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

Ladies and gentlemen, welcome to Pirelli's conference call in which Pirelli top management will present the company's full year 2021 preliminary financial results. A live webcast of the event and the presentation slides are available in the Investor Relations section of the Pirelli website. I remind you that the Q&A session will follow after the presentation. Now I would like to introduce Mr. Marco Tronchetti Provera. Please go ahead, sir.

Good evening, ladies and gentlemen, and welcome to our preliminary Full Year 2021 Conference Call. 2021 was a year of economic recovery, especially for our industry despite the prolonged covered emergency, the semiconductor crisis and growing inflationary tensions. Pirelli closed the year with results exceeding our targets and among the best in the industry, thanks to the implementation of our industrial plan and our strong reactivity to the external context. Macroeconomic scenario, you foresee for 2022 is positive, but characterized by growing volatility, as highlighted by the recent events in the Russian Ukranian crisis, which will have an impact on the prices of oil and energy. Let me dwell for a few minutes on the impact of such a crisis in the industry and on the actions which we have already taken, and we are taking at Pirelli. The incidence of energy cost on sales in tire industry is roughly 3% compared to much higher values in other sectors, construction, steel, food, chemicals, still referring to the incidence of energy costs on sales. If we compare Pirelli to our NPS, we position ourselves amongst the best by virtue of manufacturing footprint, which benefits from a high exposure to low-cost countries. The increase of oil and energy prices will be reabsorbed by efficiencies and price increases. In particular, demand elasticity to price is much lower in high value than in standard. It's worth remembering, for example, that in 2011, in the face of a peaky natural rubber prices, which the price was up to $4,500 per ton compared to $1,700 today, Pirelli reached a price mix increase 1, 3x higher than the headwind. For the entire industry, the demand outlook is positive. High Value confirms as the fastest-growing segment, 4x the standard segment, supported by an improved car park mix. In this scenario, Pirelli will go forward with the implementation of its industrial plan, seizing market opportunity in the segment with the highest value and growth, 19 inches and above and electric and at the same time, putting in place or the action needed to counter the volatility of the external context. In particular, concerning a potential impact of oil and energy on Russian-Ukraine crisis we are implementing a dynamic mitigation plan with commercial and technical countermeasures. In 2022, we pursue revenue growth, profitability improvement and deleverage with a ratio close to 2x adjusted EBITDA. We really closed the year with results above targets after 2 upward revisions in 2021. The progressive upgrade on the sales guidance has been mainly driven by a strengthening of high value with a share gain in car 18 inches and above across geographies, plus 8% the outperformance versus the market against our target of 4% at the end of March. And above all, the improvement of the price/mix due to a solid price discipline and a strong mix improvement. The adjusted EBIT in absolute terms improved against March and November that our target in March and November, through a sound commercial performance and an effectiveness of internal levers. In 2021, Pirelli was among the few players who counted inflation of full production costs with price/mix and efficiencies. And solid cash generation reflects a structural improvement in the working capital. More specifically on inventories, we are benefiting from the strong integration with our clients which provides us with high visibility into stock and demand and the flexibility of our manufacturing footprint, which allow us to react rapidly to market fluctuations and optimize group stock. Return on investment was above our target, 17.6%, reflecting an improvement in operations performance. In 2021, our commitment to sustainability continued. First of all, safety, in line with our approach towards 0 accident at work, our accident frequency index further decreased in 2021 as a consequence of our focus on prevention, training and digitization. Our eco and safety product road map is to improve rolling resistance with no compromise on safety, sees the growth of 49% versus 39% in 2020 of the new levels IP cores in class AOB rolling resistance according to the European labeling classification, confirms 87 of the new products falling to the highest wet grip A and B safety classes. Both KPIs are fully on track to our 2025 targets. Materials innovation is a major means to reduce environmental impact. In 2021, we issued in the market products made with 28% renewable materials, a significant improvement against 23% in 2020. Our objective is to reach through our technologies over 43% renewable components and 8% recycled in 2025. As Mr. Casaluci will detail you later, we have already devised a tire with 94% of materials coming from nonfossil sources. Finally, our path towards decarbonization. In 2021, as much as 62% of the electricity used by Pirelli worldwide came from renewable sources, 10 percentage points than in 2020. 100% of electric energy purchase in Europe already today is renewable. Absolute CO2 emissions in our plants went down by 31% versus 2015 reaching 4 years in advance the target approved by the science-based target initiative, which set a 25% cut by 2025 versus 2015. In line with the science-based target, we also reviewed the emission of the supply chain, minus 6% compared with 2018, base year for the target. Besides, we are proudly the first and only tire player awarded with a 3 star environmental accreditation of FIA. The company produced the first tire ever certified by Forest Stewardship Council for natural appeal. And entered a multiyear partnership with BMW and Birdlife for the sustainability and natural rubber, placing the improvement in quality of life of indigenous communities at a center, together with the protection of forests and endangered animals. Once again, in 2021, Pirelli been leading relevant ESG indexes and initiatives like the Global Gold Class Award of S&P Global, inclusion in the climate A List of CDP, obtaining an A score in the CDP supplier engagement rating leaderboard and EcoVadis Platinum among others. Thank you for your attention, and I leave now the floor over to Mr. Casaluci. Please, Mr. Casaluci.

