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

Ladies and gentlemen, welcome to Pirelli's conference call, in which Pirelli's top management will present the company's full year 2022 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.

Thank you and good evening ladies and gentlemen. 2022 was characterized by high volatility in the macroeconomic scenario, further stressed by geopolitical tensions and COVID in China. Despite these headwinds, we really close the year, results exceeding November target and among the best in the industry, thanks to the resilience of our business model. 2023 scenario is still uncertain and even more volatile, where the main concerns are consumption trend, inflation and input costs like energy level cost and raw materials. Pirelli is navigating this scenario by relying upon its assets. Seizing market opportunities in the segments, offering the highest value and growth, for us 19 inches and above in electric. And at the same time, taking all the actions to deal with the volatility of the external context. In 2023, we were progressing in our deleverage path through a solid cash generation. Before commenting 2022 results and 2023 outlook and targets, I believe I should inform you that the shareholders CNRC has indicated that it will submit the notification pursuant to low 21/2012, so-called Golden Power Regulation, in relation to the renewal of the shareholders' agreement entered into on 16 May 2022 by and between, among the others, CNRC, Marco Polo International Italy S.r.l., Camfin S.p.A. and Marco Tronchetti Provera & C. S.p.A., which will come into force with the convening of the shareholders' meeting for the approval of the financial statement at 31st December 2022. 2022 results are confirmed to be among the best in the industry. Top line growth supported 24% supported by a strong improvement of the price/mix, plus 19.7%, better than the average of our peers. Profitability at 14.8%, the highest in a Tier 1 panel and the most resilient in the context of our inflation, thanks to the effectiveness of internal levels. Some cash generation before dividends above our target and higher than our peers as a result of an efficient working capital management. 2022 marked the end of the first phase of the industrial plan. With a strong outperformance, both against the industrial plan targets presented in March 2021 and against our peers. Over the last 2 years, we recorded an average annual revenue growth of 24%, 14% plus 14% versus the plan and plus 4 percentage points versus our peers. Supported by strengthening high value were in line with the plan we increased our global market share by 1 percentage point, fully saving the strong demand recovery over the last 2 years. Our price/mix was above the plan, the plan expectations in our peers through price increases and continuous mix improvement. Furthermore, we achieved also better than peers profitability trend over the 2 years, with strong margin recovery in 2021, where we fully saved the post-COVID market rebound and the resilient EBIT margin in 2022 in the context of high volatility and inflation, thanks to our business model. It should be noted that the lower profitability in 2022 versus our industrial plan is affected by different macroeconomic and market scenarios, namely demand slowdown, more specifically in the standard segment with a high inflation environment. The dilutive impact of exchange rates and the raw material inflation impact 8x higher than in our industrial plan assumption, but more than offset by the strong price/mix improvement. Finally, cash generation approximately EUR 950 million in the 2 years, EUR 190 million higher than in our industrial plan, thanks to our better operating performance and efficient working capital management. Since we accelerate our deleveraging process ending 2022 with a level of 1.8x adjusted EBITDA better than our industrial plan target of 2x. We remind you the update plan up to 2025 will be presented in the second quarter of 2023. Moving to sustainability achievements. We are progressing in 2025 targets. In line with our toward zero accident at work vision, we further decrease our accident frequency index through prevention and training. We also achieved considerable results in our econ and safety product road map, which aims at significantly cutting the environmental impact of our products without compromising on safety. Mr. Casaluci is going to update you with more details. 2022 was another year of strong progress in decarbonization as much as 74% of the electricity purchased around the world by Pirelli comes from renewable sources, with North America and Europe at 100%. Absolute CO2 emissions from our plants went down 41% compared with 2015. And the emission from the supply chain decreased by 8.9% compared with the based year 2018. We are, therefore, working already at new science-based targets, always in line with the 1.5 Celsius degree scenario and with our commitment to net zero. As for sustainable finance, in 2020 Pirelli positioned itself as a global leader in relevant ESG indexes. Like the global sector top score in S&P, Dow Jones Indices, and was included in CDP Climate A List. And it also obtained a top rating in the sector of FTSE4Good, Ecovadis Platinum indexes and others. Now I leave the floor to Mr. Casaluci. Please, Mr. Casaluci.

