Pirelli & C. S.p.A. (PIRC) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Pirelli's conference call, in which Pirelli top management will present the company's 2020 preliminary financial results. A live webcast of the event and the presentation slides are available on the Investor Relations section of the web. [Operator Instructions]. Now I would like to introduce Mr. Marco Tronchetti Provera. Please go ahead, sir.

Thank you. Good evening, ladies and gentlemen. We are closing a year, which unfortunately shall remain in history because of the millions of lives lost and the fall of GDP. The severe crisis accelerates structural changes which will change our lifestyle and economy. When faced with this emergency, Pirelli responded at once with an action plan to protect the interest of all our stakeholders. Our high-value market position proved once more our stronger resilience and helped us to contain the impact of health crisis. The results are in line with our November indication, and especially with our top line cash generation and debt targets are not simply in line with our April indication. When at the beginning of this crisis, we were the only tire company to provide an outlook. Our yearly performance improved with significant high-value market share gain in the fourth quarter, ending 18.3% profitability, higher than last year and among the highest of the industry. 2020 was a year of great and deep change also in the way we work, as well as an opportunity to accelerate our programs of innovation, efficiencies, sustainability and growth in our key areas, such as China. At the end of March, we will go through these programs within our new industrial plan. In 2020, we have implemented a number of preventive measures to protect as best as we could, the health of our employees, their families and communities. We quickly and efficiently implemented the remote working policies, which were adopted by our staff on average for 60% of their working time during the year, thereby limiting the danger of contagion. Our production plans remain in operation for approximately 85% of the year, thereby granting business continuity to our partners. And over 3,000 employees were involved in up-skilling programs. In 2020, we strengthened our integration with our clients through a careful management of our product range and production scheduling, to guarantee a high level of service, allowing a good result in terms of sales in quarter 4, in spite of the almost 3 million pieces of finished products stock reduction throughout the year. A stronger level of integration of our Tier 1 clients and partners, ensuring a correct balance of the working capital along the entire chain. And the higher level of integration with the Original Equipment clients, who, together with the Tier 1 clients, represent approximately 60% of our volumes, managed with plant orders and ad hoc supply chains. With strategic suppliers partnering with us on critical materials and specialties, we have designed a protection program to guarantee stock levels in payment terms so as not to cause financial hardships. We activated different supply chains and strengthened local-for-local supplies. We are entering the continuity of our purchases also in the most critical times. We have concurrently reduced by approximately 3% days payable to allow our major partners a more sustainable economic process. And eventually, to impact of the crisis -- the impact of the crisis on cash generation was softened through cost reduction and a careful working capital management. Our financial structure was strengthened through diversification of funding and extending of maturities. The liquidity margin covering our days until the first 6 months of 2024, successful convertible bond placement were EUR 500 million, 0 coupon and 2025 maturity, high demand from both Italian and foreign institutional investors, which witnesses the market's trust of our corporate outlook. And this bond will also allow us to preserve our cash generation given the noninterest-bearing nature of the bonds. Moving to Slide #5. Pirelli integrated sustainability values into its strategy with a growing commitment with all our stakeholders. Consumers are looking for increasingly more sustainable products all along their life cycle and following these lines. In 2020, Pirelli revenues from eco and safety tires keep growing from 55.8% in 2019 to 58% in 2020 of our total sales. And the average rolling resistance of our tires decreases more than 1 percentage point in 2019. As to manufacturing processes and green value chain, renewable electric energy use increased and is now 52% of the total for the group, more than 10% -- 10 point percent versus 2019. And CO2 emission, absolute emissions are down by 23% year-on-year and this was supported by the temporary shutdown of our production plants. Obviously, net from all covered impacts we would have anyhow reached the yearly target, which forecasted approximately a minus 2% reduction of CO2 emissions. Furthermore, Pirelli was confirmed worldwide sustainability leader in automobile and components by the Dow Jones Sustainability World and Europe Indexes, as well as global leader in the fight against climate change and is on the A List drafted by CDP, ex Carbon Disclosure Project. Pirelli is the only auto components company to be awarded the Gold Class distinction in the Sustainability Yearbook 2021, and the only one in the sector included in the United Nation Global Compact LEAD companies. Let's now go through the 2020 car tire demand