Pirelli & C SpA
MIL:PIRC
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
4.508
6.234
|
| Price Target |
|
We'll email you a reminder when the closing price reaches EUR.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Pirelli & C SpA
You don't have any saved screeners yet
Good evening, ladies and gentlemen. The first 3 months of 2022 were characterized by growing volatility of the macro scenario, exacerbated by the recent geopolitical tensions and the new lockdown in China. Despite this volatility, Pirelli closed the first quarter with a clear improvement of its results year-on-year, which rank one of the best in the industry.
For 2022, we expect a positive scenario, however, characterized by a slowdown in economic growth. The war in Ukraine and the sanctions imposed on Russia pushed energy and raw material prices up. The new COVID outbreaks in China had an additional element of uncertainty with an impact on economic activity and consumption.
As a result, the expectation on car tire demand are more cautious, especially for the standard segment. On the other hand, high value confirms its resilience. The growth rate 7x higher than that of 17 inches and below, despite the price hikes to offset the increase in input costs.
In this scenario, Pirelli responded promptly by acting on all its levels to mitigate the impact of growing headwinds. We are implementing further actions to improve profitability. Adjusted EBIT margin cautiously expected at 15% in consideration of the impact of the war in Ukraine and demand slowdown in China.
The leverage target is confirmed with a net cash flow generation expected to be EUR 450 million. Just a few words on our commitment to fight climate change in the recent development. Having reached the greenhouse gas reduction target set for our plants in 2025 already in 2021. We asked the science-based targets initiative, international body that defines and promotes best practices in this area to validate new upgraded targets in line with the 1.5 [indiscernible] scenario versus the previous target scenario well below 2 degrees, and we obtain SBTI validation.
The 2025 targets are the reduction of absolute greenhouse gas emission of 42% compared with 2015 was minus 25% the previous target, a 9% reduction of those from raw materials purchased compared with 2018 that are confirmed. Since March, we have put in place a set of measures to mitigate the impact of lockdown in China and of the Ukraine war.
Before reviewing Pirelli performance the first 3 months of the year, I'd like to spend a few words on our operations in Russia and the measure taken by Pirelli. I remind you that in 2021, Russia accounted 40% of sales and 11% of the group's capacity mainly standard and half of which for export. Pirelli is against war, and we are supporting Ukrainian people via donation of EUR 500,000 and raising funds amount our employees ending on May 13.
Pirelli operating full compliance of the international sanctions, which are banning the imports of finished products from Russia to Europe and the export from Europe to Russia of some raw materials from the second half of this year.
In this context, we identified alternative supplies, both for export from the country with gradual activation of supply from Turkey and Romania and the imports of raw materials, mainly Russian suppliers. We diversified our logistics to ensure continuity in the supply of finished products and raw materials.
Local production will be addressed to the domestic market. To guarantee financial support for our operation, we opened a new credit facility with a local bank. Looking at Pirelli financial results, Pirelli closes the first quarter of 2022 with a solid economic and financial performance. The top line growth was supported by the price mix and by the strengthening of High Value, now accounting for 74% of the group's revenues.
Improved profitability with a 15% adjusted EBIT margin supported by internal levels. Net income was EUR 110 million 2.6x that of the first quarter of 2021. The net cash absorption in line with the levels of the fourth quarter of 2021, reflecting the business seasonality. The net financial position stands therefore at [ EUR 3,580 billion ].
I'll now leave the floor to Mr. Casaluci. Please, Mr. Casaluci.
Thank you, Mr. Tronchetti, and good evening, everybody. Let us analyze both of the market dynamics and Pirelli's performance. In the first 3 months of 2022, the global car tire demand increased by 1 percentage point with a very different trend by channel and segment.
Original equipment market was down 5% year-over-year, discounted the impact of supply shortages and in particular, semiconductors. More in details. Standard, so a minus 7% decrease year-over-year, also affected by the stop of production in Russia from main OEMs.
High value was flat as OEMs keep prioritizing high-end models in a volatile scenario. Pirelli reduced the exposure to the original equipment standard and in general, to less profitable products focusing on 19 inches and above and electric vehicles.
Replacement demand has been solid, plus 3% year-over-year, almost close to pre-COVID levels supported by the recovery in mobility. 18 inches and above grew plus 14% year-over-year as demand for high-end products remains sound despite the increase in prices. 17 inches and below saw a minor improvement year-over-year with a plus 1%.
Pirelli outperformed the replacement market in both segments by over 2 points. The solid performance across main regions was driven by our pull-through high-value volumes and new product launches. The results of the first quarter 2022 reflect the implementation of the key programs of the industrial plan.