Thank you, Mr. Tronchetti, and good evening to all of you. Now let us analyze both the market dynamics and Pirelli's performance. In full year 2021, the global car tire demand increased by 8%. The recovery was more sustained in the 18 inches and above segment with a plus 15% year-over-year, already exceeding the pre-COVID levels plus 5% versus full year 2019. Pirelli outperformed the market both in the total car segment with volumes at plus 16% and 18 inches and above where the outperformance is even more relevant with a plus 23%. Deepening the High Value market, we are able to see how Pirelli go on both channels. Original equipment growth, Pirelli volumes plus 21% versus a market plus 8% was supported by the exposure to Premium and Prestige, which was less impacted than lower-end vehicles by the chip shortage, and overperformance in all high-value regions and in particular, in North America and Asia Pacific, where the consolidation of the client portfolio is going forward as previously forecasted. And finally, due to our significant exposure to growth in the electric, a strategic segment for Pirelli future development. In the Replacement, Pirelli volumes plus 25% versus market plus 20%, we gained the market share in all main regions due to our pull-through High Value volumes and further improved product offer with specific regional lines. The growth was higher than the market, 3 percentage points even in car below 17 inches, due to a strong rebound in South America volumes. In the fourth quarter, the negative market trend, total car minus 4% year-over-year was mainly related to Original Equipment with a minus 13%. And -- this channel is still facing as we previously said, supply shocks and semiconductor shortage. Replacement demand, minus 2%, was instead affected by an increase in the volatile macro scenario. In the fourth quarter, Pirelli beat the 18 inches and above market in both channels. Replacement saw a solid growth, reporting a plus 13% year-over-year, was 10% in the third quarter and outperforming the market by 3 percentage points, with a share gain in Asia Pacific, North America and in European winter segment. The minus 5% in Original Equipment due to the automotive problems already discussed, was 6 percentage points better than the market due to our well-known exposure to Premium and Prestige carmakers. Our underperformance was only in the standard segment, minus 12% versus a minus 7% of the market, where we are reducing the exposure in line with our strategy after strong growth recorded in the first half. The 2021 results follow the full implementation of the key programs of our industrial plan as described in this slide. In our commercial program, we strengthened its position in the high value with an outperformance versus the market, definitely higher than expected and increased its exposure to the 19 inches and above, 66% of high-value volumes and plus 3 percentage points year-over-year and new technologies with an electric vehicle volume growth approximately 6x bigger than in 2020. In our innovation program, we achieved 310 technical homologations concentrated in the 19 inches and the above segment, approximately 85% and specialties approximately at 30% and developed its product portfolio with 6 lines, especially conceived for the Replacement channel with the target of meeting the needs of its consumers in the regions. In our competitiveness program, we continue the Phase 2 of the efficiency plan. And finally, in the operations program, we completed the planned reorganization, which I am going to discuss later on. Our commercial program has brought a strong high-value growth with a plus 23% in the car 18 inches and above segment compared to 15% in the market. In greater detail, more than 75% of the growth reported for the car 18 inches above segment comes from the 19 inches and above segment, while approximately 60% from specialties. In the Replacement, 18 inches and above, a consolidated growth has been reported, both in pull volumes based on the advantage from past locations and in push volumes, especially in Europe and United States. More than 85% of the world global growth through the introduction of new lines exclusively conceived for this channel. Original equipment, 18 inches and above recorded a uniform increase of its market share in all the regions with vehicle fitments accounting for about 30% of the regional equipment growth for the whole year. The Pirelli innovation plan unfolds in line with the planned road map. In 2021, a closer cooperation with the major Premium and Prestige brands was reported. And the 310 homologations were granted of which approximately 85% in the 19 inches and above segments. And an increasing focus on electric vehicles also through new partnership with emerging electric vehicle car makers such as Tesla, Rivian, Lucid, Rimac and so on. More product offerings through the introduction of 6 new lines in the regions that meet customers' requirements. The innovation program is in line with Pirelli eco and safety approach, considerable investments in R&D on materials, compounds, tread structures and designs make our products reach top performance in terms of braking power on wet and dry surfaces as well as improving environmental performance. More specifically, on the rolling resistance, as already illustrated by Mr. Tronchetti, we improved our performance by 10 percentage points versus 2020 while maintaining over 87% of all our new products with the 2 top grade levels, A/B, in compliance with European standards. The positive impact from our new products is also reported in terms of our sales, which we monitor through our eco and safety performance revenues. means sales percentage value from products that are included into the first 3 leveling classes, both in terms of rolling resistance and wet grip and that increased by 5 percentage points in 2021. The reduction in terms of environmental impact also includes materials. In 2021, Pirelli fitted the Volvo Recharging Concept with 94% of nonfossil materials like the silica from rice husks, bio resins and recycled carbon black. This opens up the way to introducing these materials also in the standard products. Silica from rice husks was introduced on several production plants and several product lines. This is a material that comes from the external shell of rice grains and these are a waste from the food industry. It sets a pattern in terms of circular economy as well as provides remarkable CO2 savings represents 90% minus compared to a typical silica production. Increasing attention is being paid to a further element in the development of new products tire wear particles generated by the combined operation of both tires and road surface. Pirelli, while promoting a proactive engagement of various stakeholders in the tire industry and institutions has also intensified its R&D efforts, research on material, virtualization and testing in real driving conditions to develop increasingly environmentally friendly products. And the new product lines launched in 2021 based on this approach, having proved the wear and tear rate up to 30% compared with the previous generations of products. The competitiveness program achieved gross efficiencies worth $155 million, $70 million net from inflation, which increased by EUR 10 million in the last quarter due to increased logistics and energy costs. In the fourth quarter, gross benefits were worth EUR 45 million, in line with the plan and such as to more than offset approximately 1.5x the strong inflationary impact compared to the previous quarters, bringing net efficiencies to approximately EUR 10 million. To give you further details as to each full year 2021 project. When it comes to product cost, which is worth approximately 35% of gross efficiencies, we have continued the implementation of a new approach to modular design and work to achieve more efficiencies in material purchases. As to manufacturing, which accounts for approximately 30% of the gross benefits gained, we have continued to work on increasing flexibility, digitization and sustainability as planned. In the fourth quarter, manufacturing reported a considerable increase of the inflation rate and more specifically of energy cost. As far as G&A are concerned, which are approximately accounting for 15% of the gross efficiencies we resorted to further efficiencies ranging from our distribution network redesign to inventory optimization. In this last quarter, a considerable increase in the rate of inflation was also reported in this area, mainly due to international freight forwarding costs. Finally, when it comes to organization, which accounts for approximately 20% of the efficiencies, we continued the digitization efforts in our processes and upskilling programs for our staff. Let's now go through the progress made in our operations. At the end of 2021, we ended the reorganization process of the measure brands of our group with the closing of the Gravatai plant in Brazil and the transfer of its motor capacity to Campinas. The Bollate plant in Italy was converted from car standard in tail Premium production. And from 2022, the plant will produce tires made in Italy for bicycles and the conversion of the Burton plant in the United Kingdom into semifinished products. Through these actions, our car capacity at the end of 2021 was of 73 million tires, 83% of the capacity in low-cost countries and 71% of the total car capacity is high value. Consistently with our planned targets, the car segment total saturation returns to 90% with the high-value segment close to full saturation. Our production arrangements can now count on 15 plants for car tires with a clear cut mission, local for local supply policy, an increasingly green approach in line with our planned targets. I wish to thank you all and then now leave the floor to Fabio Bocchio.

