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 first half 2026 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 this Q&A session will follow the presentation. Now I would like to introduce Mr. Marco Tronchetti Provera. Please go ahead, sir.

Thank you. Good evening, ladies and gentlemen. First half results confirm Pirelli's ability to generate value in an uncertain environment marked by growing geopolitical tensions. We have further consolidated our leadership in the high-value segment by leveraging the strength of our brand, technological innovation and a distinctive product portfolio. The resilience of our business model and the implementation of strategic priorities allowed us to maintain profitability among the best in the industry, offsetting the negative effects of pension in the Middle East, U.S. tariffs and exchange rate volatility. Cash flow generation remains in line with the seasonality of the business and with the expectations for the full year, reflecting the group's financial discipline. In the second half of the year, the macroeconomic and geopolitical picture is expected to remain volatile. The resumed conflicts in the Middle East have put further pressure on energy costs, with Brent price back at above $90 per barrel and the TTF gas approaching EUR 60 per megawatt hour. Furthermore, there are present signs of weak demand, especially in car manufacturing and the standard segment, while demand in the high-value replacement segment is proving resilient with a mid-single-digit growth rate. Despite the challenging external environment that I described, based on the quality of our first half results, we are confirming our full year targets for revenue growth, profitability and cash generation. Now I give the floor to Mr. Casaluci.