In the commercial program consistently with our strategy, we strengthened the position in the car segment 18 inches and above and outperformed the market. We increased the exposure to the Original Equipment 19 inches and above now reaching 75% of OE in the car 18 inches in the both segments, plus 3 percentage points year-over-year and EVs.
We reduced the exposure to the standard segment, which accounts for 40% of car volumes in the first quarter. In the innovation program, we collected 90 technical homologations, 27% of the yearly target, mainly in the 19 inches and above, approximately 90% and specialties approximately 30%.
We introduced 2 new lines dedicated to SUV segment, in particular, for electric and hybrid vehicles. In the competitiveness program, Phase 2 of the efficiencies plan continues, having reached 20% of the yearly target in line with the seasonality of our programs.
In the operations program, plant saturation increased further to over 90%. In addition, cycling production started in the Bollate plant in Italy. Our volume results in the first quarter are consistent with the strong focus of the commercial program on the top of the range and the selectivity in the regional equipment.
In car, 18 inches and above, a plus 8% growth was recorded, driven by the most technological and highest range products, namely, the rim sizes 19 inches and above contribute 81% of the growth observed in the car 18 inches and above. The specialties account for over 65% of the volume increase in the 18 inches and above segment in the first quarter, mainly due to EV products, which account for 48% of the volume increase in the 18 inches and above segment.
The replacement 18 inches and above is the driver of this growth both in the pool volumes, especially in Europe and North America and EV products and in the push volumes where the new lines dedicated to the replacement channel show very good results in the 3 high-value regions. On the other hand, in the Original Equipment 18 inches and above, the growing selectivity of projects, led to volumes almost in line with the previous year with a higher incidence of EV products.
Pirelli Innovation Program proceeded in the first quarter of 2022 with the renewal of the Scorpion range. a product dedicated to sport utility vehicles and expanded to meet the specific requirements for the different seasons. The renewed Scorpion line combines low consumption and high mileage with excellent breaking performance, also thanks to the new [ reinforce ] trade certified with a prestigious TUV SUD performance mark. The Scorpion family is particularly addressed to green vehicles, which amount to roughly 50% of the homologation target.
This trend started with the previous generation of tires and continues with these new products. Let's see some more details of the new Scorpion range built to the latest Pirelli technologies that provide further efficiencies and sustainability improvements with excellent grip in dry and wet conditions consistently with Pirelli DNA and low rolling resistance results as certified by the European A, B levels; exceptionally quiet with up to 3 decibel less noise than in the previous generation.
Much attention was devoted to the wear rate to achieve a higher mileage and therefore, decrease tire waste disposal, as well as to lower particle emissions, now down 25% compared with the previous generation. Pirelli Innovation stands out, especially in the electric vehicle segment. The rich EV portfolio includes as many as 250 homologations with the most innovative and well-known carmakers in the world.
This positioning is unique in the industry. As showed by the wild portfolio of EV market products, where Pirelli offering is 2.5x wider than its competitors' average. This success was also consolidated by the prices recently received like that of best technological innovation of 2021 awarded to Pirelli Elect by the Spanish tire and auto parts industry.
The EV segment is confirmed as the one with the fastest growth with Pirelli aiming at almost doubling its sales in this segment and reaching already in 2022, that is to say 3 years in advance, its market share target for top of the range EVs equal to about 1.5x that of premium and prestige internal combustion engine.
In the first quarter, the competitiveness program has achieved EUR 29 million of efficiencies in line with expectations and equal to roughly 20% of the yearly target, which is confirmed to be EUR 150 million. Looking closely at the first quarter performance by the single project we have in the product cost project, which accounts for approximately 32% of efficiencies the adoption of a modular and value-driven approach is proceeding.
In the manufacturing projects, 24% of the quarterly efficiencies we continued increasing plant flexibility, digitization and sustainability. In the SG&A project, 24% of the quarterly targets, we achieved efficiencies by using different levers like redesigning our distribution networks, optimizing warehouse use and renegotiating with our suppliers.
Finally, in the organization project, 19% of the quarterly efficiencies, we went on digitization processes and organization transformation. I'll now give the floor to Mr. Bocchio.
Thank you, Mr. Casaluci, and good evening, ladies and gentlemen. As already shown, the top line grew 22.2% in Q1 compared to the same period of last year. Let's give you the dynamics of the quarter.
Volumes decreased slightly, minus 1.4% at group level. They discounted a different trend between the high value and standard segments, both in the car and the motor businesses. High-value volumes are improving, plus 5.8% from first quarter of 2021, especially supported by the market share gain in car replacement 18 inches and above with a plus 16% volume growth, showing an improvement compared to the fourth quarter trend despite the price hikes.
