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

Good afternoon. This is the event moderator. Welcome, and thank you for joining the web call for Pirelli 2023 results and 2024-2025 industrial plan update. [Operator Instructions] Now I would like to turn the conference over to Mr. Tronchetti Provera, Pirelli Executive Vice Chairman. Please go ahead, sir.

Good afternoon, ladies and gentlemen. Welcome to our presentation. Today, together with the management team, we will review the achievements reached so far and discuss the update plan for '25 -- '24, '25, deep diving into commercial and technology priorities. Looking ahead, a new industrial plan represented at the end of '25 or beginning of 2026. In the last 3 years, we have faced a challenging context, characterized by an economic slowdown, the GDP growth that was 1 percentage point lower than expected, growing geopolitical tensions, high inflation and interest rates that reached the peak in the last decade, introduction of new and more stringent relation on CO2 emission in both Europe and U.S. In this scenario, we really leveraged on a resilient business model focused on High Value and efficiency program supported by digitization, flexible organization ready to implement mitigation plans and increasingly local for local manufacturing structure and an accelerated and effective decarbonization roadmap, result achieved proved the effectiveness of our strategy. Performance was better than expected and allowed us to consolidate our position in the industry. In the past 3 years, we increased our focus on High Value, which in 2023, accounted for 75% on the group sales. Improved profitability with an adjusted EBIT margin of 15.1%. This result was the highest among the Tier 1 players. Our sound and steady calculation allow us to decrease the debt and cut the leverage by half, 3.65x at the end down to 2020, down to 1.56x the adjusted EBITDA in 2023. We accelerated the decarbonization process in our plants by cutting CO2 emission by 51% compared to 2015, becoming one of the most responsive players in this area. These important results were achieved, the strong commitment of the overall company. Looking ahead in the next 2 years, geopolitical and macroeconomic context, we remain volatile, and we forecast a moderate global GDP growth in both years, plus 2.3% in 2024 and plus 2.6% in 2025, below the assumption of the previous plan, plus 3.1%, especially in U.S. and Europe. Still high inflation in 2024, 4.7%, almost double the previous plan assumption, but gradually improving in 2025, plus 3.1% the previous indication was plus 2.6%. Interest rates are declining, but still higher than forecast in our previous plan, both in Europe and in United States. We see macro trends of important opportunities. High Value is confirmed as the fastest-growing segment, plus 5% per year between 2023 and 2030 compared to a basically stable Standard segment. Sustainability is becoming an increasing influential factor for end consumers and for OEMs in turn, are setting challenging decarbonization targets. Electric vehicles, approximately 40% for new Premium and Prestige cars will be electric in 2025. And these incidents will double by 2030. Connectivity keeps spreading. 32% of the global car park will be connected by 2025, 60% by 2030. The consumers have a more inclined to use connectivity solutions in their cars. In this context, Pirelli aims at reinforcing its distinctive positioning, leveraging on our technical superiority, which is the basis of our historical leadership in Premium and Prestige and is being further reached with the new competencies through the collaborations with the emerging EV players. Our electronic brand that combines tradition with innovation remains a restricting factor in the purchasing choices of consumers. Our cost and ability to innovate that allow us to look at connectivity as the most interesting value creation opportunity. Pirelli leads in this technology, thanks to the Cyber Tyre system that has been the first to be integrated into a car system. Lastly, our leadership in sustainability. We want to be a driving force in the automotive ecological transition across the value chain. Indeed, ours is the most ambitious decarbonization plan in the industry. We aim at becoming the first tire player to achieve carbon neutrality in 2030 and next year in 2040 as well, we will see in the following presentation. This target allows us on the one hand, to comply with the regulation in advance, and on the other, to meet customer and consumer requirements for giving us a competitive edge. Now Mr. Casaluci, the floor is yours.

Thank you. Thank you, Mr. Tronchetti, and good afternoon. We will now continue with the presentation of the main achievements for 2023 then the outlook for '24 and '25, how our strategy is evolving. And finally, we will provide an update on our targets for the next 2 years. Let's begin with the 2023 results that confirmed the resilience of our business model. We closed 2023 with EUR 6.65 billion sales and an organic growth of 6.8%, driven by a strong pricing improvement. Adjusted EBIT exceeded EUR 1 billion with an EBIT margin of 15.1%, supported by internal levers. Net income amounted to EUR 496 million due to operating performance and tax benefits. Solid cash generation, EUR 509 million net cash flow before dividends, above targets, thanks to efficient inventory management. Based on these results, the Board of Directors will propose to the next shareholders' meeting the distribution dividend of EUR 0.198 per share with a payout ratio of 40%, in line with the shareholder remuneration policy approved in March 2021. In terms of sustainability, our commitment to guarantee health and safety resulted in a decrease of the accident frequency index to 1.7 with a 15% drop compared with 2022. Significant acceleration in decarbonization, where we cut our plant emissions by 51%, Scope 1 and 2, and supplier emissions, Scope 3, by 18%, exceeding 2025 science-based target. Strong push on eco and safety products with the launch of the P Zero E with more than 55% of bio-based and recycled materials, a significant result that places Pirelli in the leading position for materials innovation. Our commitment was recognized by the major ESG indices where we rank at the highest levels. As for the tire market, a demand recovery is foreseen for '24 and '25, around plus 1% driven by High Value, the fastest-growing segment with a growth rate 6 percentage points higher than that of the Standard. High Value market trend is confirmed to be in line with our 2021 industrial plan assumptions, while the weakness of the Standard segment weighs on the overall demand. Focusing on High Value, the two fastest-growing segments are: Tires 19 inches up, which will account for over 50% of High Value in 2025; electric vehicle tires, where we have the leadership with the total market, Original Equipment and Replacement, expected to reach 90 million tires in 2025 compared with about 50 million in 2023. In line with the previous plan, we aim to strengthen our leadership in High Value. With the commercial programs, we will accelerate in EV and specialties, taking growth opportunities in North America, Europe and Asia Pacific. With the operations programs, we aim to strengthen the resilience of our value chain and increase efficiencies. Finally, the innovation programs to accelerate and exploit Cyber Tyre development opportunities. In reaching these objectives, Pirelli can count on the strength, passion and commitment of all its people, led by an expert management team with a deep knowledge of the industry. In 2023, we introduced a new company structure, designed to make the decision-making process smoother. Engagement is another key factor. It reflects a consistent and performance-oriented corporate culture. Let's now deep dive into the plan, starting from the commercial strategy. In the next 2 years, we estimate that the share of tires, 18 inches up, is going to increase further. In the Replacement channel, where we aim at increasing our market share, growth will be driven by the pull-through due to the wide homologation portfolio increasingly oriented to EVs and specialties and push through, thanks to an expansion of the product range. In Original Equipment, we keep our focus on improving the mix by concentrating of tires 19 inches up and EV tires. Finally, we continue to decrease our exposure to 17 inches and below tires, concentrating sales in the regions that we define as Standard and focusing on the most profitable segment. As we said, part of the growth in the Replacement channel is driven by past OE homologations and by the high loyalty rate of 80%. We have the widest premium and prestige homologation portfolio in the industry. We continue to feed the Replacement demand with our homologation strategy in OE, which is increasingly focused on 19 inches up, accounting for over 90% of new homologations; specialties due to reach of weight of 70% in 2025; and EVs, which will account for 67% of new homologations by the end of 2025. Our offering with a high technological content is distinctive and includes safety and mobile-oriented solutions like seal inside tires and the new run forward technology; solutions for the new eco-friendly mobility, like the noise canceling system and ELECT; cyber to meet the challenges of connected mobility, which Mr. Misani is going to explain in more detail. Another driver for growth in Replacement is the widening of the product range. Between '21 and '23, we successfully launched seven new product lines per year that will drive the growth of revenues in the next 2 years. In '24 and '25, we are planning a further expansion of our range with 10 new products per year, focusing more and more on solutions for EVs and sustainability. Five new global lines with a focus on sustainability materials, ELECT technology and extended mobility, 10 new regional lines to better cover among others, the all-season segments in Europe, Asia Pacific and United States, five lines dedicated to new fast-growing segments like, for instance, all terrain in the United States. In Original Equipment, as already mentioned, we aim to grow in the electric segment. For the EV market, despite the short-term slowdown, we expect a strong growth in the premium and prestige segments. At present, EVs account for 25% of premium and prestige car production. This is expected to reach 40% in '25 and double in 2030. Pirelli is well positioned to make the most of this opportunity. We can count on our solid partnership with premium and prestige carmakers, both traditional and new pure EV players. And we continue to extend our EV homologation portfolio, reaching a target of more than 900 homologations by 2025. We have the ELECT technology for all product families, ensuring a high level of safety and performance. We aim at doubling EV volumes between '23 and '25. This growth will still be driven by OE whose weight in 18 inches up volumes will increase from the 25% in 2023, up to 40% in 2025. The High Value market is concentrated in North America, Europe and Asia Pacific that together account for 95% of 18 inches up volumes. In North America, the largest High Value market, we intend to strengthen our positioning by extending the range of dedicated products to cover key segments such as all terrain, consolidating the partnership with local OEMs on iconic American models, expanding the distribution network and with our brand boosted by the partnership with the Formula 1. We confirm our leadership in Europe with a selective approach in Original Equipment, while in Replacement, we are taking growth opportunities in high potential segments such as all season. Finally, in Asia Pacific, we will increase our focus on Southeast Asia and Pacific markets where we have a limited market share, explore opportunities with Chinese EV car makers and leverage on digitization to expand our distribution network. Our commercial strategy is supported by our brand. In High Value, the brand is a key factor in the purchasing choices of consumers. The Pirelli brand represents an element of differentiation as it is not only recognized globally, but also perceived as prestigious sporty and high tech. This is the result of more than 150 years of history and heritage combined with a continuous evolution in tune with our consumers, always keeping in mind sustainability and inclusion. But why try to explain the brand with words when I can show it to you in a video. [Presentation]