Thank you, Mr. Tronchetti, and good evening. Pirelli has reported solid results for the first half of the year, in line with our expectations. Revenues reached approximately EUR 3.5 billion with organic growth of 2.5% driven by stronger high-value, accounting now for 82% of group sales and price/mix improvement. Adjusted EBIT amounted to EUR 558 million with a margin of 16%, which remained stable compared with last year, thanks to the effectiveness of internal levers that offset the impact of the external scenario. Net profit rose by 13% year-on-year, benefiting from lower financial expenses linked to debt reduction and a greater profit contribution from equity participations in the first quarter of the year. The net financial position is approximately EUR 1.9 billion, and includes the debt consolidation of the Chinese joint venture, Shai, amounting to approximately EUR 210 million, as well as the payment of approximately EUR 47 million relating to the exercise of the call option, which increased Pirelli's stake to 70%. Finally, in the second quarter, the net cash flow before dividends and M&A transactions was positive at EUR 148 million, in line with the level recorded in the same period last year. Our long-term strategy for value creation and development continues to benefit from progress in sustainability. Over the past 6 months, we achieved tangible results in all areas. In health and safety, the prevention and awareness-raising programs contributed to a significant reduction in the accident at Work frequency index, reducing the index by 54% compared with the first half of 2025. The decarbonization plan continues in line with the 2040 net zero target. Energy efficiency and machinery electrification projects led to a 13.5% decrease in our emissions compared to last year. And the reduction of emissions by our suppliers is also in line with our 2027 target. Furthermore, we made significant progress in developing circular supply chains for the recovery and integration of sustainable materials into production processes, as we will see in the next slide. Finally, energy and water efficiency programs allowed for a 6.7% year-on-year reduction of water consumption for production purposes. We started 3 partnerships on key raw materials, namely carbon black, steel, and synthetic rubber. Our target is accelerating the transition to materials circularity from increasingly sustainable and traceable supply chains. More specifically, in the United States, we started a collaboration with Boulder Industries, a company specialized in retrieving carbon black from end-of-life tires. This raw material is then recycled and used for new tires. This project received the value chain collaboration award from the Tire Recycling Foundation. In China, together with our strategic partner, Xinda, we made a remarkable contribution to the development of a pilot project to include recycled steel among the materials certified under ISCC+, the major international standard for the certification of recycled and bio-based materials traceability across the supply chain. In Europe, we developed an integrated chain with Pirum, BAF and Sinos to turn end-of-life products into circular ISS+-certified materials, including synthetic rubber to be reused in large-scale production processes by guaranteeing high-quality performance and traceability standards. Through these partnerships, we will strengthen our strategy on circular materials with a target of bringing products made from over 80% bio-based and recycled materials to the market by 2030. Let's now analyze our first half operating performance. In line with our strategic priorities, we gained share in the high-value segment in the major geographic areas and business lines by leveraging technological innovation and sizing market opportunities. Innovation represents a distinct factor in our strategy. In the first 6 months of the year, we expanded our homologation portfolio and widened the product range. We also consolidated our position in the segments of higher value. In the cyber tire, the latest test confirmed the competitive edge of our technology. We proved that connectivity applied to tires through a physical sensor can be translated into tangible benefits for both safety and driving experience. The efficiency plan proceeds according to schedule. In the first 6 months, the efficiency plan generated gross benefits of EUR 81 million, that is approximately 54% of the full year target. Let's start with the commercial performance in the first 6 months. We gained market share in the high-value segment, recording a volume growth of 3.5%, and strengthened our position in the car and motor segments. We also continued our selectivity process in the standard segment, minus 8% on volumes, by reducing our exposure to segments with lower profitability, mainly in South America. In the second quarter, the volume trend, minus 1.5% at group level, reflects a greater reduction in the exposure to the standard segment, volumes minus 11% versus a minus 4% in Q1, outcome of a strategy based on value and protection of profitability in an extremely competitive environment. While the high-value trend plus 3% reflects a lower growth of the motor segment after a strong performance in the first quarter and a more limited growth in the car original equipment due to demand slowdown. In the second half of the year, we expect high-value performance to strengthen, supported by a solid replacement demand in Europe as well as the gradual improvement of the North American market. In the standard segment, we expect a gradual trend normalization. Let's now move to product innovation, which is one of the key drivers of differentiation in future growth. In the first half of 2026, we obtained approximately 200 new homologations, mainly concentrated in higher range size specialties and electric vehicles. These results confirm our role as a reference technology partner for both premium and prestige carmakers. Examples of these include the partnerships on the most advanced electric cars like Ferrari Luc and Radion R2S as well as premium SUVs like OD 7 and 9. Innovation also means constant renewal of the product portfolio. In the car segment, in North America, we launched the new Scorpion Season 4, developed with an increasingly virtual approach, which led to an improvement in mileage, comfort, and driving control. The value of our technological solutions is also confirmed by comparative tests. In the first half, we obtained 8 victories from leading European specialist magazines, which awarded several products in the Chinturato, Zero and Scorpion lines. Also in the 2-wheels business, we continue to incorporate the racing experience into our products. In the motor segment, we launched Mettler Sportech 01RS, developed from the racing know-how to offer top performance on the road. In the cycling segment, we introduced 2 new Chinturato lines designed for gravel riding, a rapidly growing segment. Within product innovation, Savvertire is one of the most distinctive solutions in the industry. Through sensors integrated into the tire and our own algorithms, cyber solutions can turn a tire from a passive car component into a smart sensor that can exchange data with the vehicle in real time and provide accurate information about the tire and road conditions. All this data allows the electronic systems of the vehicle, from ABS to stability control and traction, to be able to react more effectively and accurately, thus improving safety control and driving experience. Recent tests carried out on our solar testing track, also attended by international trade press, positively proved the value of this technology under particularly challenging conditions. Tests show tangible advantages in terms of safety and control of the vehicle. In an energy braking test from 100 kilometers per hour, the system allowed for a reduction of braking space of approximately 5 meters. On a wet surface, vehicle stability and grip improved. In the event of aquaplaning, better control of the vehicle was achieved in circumstances where, without cyber tire support, the behavior of the car would have been much more critical. These results prove that immediate and real data availability from the tire allows the vehicle to fully exploit the potential of safety treatment on board with actual benefits for the driver. Interest by car manufacturers and media confirms the role of Cyber Tyre as an enabling technology for connected mobility as well as further development of ADAS systems and autonomous driving. Cyber Tyre is a unique solution in the industry, strengthening Pirelli's leadership in integrating tire, vehicle and digital platforms. It provides new opportunities for growth and value creation along the entire mobility ecosystem. Besides innovation, Brent is one of Pirelli's distinctive assets. Recent market analysis confirms the strength and uniqueness of our positioning with the Pirelli brand associated with high-tech, prestige and motorsports concepts. During the first half of the year, we further strengthened this positioning with targeted actions in strategic markets. In the United States, we started a multi-year partnership with the Miami Open, one of the most prestigious international tennis events, giving even more visibility to the brand in a country which is crucial for our future growth. In Europe, we consolidated our presence at iconic events such as the Goodwood Festival of Speed and the 24 hours of Spa, occasions that highlight Pirelli's association with innovation, performance and technological excellence. Finally, the partnership agreement with Formula 1 was renewed until 2028, confirming Pirelli's role at the pinnacle of Motorsport. These activities contribute to enhancing our brand's global relevance and strengthening Pirelli's high-end positioning, supporting our ability to continue growing in the high-value and most profitable segment. I would like to conclude these sections by mentioning transformative efficiency. A fundamental pillar in terms of competitive road map. This transformation involves the whole value chain from product design to manufacturing. We are making full use of simulation, virtualization, and modularity, which means standardization of materials and semi-finished products. The aim is to reduce complexity in the factories while maintaining best of the industry quality and performance and accelerating time to market. An example of this is the virtual compounder, our own platform based on artificial intelligence, which allows us to virtually develop and optimize compounds, identifying the most promising solutions before physical validation. Results are already tangible. We reduced prototypes by 20%. Development time was cut by 30%. And in parallel, we are speeding up the introduction of bio-based and recycled materials into our products. Furthermore, we continue investing in digitization, automation, and electrification to increase productivity, quality, and manufacturing flexibility. I'll now give the floor to Mr. Bocchio. Thank you.