Thank you, Andrea, and good evening to you all. Pirelli closes the year 2021 with revenues worth EUR 5.3 billion, a growth of 23.9% year-on-year, plus 24.8%, excluding the exchange rate impact, negative for 0.9%, the latter related to the depreciation of the U.S. dollar as well as the main emerging market currencies. . Let's go through the commercial drivers in detail. Volumes contributed for EUR 675 million, plus 15.7% in solid growth in the high value, plus 20.2%, which is confirmed to be at pre-COVID levels. Price/mix reported a strong increase plus EUR 390 million or plus 9.1%, supported by price increases in the Replacement channel on both segments. Improved product mix with increasing demand for bigger rim sizes and products with higher technological content. In the fourth quarter, revenues growth was worth 11.9% or plus 9%, excluding ForEx impact. The volume trend of minus 7.3% reflects the slowdown of the global car tire demand, minus 5% in the market, mainly on the Original Equipment channel due to the semiconductor shortage while demand in the Replacement channel discounts the volatility of the macroeconomic scenario. In this context, Pirelli high-value volumes remained flat compared to 2020 while the standard volumes recorded a 13.4% decline in line with our strategy to reduce exposure to this segment. Price/mix progressively improved quarter after quarter, reaching a record plus 16.3% in the fourth quarter, benefiting from full impact of price increases from the second quarter improvement in terms of product mix, mainly supported by the migration from Standard to High Value, channel mix, driven by a better trend on the Replacement channel. And finally, a regional mix with a better performance in the high value regions. The exchange rate impact was also positive with a plus 2.9%, thanks to the appreciation of the U.S. dollar as well as the Chinese yuan. Let's now discuss Pirelli profitability. Adjusted EBIT in 2021 was worth EUR 816 million with a 15.3% margin, in line with our yearly target. The solid contribution of our internal levers, volume, price/mix efficiencies has more than offset the negative external scenario, raw materials, inflation and exchange rate impact. More specifically, the profitability improvement during the year reflects a sound volume contribution plus EUR 267 million, a strong upside in price/mix, plus EUR 283 million which has more than offset the raw material negative for EUR 212 million and exchange rate impact, negative for EUR 12 million. The Phase 2 of our competitiveness plan which has generated gross efficiencies worth EUR 155 million, around 3% of the revenues or EUR 70 million net of inflation, which are worth EUR 85 million. Inflation was higher than the assumptions made in the early part of the year and mainly due to an increased cost of transport during the last quarter. Net efficiencies covered by the reversal impact of the corporate plan, minus EUR 31 million and other cost increases, minus EUR 39 million. A short comment now on the other costs, which are excluding R&D and marketing in the high-value segment negative for EUR 32 million, a positive impact mainly from stock replenishment plus EUR 44 million, coherent with the recovery of the business, provision for EUR 51 million for short-and long-term management incentives. The impact of management incentives in 2021 is 1/3 related to short-term incentives, which were canceled in 2020 due to COVID emergency while provisions in 2021 reflect the strong performance improvement of the group on all targets. As to the remaining 2/3 related to long-term incentives, I wish to remind you that 2021 is the first year we made provisions for the 2 LTI plans, the 2020-2022 plan and the 3-year rolling plan first introduced in 2021 related to the period '21-'23. The provision related to 2020-2022 plan also reflect the adjustments related to 2020 for above-target performance, in particular, on the cumulative net cash flow. In 2022, provisions will be normalized with a positive impact on the adjusted EBIT bridge, while the other items within other costs will be negligible. In the fourth quarter, the adjusted EBIT was worth EUR 217 million, basically in line with the 2020 level. The price/mix offset 1.4x the raw materials and exchange rate impact, while the lower volumes, minus EUR 43 million, are related to the drop of standard described previously. Adjusted EBIT margin for the period was 16% compared to 18.3% in fourth quarter 2020 and discounted the reversal impact of COVID actions about EUR 8 million and the higher inflation on cost, about EUR 10 million, both approximately equal to 1 margin point. Let's move now to the net income dynamics. Net income strongly increased by about EUR 279 million in '21 versus 2020. The trend takes into account the already mentioned improvement in the operating performance, lower restructuring and nonrecurring costs. Results from equity participations was positive by EUR 4 million mainly as we recorded better results in our JVs in China and Indonesia. Net financial charges were slightly improving year-on-year, mainly impacted by higher charges on central debt impacted mainly by the COVID pandemic, which caused a temporary increase in the margin of the major credit line of the group which were more than compensated for by benefits from financial management at local level. The EUR 101 million increase in tax charges related to the higher operating results we just discussed as the tax rate is stable at about 26%. And Net income adjusted, meaning excluding all the one-offs and nonrecurring items, is positive for EUR 469 million in 2021. Let's have a look now at the net financial position. In 2021, the net cash flow before dividends was EUR 431 million, approximately $390 million to $410 million, the November target, mainly supported by the operating performance improvement already mentioned, less absorption of the working capital with trade payables trend benefiting from the business recovery and a careful inventory management, 20.5% of revenues at the end of 2021. Finished products, 15.7% of revenues and stable year-on-year as well as of stock of raw materials worth 3.3% of the revenues, plus 0.8 percentage points year-over-year with the target of easing potential risks connected to the supply chain in an extremely volatile macroeconomic situation, which is characterized by an uncertain scenario on the transportation industry. Capital expenditure was worth EUR 346 million and was primarily related to high value and the constant improvement of mix and quality in all plants. The net financial position is negative by EUR 2.9 billion with a leverage of 2.4x the adjusted EBITDA at the end of 2021, definitely improving versus the November guidance which was expecting a leverage equal of minus 2.6x the adjusted EBITDA. Pirelli's gross debt stands at EUR 5.3 billion with a net financial position of EUR 2.9 billion, thanks to the EUR 2.4 billion financial assets. Our liquidity margin totaled EUR 2.7 billion. Please note that on February 21, Pirelli signed an agreement with a large pool of international banks for the opening of a new 5-year ESG facility of EUR 1.6 billion, of which EUR 600 million as a term loan and EUR 1 billion revolving. These credit lines replaced the bank loans due in June 2022 and worth a similar amount, although with a slightly different mix as our financial flexibility has now increased. Our cost of debt increased -- increases by 44 basis points compared to December 2020, reaching 2.38% and mainly due to the cost increase of some bank lines whose margin is parameterized to the group's leverage, which was temporarily impacted negatively by COVID pandemic. Thank you. And now I'll leave the floor to Mr. Tronchetti.