Now moving to operations. We have three main priorities to support the execution of our strategy. First, keep strengthening the resilience of our supply chain end-to-end. As in example, we aim at covering 90% of demand through local-for-local production. Second, maintain a high level of efficiency, always driven by digitization and automation initiatives. We aim at obtaining about EUR 370 million efficiencies between '23 and '25. Third, accelerate decarbonization, as mentioned before, with a plan that places us in a leading position in the industry. Our first target is to make the supply chain more resilient. We can count on a manufacturing structure, which is increasingly high value-oriented which by 2025 will account for 78% of total capacity and more local for local, as in the case of the joint venture in KSA. Moreover, we keep working on risk management of the supply chain, leveraging on the experience gained in the last years in managing emergencies by extending the risk monitoring activities throughout the supply chain, increasing local for local sourcing of materials to reduce risks associated with logistics and transportation. An example here is the already announced acquisition of Hevea-Tec in Brazil. Finally, adopting AI and new technologies to support risk monitoring such as real-time visibility of shipments that allowed us to promptly react to the Red Sea crisis. Moving to the efficiency program. The 3-year period, '23-'25, is the third phase of the cost competitiveness program launched in 2020. We aim at achieving about EUR 370 million in efficiencies in 3 years, equal around 7% of the cost base in 2022 while accelerating from EUR 92 million in 2023 to about EUR 135 million, EUR 140 million in both 2024 and 2025. Compared to what indicated in the 2021 industrial plan, we expect to generate about EUR 70 million more in the 3-year period. The products remain the same but the initiatives see an extra boost from digitization and innovation. Some of the initiatives we are currently developing are modularity in product development, electrification of the curing processes, plant automation and digitization. Finally, let's switch to the decarbonization program where we keep accelerating. We have revised the SBTi targets for the third time after reaching the previous targets 2 years in advance. In defining the new targets, we standardized the base year to 2018. We adapted to the new science-based target initiative protocols, which include perimeter changes for Scope 1, 2 and 3. Therefore, we have recalculated 2023 data based on the new parameters. Our goal is to achieve carbon neutrality by 2030, reducing Scope 1 plus 2 absolute CO2 emissions by 80% versus 2018 and offsetting receivable emissions. We aim at net zero by 2040 with at least 90% reduction of our emissions and those from the entire supply chain in line with the 1.5 degrees of the Paris Agreement. To achieve these goals, we have designed a clear road map namely, for Scope 1 plus 2 emissions, we are working on more than 90 energy efficiency projects with a total investment of EUR 50 million between 2022 and 2025, a transition process towards 100% electricity from renewable sources by 2025, a project to electrify 75% of the curing process, up to 100% in Europe, by 2030 with a EUR 22 million investment per year between '24 and 2030. These projects will allow us to achieve carbon neutrality in 2030 for Scope 1 and 2. Meanwhile, we are reducing Scope 3 emissions through some key programs, engaging with the suppliers accounting for more than 90% of emissions in order for them to share primary data, report to CDP and set SBTi targets, pushing on bio-based and recycled materials innovation, targeting to reach 40% of use in our total production by 2030 and 80% by 2040. The combination of the two will allow us to achieve the net zero target by 2040. Let's now talk about 2024-2025 targets where we expect low single-digit organic growth of the top line, about 4% in 2024, which will be partially eroded by ForEx volatility on which we remain cautious; gradual improvement of profitability from 15% in 2023, up to 16% in 2025, supported by internal levers; increasing cash generation, around 80% of revenues, ensuring the leverage of 1x adjusted EBITDA by 2025. Based on the solid cash generation outlook, the dividend policy has been revised up. In 2025, we expect it to be approximately 50% of the 2024 consolidated net profit. Please note that the previous industrial plan assumed a payout ratio of 40%. We updated our sustainability targets, which are already fully integrated into our growth strategy. We have developed a plan in line with the ongoing sustainability transition process and in response to the evolving scenario. In this slide, we have outlined the main targets, but you will find the complete picture in the appendix uploaded on the website. I would like now to highlight the strong commitment to safety that has always been a key priority for Pirelli, the acceleration on decarbonization with a 60% reduction of our emissions and the 27% reduction of supplier's emissions, eco and safety product development with an increasingly high percentage of bio-based and recycled materials. Despite the dramatic change of the external scenario, the target I just illustrated lead us to confirm the same profitability and cash objectives as in the previous plan, namely 2025 revenues at EUR 6.9 billion, average estimate about EUR 6.8 billion to about EUR 7.0 billion, around EUR 1 billion more due to the inflationary boost, adjusted EBIT at approximately EUR 1.1 billion, in line with our estimate in March 2021, however, with a lower margin due to the strong inflationary impact. 2021, 2025, cumulative net cash flow before dividends at EUR 2.5 billion, in line with our estimate in March 2021. Net financial position, adjusted EBITDA ratio at 1x. Now before leaving the word to Mr. Misani, who will talk about future challenges in the way we are getting ready to tackle them, I'd like to conclude by highlighting one of our major strengths, the ability to innovate ahead of the main trends in this industry. We have driven the premiumization of the tire market in close cooperation with premium and prestige introducing the concept of perfect fit. We have accelerated the electrification of the automotive industry and in 2019, 4 years ago, more, we launched the first tire with a specific technology for electric vehicles. We are focusing on sustainability as a key differentiator of our offering. And finally, connectivity will redefine the interaction between the user and the vehicle and tires will play a leading role in this transformation, thanks to our Cyber Tyre system. Thank you so much, and I now leave the floor to Mr. Misani.