trends as well as Pirelli's operating performance. The value market confirmed its distinctive nature and resiliency during this crisis. The decline, which was limited to a minus 10% year-on-year versus minus 17% of the Standard. After a slow start in Q1 this year, mainly impacted by trade destocking measures in EU and U.S., Pirelli has accelerated and gained market share in the second semester of the year on High Value, as Mr. Casaluci will explain to you later on. Let's move to Slide 7. Full year 2020 results are in line with the yearly November indication. I believe it is important to highlight that if we compared with the guidance we gave in April, we were the only ones in our industry -- we have reached the top line and cash flow targets through a tactical use of our internal levers. Therefore, overall, we have achieved EUR 4.3 billion sales despite the strong exchange rate volatility, with a better volume contribution in second half and a lesser price/mix contribution due to channel mix as Mr. Casaluci will tell you in a few minutes. EUR 208 million worth of structural cash generation, through a careful management of the working capital, benefiting from a strong stock reduction; EUR 3.3 billion of net debt. Profitability of EUR 501 million is in line with our November guidance and is less EUR 130 million versus our April target as a result of commercial variables, compensating exchange rate volatility, higher impact of raw materials due to the higher exchange rate devaluation of our production sources, mainly Brazil and Russia. Higher other costs, mainly connected to stock reduction and with no impact on cash, which is worth minus EUR 35 million and less royalties and revenues from Prometeon worth minus EUR 22 million following the fees renegotiation only for 2020 due to pandemic FX. Let's talk about the 2021 outlook. The car tire market is expected to have a high single-digit growth, partly rebounding versus the 2020 declining, minus 15%. 2019 levels will only be recovered in 2023. Their value segment is different. The 18 inches and above-market segment is expected to exceed the 2019 levels already in 2021 in both channels. The regional equipment will have double-digit growth, we expect around 17%. The marked rebound in the first half, plus 49%, following the decline of over 30% in the past year. Also, the Replacement channel is expected to have a double-digit growth, plus 13%. In all high-value regions, we have a particular strong trend in APAC, 18% year-on-year versus 12% in Europe and North America. Segmentation is increasingly going towards higher sizes. In [indiscernible] 19 inches and above segment is growing at an even faster yearly pace approximately 2 point percent versus 18 inches and above. The recovery in '21 is an opportunity for Pirelli with the following priorities: strengthening our leadership in High Value, also thanks to a pull-through demand on 19 inches and above car tires, which is going strongly, plus 21% versus plus 12% of 18 inches and above, driven by our top end [indiscernible] portfolio of over 2,100 items in 19 inches and above, 2/3 of the total, which grew also over the past few years; volume growth on 18 inches and above car tires will be more balanced between Original Equipment and Replacement versus 2020; renew our product range for our Replacement channel with 7 push products launches, supporting gains in new volume growth areas and pricing positioning; further strengthen our position in China, also by resorting to our online channel; continue with the implementation of the second wave of our cost competitiveness plan worth EUR 1,800 million -- EUR 180 million net, EUR 180 million net achieved; investing 7% on sales to improving the mix, quality and technologies and digitalization. Moving now to Slide #10, targets for 2021, are revenues between EUR 4.7 billion and EUR 4.8 billion, with double-digit volume growth, thanks to high-value overperformance and Standard sales rebound, given the strong reduction recorded in 2021. A positive price/mix supported by an improvement in the production mix, High Value versus Standard and micro mix. Exchange rates negative, especially because of the euro appreciations versus the U.S. dollar. EBIT margin between greater than 14% and approximately 15%. Price/mix will offset increased cost of materials, mainly natural rubber and butadiene, net efficiencies in the competitiveness plan and in line with second wave benefit. COVID plan tactically launched in 2020 to protect profitability with a net benefit of EUR 30 million will reverse into a negative effect of the same amount in 2021. Solid net cash generation between EUR 300 million and EUR 340 million before dividends, supported by the operating performance and by an efficient management of the working capital. Investment are around 7% on sales. 2021 indication will be further detailed in the Investor Day presentation on March 31. We are accelerating our plans for 2021-2025, also focusing our management team to achieve our new goals. With this in mind, we are pleased to welcome Mr. Fabio Bocchio as our Chief Planning and Controlling Officer. Mr. Bocchio is rejoining the company after gaining further international experience with other multinationals. I want to thank Mrs. Valeria Leone who will get back 100% on her time to IR, competitive and business insight, where years ago, she guided the reintroduction of Pirelli in the [indiscernible] business and now is focusing on micro-mobility solutions. And now I will leave the floor to Mr. Casaluci.

