Pirelli & C SpA
MIL:PIRC
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Pirelli & C SpA
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Ladies and gentlemen, welcome to Pirelli's conference call in which Pirelli top management will present company's first quarter 2021 financial results. The live webcast of the event and the presentation slides are available in the Investor Relations section of the Pirelli website. I remind you that the Q&A session will follow after the presentation.
Now I would like to introduce Mr. Marco Tronchetti Provera. Please go ahead, sir.
Good evening, ladies and gentlemen, and welcome to our conference call. Current market and macroeconomic trends confirm the optimism about the 2021 scenario, both for the global economy, whose recovery is connected to the vaccination progress; and for the tire industry, where high-value demand is back to pre-pandemic levels already in the first quarter.
Our industrial plan implementation continues in line with our expectations. Significant increase of the high-value share has been recorded in the first quarter, particularly in China, where we had an increase of 4.6 percentage point year-on-year. First quarter 2021 results are in line with our expectations. Revenue growth lead by a strong volume rebound and price/mix improvement; adjusted EBIT margin at 13.6%, discounting the impact of some costs with seasonality concentrated in the first quarter, as Mr. Bocchio will illustrate you in more detail. Profitability is expected to further improve from quarter 2 due to the consistent overperformance in the high-value price/mix, compensating the raw material cost increase, the 2021 competitiveness plan and normalization on the seasonality of the cost adjustment. Cash flow improvement related to the operating performance and careful stock management. Full year guidance is confirmed.
Global economy is expected to grow by 5.3% this year, in line with the assumptions made in our industrial plan, with a higher growth in the United States compared to our forecast from plus 5.7% in the plan to 6.2%, also due to the high vaccination rate in the general population.
Exchange rates, particularly volatile in the first quarter, should stabilize over the next few months, also due to the recovery of the economy and more favorable comparison with the past year.
In the tire business, demand is strongly recovering with high-value growing 9% globally compared with the first quarter of 2019. '19 levels were exceeded in APAC, Europe and North America.
The limited impact during the first quarter of semiconductor shortage, with carmakers safeguarding the production of their top range models and a higher volatility is expected during the second quarter. With this background, we keep the situation monitored daily to manage any slowdown in the original equipment, and exploit opportunities in the replacement channel.
The price scenario is favorable, since it is supported by the raw material inflation and shipping costs and lower stock at dealers' level. Several increases announced in the industry, which are going to be implemented mostly for the second quarter, including the recent price increases in European winter tires. A raw material inflationary scenario is confirmed, driven mainly by the oil price trend. A price/mix improvement will allow us to offset the raw material headwind.
Our first quarter results already show the first evidence of our industrial plan key programs. Regarding the commercial program, we have strengthened our leadership in the high value through a high-technology product portfolio and a production and logistics structure that can manage the high volatility of demand. In line with our targets, we have increased our exposure of 11 inches and above as well as new technologies. The electric volumes grew 8x more than last year figures.
Our performance in China is worth being noted, with over 4 percentage points more in terms of car 18 inches and above-market share, plus 8 percentage points on car 19 inches and above. This has been achieved by having fully intercepted the global premium OEMs and main local premium electric vehicles car makers demand. Replacement recovery through our distribution chain with more than 4,000 outlets and a strong online development, a segment which is expected to grow by over 20% in this year, too.
On the innovation program, during the first quarter, approximately 70 technical homologations were achieved, which were concentrated on 18 inches and above and specialties. Two new product lines for the replacement channel were introduced in Europe, Powergy and the new Cinturato All-Season SF2, with already a very good return on the all-season segment, as Mr. Casaluci will elaborate later on.
For what regards the competitiveness program, phase 2 of the efficiencies plan has started, with gross benefit worth EUR 26 million, EUR 15 million net of inflation.
Moving to the operation program. The plant saturation level improved with approximately 90% of the total production capacity and over 90% in high value. 2021 targets are confirmed. Revenues between EUR 4.6 billion and EUR 4.8 billion. Adjusted EBIT margin in the range of about 14% and about 15%. Investments as a percentage on group sales of about 7%. Net cash flow before dividends between EUR 300 million and EUR 340 million. Net financial position at the end of 2021, approximately EUR 3 billion, with a leverage of around 2.7x the adjusted EBITDA. Return on invested capital, about 16%.