Thank you, Mr. Casaluci, and good afternoon, ladies and gentlemen. To contribute to the results and the plan and support our leadership in the High Value, our innovation will move in three directions. First of all, products, where innovation is focused on consolidating our leadership in EVs through a thorough development of eco safety design program and increasingly using sustainable materials. Second, processes and manufacturing technologies. Innovation is aimed at developing the future factories, increasingly based on the pervasiveness of digitization, IoT, automation and electrification. Third, the even more connected automotive business where based on our Cyber Tyre, we keep on developing connectivity with OEM vehicles as well as infrastructures and end users. But let's start with the product. As we heard from Mr. Casaluci, we achieved the objective set in the previous plan by becoming the leader in EV business as proven by the over 500 homologations closed so far. In this endure we leveraged on the ELECT technology package, which meets the specific needs of EVs, like low-rolling resistance to increase the battery range, better wear resistance, noise comfort, both inside the vehicle and outside, what we call pass by noise. But ELECT is not a specific product line. It's a technology that Pirelli applies to all segments from summer to winter and all-season tires for cars and SUVs to always offer customers the best solution for a specific application. In the plan time horizon, we continue to develop this technology to further improve performance and expand our customer base. As far as the acceleration of our product road map is concerned, all new products are developed using what we call eco safety design. In other words, the ability to improve product sustainability parameters like mileage and wear rate, rolling resistance, acoustic comfort also by means of Pirelli noise cancel system specialty. And all of this with the use of innovative materials coming from bio-based or recycled sources. But at the same time, we are also improving product safety features like wet braking and [indiscernible] planning, performance at worn and when required, ensuring extended mobility with a run-forward technology. In 2023, we have been the first in the market to launch a new sustainable UHP tire, the P Zero E product line, a true flagship of eco safety design because it has a AAA European label, rolling resistance, wet braking and noise which, together with an improved mileage, led to a 24% reduction of CO2 emissions when compared to previous product. And all of this was done using more than 55% of bio-based and recycled materials as validated by the third party, Bureau Veritas. But let me say P Zero E is just the first step that makes us confident and allows us to improve our internal targets for an ever-increasing use of bio-based or recycled materials. In fact, in 2025, we will launch our best product with at least 70% sustainable materials. While the value of such materials will reach 30% on the whole product range. Our vision to 2030 raises these percentages above 80% for best product and 40% for the entire product range. By using a specific logo to identify all products with over 50% bio-based or recycled materials, such gradual reduction of costive content will be transparent to consumers and will be validated always by third parties such as Bureau Veritas as mentioned before. These raw materials will also be certified as compliant with ISCC or FSC, as in the case of natural rubber. Besides the technical details, we can show in this chart how complete is our road map with the materials that will become available for production and their time line to fulfill our ambition to be able to use 100% bio-based or recycled materials by 2040. Recycled materials will not just come from end-of-life tires, like, for example, carbon black through pyrolysis, but also from waste coming from other industries like recycled polyester, the well-known silica from rice husk, oils from recycling processes and last, but not least, from pulp and paper waste, like lignin, a material that we have already used in P Zero E to partially replace carbon black. To achieve these targets, and align with our circle economy approach, we are working in three different innovation streams. The first, consistent with our open innovation model, is about working with the best raw material suppliers of polymers, flares and chemicals to develop new JDAs. Today, we already have 13 JDAs to develop exclusive materials for Pirelli. But at the same time, we closed the acquisition of Hevea-Tec, a natural rubber transformer in Brazil with the aim to develop starting both from natural rubber and latex, new technologies to transform this material and gradually replace synthetic polymers with biodegradable natural ones. Finally, through a JV with a selected partner and consistent with our focus on High Value, we are developing advanced pyrolysis processes that in our lab already allowed us to obtain high-performance grade carbon black from end-of-life tires with the final objective to replace 50% of carbon black content in a tire with this new material. Consider that typically currently available grades of recycled carbon black from pyrolysis do not exceed 15% of such content when in premium tires. The speed of product innovation, the acceleration and the introduction of sustainable materials will be accompanied in the manufacturing area by efficiency, quality and flexibility program to make the industrial processes consistent with this transformation. To shape the future factories, manufacturing will move along 2 axis. The first one, we call large-scale high-tech plants, with a capacity typically above 10 million pieces like those in Romania, Shandong in China or Mexico for premium tires and their OEM application. The second one, the small not high-tech plants, typically located in Italy and Germany for the flexibility, quality and efficiency level necessary for our leadership in the prestige segment. In this small low volume, high-tech plants, we shall work on process innovation, mainly on the second generation of the continuous mixing process, but also making semifinished products, manufacturing processes more flexible. At the same time, we will keep investing in the deployment and further development of robotized processes. Process standardization, electrification of the curing presses and automation mainly in the finishing area will become programs used in both large scale and small lot plants. To support and accelerate this transformation, we have already relaunched the Pirelli Manufacturing Excellence program, PME, to optimize all shop floor activities and flows using standard methods and cost analysis tool. And all of this will be supported by an upskilling and reskilling program of human resources. It has already started. And in the next 3 years, we'll reach more than 80% of the total workforce. It will become a powerful enabler for the development of digitization, IIoT projects that guarantee 50% of the efficiencies indicated in the plan. But the challenge of digitization can be better understood when we talk of connectivity. The automotive business is rapidly becoming even more connected, all thanks to the acceleration and introduction of electric vehicles and assisted driving systems. We expect 32% of car park will already be connected in 2025. And this percentage will almost double by 2030. With this rapidly evolving scenario, through our Cyber Tyre technology, data collected by the sensor integrated in the tire will be processed in real time to optimize care stability and control, to improve safety aspects, to contribute to consumption saving and also to plan predictive maintenance of tire itself. Let's see how all this takes place by following the data flow. The sensor in the tire measures and generates pressure, temperature and acceleration raw data and unambiguously indicates in real time, which tire type is mounted and its characteristics. These data are then sent to a receiving control unit in a vehicle and processed by algorithms, especially developed to implement the different functionalities. Then this data can be transferred to Pirelli cloud or directly used on board the vehicle for safety and control. The data stored in the cloud can be further processed to implement functions for infrastructures, fleets or end users. Finally gather data are very important as they allow as they allow to integrate a big quantity of data from the field into track development virtualization systems. We named this flow crowd testing. It's particularly important because knowing real usage condition of our products with a large amount of data and in a more detailed and objective manner, we can improve efficiency and effectiveness of virtual design methodologies in order to speed up development of new products. For the cyber technology, we have two go-to-market strategies. The first targets OEM and car connectivity. The second is orientated to services and based on the interaction with the end user. Let's start with the first one. Pirelli has been a pioneer in the integration of processed tires sensor data into vehicle system with a well-known McLaren project. Recently, we have expanded the customer base not only to Pagani in the Prestige segment, but also to Audi, Tesla, just to mention a couple of examples in the premium market. We intend to continue working together with OEMs to make an increasing use of processed tire data and improve performance and safety. But this is not all. We have already started to work in order to pre-integrate the Cyber Tyre data in the vehicle control system. This allows us to advance and enable more features in the vehicle dynamics and above all, to accelerate the introduction of Cyber Tyre technology in the larger premium market. As for servitization, we have already entered the partnership for the monitory of road infrastructures with Movyon, a company of Autostrade per l’Italia Group. In 2024, the first Movyon vehicle fleet with Pirelli sensorized tires is going to map the Italian motorway in order to perform a more pervasive monitoring of the road surface and the better road management and maintenance of the AutoStrada itself. We have also started to finance scale-up project within [ Emos, Centraal Mobilitas Sustainable ] or in English, National Sustainable Mobility Center, to further develop these technologies in other different applications. Last, but not least, we are going to develop services linked to connected tires based on sensors for different types of users, dealers and fleets. But here is a video that shows Pirelli Cyber Tyre and what it enables. Thank you. [Presentation]