Thank you, Mr. Tronchetti, and good evening, ladies and gentlemen. Let's move to the market dynamics of 2020 and of the last quarter with the relative performance of Pirelli. Car tire demand recorded a 15% decrease in 2020 due to the COVID crisis and the mobility restrictions enforced in all major countries to fight the pandemic. With an improvement in the last quarter of the year, minus 0.8% versus a minus 6% in the third quarter and minus 35% in the second quarter. Original Equipment was the only channel to go back to 2019 levels in the fourth quarter, supported, among other things, by a recovery in the Premium and Prestige car production, where the growth rate was double digit, plus roughly 14%. Over the whole year, demand went down 18% compared with the previous year. On the contrary, the Replacement channel had to face a mild winter season in Europe and the global demand down by 1% compared with the fourth quarter of 2019. On a review of the trend in the full year, the car Replacement market shows a minus 15% drop compared with 2019. Despite the crisis, the car 18 inches and above segment once again showed its resilience, minus 10% year-on-year, 7 points higher than the car 17 inches and below. The outperformance appears even more clearly when we focus on the Replacement channel, minus 7% in 2020, 9 points compared with the car 17 inches and below. In this context, Pirelli managed to gain market share in the 18 inches up, minus 8% compared with a minus 10% of the market. And I'm going to comment these dynamics shortly. In the Standard, although Pirelli grew more than the market in South America, supported by an import reduction in the region, we keep on pruning the less profitable products to decrease our exposure. Moving to Slide #13. Let us focus on the top of the range. In the Original Equipment, the market share increased, minus 6% Pirelli versus minus 13% of the market, was steady throughout the year, supported by our leadership in the Premium segment in China, and by an expansion of our customer base, especially through new projects in Asia Pacific and North America. The very good performance in Original Equipment will allow us to further extend our pull-through Replacement market in perspective. The early part of the year was characterized by a trade policy aimed at protecting our distribution patterns in Europe and North America. To this propose, we decided to reduce trade inventories, although this resulted in a loss of share. In the second part of the year, we rebalanced the trend through a sustained growth in China due to a growth in the online and in the car dealer channel. Gains in Europe share were the expansion of our summer and all-season product portfolio bore its fruit. The good performance of the last year reflects the implementation of 3 major programs: commercial development, cost competitiveness, and technology-based innovation. In the commercial development, the sales network was strengthened with approximately 500 new point of sales compared with the previous year. In addition, a growth was recorded in the weight of the volume sold through our priority channel. The online business kept on developing. In China, where Pirelli is the market leader in terms of value, the year closed with a substantial increment of our sales through the online channel, approximately plus 50% year-on-year. In the U.S., through the launch of an innovative solution integrated with our major Tier 1 partners. Inventory reduction was completed in the first 9 months of last year. While between October and December, given the improved trend of demand, we kept a high service level to our partners as a priority. This was made possible also due to a higher degree of agility development in the last few months to better manage demand volatility in the supply chain. Lastly, we progressed in our growth of the High Value business, where we increased our market share in the very top segment of the market, that is to say the segment 19 inches and above. Moving to Slide #15. Cost reduction plan was in line with May 20 expectations, registering EUR 142 million of efficiencies, net of inflation and slowdown. In particular, competitiveness program delivered approximately EUR 110 million net of inflation or EUR 160 million gross, while COVID actions generated approximately EUR 32 million net of slowdown or EUR 110 million gross. From October to December, the demand recovery are lower than higher saturation of our plants and a new quarterly impact of slowdown, with a correspondent lower level of COVID actions on manufacturing. At the end of the third quarter, overall, net benefits were consistent with our forecast at EUR 58 million, with a major contribution from SG&A, product range optimization and organization. In 2021, we confirmed to deliver almost half of the second wave competitiveness, net benefits, '21, '22 presented in February 2020 plan, partially dented by COVID action reversal linked to activities that were kept on hold during 2020. As for technological innovation, we launched it in the global market, the new CINTURATO P7 flagship product designed for the Premium segment with many innovative fitters already achieving 90 homologations. Strong emphasis on market tires and technologies like run flat, Pirelli noise canceling system, Seal-Inside and the like, that account for approximately 80% of the homologations developed in the year. We keep on focusing on electric vehicles, roughly 30% of our overall homologations in 2020, where, in the last quarter, we achieved homologation for Prestige Premium and other synergic vehicles. Thanks to the improvements in our development simulation tools, we are speeding up innovation, preparing a portfolio of new product launches that goes beyond our planned expectations. In conclusion, at the end of the year, we had different activities going on in preparation for the numerous launches due in 2021. Among this, I would like to mention the recent announcement of the integration of Pirelli Cyber System as Original Equipment in McLaren Artura. It is the first time ever that the system of sensorized tires is designed and integrated with the electronics of the vehicle. Thank you for your attention. I'll now leave the floor to Ms. Leone.