Standard volumes are going down 9.7% under the impact of a greater selectivity in car Original Equipment, the Russia-Ukrainian crisis and closure of standard motor plant in Brazil in the third quarter of 2021.
The price/mix reached a record level plus 20.4%, due to price increases especially in the replacement channel in all major countries, to compensate for the increasing inflation rate of raw materials and costs such as energy and transportation. And mix improvement in all its components, product mix, meaning migration from standard to high value, channel mix with a better trend of replacement versus Original Equipment and the region mix, sales increase in Europe and North America.
Also positive, the impact of ForEx, EUR 40 million or plus 3.2%, reflecting the revaluation of the major currencies against euro. Let's move now to the profitability. In the first quarter of 2022, the adjusted EBIT was EUR 229 million, posting a 35% year-on-year growth with a 15% margin compared with 13.6% of the first quarter of 2021.
Internal levers, price/mix and efficiencies more than offset the negative external scenario, raw materials and inflation. In particular, the trend reflects the positive impact of the price mix, plus EUR 206 million, which more than compensated for raw material cost increase EUR 120 million, including the related exchange rate impact; input cost inflation, minus EUR 53 million and volume decrease, minus EUR 7 million.
The contribution from Phase 2 of the competitiveness program, we generated structural efficiencies of EUR 29 million, accounting for 20% of the yearly target in line with the project seasonality. The positive effect of ForEx for EUR 6 million and the flat balance between the reduction of other costs, EUR 4.3 million and the increase of depreciation and amortization, minus EUR 4.8 million.
Let's look at the net income dynamics for the quarter. Net income strongly increased year-over-year. The trend takes into account, the already mentioned improvement of the operating performance, lower restructuring and nonrecurring costs. Net financial charges for the first 3 months of 2022 are quite in line with the previous year quarter despite the general progressive increase in interest rates, which we will discuss in a couple of slides.
The EUR 25 million increase in tax charges relates to the higher operating results we just discussed as tax rate is stable at about 27%. Net income adjusted, meaning, excluding all the one-offs and nonrecurring items, is positive for EUR 136 million at the end of March.
Let's give you net cash flow. The net cash flow in the first 3 months was minus EUR 673 million, in line with the business seasonality and the value of the same period in 2021. This result benefits from the above-mentioned improvement of the operating performance, lower investments also due to a different timing in the project implementation in 2022 and mainly attributable to a geographic reallocation of investments themselves as a consequence of the changed external scenario, the usual seasonality of the working capital which experienced a greater absorption than in the first quarter of 2021 due to an inventory increase, mainly attributable to raw material stock aimed at mitigating supply chain risks in an extremely volatile macroeconomic context, and a greater absorption related to trade payables attributable to both the spot measures taken in the quarter to tactically guarantee some raw material supplies to the group and the dynamics of investment-related payables which in the first quarter of 2021 benefited from the low level of investments made in the last quarter of 2020.
The Pirelli's gross debt as of March 31 amounts to approximately EUR 5 billion whereas its net financial position, excluding EUR 1.4 billion of financial assets is approximately EUR 3.6 billion. Among the most relevant actions in the first quarter, Pirelli obtained an investment-grade rating, BBB minus with stable outlook from 2 of the most important international agencies, Standard & Poor's and Fitch and subscribed a new 5-year committed bank line with a large pool of international banks for an amount of EUR 1.6 billion.
Such financing includes ESG features in line with our strategy and goals. The new line doesn't have any financial covenant, thanks to the public rating obtained. The group's debt profile is now well balanced with the backloaded deadlines.
The group's liquidity margin of approximately EUR 2 billion allows therefore to cover that deadlines until February 2024. The liquidity margin, the deadline profile and the rating obtained will allow the group to deal with markets even if volatile in the best conditions.
Finally, the cost of debt as of March 31 is equal to 2.47% with a 9 basis point increase due to the general increase in interest rates, especially in Brazil and Russia.
And now I leave the floor back to Mr. Tronchetti.
Thank you, Mr. Bocchio. We are now going to review how we changed our assumptions on 2022 in the light of the recent events. The outlook for '22 remains positive, although definitely slowing down compared with the estimates made early this year.
The war in Ukraine and the sanctions imposed on Russia put energy and raw material prices up, exacerbating inflation retention already recorded from the start of the year. COVID outbreaks in China are a further element of uncertainty, an impact on the local economic activity and global supply chain is still under pressure.
Global GDP is now expected to grow by 3.2% in a context still characterized by high volatility. The outlook of growth in the major European economies appears weakened as this depends on Russia to meet their energy needs. The outlook for the U.S. economy is also more conservative. United States values increases of interest rates are expected during the year to fight inflation rate, which reached its peak since 1995.