Thank you, Mr. Tronchetti, and good evening. Now let's analyze both the market dynamics and Pirelli's performance. In 2022, the global car tire demand declined by 1.7% year-on-year. Car 18 inches and above confirmed its resilience with a demand growth of plus 5.4 percentage points. Compared with minus 3.4% for the 17 inches and below. Pirelli outpaced the market, thanks to the strong performance on 18 inches and above segments. More specifically, on the original equipment, we sized the market rebound due to easing supply chain tensions, keeping a more selective strategy with a focus on 19 inches and above and electric. On replacement, we gained market share, particularly in North America and Asia Pacific. The reduction of the exposure to standard continued because of better focus on product mix and the greater selectivity in the original equipment. In this channel, we were also impacted by the halting of car production in Russia. In the fourth quarter, the negative car market trend, minus 7.1% market year-over-year was mainly related to wage replacement demand, minus 9.9% market, which was heavily impacted by the lockdown in China and the late start of winter campaigns in Europe due to mild weather. Positive O.E. momentum also slowed down to a plus 0.6 percentage points. Pirelli's performance was broadly in line with the market in total car tire with a better performance on 18 inches and above. Now let's turn to the results achieved in 2022 on the key programs of our industrial plan. On the commercial program, we have enhanced our positioning on the high value. On the innovation program, over 300 technical homologations were achieved, focused on the 19-inch segment and above, specialties and EV. 9 new car products were introduced, of which 4 for the SUV segment with a specific focus on EVs and hybrids. We have also expanded our offerings on the 2-wheels business with 3 new motto and 10 cycling products. On the competitiveness program, the second phase of the program was concluded recording gross efficiencies of EUR 136 million, in line with our target. On the operations program, the saturation level of high-value plans stood at approximately 90%, and the external headwind mitigation program was also implemented to guarantee business continuity in a volatile external scenario. Our commercial strategy that has signed the growth opportunities in the high-value segment, while in standard segment, we continued our strategy of reducing exposure to lower profitability product segments. In the car 18 inches and the bot segment, the plus 7.6 percentage point growth was driven by high-tech and high-end products, more specifically, 19 inches and above rim size is accounted for 70% point of the total 18 inches in the book, 4 point year-over-year of growth. Specialties increased by 10 percentage points year-over-year, mainly driven by E.V. The 18 inches and the board replacement channel was supported by pull products volumes, particularly in North America, Europe and E.V. products and push products volumes where new lines for this channel show a 15 percentage growth. On original equipment, the growth was also driven by E.V. whose weight reached 17% of the 18 inches and above original equipment volume, plus 10 percentage points year-over-year. In 2022, the Pirelli innovation program continued to feature offerings with a greater focus on consumers' needs and regional differentiation. Out of the 9 products launched in 2022, 6 in 2021, 3 are part of the old season 2 winter and 4 summer segments. In North America, Pirelli entered in the old season Northlake segment with high grid products on snow and wet services. In Europe, the renewal of the SUV Scorpion line has been achieved with the launch of the Pirelli Scorpion, featuring an asymmetrical trade pattern for better braking on both dry and wet surfaces. Scorpion All-Season SF2 guaranteeing top performance also in winter and Scorpion Winter 2, with trade sites changing shape based on the degree of were of the trade and which help tie last longer. Our innovation program places sustainability at the core of our strategy with the goal of achieving high braking performance in dry and wet conditions while improving environmental performance. 50% of our new products are in line with the top classes A or B of rolling resistance according to the parameters of the European labeling regulations. Furthermore, the average rolling resistance of Pirelli time decreased by 3 percentage points versus 2021 and by 13.6 percentage points versus 2015. 93% of our new products are in line with the top European leveling classes A or B in terms of wet grip. These results were reflected on sales, which we are monitoring as Eco & Safety performance revenues, which grew by 4 percentage points to 67% on total car tire sales. Innovation in materials is the key of all. The weight of innovative materials such as bio-based and circular materials reached 38% in some products, up 5 percentage points versus 2021. And this weight is expected to increase to 48% in -- by 2025. Research and materials, virtualization and test under real driving conditions allowed us to make important steps also on the wear rate of our tires. The new product lines launched in '21 and '22, mainly the Cinturato and the Scorpion families show an improvement up to 30% versus the previous generation. In the 2-wheels business, moto and cycling, we keep on working on product innovation to confirm our high value positioning. On moto, Pirelli is the global leader on top range with its 2 brands, Pirelli and Metzeler. In 2022, we expanded our product range with 3 new products, Diablo Supercorsa, dedicated to the Supersport segment, Metzeler Tourance Next 2 dedicated to modern crossover, which represents the most relevant segment of the market; Metzeler Karoo 4 for the off-road segment. In our Cycling business, we continue to grow. We have started production in our Bollate plant in Italy and the launch of 10 new products in different segments with a target of over 30 products in 3 years. In 2022, we established a partnership with the team Trek-Segafredo to enhance our brand impact on young people and cycling amateurs, collaborations with key partners in the high-value segments are now in place with Pinarello, Colnago and Stromer. In 2022, through our competitiveness program, we achieved EUR 136 million worth of efficiencies in line with our target of approximately EUR 140 million. Taking a closer look to the performance of each project in the product cost area accounting to approximately 31% of the efficiencies, we continue to follow our modularity and design-to-cost approach. In the manufacturing area, 43% of efficiencies, we kept on optimizing our industrial footprint as well as the implementation of efficiencies programs. In SG&A, 13% of the efficiencies, we achieved our targets through actions on several levers such as optimizing the logistic network and our warehouses as well as negotiations on purchases. And finally, in the organization area, 13% of efficiencies, the digitization process and upskilling programs continue. Thank you so much for your attention. And I now leave the floor to Mr. Bocchio.