Thank you, Mr. Bocchio. The outlook for 2022 remains positive with a global GDP expected to grow 4.4% year-on-year, basically in line with the estimates in the industrial plan. However, volatility remains high, the COVID emergency although easing in the moment at the moment is still looming. At the same time, there are growing geopolitical tensions and a tightening of fiscal policy over the last few years, both in Europe and the United States. Unlike in the past, inflation has risen in the second half of 2021 due to the reopening of world economies and a generalized increase in production factors. Its impact is significant in U.S. and Europe, where it went up to 4.2% and 3%, respectively. It should be stated that over 50% of inflation in Europe is attributable to the increase in energy prices under further pressure by way of the last days events. All due to inflation in 2022, we expect a generalized increase in the major input costs, although offset by the price/mix and efficiencies. Raw materials are mainly impacted by oil price, driven by the recovery of demand, which is due to go back to pre-COVID levels in 2022. Supply is expected to be lagging due to the limited investments made in the last few years and the policy in the major oil producers focus on maximizing prices. Let me remind you that Pirelli's price indexing closes with OEMs for over 65% of Original Equipment production. Energy is always a cost item where we expect the price to increase. The current intensification of the Russian crisis is leading to an increase in oil and energy prices, which requires the rapid implementation of mitigation actions on tire pricing and efficiencies. For example, in our plants, we are already reducing our consumption and accelerating the use of renewable sources. We are implementing hedging contracts to protect ourselves from excessive price fluctuations. As for shipping in 2022, the same criticalities as in the second half of 2021 are going to stay, especially on our long sea routes. Pirelli appear to be less affected than many other players due to our local for local production, which is close to 85%, except for the North American market, which is served by our plants in Mexico and Europe. Finally, the increasing cost of labor is going to be limited in 2022 with most of blue collar contracts being already negotiated. Let us now go through our forecast for the car tire market in 2022. Demand is expected to grow by approximately 3%. As we already forecasting our industrial presented in 2021, total car tire market should be back to 2019 levels only by 2023. Car 18 inches and above is confirmed the most resilient segment and growing the most. After reaching 2011 levels already in 2021, High value is expected to grow by approximately 8% year-on-year, around 4x the level of car 17 and below -- 17 inches and below more than planned estimates. Let us move to the next slide to go into more depth in the segment dynamics. Also in the high end of the market, more decisive growth is expected in the region equipment channel. The ramp-up of car production, especially in the second half of the year. Positive also the trend in the Replacement channel due to the restocking at dealer level and the positive impact of growth in new registrations for the last few years. Now I'd like to give you more color on the segment specifically target by Pirelli, car 19 inches and above and the electric. The 19 inches and above segment is expected to grow double digits in 2022. It will account for almost half of the 18 inches and above compartment due to an improvement in the mix of both car production and car tire. As already clarified during the planned presentation in 2021, the electric is proving to be the fastest-growing segment, approximately 27 million tires between the Replacement and Original Equipment channel and the year-on-year increase close to 40%. This good trend discounts the greater penetration of the electric unit total car production as well as in Premium, Prestige supported by an increase in the demand from consumer and government incentives. In this scenario, Pirelli, we continue implementing its industrial plan key programs. In the innovation program, we confirm our focus on high value which at the end of '22 will account for 73% of the group revenues. Our exposure to the standard segment is decreasing in line with our objective of reaching the lending point of approximately 25 million pieces in 2025. We expect more selective approach in Original Equipment, we focus of the higher rim sizes and specialties, particularly in electric. In the innovation program, we continue with the expansion of our homologation portfolio in the fastest-growing segments. And the renewal of products with the launch of 10 new regional lines, strengthening our local-for-local strategy. We confirm our competitiveness program with gross benefits of EUR 150 million, inflation definitely higher than we had forecasted industrial plan will be offset by efficiencies and price increases. Finally, in the operational program, we foresee in line with our plan a further increase in high-value capacity, which at the end of 2022 will account for 72% of total car capacity. Coming to targets. In light of describing so far, Pirelli expectation for 2022 revenues between EUR 5.6 billion and EUR 5.7 billion. The group's volume between plus 1.5% and plus 2.5%. High Value volumes are expected to be between plus 6% and plus 7%, while Standard volumes are expected to drop minus 3%, minus 4%, in line with our strategy of progressively reducing the exposure to this segment. Price/mix improvement between plus 5.5% and 6.5% supported by further increase and the more favorable mix, mainly product and region. ForEx impact between minus 2% and 1% -- 1.5% with volatility of the currencies of emerging countries concentrated in the second half of the year. Adjusted EBIT margin between 16 -- around 16% and around 16.5%, reflecting above-mentioned dynamics and more precisely positive contribution from volumes, price/mix will more than compensate for exchange rates and the growing input costs like raw materials and inflation. The latter will only be partially covered by the gross efficiencies coming from Wave 2 of the competitiveness program, basically neutral the impact of D&A and other costs, Investment of EUR 390 million equal at around 7% of revenues. Net cash flow before dividends expected between around EUR 450 million and EUR 480 million due to the improved operating performance and an efficient management of the working capital. Net financial position equal to EUR 2.6 billion, around EUR 2.6 billion with a leverage at or below 2x the adjusted EBITDA, return on investment at or above 19%. And finally, with reference to the Russian Ukrainian crisis, we developed a first sensitivity by assuming the current oil and energy price may last from March until the end of the year. In such critical context, we have also considered impacts on local operation related to flow from and to Russia, both in terms of raw materials and finished products. Factoring those hypothesis and mitigation actions the impact on adjusted EBIT and cash flow should bring us to the floor of 2022 guidance. This ends my presentation, and we may open the Q&A sessions.