Talking about inflation in '22, we expect an even more marked increase in the price of the major production factors, however, offset by price mix and efficiencies. Increasing raw materials headwind is mainly driven by higher oil prices, those quotations after reaching a peak of $127 per barrel in early March are expected to go down to an average price of $104 per barrel in full year 2022.
As for raw materials, I remind you that Pirelli enterprise indexation closes with OEMs for over 72% of the production of Original Equipment. Actions on prices and efficiencies are speeding up to cope with the growing energy cost namely the reduction of consumption and the acceleration of renewable sources in our plants and implementation of hedging contracts to protect against 2 strong price fluctuations.
As for shipping large ports remained [indiscernible] strong impacts on long sea routes. Pirelli appears to be less exposed than many other players, thanks to its local for local production which is close to 85%, the exception of the North American market served by our plants in Mexico and Europe.
Let's now move to the outlook for the tire market. Supply chain issues exacerbated by the war in Ukraine and the slowdown of demand in China, that has to adjust our expectation for the car tire market in '22. We foresee a slight market growth plus 0.5% year-on-year against the plus 3% of the previous guidance. Our Original Equipment remains flat year-on-year. The previous guidance was for plus 6% in line with cap reduction, and the replacement grows a little, plus 1% against the 2% of February, discounting the demand slowdown in China.
18 inches and above is confirmed as the most resilient segment with the highest growth, approximately 7x that of the standard. For the Original Equipment, 18 inches and above, we estimate plus 7% growth, slightly lower than the previous forecast that was plus 9% due to the strong decline of demand in Europe in the first quarter, which was -- has been minus 15% caused by the chip shortage, which is going to be almost recovered in the second half of the year.
For replacement, the growth trend is basically confirmed for 18 inches and above segment in spite of a price increase. China's demand slowed down caused by the lockdown measures will be compensated by a better trend of sales in other regions, especially in North America. We prefer to keep cautious about China, minus 6% the total car in full year 2022, minus 3% in car 18 inches and above. After the strong decline occurred in the market in March, the replacement was minus 22%, which will continue in the second quarter.
This situation is expected to improve in the second half of the year, then we recover in the period given by original equipment and high-end products. In this context, Pirelli confirms its leadership in high value. The market share gain in replacement supported by production innovation and the consolidation across our major distribution partners.
The evolution of the macro scenario and market led us to adjust our full year 2022 targets. Revenue between EUR 5.9 billion and EUR 6 billion, growing from plus 10% to plus 12% year-on-year, driven mainly by price increases in an inflationary scenario and a further improvement of the mix by volumes growing between 0.5% and 1.5% consistently with our strategy to strengthen car replacement 18 inches and above. Greater selectivity in Original Equipment and lower exposure to standard.
Exchange rates are going to be stable, we cautiously assume a greater volatility of the currencies of emerging countries in the second half of the year. Profitability is expected to be about 15%, which cautiously considers the impact of the war in Ukraine and demand slowdown in China. We confirm the solidity of our internal levels with the price mix and efficiencies capable of more than offsetting the impact of raw materials and inflation headwinds.
More specifically, the difference between the current guidance midpoint in that of the previous guidance is attributable to the one side of the Russia-Ukraine crisis. We confirm the sensitivity indicated in February with an impact on adjusted EBITDA of approximately minus EUR 27 million for the lower plant saturation also due to the ban on import from Russia to Europe from the second half, higher transportation costs, different allocation mix and supplier diversification.
On the other, demand slowdown in China is partially offset by the better trend in North and South America. We are putting in place new actions to compensate those headwinds. Working on internal levels, mainly prices in markets where demand is more solid, Europe and North America, but also cause rationalization.
CapEx at approximately EUR 390 million is confirmed. The suspended investments in Russia are going to be diverted to other low-cost plants, mainly Romania and Mexico. Net cash generation before dividends at EUR 450 million, in line with the guidance of February, but the lower operating performance is offset by lower taxes and a slight improvement of the working capital.
The deleverage target is confirmed with net debt on adjusted EBITDA equal or lower than 2x. So this ends our presentation, and we will open the Q&A session.
[Operator Instructions] The first question comes from Giulio Pescatore of BNP Paribas Exane.
The first one on the guidance, you defined the 15% margin target as cautious in your earlier remarks. And you said you pointed to China, for example, is one of the things that -- on which you are cautious on. I was just wondering if you can outline what other cautious assumptions are you currently incorporating in this target? And then the second question is more on the pricing and mix side. Can you maybe help us understand how much of the Q1 price mix was -- how much with mix -- and how much are you currently assuming for price and mix at the full year stage.