The current market environment, strong demand and favorable pricing, we are positioned in the upper part of the top line guidance. The further upside will depend on the evolution of 2 factors: semiconductor shortage impact on original equipment demand; sell-out pace of recovery, especially in Europe. EBIT margin guidance more geared to the upper range, already factoring higher raw material headwind, 2.5% on sales, fully compensated by price/mix.
I now leave the floor to Mr. Casaluci, who will discuss in detail our operating performance for this quarter. Mr. Casaluci.
Thank you, Mr. Tronchetti, and good evening, ladies and gentlemen. I shall now comment market dynamics in the first quarter of 2021 and the relative performance of Pirelli.
In the first 3 months, the car tire market grew by 12%, and Pirelli overperformed it by 10 percentage points. Volumes, plus 22%. The trend is positive for all channels. While the market performance of both original equipment and replacement reached plus 12%, Pirelli grew 28% in regional equipment and 19% in replacement. As Mr. Tronchetti indicated before, the car 18 inches and above market grew by 20% year-on-year, a broad recovery from the levels of the first quarter of 2019, plus 9%. In this segment, with volumes up 33%, Pirelli's leadership is even more marked in 19 inches and above, with volumes up 39% year-on-year versus 26% of the market.
In Asia Pacific, Pirelli's performance was outstanding, with volumes growing twice those of the market.
In the original equipment, the share increase, which was steady throughout last year, continued in Q1 '21. 18 inches and above plus 36% Pirelli versus plus 18% of the market, due to Pirelli's exposure to the premium and prestige segments and thanks to the consolidation of its customer base in North America and Asia Pacific.
In the latter region, Pirelli also benefited from a favorable comparison base, given the negative trend in the first quarter of 2020.
In the replacement channel, volumes were up 31% in the 18 inches and above segment versus a plus 21% of the market because of the recovery in market demand and thanks to the low inventory at dealers' level after the significant reduction in the first half of 2020, especially in Europe and North America.
In the standard segment, our overperformance was more contained than in the other segments, with volumes growing around 12%, 2 percentage points above the market due to our focus on products with the higher rim sizes.
The good performance of volumes registered by high-end products in the first quarter is the result of implementation of our commercial program. In particular, in 18 inches and above segment, our strong growth was driven by the more technological products in our offering. 19 inches and above products that produced over 70% of the growth in the segment and specialties, accounting for approximately 60% of the growth in the first quarter.
The replacement volumes coming from OE homologations were fundamental for the growth of pull volumes, especially in China, 50% of global growth. The new product lines, considered to be exclusively dedicated to replacement, allowed the outstanding performance of push volumes, especially in Europe, 50% of global growth.
In the original equipment channel, the increase in market share was similar in all regions. Fitments for electric cars keep on being a major focus and accounted for approximately 10% of the growth in the quarter.
The innovation program, envisaging an acceleration in the launch of new products in the '21, '22 period continues at a good pace. In the first quarter of 2021, in Europe, we launched 2 lines dedicated to replacement to complete and refresh our range. The first product is Cinturato All-Season Snowflake 2. Its new adaptive compound provides the same performance and safety in a wider temperature range than the summer-only or winter-only products. In addition, it is certified by Dekra as best-in-class in its category in terms of sustainability, best rolling resistance, lower noise and 50% longer life than its predecessor. With this new product, Pirelli recorded a relevant growth in the all-season segment in the first quarter of 2021 in a continuously expanding European market.
The second product, Powergy, the new summer line for cars, CUVs and SUVs with 18 inches and above rim size, is ideal for customers who look for high driving safety and low environmental impact. Powergy ensures an excellent grip on wet surfaces, and indeed, the whole product range ranks in the A class of the new European levels. This is matched with an optimal rolling resistance that allows lower energy dissipation, and therefore, lower consumptions with B label for the whole range.
These values achieved with new technologies place Powergy as a state-of-the-art tire with a high rating. Only 2% of tires sold in Europe today have euro label values in Class A or B or higher. Powergy which reached the market in March, serves to -- the objective of supporting the growth in the 18 inches and above segment for new CUVs of synergic brands, where Pirelli does not supply original equipment.