Thank you, everybody. I'll now leave the floor to Mr. Bocchio.

Thank you, Mr. Misani, and good afternoon all. Let's now review our 2023 results. We ended the year with EUR 6.65 billion revenues above the November guidance. Profitability at 15.1%, with adjusted EBIT of just above EUR 1 billion. Cash generation before dividends of EUR 509 million, about EUR 50 million more than expected, thanks to our solid operating performance and efficient working capital management. Please note that the 2023 figure does not include the acquisition of Hevea-Tec, the closing of which was signed on the 3rd of January 2024 at an enterprise value of approximately EUR 21 million. The negative net financial position of EUR 2.26 billion with leverage significantly better than the 2023 target. Analyzing more in detail our performance, Pirelli closed the year with revenues up by 0.5% and plus 6.8% when we exclude ForEx and hyperinflation in Argentina and Turkey. High Value sales account for 75% of the group's total revenues. It was 71% in 2022. The volume trend, which was negative 1.8% in 2023 shows the different dynamics between High Value and Standard segment. We increased our market share in High Value Replacement while keeping a selective approach on High Value Original Equipment and Standard. It is worth noting how volumes developed in the fourth quarter, plus 2.1%, outperforming main peers. The price/mix was plus 8.6% in full year 2023 and plus 2.7% in Q4 and exceeded our expectations of about plus 8% in the November guidance. It was the highest among Tier 1 players. It was supported by price increases aiming at offsetting input cost inflation and the FX impact and the product/mix improvement. Foreign exchange had a negative impact. It was minus 6.3% in 2023 and minus 10.6% in Q4, in line with the November guidance. This is due to the weakening of the United States dollar, renminbi and emerging market currencies against the euro as well as the hyperinflation impact in Argentina and Turkey. Pirelli closed 2023 with an adjusted EBIT of just over EUR 1 billion with an improvement of EUR 24 million over the previous year and a margin of 15.1% due to the strong contribution of the internal levers that more than offset the headwinds of the external scenario. More in detail, the price/mix and efficiencies more than compensated for the volume decline, the increase in raw material costs affected by ForEx volatility, input cost inflation, namely labor following the renegotiation of contracts, energy, which discounts the impact of hedging made in 2022 and the increase in logistics, especially in regional transportation costs. Internals also cover the negative impact of ForEx, reflecting Mexican peso valuation with Mexico being the production hub for North America. The increase of amortization and other costs, the latter being linked to R&D and marketing activities. In the fourth quarter, the adjusted EBIT amounted to EUR 219 million, basically in line with last year. Margin improved to 14.7%. It was 14.2% in Q4 [ 2022 ], however, lower than in the previous quarters due to the seasonality of the business. Let's move now to net income dynamics, which grew 14% year-on-year, thanks to the improvement in the operating performance, lower net financial expenses, where the interest rate increase in the Eurozone was offset by a higher valuation at fair value of other financial assets in Argentina and finally, tax benefits deriving from the patent box with the 2023 full year tax rate at 21.3%. Adjusted net income was EUR 595 million. At the end of 2023, Pirelli's net financial position stood at minus EUR 2.26 billion, with a cash generation before dividends of EUR 509 million and a leverage ratio of 1.56x the adjusted EBITDA. The operating cash flow improved by EUR 16 million compared to last year to EUR 1.25 billion, thanks to the adjusted EBITDA growth investments of EUR 406 million in High Value to continue improving the mix and quality in all plants and to increase the production capacity in Mexico and Romania, increased rights reviews and a better management of the working capital through a reduction of inventory, mainly raw materials, which reached 20.6% of revenues with a decline of 1.4 percentage points compared with December 2022. The weight of receivables, 9.8% of 2023 revenues compared to 9.6% in 2022 and payables, 30.1% and 29.1% in 2022 remained unchanged. At the end of last year, Pirelli's gross debt amounted to slightly less than EUR 4 billion, taking into account EUR 1.7 billion of financial assets. The net financial position is equal to EUR 2.26 billion. In the last quarter of the year, Pirelli signed a new committed revolving credit facility for EUR 500 million with the objective of increasing the group's financial flexibility and the liquidity margin. At the end of 2023, our liquidity margin was around EUR 3 billion, half of which was committed lines not drawn and half liquidity position. The liquidity margin covers the financial debt maturities up to the first quarter of 2028. The cost of debt was 5.08%, up 104 basis points compared with December 2022. This increase reflects the interest rate hike mainly in the Eurozone, where the group has most of its financial debt, approximately 78%. Our fixed and floating rates remains balanced with about 50% of the debt at the fixed rate. Finally, in terms of sustainability linked debt at December 2023, it accounted for 67.5% of our overall gross financial debt compared with 48.7% in the previous year. So far, we talked about 2023. Now let's address our 2024 and '25 targets, which Mr. Casaluci just discussed in his presentation. Let's focus on the main drivers behind these targets. In a still very volatile environment, we are projecting mid-single-digit organic growth, between about plus 3.5% and plus 4.5% in 2024, to be partially eroded by ForEx headwinds. More in detail, we expect volume growth to be between plus 1.5% and 2.5% in 2024. We aim to continue to outperform the High Value Replacement market and keep a selective approach on a High Value Original Equipment market and further reduce our exposure to Standard business. Price/mix of about plus 2% in 2024, thanks to continuous mix improvement. Negative ForEx impact between minus 4% and minus 3% in 2024 mainly due to the weakening of the U.S. dollar, the high volatility of emerging market currencies as well as the hyperinflation impact in Argentina and Turkey. The top line growth in 2025 is expected to be supported by similar dynamics and will further benefit from slightly better volume increased and price/mix as well as lower ForEx impact. We aim to improve our profitability by around 0.5 percentage point per year to reach an adjusted EBIT margin of around 16% in 2025. Now let's analyze in detail our assumptions on raw materials, inflation and efficiencies. We expect neutral raw material impact in 2024, including FX impact on commodities. While in 2025, we foresee some raw material headwinds, partly due to the commodities trend as a result of the improved GDP growth in the world's major economies and partly to the continued volatility of exchange rates. We expect persisting inflation headwinds until 2025, mainly related to higher labor costs and higher regional transportation costs. As Mr. Casaluci underlined, we are accelerating our competitiveness program and expect to deliver EUR 275 million of cumulative efficiencies during 2024 and 2025. The improvement in profitability in 2024 will therefore be driven by volume growth, while price/mix and efficiencies will cover the impact of the external scenario, namely ForEx, raw material and inflation. In 2025, in addition to the positive volume performance, price/mix and efficiencies will more than offset the negative impact of the external scenario. Finally, let's talk about the cash flow. Cash flow conversion in '24 and '25 is expected to be in line with the first phase of our 2021 industrial plan. We expect a solid cash generation of EUR 1 billion to EUR 1.1 billion in 2024 and 2025 leading to our leverage target of 1x net debt over adjusted EBITDA. Our sound cash profile is based on improving operating performance and efficient working capital management, which will more than cover CapEx of about EUR 400 million each year in '24 and '25, stable at about 6% of revenues, of which over 60% are devoted to technology upgrade, productivity improvement, digitization and sustainability. Financial income and expenses of approximately EUR 200 million per year in both '24 and '25, where the positive impact due to lower interest rate will be offset by the hyperinflation impact in Argentina and Turkey. Higher taxes with a rate between about 28% and 30% in 2024 and 2025, which is mainly related to the cancellation of the allowance on equity in 2024 and change in the patent box benefit in 2025. We would like to remind you that on our 2024 cash flow guidance, it includes EUR 21 million cash out related to the Hevea-Tec acquisition, which was completed in January 2024 instead of 2023 year-end. This end my presentation. I now leave the floor to Mr. Tronchetti.