Thank you, Mr. Casaluci, and good evening to all. Let's now review the dynamics that had an impact on our 2022 results. Pirelli closed the year with revenues growing by 24.1% compared with 2021. Volumes declined slightly, minus 1% because of the weak demand in the last quarter of the year. On the other hand, high value recorded a positive trend and grew in line with our target, plus 4.7%, with a market share gain in car 18 inches and above and the lower exposure to standard. Price/mix recorded at top of the industry plus 19.7%, underpinned by price increases to compensate for the headwinds coming from the inflation in raw materials and other input costs Improvement in the product mix due to the increasing demand for larger rim sizes, especially those equal or above 19 inches and a greater technological content. Exchange rates had a positive impact, plus EUR 287 million or plus 5.4%, reflecting the strong appreciation of the major currencies against the euro. Pirelli closed 2022 with an adjusted EBIT of EUR 978 million with an increase of EUR 162 million compared with 2021 and a 14.8% margin. Thanks to the strong contribution of internal levers, price/mix and efficiencies that more than offset the negative external scenario. More in detail, the adjusted EBIT growth is the result of the price/mix plus EUR 891 million and efficiencies plus EUR 136 million that more than compensated for the increase in the cost of raw materials, minus EUR 492 million. The inflation of input costs minus EUR 327 million, increasing in quarter 4, volume declined minus EUR 22 million due to a weak market demand in the fourth quarter. The increase in depreciation and amortization for EUR 30 million and other costs, minus EUR 25 million. Forex had a positive effect amounting to EUR 31 million. However, with a dilutive impact on marginality. In the fourth quarter of 2022, adjusted EBIT grew by 3.2% compared to previous year to EUR 224 million. Adjusted EBIT margin was 14.2%. It was 16% in the fourth quarter of 2021. It reflected the mentioned demand decline and a greater impact of the inflation of input costs, mainly energy and transportation compared with the previous quarter. Let's move now to net income dynamics. Net income strongly increased by EUR 114 million in '22 compared to '21. The trend takes into account, already mentioned improvement in operational performance, lower restructuring and nonrecurring costs. The result from equity participation was plus EUR 6 million compared to EUR 4 million in 2021. The net financial charges increased by EUR 57 million year-on-year, reflecting the rise of interest rates and currency hedging costs in Brazil and Russia. Partially, counterbalanced by a reduction of the parent group's financial charges, thanks to an improvement of the economic conditions as contractually foreseen by the reduction of the financial level. The EUR 45 million increase in tax charges was impacted by the higher operating results as tax rate is stable at around 27%. Adjusted net income, meaning excluding all the one-offs and nonrecurring items, is positive for EUR 570 million in 2022. Pirelli closed 2022 with a negative net financial position amounting to EUR 2.55 billion and a cash generation before dividends of EUR 516 million. The operating net cash flow improved by EUR 215 million compared with last year to EUR 1 billion. As a result of EBITDA growth, greater investments to increase high-value capacity and improve the mix, better management of the working capital through a careful management of finished product inventories and the raw material reduction in the fourth quarter. At the end of the year, overall stock reached an incidence of revenues of 22%, a reduction of 1 percentage point compared with September 2022. Working capital was also affected by the increase in the value of trade payables as a result of input cost inflation, a reduction though as a percentage of sales versus prior year from 30.5% to 29.8% and an improvement in trade receivables as a result of good collections from customers and lower sales growth in the fourth quarter, plus 17% compared to the first 9 months of the year, plus 26.5%, thus reducing the percentage of sales to around 10% compared to around 12% in the previous year. It should be noted that nonrecurring and restructuring charges decreased significantly compared with 2021 when the figure included the cost relating to the transfer of motor production in Brazil from the factory in Gravatai to the one in Campinas and costs linked to rationalization plans for the structures. This reduction partially offset the increase in financial charges plus EUR 57 million year-on-year, recording a total value of EUR 202 million in 2022 and higher taxes plus EUR 80 million year-on-year and the dividends paid to minorities for EUR 24 million as well as the negative FX impact of minus EUR 4 million. In the fourth quarter, the net cash flow before dividends was positive and amounted to EUR 839 million, increasing by EUR 31 million compared to EUR 808 million in 2021 due to the trend of the operating net cash flow. The group gross debt in December 2022 amounted to approximately EUR 4.5 billion. Taking into account the EUR 2 billion of financial assets, the net financial position is EUR 2.55 billion. Despite market volatility, Pirelli maintained a solid liquidity margin throughout 2022. And at the end of the year confirms that maturity coverage until the end of the first quarter of 2025. The 2023 maturities were fully refinanced during last year. Using available cash, Pirelli also repaid in advance the 5-year Schuldschein whose original maturity was in July 2023. In January 2023, Pirelli started managing the refinancing of the 2024 debt maturities, thanks to the issue of a EUR 600 million bond with ESG features, the first in the world of venture size in the tire sector. This bond, the first since Pirelli obtain the rating was positively received by the market with an oversubscription, which exceeded 6x the offer. This transaction proves the ability of the Pirelli Group to be able to always assess the market at the best conditions. In addition, this issuance confirmed once again the core relevance of our sustainability strategy. Already in December 2022, approximately 50% of our gross debt was linked to ESG targets. The cost of debt is 4.04% with an increase of 166 basis points compared to December 2021. Such increase reflects the rise in interest rates and hedging costs due to low liquidity in financial markets to cover risks, especially in Brazil and Russia. Thank you, and now I'll give the floor back to Mr. Tronchetti.