The competitiveness program is progressing in line with our expectations. Efficiencies for 2021 amount to EUR 155 million, EUR 80 million net of inflation, around 2% of the baseline. During the first quarter of 2021, consistent with our forecast, competitiveness benefits amounted to around 20% of the full year target, EUR 26 million, EUR 15 million net of inflation.
More in details in terms of future projects. In product cost, which is worth around 50% of first quarter gross benefits, we continued to implement the new modular and design-to-value approach. In manufacturing, which bears approximately 20% of quarterly benefits, we continue to optimize the industrial footprint, improve our infrastructure and introduce digitization in an ever-increasing number of processes.
In SG&A, we exploited further efficiencies coming from distribution network redesign and warehousing optimization while implementing renegotiations with our suppliers. Last, in organization, we mainly levered on digitization. Of the EUR 80 million net yearly efficiencies, the bulk will be in the second quarter, EUR 30 million, roughly 40% of the year target, thanks to manufacturing with saturation levels improving compared to the second quarter of 2020 when, due to the COVID crisis, production stopped for several weeks.
I'd like to thank you and leave the floor to Mr. Bocchio.
Thank you, Mr. Casaluci, and good evening, everybody. Pirelli closed the first quarter of 2021 with revenues in excess of EUR 1.2 billion, growing by 18.4%. I remember that the full year target is between plus 10% and plus 12%, achieved through its clear overperformance in a strong rebounding market. If we exclude the exchange rate impact, minus 6.1%, the organic growth was plus 24.5% in the first quarter.
Let's review the commercial variables. Volumes, plus 22.2%, reflecting the stronger trend of Pirelli against the market, especially in the high-value segment, plus 29.3%, as already pointed out by Mr. Casaluci. Price/mix was positive by 2.3%, mainly due to a product mix improvement, strong growth in high value, particularly in the higher rim sizes and highly technological products and to a region mix improvement, given the strong growth in Asia Pacific, in particular, China.
In line with the expected trend, the price/mix in the first quarter discounts is still negative channel mix due to the higher sales of original equipment. We remind you that a rebalancing of the growth rate between original equipment and replacement is expected in the second half. Neutral impact of prices, expected to become positive from the second quarter, through the increases to be applied mostly in Europe, China and North America.
Before moving to the next slide, just a brief comment on the price/mix trend in 2021. As indicated at the Investor Day, price/mix is expected to be volatile across the whole year. In the second quarter, we expect a more limited price/mix improvement versus the other quarters due to a tough year-on-year comparison. We remind you that in second quarter 2020, we recorded a 3.3% growth, the highest in the year, supported by a strong region mix due to the recovery in China and the positive channel mix given the very weak original equipment channel. As a consequence, in second quarter 2021, region and channel mix are expected to be negative, while price and product mix are expected to be positive. For the second half of the year, price/mix -- the price/mix trend is expected to be above the full year target. Price/mix is expected to fully offset raw material headwinds in each quarter.
Let's now review the trend of profitability in the first quarter of 2021 on Slide 15. The adjusted EBIT improved by around 20% year-on-year. The internal levels, volume, price/mix, efficiencies more than offset the negative impact of the external scenario, raw materials, inflation, ForEx. More specifically, the price/mix improvement, plus EUR 16 million, more than balanced the impact of raw materials, negative by EUR 11 million, affected by the depreciation of the main currencies of the countries where Pirelli has production plants, in South America, Romania and Russia.
The competitiveness program, as already shown by Mr. Casaluci, generated structural efficiencies amounting to EUR 26 million, approximately 20% of the full year target, that compensated for the inflation, EUR 11 million, and the reversal impact of the COVID plan for minus EUR 15 million, equal to the balance between EUR 25 million of the discretionary cost relating to activities canceled in 2020 to counterbalance the effects of the pandemic, and the benefits stemming from the greater use of the plants amounting to about EUR 10 million. In the first quarter, the effect of the COVID plan reversal impact was equal to 50% of what is expected in 2021, equal to about EUR 29 million. The volume component more than offset ForEx, D&A and increase in the costs for growth and other costs.
Let's spend a few more comments on the last component of the bridge, amounting to minus EUR 58 million and composed of 3 cost clusters. First, R&D, marketing and sponsoring cost variance of minus EUR 27 million in the first quarter. With the market recovery, we concentrated the increase of almost all such costs foreseen for 2021, approximately EUR 30 million in the first quarter, namely marketing costs linked to the launch of new products and sponsoring costs mainly relating to the America's Cup edition of last February and March, where Pirelli sponsored Luna Rossa.