Thank you, Mr. Bocchio. This ends our presentation, and so we may now open the Q&A session. The floor is yours.

This is, again, the event moderator. Thank you, Mr. Tronchetti. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Akshat Kacker, JPMorgan.

Akshat from JPMorgan. Three questions. The first one on market share opportunities in High Value Replacement, specifically in North America and Asia. Could you talk about and give us more details in terms of new product launches and the steps that you're taking to push through demand in these regions specifically? And can you also remind us of your market share in High Value Replacement specifically in China? The second question on managing FX volatility and risks. Could you just discuss your strategy around mitigating or managing rational and translational FX risk for the business going forward? I asked that as in 2023, there were almost EUR 215 million of profit headwinds from FX specifically. And the final question on standard tires. Could you remind us what is the size of the business today in terms of volumes? And what is the new landing points that you're targeting in the medium term?

Okay. Thank you for your questions. I will start from our growth strategy in the High Value in North America and Asia. So basically, when we talk about North America, which is by far the biggest market in the High Value in the tire industry, is where we see the major opportunities for Pirelli because our market share today is below the average of our High Value market share in other regions like Europe, for example, or Asia. The strategy is based into the introduction that we started years ago, 3, 4 years ago, of Pirelli replacement products dedicated to the U.S. consumers. We started with the complete renewal of our old season product range. And now we rank in the top evaluation of the most important magazines and the dealers' evaluation on the old season as far as the mileage performance, for example, is concerned. What we want to address in the coming years is also the all-terrain market that is quite big. We do estimate around 20% of the United States market where we are still -- we still have a very low presence and we are planning to renew our product range, which is part of the 10 new product lines per year that we presented before. It's not only Replacement in United States. My opinion is also our presence in the most iconic U.S. vehicle because in the past, Pirelli was recognized more as the, let me say, European carmaker supplier. While we started years ago to deal with the U.S. carmakers, and now we are fitting iconic vehicles like the F450, the Dodge Ram, the most important models of Tesla and so on. Moving into the Asia Pacific. We see opportunities in the introduction of all-season products in China as well. But we also can grow a lot in the -- out of China, in Japan, in Southeast Asia, in South Korea, where we still have a relatively small presence and we can still exploit a lot of the opportunities of our traditional pull-through model, so related to Original Equipment homologations. These are the two main pillars. As far as the landing point on volume, what we can tell you is that in terms of volume, in 2025, we now plan to arrive at a 65.5 million tires more or less with standard tires landing at 21 million. It means that if we compare our plan to the previous plan presented in 2021, where we are below in terms of volume, but the difference is all concentrated in the Standard segment, mainly driven by our lower presence in South -- in Russia and in South America and also the exit strategy from Standard in Europe that has been accelerated due to the loss of the Russian source. And so we decided to accelerate our phase out and exit strategy in some less profitable Standard segment. The third question related to the risk management, I leave the floor to Mr. Bocchio. Thank you.

Thank you. About the question on the FX. Obviously, we are living in a still very volatile environment. And that's why we are expecting ForEx headwind in both years, both in 2024 and 2025. And this mainly are due to the weakness of the U.S. dollar for the next 2 years, the still expected volatility of Latin American currencies and the impact of other emerging markets, weaker currencies, such as the Turkish lira and, for example, the Russian ruble. Obviously, as a policy, we are fully covered with the translational risk of the FX. We are not covering the translation risk. But anyhow, the policy that Mr. Casaluci was highlighting previously that is increasing the local for local business from 85% to the expected around 90% in 2025, we think it is already a strategy to reduce the exposure to the ForEx volatility.

One quick follow-up. Could you remind us on your targets for margins in Standard tires, please?

Yes. In the previous plan, we announced a target of a double-digit profitability on Standard. Unfortunately, we are not yet there. We still plan to have the double digit, but we have a delay, I would say, in a couple of years delay, mainly driven by the under saturation of the Russian plant and lost of the competitive sources of Russia for Europe and also the high inflation impact in South America. So these two effects were not forecasted and foreseeable in our previous plan. And so in a way, now we are trying to recover through efficiencies and more selectivity in the Standard in order to go back to the target of the double digits, I would say, with a couple of years' delay.

The next question is from Kurian Ashik with Millennium [Operator Instructions] We will move to the next question. The next question is from Martino De Ambroggi with Equita.

The first question is on the BEV tires. You upgraded your expectation in terms of volumes, but could you provide us what is the starting point in '23 in terms of sales and profits? And what do you expect in '25 as arrival point just for the BEV? The second is a more general question concerning the business plan because your strategy to focus on High Value started several years ago and was successful, but many other competitors are moving in the same direction. So just wondering if you don't feel the competitive environment could be worse going ahead? And don't you see any consequence from the European investigation, which is ongoing? And the third is just a follow-up on the Standard segment profitability. What is the starting point in '23 with and without Russia? Just to have an idea where the Standard is without the exceptional situation in Russia.