2020 results in detail. Starting from Slide 18. Pirelli closed 2020 with revenues of EUR 4.3 billion exceeding the indication we gave at the beginning of November as the trend or demand in Pirelli sales proved to be better than expected. In terms of driver, we recorded a volume decline by minus 15%, 2 percentage points better than our November guidance. On their value, the drop was more contained, minus 9% and better than expected, minus 11% our November indication, thanks to a stronger performance on car 18 inches up in the fourth quarter, especially in the OE channel, as Mr. Casaluci has already explained. On Standard, we keep on pruning the less profitable products, while improving our performance across regions in the fourth quarter, especially in Latin America. Price/mix closed at plus 1.2%, where the difference with our November guidance is related to the different channel mix in the fourth quarter, with the higher sales of Original Equipment, plus 14.5%, then in replacements, equal to minus 5%. FX was in line with November expectation, minus 5.1%, discounting the weakness of U.S. dollar, minus 2% and of the major emerging market currencies. Moving to Slide 19. I wish to describe price/mix dynamics in the course of 2020, especially mix trend that was affected by the strong volatility of demand. In the first quarter, the price/mix was equal to minus 1.3%, discounting the strong exposure of Pirelli to China, the first country to be impacted by the pandemic and where Pirelli is the leader in the car 18 inches up. We remind you that Pirelli in this market has an average sales price, which is higher than the global one. A trade policy and safeguarding the distribution chain by reducing inventories at the European and North American dealers, which brought the performance in Replacement below than that of the Original Equipment. In the second and third quarter, the price/mix equal to plus 3.3% and plus 2.3%, respectively, benefited from the recovery of demand in China, the first country to get out of the crisis; and from the channel mix improvement, especially in Replacement in Europe, where inventory reduction was completed in April. Finally, in the fourth quarter, as already mentioned, the price/mix was equal to plus 0.6%. Discounts, again, an extraordinary component. The demand of rebounding Original Equipment with the production on Premium Prestige cars, growing by plus 11% year-over-year. The price/mix trend may be affected by volatility also in the various quarter of 2021 due to the comparison basis. Let's have a look to Slide 20. Pirelli closed 2020 with an adjusted EBIT of EUR 501.2 million and profitability of 11.6%, in line with our targets. Efficiencies and COVID cost-cutting program equal to EUR 142 million net benefits, or 3.2% of the cost basis, together with the price/mix contributed to limit the impacts of both the external scenario volumes from at exchange rate and the increase of amortization equal to EUR 30 million and of other costs equal to EUR 170 million. The latter includes costs linked to the transformation process, digitalization for EUR 20 million, provisions for the long-term incentive plan for the management equal to EUR 30 million, a lesser contribution from Prometeon in terms of royalties and service provided equal to EUR 22 million and sales of raw mat, semi furnished. Other costs equal to EUR 62 million, mainly of a non-monitor nature, linked to inventory reduction, equal to EUR 34 million. In the fourth quarter, the profitability trend improved with an adjusted EBIT margin of 18.3%, driven by cost reduction programs, equal in the fourth quarter to EUR 58 million net benefit and among reaching one of the highest EBIT margin in the industry. Moving to Slide 21. We see net income in 2020 was equal to EUR 43 million from EUR 458 million in 2019. Trend in 2020 discounts, the delta EBIT for EUR 416 million, increasing or restructuring, nonrecurring of approximately EUR 108 million. More specifically, restructuring, nonrecurring costs in 2020 were equal to EUR 168 million and composed by restructuring expenses equal to EUR 71 million related to the rationalization of structures; write-off and restructuring cost, the latter related to Brazil and [indiscernible]; nonrecurring items along with the 2019 level, mainly related to U.K. pension fund and retention plan; direct to COVID-19 cost, including personnel protection material, donation for COVID-19, the impact of unusable semi furnished product because of plant closures and nondiscretionary cost for sponsorships for events that were canceled or reducing visibility. Net financial charges increased by EUR 47 million compared to full year 2019. We remind you that 2019 net financial expenses include the positive impact from the Brazilian tax credit was EUR 107 million. Excluding this impact, the net financial trend in 2020 would have been improving from 2019 level by EUR 60 million. 2020 net income adjusted, i.e., excluding all the one-offs and nonrecurring items, amounted to EUR 246 million versus EUR 514 million in 2019. Moving to Slide 22. We see net cash flow in 2020 before dividends and before convertible bond impact was equal to EUR 280 million, better than in the November guidance of EUR 190 million. That includes the payments of sanctions of EUR 34 million regarding the cable cartel imposed by the European Tribunal. This is a result of a structural improvement of working capital management. Inventories reached the end of the year a 19.4% weight on sales versus 20.5% at the end of 2019, thanks to the already mentioned reduction of 3 million pieces of finished product stocks. Trade receivable trend was in line with the usual seasonality of the business, with a strong cash generation in the last quarter of the year. Receivable reached the end of the year a 13.9% weight on sales versus 12.2% at the end of 2019. Trade payables weight on sales decreased year-over-year from 30.3% of 2019 year-end to 29.5% in 2020, reflecting both the lower level of activities and the lower days of payables equal to minus 3% year-over-year. More in details and net cash flow in the fourth quarter was positive by EUR 953 million, supported by operating performance improving quarter-on-quarter, confirming the recovery of the business, the positive seasonality of working capital in the last quarter of the year and the lower investment. At the end of December, the net financial position was negative by EUR 3,258 million, or EUR 3.3 billion, excluding the positive effect of the convertible bond, in line with the full year target, improving from EUR 3.5 billion of 2019. Moving to Slide 23. As of December 2020, our gross debt stands at EUR 6 billion, we are -- while our net financial position lands on EUR 3.3 billion. Thanks to its cautious financial policy, Pirelli faced 2020 pandemic situation maintaining a sound liquidity margin throughout the year. At the end of 2020, a EUR 3 billion liquidity margins covers upcoming financial debt maturities until the first half of 2024, when sole borrower extension option on our main committed bank lines is considered. Year-end liquidity includes, as usual, last quarter's free cash flow generation as well as the issuance of a EUR 500 million convertible bond, which allows the group to optimize its debt profile, extending maturities, preserving the cash generated from the business due to the 0 coupon. As far as our debt maturity profile is concerned, in January and February 2021 -- 2020, we have applied a part of the available cash to early reimburse EUR 82 million of Schuldschein financing original due in July 2010 and -- 2021, sorry, and EUR 756 million out of the EUR 1.6 billion bank's loan due in June 2022. This moves down our debt maturity profile and contributes to optimize our net financial charges. Coming to our cost of debt. In 2020, we have managed to reduce our cost of debt by 0.89 percentage points to 1.94%, mainly thanks to previous years deleverage, which positively impacted the margins of our committed bank lines until November 2020; reduced exposure to high-yield currencies, coupled with the general decrease in trends of interest rate. Now I'll leave the floor back to Mr. Tronchetti, and thank you.