[Operator Instructions] The first question is from Giulio Pescatore with BMP Exane.

I guess we have to start with Russia. So I was just wondering if you were willing to share your thoughts on the current situation. And can you remind us on the exposure of Pirelli, the market in terms of sales and production. What are the direct impacts on local operations that you're assuming at the floor of your guidance, as you just explained? And then still on Russia, you do have a 5.6% stake from [indiscernible] investments, which is kind of indirectly related to Russia. So do you see any risk for that shareholder potentially being forced to sell because of sanctions? And then lastly, just a quick question on price and mix. Are you willing to share how much of the 16%, which, by the way, was an incredible result in Q4. How much of that was driven by price and how much was mix?

For the first part of your question, Russia accounts for around 3% of our group revenues and below 4% of our EBIT margin. So the impact we foresee is not directly material on Russia operation and half of our sales are directly in Russia. What we see is indirect effect and the impact on oil price and energy, so we can have some logistic issues, but we don't see material impact locally. And for the second question, price mix, I'll leave the floor to Mr. Casaluci.

Thank you, Mr. Tronchetti. Out of the 16% of price/mix improvement in the last quarter of 2021, I would say roughly 30% is coming price and 70% is coming from mix. The very positive performance on mix has been supported by all the main operative drivers like the channel mix, the region mix and, of course, the usual micro mix inside the product segment. On top of that, as we presented the standard in the last quarter decreased. And so the weight of the standard and the total sale was -- sales was below the average of the full year.

For the second part of your question related to our shareholders, Russian shareholders. We recently announced that the Pirelli stake dropped below the 3% threshold. So there is no impact on our structural -- shareholder structure.

The next question is from Monica Bosio from Intesa Sanpaolo.

I hope you can hear me. My first question is on the current weight of your EV tires on total revenues. You just gave us volumes impacted, but I was wondering if you can share with us the weight on revenues. And the second is still related to the EV tires. EV market is running faster than initial expectations. For the time being, it's only Original Equipment, but can we expect some impact on the aftermarket segment already in 2022, 2023? Or should we wait until 2024 to see a material impact as a pull-through effect on the aftermarket? And the third one is on the standard tires. Can you just update us on the operating margin on the standard tires at the end of 2021. And if you have some expectation for the current year? And if the -- we should expect some restructuring on the back of the reduction in standard also in 2022?

Mr. Casaluci?