Thank you, Mr. Bocchio. Let us now discuss the 2023 outlook within a reference framework, which remains extremely volatile also in consideration of the growing geopolitical tensions. Global GDP is expected to grow by 2%, slowing down versus the 3% in 2022. With risks of recession in U.S. and Europe in the first part of the year due to increased interest rates, while in China, the economy is expected to recover with a 5.2% GDP growth due to the lifting of the zero-COVID policy. Inflation remains high with a 5.3% increase in consumer prices globally, which is lower than the 7.6% in 2022 due to the impact on the supply chain normalization process, the reduction of energy cost and the shrinking of consumers' demand. A set of pressures remain on input costs. More specifically, high volatility is expected in oil prices, given the current geopolitical tensions. The cost of energy in Europe although lower than the peak reached in 2022 remains high with an upside risk connected to the supply in the second semester of this year as well as a growing demand in Asia. Finally, cost of labor discounts contract renegotiations in the major countries. Forecast made on the overall car tire segment indicated substantially flat demand year-on-year. Resilience in the high value segment is confirmed, car 18-inches and above growing mid-single-digit and standard segment decreasing by 2%. More specifically in the car 18-inches and above, we expect a high single-digit growth in the original equipment segment, supported by the backlog from European production as well as a gradual normalization of the supply chain. Low single-digit growth is expected for the replacement plus 3% year-on-year, with first quarter substantially flat year-on-year that compares with demand, which was particularly strong in the first 3 months of 2022 in Europe and in North America. The manual replacement channel is expected to gradually recover starting from the second quarter of 2023 due to the recovery in China and on the major markets. Given this scenario, Pirelli will count on the resilience of its business model. Thanks to its distinctive position in the high value segment, increasing focus on specialties, 9 inches and above and electric vehicle with the aim of over perform in the market in both channels through an increasingly reaching homologation portfolio with over 300 communication of which approximately 60% on EVs, was 40% in 2022. And the renewal of our product range with the launch of 6 new lines for both channels and a strong focus on sustainability. The recent increases in price announced in Europe in December and North America in January confirm our solid price discipline. We are deploying a third phase of our efficiency plan in line with our forecast in the 2021, 2025 industrial plan, with benefits worth approximately EUR 100 million, also from the digitization of all our corporate processes as well as a high level of saturation of our capacity in spite of the reduced level of production in Russia. Price/mix and efficiencies will allow to offset the impact on the increasing raw materials, inflation and forex. On cash generation, we will continue to leverage on a careful management of the working capital, specifically on stock management, whose weight of revenues is expected to go back to the levels of 2021, mainly due to a reduction of raw material stocks. Based on 2022 result as well as the scenario previously discussed, expectation for 2023 are revenues between EUR 6.6 billion and EUR 6.8 billion, volumes between flat and plus 1% year-on-year with mid-single-digit growth in the high value segment, while exposure in the standard segment keeps on being reduced. Price/mix improvement between approximately 4.5% and plus 5% due to the price increases in 2022. And those announced earlier on this year as well as a continuous product mix improvement. Exchange rates between minus 4.5% and minus 3.5%, potentially assuming a greater euro to dollar volatility as well as for the currencies in the emerging countries. Profitability, adjusted EBIT margin between more than 14% and approximately 14.5%, the mid-range adjusted EBIT substantially flat year-on-year. And while the price/mix and efficiencies will offset the growing impact of the raw materials inflation and exchange rates. Investment of approximately EUR 400 million, 6% -- around 6% of revenues for technology upgrading the factories, improving the mix and increasing high-value capacity in Romania and North America, where the expansion will be completed by 2025. Expect the net cash flow before dividends between around EUR 440 million and around EUR 470 million due to the operational performance and efficient working capital management. This target includes the payment of management's long-term incentives relating to the 3-year period 2022 and based on share return cash and sustainability targets. The last 2 calculated at the maximum. Please note that from 2024, following the transition to the rolling system, incentive payments will be on an annual basis. We have substantial alignment expected between impact on the income statement and cash outflow. Net financial position of around EUR 2.35 billion, we've leveraged between around 1.65x and 17x adjusted EBITDA, in line with the leverage process outlined in 2021, 2025 industrial plan. This ends our presentation, and we open the Q&A session. Thank you.

[Operator Instructions] The first question comes from Giulio Pescatore of BNP Paribas Exane.

Being the first one, I guess, I have to address the elephant in the room. We saw headlines in the last couple of weeks saying that your Chinese shareholders are looking for an exit. Can we just please have a comment from your hand on this? I know that the shareholders in question have denied, but what is in your mind the long-term gain for the shareholders? And is there any truth to those headlines? I'll follow up with my other questions later.

Thank you for the question. The shareholder made a clear statement, so nothing changes. And so we -- I have nothing to comment because all comments have been made by the shareholder. Thank you.

The next question is from Monica Bosio of Intesa Sanpaolo.