Thank you, Mrs. Leone. This ends our presentation, and we may open the Q&A session.

[Operator Instructions] The first question is from Martino de Ambroggi of Equita.

The first is on the price/mix. First of all, some of your competitors revised upwards prices twice. I suppose you will follow or you are going to do the same. So this is the first part of the question. The second is on the price/mix trend. It's clear, for the full year, you expect the price/mix offsetting raw mat. But if you could elaborate on what is the trend of price/mix in absolute value for 2021?

So to answer the first question, you are right. There are movement in the market on the direction of the price increase. This is true for basically all the markets around the world for the time being, has been already announced by the major Tier 1 players, including Pirelli, and we are the second announcement of price list increase, both in Europe and in United States. So the outlook for the price is positive as far as the beginning of 2021 is concerned. Relation on the trend of the price/mix, we will give you more detail during the presentation of the industrial plan in the 31st of March in terms of value. But we can confirm that the price/mix will compensate all the negative impact of the raw material. And we expect, compared to 2020, 2 different improvements: One is price, as already mentioned; and the second is a more rebalanced channel mix compared to what we saw in 2020.Thank you.

The second question is on the drop-through for volumes. Okay, 2020 is a strange year. But in Q4, the drop-through was quite low probably because, well, this is the question. So I don't want to suggest the answer, but this is the question for 2021. And the last, if I do my calculation in a right way, you are stating high-value, had 18% return on sales. High drive Standard was negative by 4%, roughly. So is it for sure, improved in 2021, the Standard stand-alone. But is there any pricing environment which is more challenging than in the high-value, so it can be compromised, the recovery for the Standard stand-alone?

Mr. Casaluci.

Thank you. First question, the drop-through of the first quarter has been negatively, negatively affected by the channel mix. As Ms. Leone explained before, we had a higher weight compared of on the average of our sales of the original equipment. While we do expect to go back to the normal level of drop-through of volume in the coming future, so from roughly 40%, 45%. If we talk about Standard, yes, we do expect recovering volume in Standard following the trend of the market. We never target to gain market share in Standard, but to continue our selective approach, protecting profitability. We did a lot of job in the last 1.5 years to improve the profitability of Standard because, thanks to the right size of our capacity, the phase out of the second brands and the low end of our product range, and also the price discipline. So we do expect to improve significantly the profitability of the Standard and keeping on our strategy of pruning the less profitable segment. Thank you.

So also in this segment, pricing is not under pressure, so going forward?

In the Standard segment, there is always higher pressure on price. That's the reason why we are progressively reducing our exposure to the segment. But considering our exit strategy, we don't follow the price pressure dynamic. And so being selective, we keep on maintaining our price trend, which was from neutral to positive also in 2020. And we focus on the more profitable. So the 17 with technologies or season, winter segment, market tires in the Standard and so on.

Sorry, I just add 1 point on Standard. We have better sources also for the Standard. So we are upgrading our mix in the Standard. And we concentrated in Brazil in 1 factory, the 2 factories where we produce Standard. And we moved our production of Standard from Italy to Russia. So that makes us confident that Standard will continue to improve the average profitability.