EV tires. Despite the slowdown of the last months in the car registration, we are confident of our forecast, mainly the Premium and Prestige segment. We confirm our forecast of 80% of new car models within 2030 in the electric either Premium and Prestige segment. Having said that, in terms of volume, we start from 2023 where we closed around 4.5 million tires in EV, mainly related to Original Equipment because the market is extremely young, and we plan within 2025 roughly to double this volume. The Original Equipment will remain the biggest contributor, but we will start to see a presence also in the Replacement channel of sales, I would say, between 20% and 30% of the total volumes in 2025. As far as profitability of the EV, we see a similar profitability on the -- of the High Value so -- is in terms of percentage. But as I mentioned in the past, this profitability high double digit in close to the 20s is applied to an average selling price, which is roughly 15% higher than the average selling price of a tire developed for internal combustion engine. As a consequence, in absolute value, we do expect an improvement of the profitability. The competition in the High Value, of course, is high, which is in a way confirming that our strategy and our business model is the right one. And so the vision of more than a decade ago of Mr. Tronchetti was the right one. So we are happy to see that others are following. We like competition and we always target to remain the leader in this segment for a simple reason -- two simple reasons, I would say, because we are focusing on this. We just do that, and that is the core of our business. We exited from the industrial, from -- we have a very consistent exit strategy from the Standard and more and more, we focus on the development of the High Value segment. And now I come to the second reason, which is our capability to innovate and always introduce new technologies in tires. We started with the market tires concept in the Premium and Prestige segment, where we still have in prestige half of the market with a market share of around 50% then we move it into the electric vehicle. And we are now accelerating the introduction of sustainability as a selling proposition, both in the Original Equipment and Replacement and the new frontier we have seen in our presentation has to do with the connectivity and the connected tires which is already a reality, but numbers and impact will arrive in the following year after the 2025. And then there is also a strong acceleration in virtualization that is helping us to be faster in introducing new technology. So innovation and focus are the two answers. And then there is also a long, long-term relationship with the most important carmakers based on trust and again on the capability to innovate and provide the right service level that way is protecting us as a competitive advantage. Yes, yes, yes. Yes, you're right. This is also demonstrated by our market share in EV, which is a brand-new segment very related to performance. Mr. Misani explained why an EV tire is different from a tires developed for internal combustion engine. And this, again, has to do with technology and innovation. Antitrust, we are very confident that we act always following the antitrust rules, not only in Europe but everywhere. We provided the full transparency and access to all the information we have and we are waiting for the response, but we are very confident that this is -- you have to know it's an extremely competitive industry. And what I can tell, but is a personal opinion is that it's a bit frustrating to spend the last 20 years of my life to find a way to gain against competition, a bit of share, a bit of positioning and then to have to answer to this question. But okay, we assume and we are very confident and wait for the response in the coming future, being always full available with the authorities for the investigation. Standard in the -- today, the profitability of Standards is in the range of the mid -- high single digit, I would say, between mid- and high single digit. And I cannot exclude the Russia effect, simply because Russia was providing a positive contribution to the profitability of the Standard for Europe because it was a competitive source. And today, the profitability I just mentioned you is including the exit from Russia effect. So all in all, we can consider that without Russia, the Standard profitability is between single and -- single-digit and high single-digit profitability.

The next question is from Sanjay Bhagwani with Citigroup.

I have got two questions. The first one is on the follow-up on the BEVs. So if I understood it correctly, the price of -- in the type of High Value tires, BEV tires are priced 15% higher and similar profitability. So my question is to what extent this accretion or the acceleration of the BEV is already baked into your margin targets and the sales targets on the mix side? And is there any scope for further upside, especially to 2025 margins if BEV penetration or let's say, the replacement tire for the BEVs goes up? . My second question is on the '24 outlook. So I'm really trying to reconcile is like your guidance looks a bit conservative for margins, especially you're guiding for 15 basis points margin improvement versus this year for '24. But when we look at all the key drivers like the volumes are getting better, price is still holding up well price and mix, FX is okay. So can you maybe walk us through the key -- what sort of drop-throughs we should be thinking for the volume, price/mix and FX? And to what extent this guidance is just you're being conservative on the margins?

Thank you. I will answer the first question, then I will leave to Mr. Bocchio for the second one. As I said before, the BEV penetration is expected to grow. Of course in our estimation, the car production in BEV is expected to be in '25, around 20 million car productions. And -- but what is more important is that if we focus for a while on the Premium and Prestige in '25 is expected to reach 40% of the car production, which means roughly 6 million new cars in the BEV. As a consequence, as I said before, we plan to double up our volumes in BEV types from the actual around 4.5 million tires up -- more or less double in 2025 with the Replacement reaching around a couple of million. So a bit more than -- around 20%, 25% in terms of volume. In terms of profitability, I said before, is in terms of return on sales, I would say, EBIT margin is similar to NI value, but this EBIT margin is applied to an average selling price, which is roughly 15% higher. And this is included in our profitability projection of 2025 at around 16% as a whole company, of course. But why is higher the average selling price, is because of the technology inside the ELECT tires. So is more -- even more a mix effect because at the same tire with the same size of the same diameter with the ELECT has more technology inside. And this technology is what is creating the better average selling price with, again, same return on sales. I leave to Mr. Bocchio's for second question.

Yes. Thank you. I will summarize a little bit a few numbers for you. So first of all, the organic growth in 2024 of the top line is expected to be between 3.5% and 4.5%, out of which volumes will be between 1.5% and 2.5% and the price/mix about 2%. And you may consider in this price/mix of 2% that we foresee prices to be flattish, while the positive coming from the mix -- from the improving mix that is typical from our business model. FX still expected to have a negative contribution, and we expect to be between minus 3% and minus 4% in 2024 compared to 2023. Another important point to consider in order to -- for us to gain the 0.5 percentage point in the EBIT margin that we are forecasting for 2024 is that our efficiency program will be able to offset almost completely the inflation that we are expecting; inflation that mostly will be related to the labor cost renegotiation, regional transportation and the inflation coming from the high inflation markets. While on the other side, the price/mix raw material, almost neutral and the negative impact on the EBIT coming from the FX will be balanced -- overall balanced. So the real engine for the increase in the result will be the volume. And the target, as I said, is to increase at least 0.5 percentage point. So from the 15.1% ROS achieved in 2023 to be in the range higher than 15.1%, up to 15.5% in 2024.

The next question is from Monica Bosio with Intesa Sanpaolo.

I hope you can hear me. I have a few questions. The first one is on the BEV tires. Thanks for giving us the weight in volumes. I was wondering if you can share with us also weight in terms of revenues for 2023 and 2025? My second question is on the Replacement market. What are your expectation for 2024 and going forward and especially what are your expectation for China? Also, on China, can you share with us your exposure to Chinese local players? And what could be the balance in a 2 years' time?