The first one is on the competitive environment in the replacement segment. Are you seeing some trading down in your core business? I know that there is some trading down between Tier 2 and in Tier 3. I'm just wondering if you are seeing some trading down also in [indiscernible]. And as the second question is on the guidance, on the price/mix, which looks to be quite robust, plus 4.5%, plus 5.5%. I was wondering if you can tell us how much is price and how much is mix? And the very last question is on the guidance, still on the guidance. What is your level of confidence in meeting the top hand of the guidance? And what are the assumptions behind the potential achievement of the top end of the guidance?

I will leave the floor to Mr. Casaluci for the answer. But one point we -- our target price mix is between 4.5% and 5%. It's not 12. What we see is not trading down in our segment, but please, Mr. Casaluci.

Yes. Thank you, Mr. Tronchetti. Yes, starting from the trade down, there is a trade down effect in the market, but is related to the standard segment. So if we focus on our addressable market, which is the 18 inches and above and the high value itself, the impact of the trade down is very, very limited. If we stay for a while on the market tires where there is a high content of technology. Today, more than 95% of the European market is Tier 1. And we don't see any kind of trade down in this segment, not at all. Moving to the price mix. Let me say if we consider the average point of 5 percentage points of growth in the price/mix expected for 2023, around 60% is expected to be priced coming from the rollover of the price increase already announced during 2022 plus the one announced in Europe in December and the one announced in January in the United States. And 40% is expected to be mixed with the usual good performance on the pure product mix of 3%, 3.5% and the negative impact on the channel mix, because the expectation is to have an original equipment market and demand growing more than the replacement channel because of the rebound of the shortage in the supply chain. So all in all, today, we -- of course, we will try to do our best and to match the high part of the guidance, but there is still a high level of volatility in the market because of different elements in input cost, inflation, demand and so on. So we maintain our guidance, of course, targeting to do as much as we can.

Sorry, if I insist. But which is the main issue that could prevent the achievement of the top end of the guidance, inflation and the cost energy or the renegotiation on the labor cost side?

We think that it's linked really to the macroeconomic scenario. If Europe and U.S., they are able to serve on inflation and on the recession in a way that lately has been for a cast that we feel comfortable with the numbers. Obviously, it's something unexpected happen the scenario changes and profitability can be affected. But in an average scenario we see today, we are confident we can achieve these targets.

The next question is from Philipp Koenig of Goldman Sachs.

My first question is just on the costs. Can you maybe provide a bit more of a detailed breakdown sort of what you're expecting between raw materials and inflation and maybe sort of the total headwind that you're currently seeing for this year? And then my second question is on the price/mix. Does the 4.5% to 5.5% that you're forecasting, does that imply any further price increases this year? Or does that basically imply that prices stay where they are from this point onwards? And then my last question is just on the volumes again. Can you maybe just comment on Europe, in particular, where your inventories are sitting?

Mr. Casaluci, please.

Yes. Thank you. Cost side and inflation, as Mr. Bocchio presented, we do expect a headwind in terms of inflation of around EUR 150 million in all. The building blocks of these inflation are mainly inflation of raw materials. Just to give you a rough number is around between EUR 70 million and EUR 80 million of inflation in the -- on EBITDA level on the raw materials that will account for 37% on sales of our total cost. Around EUR 40 million is expected to come from the logistics inflation, mainly the land transport in Europe and United States, where we still see some negative impact coming from the shortage of drivers and trucks. Some positive signals are coming from the international freights on the sea freights. Then we have an expectation of around EUR 100 million of inflation on EBIT level coming from the energy cost, where we have already hedged around 75% of the total cost for 2023, which is in a way, protecting ourselves from further eventual volatility on this market that is not expected to be stabilized yet. And all in all, around -- between EUR 90 million and EUR 100 million of negative impact coming from labor cost, where we are renegotiating the labor contracts in the majority of the countries where we are present. These are the headwinds. As we said before, compensated, more than compensated by the sum of efficiency plans and price/mix. Then I move to the second question, price/mix. 5 percentage points are including already the announced price increase of Europe in December up to 3% and United States in January up to 10%. No further price increase are included in our numbers. So only the rollover effect of the already announced price increase, eventually further price increase will depend on the trend of the demand and the global inflation. So far, we don't see major changes in the price scenario. Last point related to volumes. Well, the start of the year in Europe has not been a very positive January recorded a negative market, double-digit negative market around 10%. But there are good reasons that feel as confident that the recovery of the market will come from the second quarter. The main reasons of the slowdown of the demand in Europe are related to a not favorable comparison versus last year because in 20 -- end of '21 and beginning of 2022, there was a strong rush to pre-buying and pre-booking because of the expectation of inflation on the price. Today is more stabilized. And then there is a winter season that is not performing as expected, generally speaking, in the market because of the weather conditions that is leading to a high level of stock in the trade. So all in all, Pirelli is gaining market share despite the tough environment, we are over performing the market, and we expect from the second quarter an improvement of the external scenario.

The next question is for Mr. Giulio Pescatore of BNP Paribas, who was inadvertently removed from the queue.