The second item is linked to the provision for short and long-term management incentives, EUR 11 million in the first quarter, as the company performance is in line with its targets. Finally, the other costs variance amounted to EUR 20 million. This item typically includes stocks, credit impairment, royalties and other costs. In the first quarter of 2021, the other costs, discounted costs relating to activities and events, for instance, Formula 1 and motor sport racing, which last year, due to the COVID emergency, had to be postponed to the second half of the year with a positive impact of EUR 13 million in the first quarter 2020.
Over the full year, the costs for growth and others are expected to amount to minus EUR 30 million, approximately half of the impact recorded in the first quarter. More specifically, R&D, marketing and sports in cost variance is expected to be approximately EUR 30 million, with a residual impact in the next quarters. Provisions for management incentives are expected to amount to around EUR 35 million. In 2020, this item had a more contained impact because of the cancellation of the short-term incentive plan due to COVID and the resizing of the long-term incentive plan.
For the other costs, instead, a positive impact of approximately EUR 40 million is expected due to: the normalization of cost seasonality, offsetting the negativity of the first quarter; and the normalization and increase of inventories compared to 2020 with a positive accounting impact of about EUR 40 million. Such dynamics will become visible already in the second quarter, with a positive impact on the cost for growth and other items.
In the next quarters, we expect a steady improvement of profitability due, to the ongoing high value overperformance, to the price/mix offsetting the raw material increase, to the progressive implementation of 2021 competitiveness program and to the dynamics already described, whereby the cost for growth and other costs will be reabsorbed.
Let's move now to the net income bridge on Slide 16. Net income in the first quarter of 2021 was equal to EUR 42 million from EUR 39 million in the first quarter of 2020. Trend discounts. The operating performance improvement with an adjusted EBIT delta of plus EUR 28 million, an increase of restructuring and nonrecurring of approximately EUR 19 million, mainly related to the restructuring expenses. More specifically, restructuring and nonrecurring costs in first quarter '21 are equal to a total of EUR 43 million. They were EUR 24 million in first quarter 2020, composed by restructuring expenses related to the rationalization of our structures and manufacturing footprint; nonrecurring items related to the retention plan; direct COVID-19 costs, which are mainly related to personal protection material.
Results from equity participation was basically flat in the quarter, improving from the minus EUR 5 million of the first quarter 2020. Net financial charges increased by EUR 7.5 million compared to the first quarter 2020. The increase of EUR 7.5 million mainly reflects costs for commissions related to the early reimbursement of part of the major credit line expiring in June '22, as I will illustrate in a couple of slides. This net financial charges increase will be reabsorbed throughout the year. In the first quarter of 2021, net income adjusted, meaning, excluding all the one-offs and nonrecurring items, is positive for EUR 94 million.
Let's look now at the cash flow dynamics. In the first quarter of 2021, the net cash flow was negative for EUR 654 million, in line with the seasonality of the business, yet definitely improving with a plus EUR 100 million if compared to the same value of the first quarter 2020. This is due to the improvement of the operating performance, which has covered the higher investments mainly devoted to the high value, quality and mix improvement.
The usual seasonality of the working capital, with a lower absorption versus the first 3 months of 2020, coming from a careful stock management substantially stable at the December 2020 levels, about 19.5% of the revenues over the last 12 months, after growing in the first quarter of 2020 due to the COVID emergency. Less cash absorption from payables connected to the lower investments in quarter 4 2020. Such improvement was partially compensated for by a greater cash absorption connected to trade receivables, but in line with the business recovery and revenue increase versus the first quarter 2020.
Let's finally move to the gross debt structure on Slide 18. At the end of March, gross debt totaled EUR 5.1 billion, approximately EUR 900 million less than in December. More in detail, during the first quarter of this year, we used part of the group's liquidity to early repay some financial debt maturities in advance, EUR 82 million from the Schuldschein financing and EUR 756 million from the group's main bank line. These early repayments allow the optimization of the yearly financial charge. Early reimbursement of a bank line for EUR 200 million due to expire in September '21, and underwriting of a new loan worth the same amount expiring on September '22.