Thank you for your questions. I will start from the Replacement expectation for the market, including the China view, and then I will leave to Fabio Bocchio for a rough estimation of the -- of EV tires in revenues. We are positive on the High Value market, as we said before. We do expect roughly a growth of -- from 5% to 6% of the High Value market in 2024, which is both valid for Original Equipment and Replacement, both. China is following this trend. So we're confirming the High Value pace of growth for China in '24 and in '25 around 5% as a whole market, also reflected in both channels, around 4%, 5% in Replacement, a bit higher in the Original Equipment. This is the whole High Value market I'm mentioning. About our partnership with the Chinese carmakers and mainly, I would talk about the new EV carmakers on the Chinese market. We follow, in China, the same strategy we have in all the other markets and regions. So we partner with the premium carmakers. We are not entering in the EV market of the synergistic segment, which is very big in China and offering a lot of opportunities, but is not our target. We partner with the new carmakers focusing on the electric vehicle and growing very fast in the premium segment, both in the local market and in the export as well. Just to mention some of them, [ Rialto, Sokona, NEO ], but also the high end of [ BYD ]. So brand, mainly the first one that were basically unknown 4, 5 years ago and now are growing and introducing new cars, successful car models in this segment. This is demonstrating that Pirelli is not selective with a specific region or a specific carmakers. Pirelli is following the premiumization of the car park. And if the premium car park or the prestige car park is becoming electric, we partner and we support the transition into electric. If the newcomers of the electric vehicles are more from the United States or from China, we partner with them. And we start a new relationship and new long-term technical relationship that are also helping us to first, derisk the exposure on the customer base; and second, to learn more from a different way to develop cars. At the same time, we are supporting the incumbent European carmakers into the EV transition. So it's a premium strategy that is widening the customer base all around the world as far as OE is concerned? Fabio, please.

Yes. Regarding the weight of the ELECT product on our sales, I have to say that for the year '23, '24 and '25, the weight of volume is pretty similar of the weight in net sales, and that is related to the fact that still for '23, '24 and '25, the majority of the sales of the ELECT product are related still with the Original Equipment. Obviously, going forward, we expect the part related to the Replacement market to grow. That's why I am expecting going after 2025, the weight of -- on net sales will be much higher than the weight on the volume. For the time being, I can tell you that in 2023, the weight of the ELECT on the 18 inches and above was between 8% and 9% overall.

Okay. And maybe I did a previous question. Can you remind the drop through on price/mix across the plan, please?

For the plan in both in '24 and '25, what we are expecting is pricing to be in '24, flattish and really slightly positive in 2025, driven by the fact that we are expecting raw materials to be a little bit rebounding in 2025. So obviously, there is a part of our pricing that is linked to the Original Equipment and linked to the cost matrix. So there will be an impact coming from that. But there is no major increase in the pricing for this year, for next year. And the price/mix is fully related to the improvement in mix. So you may consider that the vast majority of the price mix. Guidance is coming from mix. So the drop-through is -- you consider the use of drop through, overall, obviously, price is 100%, but on mix is between 60% to 65%.

The next question is from Ross MacDonald, Morgan Stanley.

Ross MacDonald from Morgan Stanley. I have three questions, please. First one on R&D expenses. Just given the new product rollout, the 20 product lines you're talking about and the sustainable tire acceleration that you're rolling out also, how will that impact your R&D expenses on sales in '24 and 2025, please? And secondly, on your 2024 guidance, I can see you're guiding to net interest expense being flat at EUR 0.2 billion. Just curious if you can be a little bit more specific around net interest expense going forward. Are you expecting that to be slightly higher than the current '23 level or broadly in line? And then third question, a theoretical question on tire wear. I can see you're guiding to quite large improvements in wear rates by 2030. Obviously, that's good for the environment. It's good for the consumer also. But it could be an issue for the Pirelli business model if tires are structurally lasting longer. Can I just understand how I should think about that in my model? Should I be assuming a longer wear rate for Pirelli tires? Or are you effectively keeping the tire life span the same by using less tread? So be really interested to understand that.

Okay. Thank you so much. First question, the R&D expenses, we assume around 6%, and we maintain. So growing the net sales, we will support as a consequence but this is the core of our activities. And so we keep on this ratio and we do consider this as the optimal one to support our road map of technologies. As far as the tire consumption, I leave to Pierangelo Misani, which is the most expert in the company.

Thank you. As you correctly highlighted, the tire wear improvement will not be fully reflected into higher effective mileage. But part of it is cash, let me say, to reduce the tire weight, to reduce then the amount of rubber that will be generated by the abrasion. In the case of the P Zero E, for example, I mentioned that we had up to 42% increase in tire wear. Of course, we have not translated this 100% in more mileage, but only the half of it has been used to increase the true mileage of the tire to make it in line also with the fact that being fitted to -- mainly to EV tires, we have to compensate, let me say, the effect of e-vehicles to wear more the tire.

Can I maybe just follow up? I think I understood that correctly. So R&D expenses for '24 are rising to 6%, up from 4.3% of sales in '23. And then there was a question also for financial expenses. I'm wondering if -- how you see those progressing versus '23?

Yes, R&D expenses on a high-value sales will remain around 5.5% and 6%, yes. And Fabio will answer on the question.

Let me take the question on the interest. First of all, reminding that on the full year 2023, the financial -- net financial expenses stood at EUR 194 million. Now for '24 and '25, we had lower interest charges as a consequence of the reduction of debt and the expected decrease of the interest rates. On the other side, we are expecting higher volatility, especially related to the hyperinflation in countries such as Argentina and Turkey. So overall, we maintain guidance of around EUR 200 million of impact per year.

The next question is from George Galliers with Goldman Sachs.

I had two questions regarding the connected or Cyber Tyre. The first one was whether you could help potentially size the market there. On Slide 14, you very helpfully give us the percentage of cars that you expected to be connected. But do you see a very high, almost 100% of connected cars having some kind of connected tire on them? Or will the penetration start quite low and grow in coming years? And any insights or color around that would be very helpful. The second question I had was with respect to the biggest opportunity economically from the connected tire for yourselves. Do you see it coming from the sell-up of connected tires and the higher price points, which presumably they command? Or do you think the bigger economic opportunity in the medium term will be the R&D and manufacturing efficiencies and learnings that you're able to make as a result of the data from these tires?

Thank you. So as far the penetration of the connected car park, what we can confirm is what we presented in terms of different pace of growth of connected cars between the EV and the traditional one. And so this is what we plan and where we see the big opportunities of this fast-growing market. While if we move into a pricing estimation or a value creation estimation inside our numbers, it's too early to have these and this will be part of our next industrial plan because we are now defining the sizing of the market, but also the different application and opportunities related to connected tires. You mentioned already some, integrating the tire with the dynamic of the vehicle. And so to be a contributor in the performance and safety of a car which is the first, I would say, priority for us now and so be part of the development of the new way of designing the dynamic of the vehicle. Second opportunity is to provide data to infrastructure and to support the maintenance of infrastructure. And third potential application is to provide a new way of having a predictive maintenance of the tire and so has to do with the servitization to the end users that we'll be able more and more to plan well in advance the tire change at the right time without losing money, but at the same time, without losing nothing in terms of safety. And then there is also the opportunity to use data back from the tires crowd testing, as Misani explained before, to improve the development of our new products. So it has again to do with better performance and more value to our products. So as you can see, there are a lot of potential opportunities. We are sizing all these opportunities, and we are accelerating the introduction of the technology in order to be ready in the next industrial plan to translate all these road map of technology and first marketing activities we have already in place into consistent numbers and business plan.

The next question is from Edoardo Spina with HSBC.