So I had a second question and a [indiscernible]. So the second question on volumes based on the market assumptions you're making, I just tied to reconcile your guidance for flat to plus 1% when you see the high-value market actually growing at 4%. Are you expecting -- are you being conservative? Are you expecting potential market share losses and you focus on the higher end of high value, if that makes sense or 19-inch are about? Then the second one is a bit more long term. It's on regulation. So unlike for carmakers, the regulator has so far chosen to let tire makers set their own standards in terms of emission. And I really appreciated all the color you started to share today on -- in terms of recycled materials and all the rest. Do you see this changing in terms of regulation? Do you expect the regulator to become more kind of prescriptive in terms of what tire makers can produce themselves? And do you think this is a potential opportunity for Pirelli given how well you do on this level?

Well, the market for 2023, yes, we do confirm the expectation is for a flat market. But it's important to remind that in this market, the high value is expected to be more resilient. Despite the flat market on the high-value replacement is expected to be between plus 3% and plus 4%. And the high-value original equipment is expected to be a plus 7%. So all in all, we are confident that this market is reflecting the slowdown of the demand, all in all, but mainly concentrated in standards. So we feel confident that this market is the best estimation we can do for the foreseeable future. On the second point, to be honest, we see opportunity for Pirelli due to the acceleration of the EV car registration. Also, if we see the acceleration of the regulation in Europe that target the -- within 2035, the disappears of internal combustion engines is supporting the acceleration all in all of EV penetration starting from the Premium and Prestige segment. And EV, high-value EV represents for a tire maker, a premium tire maker, like Pirelli an enormous opportunity because it means starts with a higher level of content of technology because of rolling resistance because of load index because of noise control because of grip. And as a consequence, we see it as an opportunity. And we see that the pace of growth or the tires is higher than expected.

The next question is from Christoph Laskawi of Deutsche Bank.

The first one would be on the energy cost and you show in the presentation that you expect the cost relative to sales to move up by 100 bps. You also said that 75% of that is hedged. Is that expectation of 100 bps higher based on the current spot or on other prices potentially a bit higher in case the prices move up again? And then on the volume trends in the regions and your Q4 performance, there was slightly weaker than thought. Is there anything that is spilling over outside of the general market into Q1? And did you have to adjust your production run rate as a reaction to the volume that you saw in Q4? Or for example, there are also the logistical issues on the road right in Europe and the U.S. impact your production footprint? And then just lastly, on the phasing of the year, could you give us a rough sketch of how the margin will be phasing throughout '23?

So thank you for the question. Talking about energy cost, we -- you are right. As we said, we had hedged roughly 75% of the total energy cost for 2023. We do consider that this is the right level to enter into this year, hedging at this level -- we paid more than the spot price of today. That's right, but we assure the stability of the cost for the entire year. And so we stay at this level, and we will monitor the volatility of the market. But we are protected because with the 75% of hedging already included in the number we presented, we are protected from the volatility. What we can do more and more is to accelerate the reduction of energy consumption. And there is a set of projects that we have in place, mainly in Europe, curing machines, segmentation, lightening all we can do to reduce [indiscernible] per ton that we consume in our factories. And we will never stop because this is also consistent with our road map of carbon neutrality. And market-wise, the trend of the first months of 2023 are expected in line with the last quarter of 2022 in terms of market speed with the slowdown of the replacement mainly in Europe because of the reasons I mentioned before, a tough comparison versus last year and a weak winter season, and also in North America because of the tough comparison versus last year. While we do expect a recovery in China after the Chinese New Year where we see first positive signals coming from the demand of China. Pirelli performed in line with the market in the last quarter because we decided not to accept any compromise in the price performance and not following wholesalers that were looking for pre-buying based on our already announced price increase in January and December. And we expect and we target to over perform the market for the entire 2023 as we did in the last 3 quarters of 2022. And I have to say that January already started with the right speed.

A quick follow-up, if I may, just on the energy cost because I have been after the 25% that you didn't hedge. Is the expectation that you gave in the presentation for the 100 bps uptick factoring a certain assumption for the unhedged part already? Or is it basically at current spot?

No, it's already included, of course, our estimations includes the hedging we did at the price we know because it's already fixed in our numbers and expectation of -- for the 25% not covered already, to be honest, a bit higher than what is the spot price today. But the spot price today is around EUR 50 per megawatt, so is the lowest of the last 2.5 years. So we do prefer to be more conservative in this forecast.

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

I have 2. Perhaps just going back on your cost assumptions for 2023. Firstly, are there any materials that you would point to specifically that are materially higher year-on-year? Just sort of looking at spot prices for materials such as natural rubber, butadiene oil, it seems as if they're actually tracking lower versus the 2022 level. And then secondly, could you just please comment on the magnitude of the sea freight related headwinds that you incurred in 2022? I would have imagined as a cost item that this component would be larger than road transport.

Well, on the cost side, I assume our expectation on labor cost, energy cost and logistic costs, we are confident that we are on the safe side. So we don't expect major changes because of what I said before. We are already hedged 75% of energy. Half of the labor contracts, we have to negotiate in 2023 are already closed or close to be finalized in the coming weeks. Logistics is going in the right direction. So we see positive signals on the logistic cost, all in all, compared to our numbers, where we can expect more volatility of the raw material. But every time that there is a movement -- significant movement in the raw material cost, then we can in our segment, the high value and with the price discipline we apply, we can always pass through the increase of course, into the selling price.