The group liquidity margin at the end of March was approximately EUR 1.5 billion, and allowed to cover the financial debt for over 2 years until June 2023. The cost of debt, 2.1% in the last 12 months, is increasing by 0.16 percentage points due to the COVID impact on the business, which caused a short-term increase of the financial leverage and consequently of some spreads of some central bank lines indexed to this parameter, wash down of the fees yet to be amortized, deriving from the partial early repayment of the group's main bank line.
But all these effects were partly offset by the benefits achieved through a decreased exposure of the group to the high-yield currencies. The impacts mentioned above were anticipated in our industrial plan and in the targets of financial charges already announced to the market and which, therefore, remain unvaried.
I now give the floor back to Mr. Tronchetti. Thank you.
Thank you. Thank you, Mr. Bocchio. This ends our presentation, and so we can open the Q&A session.
[Operator Instructions] The first question is from Monica Bosio of Intesa Sanpaolo.
The first one is on raw materials. I understood that you are going to offset the raw material impact for each quarter through price/mix. But I was wondering if you can give us the total absolute impact of raw materials that you are expecting for the full year 2021.
And the second question is on China. The growth and the market share gains was impressive. Can you give us some flavor about your market share gains in electric vehicle tires in China.
And the very last is on the Standard segment. Maybe it's too early to ask, but can you share with us some colors about the profitability of the Standard segment in the first quarter?
So as far as the raw material concerned, we expect a 2.5% on revenues, the increase in raw mat. And that is what we are going to compensate with the price increase.
On China, the growth obviously is driven by the high end, and the electric is evolving but is not creating yet a significant profitability. The market share continues to grow. We have, today, in original equipment a market share that is going to be 1.5x what the market share we have in the high value in traditional position we achieved in the high value and we expect it to be 1.5x.
The Standard EBIT margin is in the range of the, let's say, 7%, 8% what we mentioned as the target for this year. So we are in line with the target, considering that next year, we should be very close to the double-digit as it has been planned.
The next question is from Gabriel Adler of Citi.
This is Gabriel Adler at Citi. I have two questions. My first is on the market share gains. Could you just comment on what drove the market share gains and the outperformance both in the market in Q1. How much of that was due to the new product that you talked about in the presentation? And should we expect Pirelli to continue to gain market share in all regions in the coming quarters because of that? That's my first question.
And then my second question is around the R&D and marketing expenses in the EBIT bridge. Could you just confirm the total amount again? I missed it in the presentation. And can you explain why the marketing and R&D costs are so heavily weighted to Q1? Why won't we see marketing and R&D costs remain at these levels in Q2 and beyond?
Mr. Casaluci, please. And Mr. Bocchio afterwards for the R&D expenses.
Thank you, Mr. Tronchetti. So as far as market share is concerned, we increased our market share in 18 inches and above, which is our target segment, of 1.3 points in the first quarter. And we plan to grow, as presented in our industrial plan, 1% -- 1 point within the full year. So in the first quarter, we overperformed the average target of the full year.
Mr. Bocchio?
Yes. Thank you for the question. As we saw on the bridge on Page 15, the increase in costs are related to research and development, R&D, and marketing expenses, including the sponsorship. And the vast majority of this increase actually is related to the sponsorship. While we have a limited amount of increase related to the R&D, mainly related to the launch and the final development of the 2 lines that has been put on the market in the first quarter of 2021. As we said, in between the February and March, Pirelli Group was sponsoring in the event of Luna Rossa. So obviously, this was attracting some costs in this specific quarter.
Okay. And sorry, could you just clarify your expectations for the full year? I just missed it in the presentation earlier.
Yes. On the full year, for sure, we are expecting not to have a different impact compared to what has been presented in our Investor Day a few weeks ago. So we really expect the cost for growth overall to be about -- with a balance of about EUR 30 million compared to previous year. And this is including overall, the R&D and the marketing sponsorship. So we are fully aligned with the indication we gave a few weeks ago.
Next question is from Martino De Ambroggi of Equita.
The first question is on the price, specifically price, because you announced several price increases in different regions. But trying to summarize what is the weighted average of the price increase, just a rough range for the remaining 9 months, what's the range for price alone? And based on the current visibility, do you believe you need more price hikes going forward? Or probably that's already enough, they're already factored in your guidance?