The next question is from Gabriel Adler of Citi.

It's Gabriel Adler at Citi. I have 3 questions. My first is on the net efficiencies in 2021. Could you please clarify your comments around that efficiencies, specifically the impact of one-offs this year that are going to reverse in the bridge? If we think about the EUR 90 million net efficiency target for 2021, how much of this do you expect to be offset by one-off reversals and other costs this year?

Mrs. Leone.

Okay. As for us, the efficiencies is concerned in 2021, you have to split between the COVID plan and the competitiveness. For once, with regards to the competitiveness, so we confirmed the whole plan for '21, '22. So as Mr. Casaluci said before, we should have more or less EUR 85 million of positive effect. For what regards the COVID, I remind you that in 2020, we had a net effect -- positive net effect of EUR 30 million. In 2021, this impact will revert back. So because we will have 65% of 2020 efficiency that will revert back, so we will add EUR 73 million on EUR 110 million. But on the other hand, we will have the opposite effect due to volume rebound equal to more or less EUR 45 million, consider the production recovery, still below the old plan. And follow that are not contributing any longer. So net-net, we will have the same amount, the positive effect of 2020, will revert back in 2021. So net-net, the effect will be 0.

Okay. My second question was just coming back to price/mix. I know that you commented there that we will have better pricing environment, and we should also have better channel mix. So if we look at Slide 19 in the presentation, in Q3 of this -- in Q2 this year, we have favorable channel mix, favorable regional mix and global product mix. On top of that, we should have good pricing. Is it therefore fair to assume that in 2021, you could see price/mix ahead of what we did in 2Q of this year?

I'm sorry. Yes. Thank you.

And then the final question is on -- just recent trends. Maybe you could comment on how trends have developed in the first quarter, specifically, if it already continued to grow volumes ahead of the market? And have you already seen an improvement in that price/mix we just talked about?

Mr. Casaluci.

Yes. So first quarter of '21 is -- we have first information. We don't have the clear picture of the entire quarter. But we see, as expected, a rebound of the demand both in the regional equipment and in the replacement, I would say, roughly 10%. And it is mainly driven by Asia Pacific because of the more favorable comparison with last year. And so we see from 30% to 40% of growth in this region, mainly driven by China. There is also a good signal of demand with, I would say, a single digit, mid-single digit growth in Europe and North America because there is a positive trend of restocking of the trade based on positive expectation on the sell-out, and also based on the announced price increase. And so there is positive signals from the replacement channel. While in Europe and North America, the regional equipment, in contrary on what is happening in China, there is a growth which is less than expected, mainly due to the semiconductor shortage in the supply chain -- sorry, in the supply chain, which is affecting the car registration. Thank you.

The next question is from George Galliers of Goldman Sachs.

The first question, I just wanted to quickly follow-up on the prior question around the price/mix for this year. I believe you confirmed it would be higher than the 2Q, 3.3%. Is that correct, if I understand that one correctly.

The comment of Mr. Tronchetti was related to the average of 2021. So the expected performance in 2021 is expected better than...

The question was, if we expect for 2021 a better price/mix, the answer is yes. More details will be given during the presentation of our 3-years plan end of March.

Okay. And then the second question I had is if I look at your margin guidance for this year, it's around 300 basis points lower at the midpoint than what you achieved in 2019. And that despite the fact that your expectations are for the high-value market to be higher in 2021 than it was in 2019. And obviously, we also have some benefits from your competitiveness plan. So I think when we compare the margin expectation for this year versus 2019, what are the big headwinds?

What -- as you can see from the top line, we expect not to work at full capacity in 2021. So strong recovering of volumes, but not reaching the level of 2019. We have in the high-value a, let's say, a full recovery compared to 2019. But overall, including all the Standard, we are not back to the volumes of 2019. That's why there is some obvious cautiousness.

Understood. So it's the fixed cost absorption on the Standard tire volume?

We'll have more details end of March.

The next question is from Monica Bosio of Intesa Sanpaolo.

I have 3 questions. The first is on the regional mix this time. Can you comment a little bit on the evolution of the regional mix in 2021? I can imagine it should improve also on the back of the market share gains in China. And on this last topic, can you just please give us some more detailed figure on the Pirelli market share in China in the last quarter of the year. And still on China, can we figure out better profitability of the online channel in China than the rest of the online channels probably well in other countries? And then the second question is on the semiconductor shortage. It seems that you have not any impact from the semiconductor shortage, but I would like to be sure if you see an increase in volatility in the volume market due to this issue.

Mr. Casaluci.