If I could maybe just -- sorry, if I could maybe just follow up on the raw materials. I mean, just in terms of your planning assumption, are you using estimates for natural rubber and some of the other inputs that are higher than the current spot prices?

We look at the future with expectation of the futures in the market, and we consider the best estimation coming from our internal analysis, banks, analysts and we take the best estimation for the next months. We have coverage on our COGS the coming 3 months. So we are -- we can assume that the cost of the natural rubber tier April are already fixed in our numbers. And the best estimation we can do for the following months. But again, the cost increase on raw material in our segment, the high value is easily to be transferred to the price selling price as we did in the last years.

The next question is from Martino De Ambroggi of Equita.

The first one is very quick on price/mix. You didn't mention the drop-through or I missed it, I don't know. The second is on Russia. Just to understand what was the contribution in 2022 because you mentioned 4% of sales, just to understand if it was still profitable in terms of EBIT and what is the net financial position? And what you have embedded in your 2023 guidance from Russia? And still on Russia, I'm a little bit surprised hearing you do not mention any negative effect due to the need to transfer part of your capacity from Russia to other countries. So should we consider it a minor cost? Or could it have weighted quite a lot on '22 results? And how is progressing the transfer of capacity?

Before leaving the floor to Mr. Casaluci, there is an impact that is in the numbers of 2023 of the reduction -- of the results coming from Russia in the second part of the year. Because the first part, we had the export coming to Europe, convenient and profitable. In the second part, there wasn't obviously. And so this year, there will be the full year impact of the Russian situation. So -- but now I leave the floor to Mr. Casaluci.

Yes. Staying for a while to the Russia and then moving to the price/mix question. Yes, as Mr. Tronchetti said, we are discounting in our numbers, the not full saturation of our operations in Russia. We target to have a saturation around 70%, 75% of our factories. It's difficult to have a clear understanding because the environment, as you can see, is not stabilized at all. But with the 70%, 75% of saturation, we have a negative impact on the efficiencies plan included in our numbers. It means that we target basically 100% of the production for the local market and local market under strong pressure because it's a shrinking market, is a trade down market. But it's a purely 90% standard market. So we stay there to keep the operation running, protecting our people and our assets and nothing more than that. And we already reduced the expectation of the result. Moving to the price/mix. Price/mix -- sorry, price/mix drop-through is between 60% and 65% the mix and between 40% and 45% the volume or the drop-through.

If I may, on Russia. It was EBIT in '21 was positive at EUR 29 million. So should we assume in your guidance is basically 0 in '23 or still profitable or maybe negative?

It's between 2% and 3% of our total EBIT results, so it's a positive but very, very limited.

And the last question is on VEV because I remember in your last call, you mentioned 14% of your original equipment sales for 18 inches and above was already equipped for VEV cars. What is your projection? What was in full year '22? And what's your projection for this year? And when you believe the aftermarket will become visible in terms of contribution to sales and obviously, margins?

Well, the VEV replacement will start to give positive contribution to the result in 2023. It will be limited. We do expect around 700,000, 800,000 pieces sold in the replacement in EV in 2023, while we plan to go around EUR 5 million in the regional equipment. So start to be visible already this year. Then from 2024 on, we will take the pull-through of the original equipment sold in '21 and '22. What is positive is we confirm a 15 percentage point of average selling price in the replacement higher compared to the internal combustion engine, which is the way we see the good opportunity coming from EV.

And very last, if I may. Profitability for the standard products in '22?

We confirm our target to reach the double-digit ROS on the standard. But as we said last time, we have a delay in this target because of the Russian effect, both because we run with not saturated plants that generate an inefficiencies 100% linked to the standard. And secondly, because we lost the Russian source for the European sales. So we transferred the demand to Romania and Turkey, but today, we discount the delay. High single digit for 2023.

The next question is from Sanjay Bhagwani of Citigroup Bank.

I have got 3 questions as well. My first one is on your free cash flow. And it is actually very impressive that you were able to meet your free cash flow target where some of your peers actually list their target. So just wanted to know that what do you think you did differently versus your peers? Were you more efficient on the ground in terms of like proactively getting the receivable? So any color on that will be very helpful. Then my second question is on price/mix. So this is a bit more confirmation than equation. So if I understood it correctly, yes. So first of all, can you please remind me what portion is coming from the price and what is from the mix? And if I understood this correctly, price is already -- it is just based on the price increases you have already done. So no further price increases required to meet this price/mix target right. That is my second question. And my final question is a bit more structural. I think you just mentioned that the EV tire will be making somewhere around 15% higher on the average selling price. So my question is like how sustainable do you think this is? Do you expect this to remain for like next 5 to 10 years? Or do you expect that this can eventually normalize?