Yes. Thank you for the question. So I will start from the electric vehicle. In 2022, we do expect that in the Original Equipment channel at electric vehicle, we start to have a significant and meaningful impact. In terms of volume, we target roughly a bit more than 10% of the total sales will come from the EV while as far as the net sales is concerned, it is a bit higher, closer to the 12%. In the Replacement channel, the impact is still very low, I would say, around 2% on the total sales inside the high-value channels. And as you correctly said, the first significant impact on the Replacement channel due to the pull-through of the regional equipment will start to be, let me say, meaningful from 2023, but we need to wait until 2025 to see a first material impact on the total result of the company because the volume grew mainly in 2021 and in 2022 in the regional segment is targeting today more than 2 million tires. As far as the standard profitability is concerned, at the end of 2021, we reached the target of the double digit, which is at the very end of 2021, which is what we expect for the entire 2022. So more than 10% of return on sales with a total volume on standard that is targeting roughly 25.6 million tires in 2022. It means that we are fully on track with our target of EUR 25 million within the industrial plan time horizon.

Okay. And sorry, do you expect some restructuring related to the further reduction?

No. No, we don't have -- we finalized all our project of restructuring. We should see the opposite reduction of the cost related to restructuring we still have in 2021.

The next question is from Michael Jacks from Bank of America. The next question is from Martino De Ambroggi with Equita.

The first question is just a very broad question because you reminded that in 2011, you were able to react to skyrocketing raw material costs. If the figures I have in front of me are correct, in that period, you were able to improve margins both in absolute and as a percentage of sales. I clearly understand it was 10 years ago, but what are the main differences and the base similarities versus the current environment? Maybe more unpredictable, but I remember also that period was quite unpredictable. So that's my first general question. The second is on the free cash flow guidance because in the press release, you write -- you also -- and your guidance embed efficient management of working capital. Could you elaborate a bit on this and trying to quantify it? And related to this question, what was the factoring at the end of the year? And what's your assumption in the free cash flow for the current year? And very last, sorry, if I missed it, but I didn't see the split between Standard, High Value profitability. So I was wondering if the standard tire was able to approach or achieve 10% return on sales? And what is the profitability for High Value?

Thank you. So for the first part of your question, in 2011, the natural rubber grew because of lack of capacity and strong demand, lack of capacity that needed to be restored through new investment in new plantations and there was also a speculation. The -- today's raw materials increase is also related to a growth in demand that is sound, average, like it was sound in 2011. So the difference is on energy, likely towards on natural rubber in 2011, 2 extraordinary elements that have an impact on the total cost of the total input cost that is higher than what is related to the real growth in demand. One today is related obviously, to the international geopolitical crisis. But in both cases, we see that the environment is sound. So was sound in 2011 and is sound today. The stock level as it was in 2011 in the trade are still below average. So there is no channel, let's say, risk visible today. And so we expect we can have a protection of prices. And let's say that in 2011, there was also a much lower penetration of the High Value segment that is, as I mentioned before, more protected because the consumer are less, let's say, sensible to the price increase compared to the standard. And the standard, the raw materials represent a double of the input cost that was represented in a High Value tire. So considering all these factors, we should be in a better position today than in 2011 because the segment is more than double compared to 2011 in our total turnover percentage. So that's why we expect we can cover with the price increase and with efficiencies, the impact. Also of the extraordinary element that is the energy and oil price. Mr. Bocchio, sorry for the factoring in...

We'll get a question on the cash flow target and working capital. So our target for 2022 net cash flow in the range EUR 450 million to EUR 480 million relies upon, first of all, obviously, a very sound operating performance. Second point is related to the CapEx that is absolutely in line with what we were foreseeing in our industrial plan presented last year. restructuring cash out strongly reducing year-on-year. 2022 will be more or less 50% compared to 2021, as already foreseen in the industrial plan and an efficient management of the working capital with still a positive impact on cash. Specifically speaking about the working capital, we think that the improvement that we reached in 2021 is really structural with particular reference to the inventories. I wanted to highlight that the strong integration with our clients that has been established along the last few years provide us high visibility on the trade stock and on the demand and the flexibility of our manufacturing footprint allow us to react rapidly to market fluctuation and optimize the group inventories. For 2022, in particular, we forecast an increase of the stocking units, obviously, given the increase of the sales in volume, but keeping the same inventory efficiency, meaning the same impact on the top line and an increase in the unit value, obviously due to the inflation. Based on this, we expect 2022 inventories to increase in absolute value, but remaining stable year-on-year in terms of incidence on sales. The higher value of inventories will be more than compensated, more than offset by the expected increase in trade payables. Stable weight on sales is also expected for receivables and payables with the DSO and DPO in line with the pre-COVID levels. And we don't foresee any change in our policy regarding factoring. So pretty in line in 2022 compared to 2021.

And those are '21 versus 2020?

Yes. Actually, there was a slight decrease in our operation in 2021 compared to 2020.

Mr. Casaluci for High Value...

Yes. The last question was the profitability of the 2 segments. Standard we already said, is around 10% and High Value is around 19%.

Is it improvable, the Standard?

Yes, we are in the direction of improving year after year. So the total profitability of the company is improving both for the higher weight of the high value and the improved profitability of the Standard itself.

The next question is from Sascha Gommel with Jefferies.

The first one would be on your CapEx program again. Can you explain a bit the split between maintenance and growth CapEx? And then related to the CapEx question, we hear a lot of your competitors in Europe but also in the U.S. stepping up the investment programs as well and volume growth seems to be quite muted in '22. Is there a risk that we're coming into an overcapacity situation in tires again? And then my second question is on your margin guidance, 16% to 16.5%. I think your midterm plan had 16% to 17% for '22. I was just wondering given that your top line is better and your price/mix is offsetting not only raw mats, but also other cost inflation. What's the reason that you become a bit more cautious on your margin?