If you can give us an indication of that? And -- can you remind us of what is the drop-through of mix of that pricing. And then a last one on Russia. Well, I understand that you have responsibility towards your employees in the market. But I mean, have you consider potentially selling the assets? I mean it's shutting it down wouldn't be fair for your employees in the region.
But at the same time, what is the -- I mean the -- I guess the ESG, the government's potential concern with keeping this asset is quite significant. So have you considered spinning it off or selling this asset.
We consider that should recover in the second half of the year. So we expect the situation of the lockdown continue until end of June. That is what we cautiously believe and we have obviously to see which will be the development before mid-May where these restrictions should be revised.
The second element is obviously the strength of demand that until now is good, and stocks in the trade are still lower than where they were in 2019. So the situation is still good, both in U.S., Europe and also obviously, in China. That is the general situation why we are cautious.
We experience that in our segment, the price increase went well until now. And so we expect it to continue. But obviously, it depends on the global demand. On Russia, we continue with what we already announced, so slowing down and reducing down to zero the export to Europe remaining as we did in other countries. We did it in Venezuela in very bad times, just to continue to pay wages and salaries and social protection to our workers and employees. On price mix, I leave the floor to Mr. Casaluci.
Thank you, Mr. Tronchetti. Try to give a bit more color on the price mix. The performance of the first quarter was plus 20.4%, out of which half more or less is related to pure price effect. On the full year basis, we project today from 10% to 11%, out of which most roughly 80% will be price. So we expect to move from a plus 10% of the Q1 into a plus 8% of the full year.
Here was probably the result of consciousness that is part of our numbers. Why is this percentage lower performance is because in 2021, we started with a price increase process from May, June on. And so the comparison versus last year on the price, it will be less favorable.
Nevertheless, if the demand will remain as it is today, as sound, especially in Europe and North America, we see opportunities to improve this performance even more. As far as the mix is concerned, we had a very good performance in Q1, also driven by the China mix, so the slowdown of the regional equipment, while we do expect a recovery during the second half because of the recovery of the supply mainly on semiconductor.
This is the reason why you see a lower performance in terms of mix versus the first quarter.
And just to follow up on the mix point. Can I just ask what is the normal drop-through of mix on the EBIT?
So we consider 65% average drop-through.
The next question is from Gabriel Adler of Citi.
I'd like to start with price mix again. Could you maybe help us understand how you will manage the business as and when raw material prices begin to soften.
Do you plan to operate with roughly neutral price mix road maps in such an environment or because supply has exited the market and CapEx is actually quite low still. Do you think that you could maintain price at high levels even if raw mats begin to come down?
And then my second question is on the high-value standard mix. I think [indiscernible] highest quarter. So could you maybe remind us how much further you think you can push a high value with your current production capacity. And then lastly, I just wanted to come back to Russia, I know you had a question already, but I think it's important to get some clarity here on the longer-term plan.
Are there any circumstances where would withdraw from Russia? Or is this just another option that you're considering the environment?
So starting with the second question. On Russia, obviously, nobody knows what is going to happen. What we consider is to stay only in the local market and we have no problem on our assets because they are in Rubles -- or the lines are in Rubles. So it's isolated self-sustaining and that is what we are targeting looking forward. So nothing more than this. Please, Mr. Casaluci.
So I confirm there is -- in this moment in the market, a very high level of price discipline. The stock level in the trade is still below the normal level in Europe and North America. So we don't see major issues for the foreseeable future in applying the price increase in the replacement channel related to the inflation of the input cost.
While in the regional equipment, we have 72% of the business, which is related to the cost metrics approach. So the price increase, it comes automatically with the inflation of the input cost. As far as the expectation of growth in the high value, yes, we confirm this is the most resilient segment.
And every time we face the crises or a volatility in the external environment, we saw the higher resilience of the high value. This is also demonstrated by the decision of the carmakers to always protect the high value segment in an environment of shortages of parts. So we are very positive on the future demand of the high value.
Next question is from Monica Bosio of Intesa Sanpaolo.
The first one is just a check. In the first quarter, the group more than covered the raw material cost and inflation in other inputs. Do you expect this to happen in each quarter of the -- in each of the remaining quarters? Or there will be a quarter more challenging on this side, what the group maybe will not be able to cover.
And the second is on China, can you elaborate a little bit more on the expected growth of the group in high value in China? Because I've seen that the market is still down at minus 3% for tires above 18 inches. And so I'm wondering -- I was just wondering if you can elaborate a little bit more and give us a highlight on the market share gains that you expect to get both in China and elsewhere.