I have two. The first is on merger and acquisition and financial leverage. If I recall correctly, a couple of years ago, in 2022, you mentioned that the once net debt-to-EBITDA went below 1.5x that's when you could start look again at the use of cash and potential M&A. So given that we are approaching that level, I was wondering if you have any internal discussion about M&A at this stage at all? And if you look in the future for something transformative or just a small bolt-on? I think it will be very time for understanding growth prospect for the next decade and beyond the tires, if any? And the second question is on the regulation. You already touched a little bit about the durability of the tire and the fuel consumption. But we understand that the European Union is evaluating the opportunity for some restrictions on the emission of particulate matters from the tires. So I would like to ask, first of all, if you expect some regulation in Europe to actually come in the near term, if you expect other regions to follow maybe the U.S.? And finally, if you -- what would be the impact on Pirelli, vis-à-vis, the cheaper tires and potentially also some big competitors? Because I understand Pirelli focused a lot on the performance and maybe a little bit less on the durability. So I was wondering about this.

Thank you. So as far as the M&A strategy, priority one today, as we mentioned, the priority of our balance sheet is to reach the level of one within 2025. But in the meanwhile, of course, we are looking and evaluating, analyzing different opportunities. So far, I would say that the most important opportunities that we see in front of us are in the field of materials and it has to do with sustainability. We have the small example of Hevea-Tec acquisition already in 2023 finalized in '24, in the beginning of '24. But this is a small example where we can accelerate our M&A strategy in the future because this is opening opportunities to increase the percentage of bio-based and recycled materials. It's not only natural rubber, is also paralyzed -- pyrolysis and carbon black opportunities and so on. So the feel of new materials and innovation. Another big opportunity is we already discussed is coming from connectivity. And so creating an ecosystem of alliances and opportunities to enlarge our knowledge, mainly in the side of digital and algorithm and to accelerate the introduction of these technologies. These are two examples of where we are evaluating possible future opportunities. As far as the tire road wear particle, the most important regulation that we have in front of us is by far the Euro 7 announced in Europe. We fully support the introduction of the Euro 7, and that is expected for the car tires, if I'm not wrong, to be applied within July 2028. And we are accelerating all the development of more durable product. As Mr. Misani said before, it's not right that is not the first performance we look at. On the contrary, all the new product lines that we are introduced today is a minimum target of 30% of reduction in the tire -- in the wear and the emission of particles. So we fully support the introduction of this regulation, and we will -- we do expect that these will have possibly even a positive impact on the value of product because we'll raise the technological barrier and only the players with the technology and the capability to develop more durable and with lower road wear particle emission tire will have a competitive advantage. So we are fine with that.

The next question is from Gianluca Bertuzzo with Intermonte.

I have a couple of them. Can you talk about the contribution of your equity investments line in the P&L? What are the driving for the year? And what do you expect going forward? A second one is a follow-up to last question on tire wear. There are any plan in terms of tire labeling to present also tire duration? I'm talking at legislative level.

Thank you for the question. I will start from the tire wear. As anticipated, Euro 7 is going to regulate non-gas emission, non-exhaust emission and then regulate brakes and tires. The current status is that it has been completed a first stage of methodology setting just at the end of the last year and the community will take 1 year to evaluate the levels, to evaluate the clusters. So we do expect that by the Q1 2026, there will be a definition inside of the Euro 7 clusters, so labels basically and which will be the limit for these labels.

The results from equity investment, which you are right, in 2022, we were pretty positive or pretty good compared to 2022, and they are coming mainly from the result of the two JVs that we have with local partners in Indonesia for the production of motorcycle tires and in China for the production of some car tires. Those two JVs generated a good operating performance. So obviously, we received part of the dividends related to the two JVs.

Okay. Is there any plan to buy out these minorities?

Not for the time being. We are not foreseeing any buyout in our plan for 2024 and 2025.

The next question is from Michael Aspinall with Jefferies.

Just thinking about your continued shift to sustainable materials, are those recycled and bio-based materials cost competitive with kind of more legacy materials? Or do you expect to see higher prices of those more sustainable tires to offset the higher costs?

I would like to evaluate our sustainability roadmap at 360 degrees for answering you to this important question. Yes, I'll tell you why. Yes, because in the short term, we do expect a higher cost of these materials because the demand will be most probably higher than the offers in the coming years in the short term. In the long term, we do expect the rebalance of demand and offer. And so again, a more stable cost and -- of these materials. But if I look at the sustainability roadmap at 360 degrees, I don't see this as a cost. I see this as an opportunity in terms of global efficiencies for the company. Because on one side, most probably we will pay a bit more for these materials. On the other side, we expect a lot of efficiencies coming from the reduction of energy consumption and also electrification of our factories. So all in all, the balance we see in the coming 4, 5 years is positive. So we do expect a positive impact on global efficiencies of the company, putting together a higher cost of some materials and better efficiencies of our factories, all these keeping aside the commercial opportunity because, first of all, we do this because of ESG reasons. And then we do expect that in some markets with some product, we also have the opportunities to grow in terms of revenues, thanks to the selling proposition of sustainability. But this will come later. If you look only at the efficiency plan, we see these two effects more or less balanced or even slightly positive.

Okay. Great. And one follow-up, just a very quick one on your dividend payout policy, just checking that your leverage target of 1x net debt to EBITDA, adjusted EBITDA by the end of the plan includes a step-up directly to 50% in '24 and '25 from 40% this year?

I'll take the question. No, our policy, as explained, is for in 2024 a payout of 40% of the net result. And in 2025, a payout of 50% of the result of 2024. And this is already included in the number, so to arrive at the end of 2025 with a leverage ratio of around 1.0, the adjusted EBITDA. .

The next question is from Kurian Ashik with Millennium. We move to the next question. Next question is from Martino De Ambroggi with Equita.

Two more questions. One, still on connectivity. I was wondering if you probably, you are looking for or you need a joint venture, a partnership, I don't know, car components maker, carmaker. I don't know if you are looking at it in order to maximize the potential value of connectivity, which will come later on? And the second is on the press release because I read in your press release about the shareholding structure, the golden power and so on. Could you clarify what are the next steps and the potential implications on the shareholding structure, if any?

Thank you. As far as potential opportunities in the future to create alliances, joint venture or maybe acquisition with some partners, as I said before, I do see this more in the side of algorithm, data management or a capability to integrate our systems with the dynamic of the vehicles more than on hardware producers of components of cars. Anyhow, we are in the phase of evaluating all the opportunities we may need with the clear target to accelerate the introduction of the technology into the market.

As far as the second question related to control, after DPCM decision, the Golden Power decision and the implementation of the DPCM, the internal auditors and the management started an analysis if the Marco Polo Italy that owns 37% of the company is still considered to be in control of the company. Meanwhile, also Marco Polo is doing its own analysis. The process has not come to an end until now and we decide to keep the declaration of control of Marco Polo until now has not be modified. Obviously, if the conclusion will be different, we'll be in the future modified. So that's the situation. We will inform obviously, as soon as the Board will achieve a conclusion, we will inform the market. Now the analysis is ongoing. And this will be disclosed as it is in our press release, will be disclosed the same way it is in our press release will be disclosed into the balance sheet.

There are no more questions registered at this time. I leave the floor back to Mr. Tronchetti.

So thank you. Thank you very much. This meeting has come to an end. I thank you, everybody, and I wish you a good evening.

Ladies and gentlemen, thank you for joining.