difficult at this stage. As we said, we are in a very volatile and unpredictable environment. Nobody knows what will be the consequences of the or how the government will, let's say, gradually withdraw their support measures. And we know that some companies have heavily relied on these measures. So it's our duty to be prudent and to factor some part of that risk in our forecast.
Thank you. But just to clarify, you're not at all envisaging something where all the non-volume components in the EBIT bridge will be close to break even, right? You're budgeting something very clearly positive.
Yeah.
We said we will have a positive price mix raw material effect, but we have also some we clearly think that there is some risk that we have to take into account. I mentioned the one on the receivables that there might be others depending on how the situation will evolve.
Sure. That's understood. Thank you. And as a second question, maybe just on the free cash flow, can you maybe just speak a little bit about the free cash flow opportunity in the slightly more outer years? You've obviously previously guided for 1.7 billion free cash flow towards 2 billion free cash flow. Do you see any reasons why that wouldn't be possible once we recover towards volumes more pre-crisis levels, maybe in 2022, 2023?
Yeah, of course.
And you will see in the detail of our press release that for the time being, we are expecting the markets to recover the pre-COVID-19 level, so basically the 2019 level, in the second half of 2022, which means that we should see a 2023 full year above 2019. So of course, if we come back in this range of activity, there is no reason that the group would not be able to generate even greater free cash flow. Sure. And on top of that, as Yves has expressed publicly, we will do additional efforts in our inventories, which will improve our free cash flow when the activity goes back to a more normal level.
Thank you. And finally, if I may, just on the synergies and cost savings potential, we haven't been talking about that so much recently because of COVID.
But 2021, of course, was going to be a very good year for you when the synergies of the acquisitions and the Multistrada savings come through very strongly for the first time. And you've guided a lot of the absolute amounts that you're expecting in the EBIT bridge by then. Should we assume any material difference as compared to your indications from the time, or would you say it's still fair to sort of be adding these amounts onto the EBIT bridge in 2021?
The synergies rate will be in. I think extraction of synergies is going well. Now, what you have to factor is that, as Yves mentioned, we assume that we will only reach back 2019 levels only by 2022. So therefore, if you take Multistrada, for example, Multistrada is also impacted by the overall drop in the demand worldwide.
Understood. Thank you.
The next question comes from José Asumendi from JPMorgan. Sir, please go ahead.
Thanks very much, José, JPMorgan. Three items, please. The first one, can you comment a bit around product mix in the second half? Do you expect the EBIT contribution to be stronger than in the first half or similar, maybe? Can you comment on that topic? Second, can you comment on your drop-through on volumes? And if we compare second half versus the first half, any direction you could give us there, any color in terms of that drop-through? And have you taken any measures in the first half to improve structurally the capacity of your plants in Europe specifically? And the third point, just going back to this SG&A as percentage of sales, you have made substantial progress in the first half to reduce the ratio.
Can you give us some direction as to how far or what is your gap now to the best in class in terms of the percentage of SG&A to sales? Thank you.
As far as the product concern, what you have to consider is that there are many different types of mixes in our mix effect. And so you will have some positive product mix effects coming from 18-inch plus, these kind of things, but you will have less favorable effect due to OE coming back. So OE replacement will offset some part of that mix. As far as the drop-through is concerned, as a structural capacity, the drop-through, as we were telling you, is the drop-through will improve slightly versus what the drop-through has been seen in the first semester. However, we're not back to full production where we were entering the crisis.
So therefore, the drop-through will improve slightly, but it's likely. Now, as far as the structural capacity, we have anticipated the closure of the Dundee factory because we were not in capacity to produce. And we have also, we did not resume production at La Roche-sur-Yon. So of course, you will see some impact of that in the months to come.
Thank you. And SG&A as percentage of sales, please. Where do you stand in terms of the gap to the best in class?
I think we are the first to publish for the first half. So we will see afterwards when all our competitors will have published their first half results. In the first half saving, there was, let's say, some measure that we have taken due to the circumstance.
But we have also realized that we were able to perform some activities, for example, without necessarily having people traveling. So there will be some key lessons that we will retain from the first half, and that will help us in our future simplification programs. But it's too early to say where are we or how far are we from the best in class. Okay.
Thank you very much. Helpful.
Thank you. Last question.
The last question comes from Victoria Greer from Morgan Stanley. Madame, please go ahead.
Good evening. Just a couple, please. Firstly, on the specialty division, mining volumes clearly have been probably the best segment in H1 relative to all your other end markets in that business. Do you expect that to be a similar dynamic in H2? Yeah, because obviously, that's been pretty supportive for margins in that business in H1.
Secondly, could you give us an absolute number either for H2 or, yeah, for the full year for raw materials? Because I think we've discussed before that the spot rates have come down quite a lot, but there was a period where you were not really purchasing. So if you could help us on an absolute number for the raw mats tailwind for the second half, that would be great. And then the third small one, which I'm pretty sure I know the answer to already, which is no. But could you give us any commentary around the magnitude of the impact from the site closures in the second half?
So for the site closure in the second half, we will not disclose you details on this. But we did not resume production at La Roche-sur-Yon, and we have closed earlier at Dundee.
You will see that in our drop-through coming forward. Maybe Yves on the.
So regarding mining, yes, we are expecting, let's say, a similar trend during the second half that's very comparable with what we have seen in the first half. Of course, the geographical mix can be different depending on the impact of the COVID-19 on the different geographies. Regarding raw material, we are not going to provide absolute number for this specific item, but what we can tell you is that the overall price mix raw material effect should be similar in H2 versus H1. But of course, with different components, probably more raw material effect and less mix than during the first half.
That's fine. Thank you.
Thank you. So that concludes our Q&A session. So thank you very much for joining us tonight in French time.
And we all hope that the second semester will be better than the first one. Thank you.
Thank you very much. Bye-bye.
Ladies and gentlemen, thank you all for your participation. You may not disconnect.