Thank you. First, on price mix, looking forward. But -- and obviously, inflation cost. We see that the demand is still positive even in the coming months. So we have visibility for the second quarter and the beginning of the third. And we see the stocks remaining at a level that is below what we saw in the previous years. And that's why we are positive and we believe we can continue the same trend for the coming quarters. On the other question, I leave the floor to Mr. Casaluci.
Thank you. As far as the Chinese market, you are right. First, the second quarter was pretty good with an 18 inches and above market demand positive at 3.3% and Pirelli overperforming the market, mainly in the replacement. We do expect a negative second quarter fully affected by this lockdown. And this lockdown is affecting the mobilities in all the Tier 1 cities involved by the restrictions. So we do expect that this will affect the 18 inches and up as well, of course.
And our expectation for the total tire market in the second quarter is, let me say, it's difficult to have a clear understanding of all the impacts. But today, we estimate a market down 20% more or less affecting both channel replacement and original equipment the same way.
While if we move to the outlook of the full year, all in all, we still maintain a positive outlook with an expectation of plus from 3% to 4% of the demand with -- I'm always talking about 18 inches and above at 3%, 4% of growth with replacement overperforming the Original Equipment with roughly 8% of growth. This is the outlook of the market.
Pirelli is targeting to overperform the market in both channels, original equipment because of the enlargement of the customer base mainly driven by EV producers like Tesla that is growing very fast in China or NIO the newcomers local producers and overperforming the replacement, at least of a couple of percentage points, thanks to the pull-through effect and the enlargement of our retail network.
The next question is from Martino De Ambroggi of Equita.
The first question is on Russia, but trying to -- I don't know if you can elaborate a bit more on how you plan to substitute the Russian outlook capacity with the Turkish or the Romanian plant. Doesn't -- it means there is a risk of lower profitability because of transportation cost, the production cost and so on? And what is the outlet capacity utilization nowadays in the alternative plants that you are planning to use.
And the second question is probably connected to the answer to the first question because Mr. Bocchio during your remarks, you talked about CapEx with a different geographic reallocation. They were very low in Q1. So trying to understand where this geographic reallocation is acting.
And frankly, I thought the EUR 390 million for the full year could have been lowered for this year. Because what is surprising me. Third question, is the EUR 450 million free cash flow, knowing that lower profitability, higher working capital because the cost on average are growing every day. And you are confirming CapEx. So just to understand how do you elaborate these moving parts.
Thank you for the question. First I answer your last question. The driver, the priority is the cash flow. So what we have as a priority is cash flow production. So working capital investments, everything will be done in line with the target of cash flow production. And the EUR 390 million can remain or can also be reduced in case there will be a slowdown somewhere. So we have a flexibility that accounts for 1/3 of these investments. And so we don't see now any reason to reduce it, but we are ready to do it having as a driver as a priority to the cash flow.
On Russia, it's obvious that there is a cost in these months to move capacity out of Russia and to create capacity in other countries, mostly in Romania and Turkey, which means investment. That's one of the reason why we foresee this EUR 390 million remain as they are forecasted to be.
There is also some investments in Mexico to improve capacity where we have a good opportunities in the United States. So this is the picture we see today, but keeping in mind that cash flow is the most important driver to stick to. On Russia, internal market remains good for the local sales. So we have the factories working now in normal condition.
And we have a very low cost in Russia. So even if there is a slowdown we don't see major impacts coming from this slowdown. There is obviously a temporary reduction of profitability on standard because of the cost that already mentioned. But we are quite confident that we are back soon with the double digit we have as a target. Mr. Casaluci?
Thank you, Mr. Tronchetti. Just to reinforce with a few numbers, today, the export from Russia, more or less 50% of the production. It goes in Europe for EUR 3.5 million, EUR 0.5 million is going to other countries not affected by the ban of the export. This EUR 3.5 million in the logic that Mr. Tronchetti presented before of derisking -- the process of derisking of the company.
And as a consequence, maximize the local for local production. These volumes will be recovered with a higher level of production in Europe in the low-cost countries like Turkey or Romania and reducing the export from Europe to Asia Pacific and to North America, taking advantage of the free capacity we have in China today for Asia-Pacific and setting new investment of capacity increase in North America.
And that's the reason why, for the time being, we confirm the EUR 390 million given the target that Mr. Tronchetti was underlining of the free cash flow that is the priority one.
If I may, just very follow -- a quick follow-up on price mix. Could you provide a split between the price mix in high value and standard?
Yes, more or less is 17%, 18% on the high value and the 22% on the standard.
The next question is from Akshat Kacker of JPMorgan.
Two questions for me, please. The first one, just on cost inflation. You mentioned that raw materials, energy and other inflation elements was 11% margin headwind in Q1. How do you expect this to evolve in the coming quarters or for the full year, please? That's the first one.