Thank you, Mr. Casaluci. Let's see now in more detail the dynamics that have characterized the performance of the first half of 2026 compared to the same period last year. As already pointed out, revenues were approximately EUR 3.5 billion with a 2.5% organic growth. Volume trend in the semester was stable, reflecting a share gain in high-value original equipment and replacement in both quarters. The reduction of exposure to standard continues more specifically in the second quarter to protect profitability in a highly competitive environment. Price/mix was positive, plus 2.5% in the first half and plus 2.9% in the second quarter, guided by the continuous improvement of the product mix and regional mix, while the price increases announced in the second quarter will be visible in the second part of this year. The ForEx impact is negative, minus 2.1%, mainly due to the U.S. dollar depreciation versus the first 6 months of 2025. The exchange rate trend was positive in the second quarter, plus 0.4% due to the U.S. dollar trend improvement and the strengthening of some currencies such as the Chinese renminbi and Brazilian reais. Finally, the perimeter change, minus 0.5%, is linked to the deconsolidation of the Dia business in the second quarter of 2025. We closed the first semester with an adjusted EBIT of EUR 558 million and a 16% margin, in line with last year, thanks to the effectiveness of the internal levers, which compensated the negative impact of external factors such as exchange rate volatility, the impact of exchange rate volatility, the Middle East crisis, as well as U.S. duties. More specifically, the positive price/mix contribution of EUR 50 million and the efficiencies for EUR 81 million have more than compensated the negative impact from the exchange rates, minus EUR 44 million, and the inflation of input costs, minus EUR 65 million, which increased in the second quarter following the Middle East crisis. Raw materials provided a positive contribution of EUR 32 million. Finally, the negative impact of depreciation and amortization equal to minus EUR 12 million, and an increase in other costs of EUR 43 million, mainly connected with the impact of the U.S. tariffs as well as the rigorous management of finished product inventories due to the highly volatile environment. Profitability remained stable at 16% also in the second quarter. The contribution from price/mix for EUR 29 million and efficiencies for EUR 38 million more than offset inflationary pressures, including higher energy and logistics costs stemming from the Gulf crisis, the impact of U.S. tariffs recorded under other costs, and the negative foreign exchange effect mainly related to the appreciation of the Mexican peso. The raw material impact was positive. We expect this tailwind to reverse in the second half of the year, reflecting the increase in oil prices that started at the end of February. Let's now analyze the trend in net income, equal to EUR 299 million, up 13% compared to the EUR 264 million recorded in the first half of 2025. This trend reflects the reduction of amortization included in the purchase price allocation worth EUR 11 million, lower net financial expenses of EUR 29 million, mainly related to the reduced gross debt as well as to a lighter financial debt in countries with higher interest rates, greater contribution from the results of equity participation for EUR 13 million, mainly connected to the revaluation at fair value of the 49% stake in the JV Suhzen Tyre, which occurred in the first quarter. Higher tax charges of EUR 19 million with a tax rate of 30%, an increase as expected from the 29.2% in the first half of last year, but benefiting from positive impacts from nontaxable income and one-offs. Let's now move to the net financial position. At the end of June, our net financial position is negative for approximately EUR 1.92 billion. This reflects, on the one hand, a net cash flow before dividends and extraordinary operations of minus EUR 557 million, substantially in line with the first half of 2025, which had recorded minus EUR 547 million, net of the positive impact from the divestment of Dackia, while on the other hand, includes the negative impact of EUR 257 million related to the consolidation of the debt and the increased stake to 70% into Suhzen Tyre. The operating net cash flow in the first half of 2026 is negative at EUR 416 million. It was EUR 217 million in the same period last year and mainly discounts increased investments and greater cash absorption due to trade payables dynamics. More specifically, CapEx reached EUR 177 million compared to EUR 128 million in the first 6 months of 2025 and was mainly dedicated to high-value development, technology upgrades and industrial automation. Working capital trend was negative for EUR 1 billion compared to EUR 810 million in the first 6 months of 2025, reflecting the reduction of trade payables related to the payment of the investment concentrated between the fourth quarter of 2025 and the first quarter of 2026. Receivables follow the usual business seasonality with a limited negative impact due to the Middle East situation. Inventories on sales over the last 12 months stood at 22.4% compared with 21.2% for the same period in 2025, a figure that reflects the rigorous control of finished product volume, as the increase is mainly attributable to the rise in the cost of raw materials and the buildup of raw material safety stock to support business continuity in a context characterized by tensions in the Gulf region. Net cash flow before dividends in the second quarter of 2026 is positive for EUR 148 million, in line with the result of the second quarter of 2025, which was EUR 150 million, excluding the already mentioned positive impact from the divestment of Dackia. As of June 30, Pirelli had a gross debt of approximately EUR 3.1 billion, financial assets worth EUR 1.2 billion, and therefore, its net financial position is approximately EUR 1.9 billion. The cost of debt over the last 12 months was 3.89%, down by more than 50 basis points compared to 4.40% at the end of 2025. This decrease is attributable to the reduction of the level of debt as well as optimization of the mix due to the lower financial debt in countries with higher interest rates. The liquidity margin is approximately EUR 2.6 billion and allows for the hedging of maturities for over 3 years until the third quarter of 2029. In January 2026, the group signed a contract for a new multicurrency banking line worth EUR 2.1 billion with a group of leading domestic and international banks. This new line, linked to the decarbonization targets of the group for Scope 1, 2 and 3, consists of a term loan worth EUR 600 million and revolving lines for a total amount of EUR 1.5 billion. The contract allows for the possibility to agree between the company and all the financial institutions to extend the expiration date with the same terms for a maximum period of another 2 years, that is until 2033. This transaction has also allowed for refinancing of the whole amount of the debt due in 2027. I now give the floor back to Mr. Casaluci.