Yes. So as far as CapEx is concerned, we can consider the EUR 390 million, so roughly 7% on sales of the total CapEx divided among will be devoted to High Value capacity, mainly China, Mexico. And this is to prepare the growth of the coming years because in 2021, we are already well balanced with more than 90% of overall saturation. And no, there is not under saturation of the capacity at all in this moment in the industry. On the contrary, there is a shortage of availability mainly due to the very good demand on the Replacement channel coming from North America and the United States, both high-value markets where we are overexposed. Then more or less 40% of the CapEx, which is the vast majority, as always, Pirelli is dedicated to technological upgrade and quality and productivity improvement, 7% more or less in digitization, the digital transformation of the company. And the remaining part, roughly 30% is maintenance and base load. And I leave now the word to Mr. Tronchetti for the other question.

Regarding the profitability, so we have a growth in volumes that is higher than expected so -- and faster the recovery, even faster. And we see an average profitability slightly below the plan, but we keep the targets for our 2025 plan. So the trend you see is a trend of growth when 2021 was better than expected. And I think in this environment, these numbers are reflecting our objectives considering also the top line growth.

The next question is from Christoph Laskawi with Deutsche Bank.

The first one will be on the price rounds that you're targeting. Have you already implemented price hikes across the regions for Q2? And are you planning to grow quarter-by-quarter like your competitors? So essentially 4 hikes in '22? And then sort of following up to that, do you see a risk of trade downs by customers more into Tier 2, Tier 3 brands when Premium moves up constantly throughout the year? And in case freight rates are normalizing more into the second half of the year, do you expect pressure on market share from imports, especially in Europe and the U.S. And last question from my end will be on the inventories across the regions. If you could comment on those, please.

Before leaving the floor to Mr. Casaluci, what we see we don't see any trading down of the Premium. We see a premiumization of the market related to the electric vehicle that today is affecting the Original Equipment and in the future will affect the Replacement in a positive way. The market itself, as I said before, is sound, considering the stock in transparency, our stock and the stock of the trade and the demand we have. And we see that all the logistic issues are creating an environment where the costs are going up as also the importers from Asia to Europe and U.S. they have to revise their price up because there is obviously an impact. We have a lower impact because we are more local-for-local. In the second half, there should be also an effect on the recovery of the volumes in the Original Equipment that volume-wise, could keep the market sound also in the pricing for the replacement market. Please, Mr. Casaluci.

Thank you. As far as price increase is concerned, we have already announced all around the world, price increase. In Europe is 3.5% of price increase, in United States is up to 10%, in China is a 3% price increase. These already announced price increases all around the world, together with the favorable exit speed from 2021 will assure the price performance that is embedded in our guidance of a price/mix EUR 5.5 million to EUR 6.5 million. And I would say that more or less 70% of this price/mix increase is related to fuel price. Clearly, we are following on a daily basis, the development of the market demand or end of the inflation environment. And we are ready to increase -- to announce further price increase where and when necessary. As far as stock is concerned, the level of stock in the trade in U.S. and Europe is still below the average. So we see opportunities of good demand, even if we are entering most probably in a restocking phase, the stock in the trade is below what we consider a normal level while in China has been normalized into what we consider a healthy environment on the -- with the trade stock at the normal level since the second half of 2021.

The next question is from Gabriel Adler with Citi.

Just 2 quick questions left for me. In 2022, should we expect the drop-through on price/mix to be much higher because there's more of a weighting towards price. Is that the right way to think about the drop-through for '22 price/mix? And the second question is just a follow-up on the EV tires point. Could you just confirm what your current market share is in the EV tire market relative to your market share for the total market? I appreciate you gave a target for 2025, but a comment on where we are today would also be very helpful.

Mr. Casaluci.

So I will start from the last question. Our market share in the electric vehicle today, it makes sense to talk about market share in the Original Equipment channel that already started. So our target within 2025 was to reach in the Premium segment of the EV 1.5x our market share on the internal combustion engine. And we have to say that we will reach this target 3 years in advance because in 2022 numbers, we already have embedded a market share in EV Premium and Prestige segment that is 1.5x our market share in VIC. To give you consistent numbers, if we have a 20% of share in the VIC in the Premium segment, our market share in EV Premium segment in 2022 is targeting a 30% of market share. While if we talk about Prestige segment, as you know, we already have 50% of share in this segment, and we target to confirm the same share in EV and we are fully on track with this target. The other question was related to price/mix. As I mentioned before, price/mix in our guidance is in the range of 50 -- 5.5% and 6.5% with a midpoint of 6%. And out of this 6%, we can easily consider a 70% at least related to price and we don't see any kind of risk on this target. On the contrary, we will follow the inflationary environment, and we will evaluate if announced further price increase or not in the coming weeks. Thank you.

The next question is from Philipp Koenig with Goldman Sachs.

My first one is on the volume guide. So you're mentioning that you're expecting your High Value volumes to grow between 6% and 7%, but you're sort of expecting the market for 18 inch and above to grow above that. Can you just explain why your high-value guide is just sitting slightly below that? And my second is just getting back to the net cash flow guidance of EUR 450 million to EUR 480 million. If we go a year back to the industrial plan, you were guiding for cash flow of around I think, EUR 440 million at the midpoint with the same amount of CapEx, but obviously a much lower adjusted EBIT in absolute terms. So has there anything changed otherwise on the cash flow if we think about today against the plan a year ago.