The guidance is between 2% and 3%. So that's the price increase. And obviously, it will depend on the trend until July, August because the prices of the raw materials are affecting year-end until August, let's say, most of the prices. And so for the time being, these are the price increase and they are covering what we expect as a growth of 2.5% of growth in raw materials, 2.5% of our turnover. So that is the expectation today, but we don't see major problems in, let's say, passing through the cost of raw material. The market is sound and expecting that.
Okay. Just to be sure, the last 2%, 3% is price alone?
It is repriced, obviously. This is what we see today, as I mentioned before. So this is price.
Okay. The second question is on the guidance because at the beginning, you mentioned that the visibility allows you to be in the upper end of the full year guidance. Just wondering what are the main drivers? Is it just a matter of better visibility on volumes, probably better mix, better cost control, or just a flavor.
We see that we can stay in the upper side of the guidance. If there are no major events. We -- I mentioned the semiconductor issue. So we know that in the second quarter, we can balance first of all because in the first half of the year, the high value cars are less affected. So the carmakers, they protected this segment of the market. But in second half, we don't know. And also the carmakers are not providing precise information what is going to happen. So we say that we stay in the higher end of our guidance only if there are no major events. The major event I see is the semiconductor. But anyhow, we confirm the guidance.
Okay. And very last follow-up on the tires for electric cars because I was wondering if the -- I suppose, it's a very tiny business today so I don't know if you are willing to quantify what's the amount of sales for electric cars. And you mentioned they are -- they had low profitability, but compared to the original equipment sales for the normal combustion engine cars, are they dilutive, having only small volumes today? Or they are not far from the normal original equipment profitability?
The profitability is a bit better. So the -- there is a price premium on the very high end electric where the competition is lower. The -- let's say, it's not significant the number in terms of profitability. This year I mentioned also in the call presentation of our plan that we expect to have some significant result in 2023 where we will have the impact of the starting replacement cycle. And getting the market share we are getting today, we see that it will become of some -- with some material effect in '23.
Okay. But they are more profitable even today with very low volumes. Okay. Thank you.
Yes, they are. Thank you.
The next question is from Thomas Besson off Kepler Cheuvreux.
I'd like to come back to this other cost impact, EUR 58 million in Q1, EUR 30 million for the year. I mean I would just like to make sure that in '22 or '23, we won't have such a concentration of the impact of these other costs in a given quarter and make sure I understood correctly that this is partly linked with the different timing of incurring those costs, like for instance, the Formula 1 you've mentioned so that we have, let's say, more balanced quarters because if I understood correctly, you are going to have much better margins in coming quarters and this is partly linked with this kind of delays in expenses last year.
Mr. Bocchio?
Yes, I can confirm your understanding. In 2021, we have a comparison base of 2020 that obviously has been pretty volatile quarter after quarter due to the COVID impact. As I said, on these other cost, for the time being, we see full alignment with our guidance that we gave a few weeks ago. And your understanding that the profitability -- our profitability in the next quarter will be improving is exactly our view for the next quarters. Moreover, as you were saying, in the next few years, there is no rebound, no foreseen rebound of the other cost. So they will be just inside 2021, some up and downs due even to the comparison base of 2020 between the different quarters.
Okay. Yes, I think it's an important point here. I have a second question, please. Could you comment about the level of inventories? I think inventory levels for the industry, both for you and for distributions, were quite low. Have you rebuilt inventories? Or have you seen already some inventory rebuilds at distribution level? Or do you believe that there is a fairly decent cushion ahead for you and your peers because the industry inventory levels are still very low?
Mr. Casaluci?
Thank you, Mr. Tronchetti. Yes. So our inventory, our own inventory is stable while in the trade, we see that there is still a shortage in terms of availability with a low level of inventories, generally speaking, in United States, where the demand started both in sell-in and sell-out; a restocking phase in Europe, but still below the average; and the physiological level of stock while is more normalized the inventory level in China.
Okay. One last question, if I may. Linked with the -- your work with Formula 1. You've mentioned in the past that it was kind of a marketing budget for you. And that it was completely worth it. Could you comment on the evolution of the cost for you for this marketing budget, given that we are into a more normal season, so more races. Is that part of the reason why we've had this bigger Q1 cost? Or is it really just a timing issue?