Thank you. Thank you, Fabio. And let's now talk about the update on this year's outlook. This macroeconomic environment continues to be characterized by high uncertainty, with the Middle East tensions remaining the major risk factor when it comes to growth, inflation and raw material costs. Recent hostilities between the U.S. and Iran have indeed caused a new increase in energy prices and commodities and caused an interruption in the normalization process observed in the weeks following the Strait of Hormuz agreement in June '26. Based on the latest estimates, the worsening of the scenario is confirmed compared to our assumption in the first quarter of this year. In 2026, global GDP growth is now expected to be 2.3%. The slowdown is more marked in Europe given its strong energy dependency, while the United States continues to show good resilience, supported by the investment connected with AI. China is confirmed at a plus 4.5% expansion, although its domestic demand is still weak. Inflation is expected to increase to 3.8% versus the previous 3.7% and continues to be an element of scrutiny for the major central banks. Regarding commodities, the scenario remains very volatile, and a reduction of prices is expected in the third quarter as well as a normalization of the flows through the Strait of Hormuz. Based on this new environment, we updated our market outlook for 2026. The car tire demand is now expected to be between minus 3% and minus 1% versus minus 2% and flat indicated in May. The estimate review involved the 2 most cyclical segments, the standard now expected to be negative mid-single digit versus a negative low single digit in May, and the original equipment demand, minus 3% compared to minus 2% in May, in line with the car production trend. Regarding the high-value segment, Expectations are now for low to mid-single-digit demand growth given the more cautious outlook in original equipment, following the weak market performance in the first half, minus 2.5%, especially in China due to the end of government incentives that supported demand last year. In the replacement high-value segment, we expect mid-single-digit growth with an improving trend in the second half of the year, driven by Europe and Asia Pacific, also thanks to better EV penetration and, above all, improving demand in North America following a weak first half. In light of the quality of the results in the first half of the year, we confirm the 2026 guidance and update some of the drivers based on the current external scenario. Revenues are expected to be between EUR 6.75 billion and EUR 6.95 billion, with volumes between stable and plus 1%, slowing down compared to the plus 1% and plus 2% indicated in May due to the original equipment and standard market demand slowdown. Price/mix improvement is confirmed between plus 2.5% and 3%. Exchange rate impact has been slightly revised based on expectations of a smaller U.S. dollar depreciation. ForEx is now expected to range between minus 2.5% and minus 1.5% versus the previous minus 4% and minus 2%. Profitability is expected to be approximately 16% with an adjusted EBIT in absolute value at EUR 1,080 million at the midpoint. Investments confirmed at EUR 450 million, net cash generation before dividends and the impact of the exercise of the call option for the Fusentile joint venture confirmed at EUR 500 million. Net financial position confirmed at EUR 1.2 billion, including the impact of the call option exercise. And I now leave the floor to Mr. Tronchetti for the final remarks.