So region mix, first. Yes, you are right. We had a positive effect of the region mix in the second half of 2020 because of the rebound of China. And considering the speed of growth of China expected for 2021, we confirm a positive region mix. Let's consider that our pace of growth in North America and China that are affecting positively the region mix are always higher than the pace of growth in the other regions. So normally, in our price/mix, there is always reflected a positive impact of the region mix. But you are right, in 2021, we expect this a bit better than 2020. Market share in the last quarter of 2020 in China has been extremely positive. We were able to gain market share during all the quarters of the year in China, both in the replacement and original equipment. But to give you a rough indication, we gained roughly 1.5 percentage point of market share, both in replacement and original equipment in Q4 in China. Semiconductor is a niche we have not completely solved. We were affected compared with our initial expectation of rebound of the original equipment in January and February. Nevertheless, we don't see a major issue, at least so far for the second quarter. We do expect a recovery. Channel mix on the first quarter will be positive because of the impact of the semiconductor, as we said before. Sorry, I forgot the first...

Yes, on the profitability of the online commercial strategy in China versus Pirelli online commercial strategy in other regions. So I'm just wondering if the margins of the online channel in China is better than the rest of Pirelli in the other areas.

The online in China is profitable -- in line with the profitability of the market in China. It is handled very professionally, thanks to the involvement of the trade. And we are not conflicting channels. And so that is, for us, an opportunity to have a larger market, keeping the profitability and not conflicting with our structure. I think that China is leveraging on its own knowledge of the online very well also in the tire business. And in the high end, I think we -- our people are doing a great job.

If I may add a comment compared to the other countries. As Mr. Tronchetti was saying, in China, the e-commerce is growing so fast, that today it represents the average of the market behavior. While in the other markets, following your question, is still more concentrating in the lower end. That's the reason why we are following the growth of the channel with an expected profitability, which is in line with the average of the market.

The next question comes from Michael Jacks of Bank of America.

I have 2, if I may. The first one, working back from your revenue guidance, applying high single-digit market growth, a positive regional mix, as you just mentioned, and assuming around a 3% positive price/mix. And perhaps a little bit of negative ForEx implies that you haven't really priced in anything for market outperformance in 2021. Is that a fair observation, firstly? And then my second question relates to Standard tires. It sounds like we expect the underperformance relative to the market in Standard tires to level off in 2021. So can we expect this to be the case now going forward? Or do you expect some more underperformance in the future?

On Standard, we go towards a neutral position. Obviously, today it is also affected by the situation in Latin America. But all in all, we expected our position to stabilize looking forward. In the overall market, as we assessed during our presentation, we expect the high-value to go back to the numbers of 2019. So growth, obviously, and overall, the Standard will not recover the level of 2019.

And then just on the first question, is it fair my comments around you're not including any expectations for market share gains in 2021 in your guidance. Is my math correct? Or is there another dynamic that I'm missing?

No. You're right. We expect on the high end, on the 18 inches and above, to grow in market share.

The next question is from Thomas Besson of Kepler Cheuvreux.

I have a few questions, please. Firstly, I'd like to come back to your Slide 13, where you show both market and Pirelli's performance in the 18-inch and above market. First, I'd like to understand whether the very sharp performance in OE remains a voluntary strategy from Pirelli to continue to build up presence in different channels and eventually get some pull-through? And if that's the case, I would like to understand why we don't see that pull-through effect because clearly, your relative performance is much better in OE, but weaker in replacements, apart from the second half. And I'd like to understand what we should expect in 2021. Should we expect that you continue to outperform in OE, but that you are talking about in replacement or that eventually, you slow down in OE and you replaced your accelerating replacements. So it's maybe a long question.

Mr. Casaluci.

Yes. So the good performance in 18 inches and above in Original Equipment was mainly driven by 2 factors. First is the enlargement of our portfolio of homologation in the traditional carmakers, so the Premium and Prestige that are our historical partners, both in Europe and in China. Second is our program of customer base enlargement that we started already end of 2019, and that is now delivering interesting results, not because we are changing our strategy but because there are a lot of car makers that are entering -- let me say, synergy carmakers that are entering in the Premium segment. And so today, we are able to deliver our technologies and our brand to very important partners in North America, in China and in Korea that were not partnering with us in the past. I can make some examples like Ford, like Tesla, like Hyundai. So extremely important carmakers that are more and more entering into the Premium segment. And this is a result of our business model enlarging in this segment. Yes, we expect an over performance also in 2021, maybe less than what we saw in 2020 in terms of over performance of the market. But of course, we plan to gain market share also in 2021 in Original Equipment in 18 inches and above.

Okay. But do you expect to do better than the market in Replacements, finally in '21? Or are you also expecting to lose share in the market like in 2020?

Yes, of course, both in Original Equipment, in Replacement, we plan to gain market share in 18 inches and above. Of course, Replacement is our main target. But as I mentioned before, also in the Original Equipment, we expect to overperform market in 2021.