No, the Formula 1 stays at the same level. We do not have an increase in cost because of a couple of grand prix more than the previous year. What we have as a marketing costs are related only to new products and Luna Rossa, which has been already paid in the first quarter. So as we mentioned in our presentation, we see that the extra costs are mostly absorbed in the first quarter. So looking forward, this marketing cost will not exceed what we have in the plan.
The next question is from Victoria Greer of Morgan Stanley.
Could you just talk a bit about any view that you have on the rate of sell-out demand in the main regions? You've commented on the restock basis, and that's very helpful. But yes, do you have a view on where sell-out demand is, say, versus 2019 levels now?
Obviously, it's too early to give you an exact, let's say, number related to the sell-out growth. What we see and we are experiencing is the rebound in China, that is in our number already, at least for the first part of the year. What we see in the United States -- the rebound in sell-out that there is in the United States. In Europe, there are some positive signs and we expect mostly in the second half of the year that the, let's say, the effect of the exit of the lockdown will positively impact the demand. Our trade that is directly in touch with the consumers is quite positive. And so -- and the first sign positive also in Europe, that is what we can see today, positive in Europe as we are positive in the Middle East for the minor part we have there and in Russia.
And then just a second one on production. You mentioned in the presentation, I think, that you're back to 90% capacity utilization. Can you talk about how much impact you have had previously from, yes, I guess, mostly COVID safety measures, how disruptive has that been to production so far? And as there is very strong demand, could you push capacity utilization a bit higher for the next couple of quarters?
We -- the -- let's say, that the first part of the year, obviously, we have a minor -- we had a minor impact of the cost of COVID because it was just China that affected us. Then the largest part is coming after. And we see that the rebalancing between, let's say, the cost and efficiencies as such that is not affecting negatively our efficiencies. So we confirm the effect of the efficiencies we have in the 2021 plan.
The next question is from Pierre Quemener of Stifel.
I got three, if I may. The price/mix is seen worsening in the second quarter on mix deterioration. But will it remain positive? That would be my first question.
And over the full year, if the guidance are between plus 2.5% to 3% of price/mix, my understanding from your previous comments is that for 2021, that should be mostly pricing and less mix. That would be my first 2 questions, please.
I give you the general answer, and then Mr. Casaluci will elaborate in detail. So the number, luckily, is higher than the one you mentioned. So we see beyond 3.5%. That is what we see today. But Mr. Casaluci?
Yes. So first of all, second quarter price/mix will remain positive. With the comments that Mr. Bocchio did before, we do expect a performance lower compared to the average of the year because of the negative region mix and channel mix. But we will start to see the positive effect of price increase. In the second half, we target a price/mix above 4%, with the landing point in the full year that will be higher than the guidance, 2.5%, 3%. So we set more or less a target around 3.5%, 3.54%, that is what will allow us to fully compensate in terms of price/mix the negative impact of raw materials mentioned before. Clearly, from the second half, we will have the full effect of the price increase. So the impact on price/mix will be balanced more or less half and half between price and mix.
Okay. And one last question, if I may. Regarding the other costs, which have been a real headwind. In the first quarter, the reversal in the balance of the year, would it be evenly split between the last 3 quarters? It's a partial reversal, I understand. Or will it be -- will it impact more the second or the third quarter? I'm referring to the EUR 58 million negative in the first quarter.
Mr. Bocchio?
Thank you for the question. Regarding the other cost and the rebound, actually, what we expect is an overall positive rebound in the second quarter and a little bit smooth rebound in the second part of the year. As I mentioned before, these different dynamics will bring us, again, to the level that we envisaged for the full year. but with different dynamics between quarter 2 and the second part of the second semester.
The next question is from Gianluca Bertuzzo of Intermonte SIM.
First one, I was looking at the level of sales you reached in the first quarter. It wasn't very far from what it was in the first quarter of 2019. And actually, for your most profitable division, it was also above. However, the level of profitability of the group is still below the level of 2019. And this came in a context where you announced a cost-cutting plan and a lot of activities are stopped due to COVID. Can you elaborate a little bit on the reasons why of the difference in profitability?
Second one, I was wondering if you can provide us the organic growth for the 2 divisions. And the last one is on restructuring. Do you confirm the EUR 120 million guidance you gave at the Capital Market Day?