Thank you, Mr. Casaluci. The results of the first half of the year confirmed the strength of Pirelli's business model and the effectiveness of the strategic decisions taken in recent years. In an environment characterized by high volatility and growing geopolitical uncertainties, we continue to deliver strong results, maintaining a profitability that ranks among the best in the industry and confirming the group's ability to react rapidly to changes in the external scenario. We continue to stand out, thanks to a combination of unique assets, the strength of the brand, our technological leadership and an increasingly efficient and sustainable industrial platform. Innovation remains a key element of our differentiation. Sebertire is a clear example, a unique technology in the industry that reinforces Pirelli's role in the evolution of connected mobility. It confirms our ability to anticipate demand trends in the automotive industry. The quality of these assets, combined with disciplined execution and the flexibility of our operating model, allows us to look forward to the second half of the year with confidence and to confirm our 2026 targets for revenue, profitability and cash generation. We will continue investing in our areas of strength to further improve Pirelli's competitive positioning and create sustainable value over the long term. And this concludes our presentation. We may now open the Q&A.

[Operator Instructions] The first question comes from Monica Bosio with Intesa Sanpaolo.

Actually, I have 4 questions. The first one is on the market share at the country level. At the country level, where did the group find the most relevant market share gains in the second quarter? If I remember well, in the first quarter, it was in the U.S.A.; is it still the case for the second quarter? The second question is on the replacement channel trend in China, which is also positive in the second half. So can you confirm that you expect to get market share in China in the replacement channel on the back of the EV tires replacement cycle? And if you can share with us what the loyalty rate of the Chinese consumer to the Pirelli brand is. The third question is on the price mix. Please correct me if I'm wrong, but I think that the 2.9% price mix in the second quarter was mostly products and regions, so mostly mix. For the second half, we should also add the pricing effect. So can you confirm this and tell us what the drop-through will be by year-end? And finally, on the Cyber Tyres, I was wondering if you can share with us some indication of the multi-year investment plan. What is the time horizon? And I'm curious to know if you have received further homologation in Cyber Tyres since the beginning of the year.

Thank you for your questions. I will start from the gain of market share in the second quarter. We have been able to gain market share in all the high-value markets, but the better performance also in the second quarter is coming mainly from the United States, where we have been able to gain market share both in the original equipment and in the replacement. This is the result of our growth strategy based on the introduction of new products fully dedicated for the U.S. market, the enlargement of the customer base where we grow market share with all the most iconic vehicle for the United States in the last years like the 4 F150, A the Dodge Ram, all the Tesla's most popular models, but also the growing popularity of our brand and the enlargement of the customer base. In the second quarter, we also gained quite significantly in market share in China in the replacement channel. And this is mainly driven by the pull-through effect starting in the electric vehicle, as you correctly said. And so we are taking advantage of the original equipment growth in the last years. Price/mix, you are also right. In the second quarter, the performance, roughly 3%, has been mainly driven by product mix, including the region mix, with still a slightly negative channel mix, where we had a growth of the original equipment faster than the replacement. What we do expect in the second half is a slight reduction of the mix effect, mainly due to a lower reduction in the standard volumes, where we do expect a normalization of the volume performance, also thanks to a more profitable comparison versus last year in South America, while the price will start to be meaningful because the price increase that we announced during the months of May and June will be effective starting from the second half. So you can expect another 3% roughly of price/mix performance. But in this case, half driven by price and half by product mix. It's improving the drop-through in the second half. We do expect 80% more or less of drop-through in the second half. Cyber will keep on growing in penetration. And what we do expect, considering the high interest of the most important premium and prestige carmakers in Europe and in China and also in the United States, we do expect to finalize agreements also in the premium segment. You know that we are already delivering in the Prestige segment the Cyber Tyre technology. We do expect to scale up into the premium, and we are confident some good news will come already in the last quarter of this year.