Okay. I will answer about the pace of growth of the High Value in 2022, you are right. We have a total growth that is more or less in line with the market with very different behavior between Original Equipment and Replacement. We target to gain market share in the Replacement in the 18 inches and above in all the markets and regions, which is the core of our business model, and we will over perform the market of at least 3 percentage points. While we target decrease of market share in the regional equipment, mainly or, I would say, concentrated only in Europe, where we are in the in the phase of execute our selective approach with the carmakers with a clear target to grow in the electric vehicle both in traditional partners and carmakers in Premium and Prestige and in the newcomers and to reduce our presence in the Synergic segment and also in the lower end of the Premium segment, where we do consider the integrated profitability is no more at the level we want to reach. At the same time, we still plan to grow, thanks to a customer enlargement in the regional equipment in Asia and in North America.

Okay. So regarding the cash flow, I think it's the opposite of what you said. So the midpoint of the guidance was EUR 440 million in the plan and is now EUR 465 million, and the CapEx remains at EUR 390 million. So that is in line with a better cash flow in line with the investment and with better cash flow.

The next question is from Thomas Besson with Kepler Sharp.

I have 2 quick questions, please. I would like first to ask you what you're assuming in terms of ForEx to get to your minus 1.5% to minus 2% because looking at it just at the current spot prices, it looks like it's going to be a positive effect in H1. So are you assuming...

Excuse me, Excuse me.

Yes.

You please repeat because we can't hear you well.

Okay. Sorry for that. I hope you can hear me better. Two questions, please. First, on ForEx. I'm wondering if you could explain us how you get to the minus 1.5% to minus 2%, please as current spot rates suggest more something positive for the first half. So are you assuming a sharp deterioration in H2 of currencies. That's the first question. The second -- looking at the exit price/mix level, I'm a bit surprised that you're only assuming 6% midpoint. Is it reasonable to think that the overall elements of your revenue guidance may be a bit conservative? Thank you very much.

Mr. Bocchio, please.

I will take the question about the FX. And I will say, yes, you're right, meaning we do expect deterioration mainly concentrated in the second part of the year, so in the second half of the year. And our forecast about the ForEx that is between minus 2% and minus 1.5% comes mainly from the currencies of the Latin American countries and the Turkish Lira. Obviously, Turkish Lira, we are already seeing in these days, the impact coming from the country, but we expect higher volatility from Latin America for -- on the second part of the year.

Relative to the price mix. Obviously, the second part of the year will be a comparison with the -- sorry, with last year was 2021. And as you have seen, there has been a 16-and-something percent increase in the fourth quarter. So let's say, there is an opportunity, but the comparison base is quite challenging.

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

It sounds like you're still factoring in a positive mix impact for 2022 despite OEM volumes coming back. How should we think about the negative channel mix implications of a recovering OEM market. Are you able to quantify the estimated impact on price/mix? And I would imagine this would be more weighted to the second half of the year? And then my second question is just focusing in on cost inflation. Can you please give us a sense for what you're factoring in for the various cost inflation categories in euro terms? Is it fair to assume that raw mat inflation would be roughly the same the first half of this year as it was in the second half. And then if you could give us some sort of steer on what you're expecting from the combination of wages, transport and energy prices in euro terms.

Mr. Casaluci?

Yes. channel mix. So if you look at the market, we would expect a negative price mix because of the recovery of the regional equipment due to the shortage that affected the 2021 and that is expected to recover even not full recovery during 2022 mainly in the second half. But as I said before, at Pirelli we are implementing a more selective approach in the channel, mainly in Europe. As a consequence, we do expect a neutral impact of the channel mix during 2022 with similar speed between first and second half.

Mr. Bocchio.

Yes. On the inflations, we foresee an overall environment, obviously, that will have much more inflation in 2022 compared to 2021. Given a few details about it. I would say that on raw materials, we see 2022 reasonably similar to the ongoing situation of '21. So we already foresee this increase in raw mat with the latest increase even in brand that will hit us in the COGS in the next few months. So the picture on raw materials will be '22 similar to '21. We are seeing impact even on the -- specifically on the international transportation, which has not had an impact in our -- almost not had an impact in our accounts in 2021 instead will be almost fully hitting our profit and loss in '22, and we are taking into account this impact, obviously, in the guidance that we released. And obviously, what we foresee on the other side is even the impact coming from the energy that has been coming -- starting from Q4 of 2021, and will be hitting fully 2022. And even this assumption, obviously, it is already included in our 2022 guidance having in mind that we still see a lot of volatility on the market. So obviously, there is always the possibility to go up and down. We have in our number, obviously included some inflation related to the labor cost that is slightly higher than previous year. We don't foresee anyhow on the labor cost, any major impact in the year 2022 different, much different compared to previous years.

So is it fair then to assume that the absolute in absolute terms, the cost impact from other OpEx inflation is going to be roughly similar then to what we're going to see in raw mats?

What we can see to simplify things is that we see the forecast road map as inflation heading close to 7% on sales. So that is what we -- we can foresee some volatility and some risks upward that we can imagine to offset, as we mentioned at the beginning, through price increase and efficiencies.

Mr. Tronchetti Provera, there are no more questions registered at this time. The floor is back to you for the closing.

Thank you, ladies and gentlemen. So this concludes today our today program, and I wish all of you a very good evening.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.