So on the third question, we confirm what we said in the Capital Market Day, and I leave the floor to Mr. Casaluci for the other answer. One comment, if you like, on other costs. Other costs, we mentioned in our presentation that in the first quarter, we have the impact of the marketing costs and adding costs higher than in the following quarter. So the difference that you see -- you don't see at the level of contribution margin is at EBIT level is mostly due to this. And obviously, there is also the price/mix that will provide more support in the second half of the year compared to the first half of the year. So we expect to rebalance in the second half of the year. Mr. Casaluci?
Nothing to add to what Mr. Tronchetti said. So the negative impact on EBIT margin is only due to the other costs that Mr. Bocchio explained before in terms of contribution margin. We already overachieved the comparison of 2019, and you will see the improvement of the EBIT margin also starting from the second quarter because of all the drivers we mentioned, price/mix volumes and lower effect of the cost base.
The next question is from José Asumendi of JPMorgan.
José from JPMorgan. I would like to hear a little bit more with regards to maybe the regions or the products where you're looking to expand the capacity on a 1- to 2-year view and then maybe the other regions where you're looking to reduce capacity as volumes basically normalize in the next 12 months. Are you looking to reduce more capacity in the U.K.? Are you looking to expand more in the U.S.? If you could just give us some examples either by region or by product?
First of all, we don't see a need to reduce our production because the production, when I mentioned 90%, means that there is, let's say, considering some savings, but there are other 6-point net of growth that is still available. Regionally, we are, in all regions, except Latin America, where the market is, let's say, still very, very weak, in all the other regions, we are in the range of 90%. So that's the -- there are no major differences. Because in Europe, we are reaching this level, considering also that Europe export some high value tires also to other regions. And so all in all, it's well distributed and balanced. So the efficiencies in the factories are improving.
Additional or follow-up question. You're entering a very, I think, strong free cash flow generative cycle in the coming sort of year, 2 years. So if -- can you talk a little bit about the use of cash, how do you think about the use of tax-free calculation, either to deleverage; dividend, special dividends; or any other activities?
The dividend policy, as we already mentioned in our plan, the industrial plan is 50%, '21, '22 down to 40%, '23, '25. We go up to 50%, considering that we didn't distribute last year. So we have reserves so they were the profit of '19 that were not distributed. So that's the -- and that's the dividend policy. About production capacity looking forward, until 2023, we don't see any need of additional capacity, if not the one -- the minor that is part of our plan.
If the market continues this trend, but investment will grow to, let's say, fulfill the demand in '25 on, that's the -- these are the number of the plan, and we have no reason to change them. We see as you have seen that we did perform better in the first quarter, and we expect this also in the second quarter in terms of volumes, but it's not affecting the general view. Obviously, if this growth will exceed looking forward, we have still some capacity available, and we are also making efficiencies that are providing us some reserves in capacity.
The next question is from Edoardo Spina of HSBC.
I have two quick questions. The first on the second quarter specifically, I know you do not provide guidance by quarter, but I wanted to clarify, considering the very strange and difficult comparison last year in the second quarter, if you can anticipate any volatility across in the second quarter of '21? Or I think you mentioned earlier you expect some improvement in profitability already in the second quarter itself, not the first quarter?
And the second question is on China, on the winter tire market. I was wondering if you could give us some updates. In the past, there was a discussion about the potential regulation for that. I did not hear more updates. I was wondering if you can share your thoughts about the potential niche in China.
In China, there are no news about the introduction of regulation. The news is in France, the introduction of regulation, which is obviously good.
And for the first question, we see in the second quarter a strong recovery of volumes to continue. The drop-through that we remain in line with historical trend volumes, 40%; ForEx, 15%. Price/mix, more than compensating raw material headwind and positive net efficiencies around 40% of our yearly target, thanks to plants back at high saturation, as I was saying. Last year, there was a strong slowdown impact in second quarter. So we will see this reversing in the second quarter of this year.
Lower ForEx headwind is expected and positive others pushed also by the stock effects. These are the main driver. I'm saying more than usually about the second quarter. But we are mid-May, so we can be more open.
Mr. Tronchetti Provera, there are no more questions registered at this time. Back to you for any closing remarks you may have.
Thank you, ladies and gentlemen. This will conclude today's program. Thank you for your attendance, and have a good evening. Bye-bye.