The next question comes from Martino De Ambroggi with Equita.

The first question is on net working capital. Considering the additional absorption you saw in the first half and considering the raw materials price increase, isn't it a risk for your free cash flow guidance? And if I remember correctly, you are always using factoring in the region of EUR 200 million at year-end. So this is my first question. The second is on the standard profitability because volumes are heavily down. So just to have an idea if it remains profitable this year. Maybe this is too rude to say that. And price increases, is it easy to pass price increases also in this segment? And referring to price increases, any pre-buy that you saw in the second quarter?

I will start from the first question related to the net working capital. Obviously, we confirm our guidance for cash generation for the full year. We don't expect to have difficulties. Everything is on plan. As you saw in the first semester, stock management made us arrive at an incidence on net sales of about 22.4%, which is a little bit higher than March and last year. But this was due not from the volume of the stock, but from the value of the finished products and the raw material given the fact that obviously, the commodity has grown up quite a lot since the end of February. We expect this effect to slow down a little bit during the last part of the year. So we expect December to have an incidence of inventories on net sales of the last 12 months at about 22%. Consider that in June, actually, we were building up a little bit of safety stock on raw materials in order to avoid any kind of disruption in our factories. On the receivable side, we achieved 14.5% in June, which was in line with March. And for the remaining part of the year, by year-end, we expect this number to arrive at about 9% of sales. On the payables, again, we had a negative impact in June related to the fact that there was this accumulation of CapEx between Q4 '25 and the beginning of '26, so with the cash out during quarter 3, but then we expect normalization given that our CapEx at EUR 450 million will be expected. So by the end of the year, we are expecting payables to be in the range of 30%, so not dissimilar to what we had in the previous years. We use factoring to balance the cash flow of the company on one side and to balance the risk of our accounts receivable, and we are in line with the usual trend. In some quarters, it's a bit higher, and in some quarters a little bit lower. In June, for example, it was lower than the average of the previous quarter, but no major differences compared to the past.

Thank you. And now I'll move to the following questions. The standard profitability in 2026 is expected to be between 7% and 8%. So high single-digit. We still target double-digit, and we are confident we will arrive there. Nevertheless, it's a more volatile segment. It's not really a question of price increase, but the volatility of the demand. It's down at 18% of our total sales. It will be reduced even more. Let's consider that in the high-value regions, Europe, the U.S., and Asia Pacific, the weight on sales is already in the ballpark of 10%, 12%. And in these regions, we are very close to double-digit profitability. And last point is the pre-buying; no, we haven't seen pre-buying effects. The stock level in the trade is well normalized so far.

The next question comes from Christoph Laskawi with Deutsche Bank.

I'd like to start on the U.S. investment plan, please. I know it's not yet fully approved by the Board, but the size that you have indicated in the press release of EUR 1 billion to EUR 1.2 billion, very back of the envelope, I can get to up to a 10% capacity addition from that. Could you comment on whether there is a need then to cut elsewhere, say, in South America or Europe? The capacity? And if there essentially is now a bit of a change in strategy, should it be approved from basically growing through mix improvements now actually chasing volume a bit? And then the last one on that one would be, is it in the short term limiting cash return potential if you should approve the U.S. investment plan and actually follow through with it? And then just the second block on volumes into H2. You mentioned that high-value-added volumes should improve in the second half. At the same time, obviously, you've raised prices. Is there any indication that volume or demand has changed as a result of the price hikes? Or is it pretty stable and resilient as you see?