And the second one is on M&A. If I can ask that a key winter tire competitor of yours is facing operational difficulties in the current situation. Do you think this could be an opportunity for you to look at the asset? Or is this hospitable for you?
Thank you for the question. The second question, we don't have evidence that there are transaction on assets of competitors now. So we don't have anything in mind, and we don't see anything on the table. I'll leave the floor to Mr. Casaluci for the other question.
Yes. Now the impact of the inflation on the input cost is more or less balanced. And that's the reason why you see the full compensation on the price with the price mix of all the inflation in input costs, keeping this from 8% to 10% of price increase along the year. We don't see for the foreseeable future measure impact. We consider that the actual input costs are more or less stabilized. Clearly, we monitor on a daily base, the market trends in the futures, and we react as soon as possible with hedging always price increase into the market.
Next question is from Philipp Konig of Goldman Sachs.
My first question is just following up on raw materials and inflation. I think on the full year call, you mentioned that you were expecting around 7% of sales as a headwind for this year. I'd be curious sort of what your latest estimate would be at this point?
My second question is on your plant in Mexico. You were mentioning that you're expanding your capacity there to serve North America. Can you provide us with a number of how many more units you're expecting of capacity for this year?
And then my last question is just on raw material sourcing. You mentioned that obviously, there are also costs associated with moving raw materials that you just saw from Russia to other regions. Can you just provide us with an update? Have you already resourced from Russia? Or when are you expecting to buy the raw materials that you used to buy from the region? When do you think it is completed? And where will you buy them from?
Starting with the last question. Raw materials, Russia, we already moved to a different let's say, raw material. We -- instead of some derivatives of butadiene, we are substituting with treated natural rubber that is, let's say, technologically obtaining the same result.
Plus we are buying in Japan, mostly Japan, some of the products. And we don't need to go back to Russia to -- we have only a few raw materials from Russia, we don't have carbon black. And they are already substituted by other sources in line with the quality.
On Mexico, we don't have any growth this year. We are investing for next year, and we are serving today the market from Mexico and Brazil, we have need of more capacity for the internal market in Brazil and is more convenient to have a Mexican source for U.S. and that's why we are planning to invest this year for next year.
I'll leave the floor to Mr. Casaluci for the other questions.
Yes. The other question was related to the impact of the inflation on net sales as far as understood, and we consider 12% on yearly base on net sales, 12% of the all the inflation impact.
So I mean raw material, logistics, energy and labor altogether.
The next question comes from Thomas Besson of Kepler Cheuvreux.
I have a few questions left, please. First, on price mix, we've seen the industry raising prices at an amazing pace. I think is whether it's you or others have reached higher levels of price mix than in 2011, '12.
And you've continued to raise prices in Q2. So the question is, do you expect price mix to go even higher in Q2? Or have you seen the peak already? That's question one.
Question two, could you please give us the book value of your Russian operations? Maybe a more abrupt way of asking the questions of -- at one point, the situation becomes containable what would eventually be the potential write-down?
And third question, still on Russia. Could you explain how you managed to source natural rubber in Russia and how you handled transportation, logistics and so on. Because from what we hear from other players, nobody else seems to be operating normally in Russia, even for the local market or at least if people operate normally now, it's going to be over as of July 6.
We have created a task force that has been taking care of transportation. And we had obstacles, and we are having obstacles, obviously. But we are, let's say, replacing quite easily the source Russia because it's a standard product. What we used to sell from Russia.
So we have some capacity. We are adding some capacity, as I was saying before, mainly in Romania and Turkey. So we have problems, as everybody has. That's why we also mentioned that we have, for the time being, a profitability that is in the high -- so it's close to 10, let's say, but it's not reaching the double digit, but it's temporary.
And with the sources we are setting that are also local sources, we will go back soon to that profitability. But this is something that in few months will be solved. The internal market we are serving in a normal way. There are no restrictions until we are independent in raw materials because we buy most of raw materials in Russia for Russia.
So for the time being, it's not a major reason I think this is mostly because it's standard what we have to replace. On -- you mentioned price mix, we have the same -- we see the same trend we had in the first quarter if the demand remains as it is. So in our segment in the high-value segment, the demand that we see for the next 3, 4 months continue to be strong enough to guarantee a policy of price that is fine.
The mix is also related to replacement that is stronger than original equipment. And the trends will continue for some months. So we don't see major changes coming up. Mr. Casaluci, do you want to add anything?
It's okay.
Sorry, maybe I missed it. Did you mention the value of your Russian operation or you're not disclosing that?