Perfect. Second question, please, I'd like to come back to your CapEx guidance and talk about CapEx versus depreciation in '21. So you clearly underspent in 2020 but moving sharply to 7% of CapEx is a bit higher than what I was assuming. So it's more than EUR 300 million, so more than doubling CapEx. While you said you would not be operating at full capacities in '21. Could you explain what you intend to focus your CapEx on? And where CapEx is going to -- is expected to stand versus depreciation in '21, please?

No. We underlined that we have in mind to invest, we have, in our budget, to invest 7% of revenues in 2021. And we will reduce investment in 2020, and now we are at 7%, to improve mix and quality and technology. And then there is also investment in digitalization.

Okay. Last question, please. Could you confirm what you expect for nonrecurring items in 2021, given what we know? So if we assume that the world remains [indiscernible] as it is but [indiscernible]?

Which -- can you please give me more detail, because...

Of course, I mean, in your 2020 results, you had, if I'm correct, EUR 168 million of nonwritten items. What should we expect for 2021?

There will be a difference, not enough -- not higher expenses, but we will provide you information in detail in end of March. Anyhow, it will be lower.

The next question is from Giulio Pescatore of Exane.

The first one is going back to the topic of high-value market share and growth. And I was just wondering, what is allowing you to -- allow you to gain market share in that segment? And is that technology, is that being more aggressive on pricing? What is allowing you to gain market share? And who is losing market share, if you share gain?

19 inches and above?

Yes. In High Value, yes.

Okay. I think that when we look to the market, we see that there is a move upward between -- from the 18 inches to the 19 inches. We focus since the last few years in 19 inches and above. And the growth of this segment made it possible to us to have an overperformance. Also, electric is helping. It is becoming quite an important segment. It's around 40% now of our new homologation in our portfolio. And so I think these are the 2 main reasons why we increased our market share.

Okay. And following up on that, can you remind us on what is the typical conversion rate? So from OE to Replacement in the High Value and in the Prestige, in particular segment, is that different from Standard, I assume?

In High Value, we have 80%, and we have 90% for the Prestige. So that is the -- these are the numbers.

Okay. And just one last one, on the slide you showed about the new technology partnership with McLaren. I mean it's interesting in itself, but I just want to understand, is it also an opportunity for you? I mean, are these type of programs only very niche and with very high end car makers? Or can we expect something more scalable to take place in the coming years?

For sure, we have been working on it for 20 years. Now we are inside the car with the Original Equipment. And we have a number of other projects. And obviously, we see the evolution of the technology and the industrialization of that technology that we have achieved will allow us to enter into larger, let's say, Original Equipment. And we expect in the coming years that this will be one of the drivers of our technology growth. And so I think that we are naturally inclined to be focused on technology. And this is the evolution of technology. So we have to combine the information we get from the only point that touches the ground with the electronic of the cars. We are working on it. We have the first industrial results because we are inside the performance car, but we are working with others, and we strongly believe it will be part of our future.

The next question is from Gianluca Bertuzzo of Intermonte SIM.

First one is a clarification on price/mix. You previously mentioned that you expect drop-through to go to 40% to 45%, right? Second one is on nonrecurring costs. Can you maybe provide us some color on the delta between the EUR 130 million guidance provided at the end of the third quarter and the final result of EUR 168 million? Last question is more general, it is on consolidation. At the end of February, we saw the acquisition of Cooper by Goodyear. Can you elaborate on the potential impact on Pirelli's business from this move?

First of all, I answer to your second question, then I leave the floor to Mr. Casaluci and Mrs. Leone for the first question. It's a local transaction that is not affecting the market. It's good news in our mind because it's strengthening 2 companies, combining them with synergies. And there is also, let's say, a synergy they can have in China. So good for them, good for the tire industry. The more we have sound and competitive competitors, the better it is, and it's extremely local. And I think it is a value-accretive move, good for the market.

Okay. I answer to the drop-through question. The drop-through, I mentioned before, 42% is related to volume. While if we talk about price/mix, the drop-through goes roughly at 55% -- 55%, 56%. Thank you.

As far as the other -- the nonrecurring costs, I think it is useful to remind that in 2020, we recorded EUR 168 million of nonrecurring cost, after which perhaps it is useful for you that I repeat, the EUR 71 million were related to restructuring, EUR 37 million were related to one-off, nonrecurring and other costs and EUR 60 million were linked to COVID direct cost. In '21, we have -- we are factoring more or less EUR 120 million, mostly related around 75% to the ongoing restructuring programs, with a similar cash out that we will have in -- that we had in 2020, just a little bit higher. Because we have to include the payments of restructuring provision accounted in previous years.

[Operator Instructions] Gentlemen, there are no questions registered at this time.

So thank you. Thank you. Thank you, everybody, and have a good evening.