Thank you for your questions. First, there is no change in strategy. So the investment in the U.S. is just related to the growth we are having in the United States, as I told you a few minutes ago. We grew in the first quarter. We grew in the second quarter. We continue to grow. We are underrepresented in the United States compared to our market share in the other main regions. So it's in line with what we are doing. It's in line with our strategy. And now I leave the floor to Mr. Casaluci.

Yes. Thank you. No. Let's consider that, as we commented on other occasions, if we do consider 100 what we sell in the United States today, 5% is more or less 5% is already produced locally. 55% is coming from Mexico, and 40%, 40% remaining, is imported by Europe and South America. The capacity we will install in the U.S. will be, of course, 100% high value and will support, as Mr. Tronchetti said, the local growth plus eventually a reduction of imports from Europe and South America, and the free capacity in these regions will be used to support the local growth. So we don't plan any kind of reduction in the high-value capacity of the group. While the major changes in demand are in the second half, it's mainly linked to the different expectations of the market. First, we have to remind you that the change in the outlook of the market is mainly driven by the result of the first half, where we saw a worsening of replacement demand in the United States and regional equipment demand in China compared to our previous guidance. So what we do expect in the second half is an improvement in these 2 areas. Also driven by a better comparison year-over-year in the 2 regions. So all in all, we keep on growing in the high value, overperforming the market, and we have a more positive outlook of the second half compared to the first half, mainly driven by lower reduction of the original equipment in China and a star growing environment in United States replacement, while Europe is expected to maintain its high double-digit growth in the replacement high value as has been showed in the first half.

The next question comes from Harry Martin with Bernstein.

The first one actually is a follow-up about the outlook for U.S. volume growth in the market in the second half. What gives you the confidence that that will get better? It looks like the first half of the year has really been driven by the weak consumer. I appreciate that June data may have been a little bit better. Is there an extrapolation of that? Or do you have any other information for us that can help explain why that market will get better? The second question, I wanted to ask about the U.S. MTA renegotiation. What are you hearing? We've seen some headlines that the U.S. is pushing for increased U.S. content within cards, but is there anything else that you've heard or we need to think about for that Mexico-to-U.S. business? And then finally, I wanted to ask about your capabilities in digital twin and software. What higher proportion of original equipment shipments today are requiring some level of digital integration with the R&D and design phase? And how differentiating is Pirelli's software in this field and helping to win those market share gains?

Thank you for your questions. Mexico, USMCA. The fact is that the agreement is to be renewed for 10 years. Negotiable every year. But as far as we can see, considering the importance of the Mexican supply to the American market to the North American market, we do not expect an impact on our operations in Mexico. So we feel comfortable on that side. But now I leave the floor to Mr. Casaluci.

Yes. Thank you. The U.S. volume, we are optimistic on the second half, mainly in the replacement, first of all, because we come from 6 months in a row of negative markets, which is something that is preparing a restart of the demand in our view. And also because of a more favorable comparison versus last year, which is also helping. And we target to outperform the market. So we already have a long-term agreement with our partners in distribution. So the orders are already on our hands with a clear view at least for the following 3, 4 months. So we are very positive on the outlook of the U.S., both driven by an expectation of a better market and also our order collection. Digital twin, yes, you are fully right. This is one of the most important innovations that we have been able to introduce in our research and development processes. And the competitive advantage that we see is for 2 sets of reasons. First of all, we are becoming much faster in the development of new products, which is meeting the needs and requirements of the OEMs, especially the Chinese ones. And that's one of the major reasons why we have a competitive advantage in this arena. It's also allowing us to reduce the number of prototypes, and so has a positive impact on cost and is helping us to accelerate the introduction of recycled bio-based materials because with the virtual compounders, so the simulation on the development of new compounds, we can make test on laboratory without losing a lot of time for physical tests, and that's also a good competitive advantage. The second reason is linked to our Cyber Tyre technology. So the digital twin of Tyres, a mathematical model mirroring the real performance of a tire is part of the Cyber Tyre technology that is integrating data collection from sensors into the tires into a way to use this data applied to the digital twin of a tire, thanks to the new computing capacity of the cars to elaborate on the best possible instruction to give to the control unit of the car using the same logic that we use when we develop the tire, but applied with a completely different conditions.