I think I said enough. So the operation in Russia set for the local market. It takes a few months to set it properly. We handled these problems in other countries. I mentioned before, Venezuela, it happened in Argentina many years ago. We stay there still until there is a market, and we have employees in regions that are poor regions, and we work in internal market. It takes some months to stabilize the situation. But the local market was a little part of -- is a little part of our business, and we can grow a bit. And there is nothing hidden just as I was saying, is a situation of crisis as we had in other countries, and we are handling.
The next question is from Edoardo Spina of HSBC.
My question is about China. You have a very strong -- I hope you can hear me. My question is on China. You have very strong operations there. And I was wondering if you can give us an update about the current state of production and also logistics.
If you have any problems or if you see risks of disruptions to come? And finally, on the sales level, I assume miles driven are very low in many regions in China. Do you see any improvements at the moment? And what do you assume for the second half in your guidance?
And so what we expect until now is that by mid-May, some decision will be taken to open up. So we really don't know what is going to happen. What we know is that the -- let's say, the economy in China is suffering because of it. And it's much more important in our business, and so I think that this problem will be handled in a way that the -- let's say, the situation of lockdown will improve. And we know that the demand is there but it's only that people are locked down.
So the problem is in the hands of politicians and we -- but it's not a Pirelli problem. So this is the Chinese problem, which involves, obviously, the global economy. And hopefully, as they say in a few weeks, the situation should be eased. But we don't have any information more than what we read in the newspaper. Mr. Casaluci.
Yes, I can only confirm that the operations in China are running. We -- our factories are in Shandong and in Henan provinces not affected by the restriction for the time being. We have a lockdown in the Q2, of course, of production related to the slowdown of the local demand.
As far as supply base is concerned, we have suppliers that are providing goods for the local factories, while we have a backup plan to be fully independent from China in the other factories in terms of supply. So that's the picture for a bit of this order in the harbors, you are right, but this is affecting, as Mr. Tronchetti was saying the global environment, we are managing it. Thank you.
The next question is from Gianluca Bertuzzo of Intermonte SIM.
I know maybe it is hard to tell, but how do you expect you and the industry will behave in the case of raw material prices will go down or is unlikely as you don't expect raw material to come down.
Second question is on competition. I would like to better understand because you cited that the surge in shipping cost is keeping away some competitors. Can you elaborate a bit on that?
So as far as shipping cost is concerned, what Mr. Casaluci was underlying is that we have our production that is 85% local for local. In China, it's even more than this. And we don't have export from China to other regions, if not Asia. And that's why we are less involved in the problems of logistics.
And all the regions are local for local. Now Russia is becoming 100% local for local. Europe is local for local and some to the United States. So the only exception is that one. On raw materials, what if they go down, they go down for -- to normal. That means that -- that's fine. So it happened in the past and can happen in the future.
And when we have an inflationary environment, what we do is always to set the prices, to protect, obviously, from the inflation. And when the cycle changes or specific situation changes, we will do as in the past, whatever is related to keep the same shape of growth of our company the same business model.
Nothing can be predicted 100%, but we know that we have the flexibility to cope with different situations.
The next question is from Michael Jacks of Bank of America.
I've got 2 questions. The first one is just going back on volumes. I know there are a lot of moving parts here, but the impact of Russia lower global light vehicle production, China lockdowns on their own, I would imagine account for around a 4% negative volume impact for the year, which in light of your new volume estimate being only 1% lower suggests that your expectations in the high-value replacement segments in North America and Europe are well ahead of what your initial plan was.
So would you say then that the new volume guide is more on the optimistic side of the spectrum? That's the first question. And then the second question is, again, is just going back on price mix. Unless this drops off quite significantly in Q2 already, the full year guide doesn't seem to be factoring much in for the second half despite the fact that you've announced another price increase of up to around 10% in North America effective in June. Does this mean perhaps that you expect a negative mix impact in the second half?
Yes, as far as volume is concerned, the first question, we confirm that we have -- it's more a 65 million pieces in our reviewed guidance. We are confident -- we have already included in these numbers the hypothesis of slowdown of the demand in China, at least for the entire second quarter and some prudence for the third quarter, but it's not forecast about the trend of demand in China.
All the other regions are much more stable, and we feel confident with this number. Price mix, you are right, we announced yesterday a further price list increase in United States up to 10% and this is part of the opportunity that we have in our price mix and is part of what we mentioned as the consciousness.
Again, we have -- we see opportunities on the price mix. We see major risk not predictable in the demand of China. These are the 2 major aspects.
Gentlemen, there are no questions registered at this time.
Thank you. So ladies and gentlemen, this will conclude today's program. Thank you for your attendance, and have a good evening.