So I will start from the last questions. EV is a new technology. And so we are in a growing phase of the technology both for the carmakers and the tire makers. And so the premium price is recognized and is expected to be recognized for the coming years. To be honest, I'm not able to say if 10 years will remain the same price gap or not. What is sure that in 10 years from now, the internal combustion engine and the electric vehicle will coexist in the market more than 10 years for a couple of decades at least. And this will create more complexity, more differentiation in the commercial offer and as a consequence, more opportunity for us to leverage on this in terms of innovation technology and as a consequence and price point. The price/mix, as I said before, is 60% price, so around 3% out of the 5% and 40% mix of this 2% of mix, there is a 3 percentage point positive of product mix and roughly a 1 percentage point negative of channel mix. Because as you see, the original equipment is growing, is expected to grow to rebound in 2023, more than the replacement. And I'll leave to Mr. Tronchetti for the cash flow question.

Cash flow, we have to consider compared to our competitors that the EBITDA adjusted was higher and we were more efficient in handling the cash flow. We commented last time that we have more visibility on our dealership. And so we have a better forecast on stocks and so we can handle better the stock. So that is why.

The next question comes from Edoardo Spina of HSBC.

I have 3. First, on the midterm and 2025, I mean, inflation was higher than forecast for the cost and revenue in the last 2 years. So I wonder if you reviewed your internal plans for the midterm and how you look at the 2025 targets, the consensus being that EV -- targets are still achievable if I'm not wrong? The second question is on the steel on the midterm. What is your outlook for volume growth after 2023 for Pirelli? Do you still expect an acceleration towards mid-single-digit growth at some point or has this view changed for the moment? And finally, on the cost of debt, what is the forecast for 2023 and for 2024 debt maturities if you plan to finance soon? Or are you prepared to wait for lower interest rates later?

Related to the 2025, we will give to the market our revised plan in June. So it's early to say as far as inflation is concerned, we just can summarize what is the best, let's say, analysis providing today that is decreasing inflation both in U.S. and Europe. And but it's really early to say. I leave the floor to Mr. Giorgio Bruno about the cost of debt.

So related to the cost of debt, what we have in mind is for 2023, we have already managed all the debt maturities. So we are targeting cost of debt. There's at least 20% higher compared to 2022. For 2024, we are working now in order to manage the maturities related to 2024 because as you have seen, lastly, we have launched an ESG bond. So our approach is to maintain a well-balanced profile between debt capital market and the bank loans. So all in all, we are taking opportunistic approach. And we see, for sure, that also counting on the cash flow that we are generating. And so we are targeting for 2025 a net debt EBITDA ratio at least 1x. So we are quite confident to handle also the scenario where we can have a volatile scenario in terms of interest rates.

Next question is from Gianluca Bertuzzo of Intermonte SIM.

First one is on inventories. What is the level of inventories on winter, all-season and summer tires? Second question is on North America, where it seems that your actions are getting ripe as you're gaining market share. Do you plan further growth in 2023? And what are your expectations? And last question is on the CapEx plan. Can you give us the split maybe between capacity increase, transformation and other elements?

So starting from the stock in the trade in the winter is a high level, above average of the season because of the weather conditions that has not been as severe as expected, in Europe, in North America, in Canada, mainly and in Russia as well. So we need to wait another month to see -- to have a final conclusion on the level of stock and the -- as a consequence, the expectation of the coming winter season. While on summer in the season, the stock is, let me say, consistent with the seasonal leverage. We see that there are opportunities to increase the stock in the trade in China that is quite low, while North America and Europe, both summer and a season are in line with the average of the season. In U.S., you are fully right. Our target is to grow. We see that we have a lot of opportunities in the U.S. market because we are -- we have a lower market share compared to the other regions in the high value markets in the high value segments. We were able to gain share in 2022, and we target clearly to gain share in 2023 and the coming years. We are planning everything to do it in terms of new product launches. The vast majority of the new product lines have been launched in United States. We have -- we are entering in U.S. original equipment partners that were not customers of Pirelli 5 years ago. The GM, the Chrysler, Tesla, all the most important in iconic cars of U.S., like the F150, the Dodge Ram, and we are enlarging our customer base with long-term agreements with the most important distributors in the region. Last but not least, we are investing in the production capacity, as we already announced in our Mexico plant up to EUR 8.5 million within 2025. As far as CapEx in 2023, I would say, more or less 30% will be related to capacity increase, mainly concentrated in Europe and North America and we already announced projects in Romania and Mexico. Then around 44%, 45% is related to technology upgrade and digital transformation, which is always the most important part of our CapEx concentrated in technology innovation, sustainability and digital. And the remaining part around the 25% is what we call business continuities, basically base load, [indiscernible] and things like that.

The next question is from Valentin Mory of AlphaValue.

I have actually one question remaining. I was wondering if you could share your thoughts on the price sustainability versus decreasing costs? In other words, what would make you consider any price decreases?

As far as we see today, there are no reason to decrease the price in our segment. The price can be affected only by a strong recession. So for the time being, there are obviously pressure in many areas, but the volatility of the raw materials keeps everybody quite stable. So that's why we don't see short term anything happening. I remind you that in our segment, in general, the price is more resilient than average.

Mr. Tronchetti Provera, there are no questions registered at this time, sir.

Thank you. Thank you so -- thank you, ladies and gentlemen. This concludes our today's program, and have a good evening.

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