Pirelli & C SpA
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Pirelli & C SpA
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Ladies and gentlemen, welcome to Pirelli's Conference Call in which Pirelli's top management will present the company's First Half 2022 Financial Results. A live webcast of the event and the presentation slides are available in the Investor Relations section of the Pirelli website. I remind you that the Q&A session will follow after the presentation.
Now I would like to introduce you to Mr. Marco Tronchetti Provera. Please go ahead, sir.
Thank you. Good evening, ladies and gentlemen. The first 6 months of the year were characterized by a growing volatility of the macroeconomic scenario, worsened by the China lockdown measures, the Russia-Ukraine conflict and the rising inflation of rates.
Despite these headwinds, Pirelli closed the first half with a clear year-on-year improvement and ranks among the best in the industry, confirming the effectiveness of our business model as highlighted by strengthening the car, 18 inches and above, thanks to our solid partnership with premium and prestige carmakers as well as the new energy vehicle makers, the solid pull-through and product innovation.
Our price mix, among the best in the industry and the growing profitability is supported by internal levers, namely price mix and efficiencies and improvement in operating cash flow deriving from our careful inventory management with particular regard to finished products. Once again, this is the result of the sound partnership with our clients and our flexible manufacturing structure.
The effectiveness of our business model and the response speed to different headwinds, as we're going to see in the case of the gas emergency in Europe, make us confident that we can cope with increasingly challenging scenario.
Before we discuss our first half results, I wish to give you an update on the situation in China and Russia and on the gas emergency in Europe.
In China, the situation is progressively improving, thanks to the resumption of the production activity and the government incentives to support the industry and consumption through subsidies and tax cuts, while the uncertainty related to the new lockdown remains.
The tire sector June data showed a significant rebound in our retail equipment demand, supported by the recovery in car production and government incentives for the purchase of new vehicles, a progressive recovery in replacement demand, which is still below 2021 level. In this context, we're gradually increasing plant [ affiliation ] rates to respond to the strong recovery of the regional equipment demand in the second half due to government incentives focusing on electric vehicles. Our replacement, where we maintain a cautious approach, we are promoting the destocking of the distribution chain, and we lever on prices to offset the increase in raw materials and inflation.
In Russia, U.S. sanctions effective since July 10 provide the extra ban on tires produced in Russia to the EU and the import ban of selected raw materials and technical equipment from EU to Russia. Pirelli confirms its presence in Russia, in full compliance with international sanctions.
We activated alternative supplies for both exports from the country, Turkey and Romania and imports of raw materials, mainly local suppliers. We diversified our logistics to ensure the ongoing supply of finished products and raw materials. We directed production to the domestic market, focusing on the most profitable product segments, increasing prices to offset the increase in raw materials and transportation costs and maintaining a cautious approach to continuous monitoring of inventories and taking measures to protect trade receivables.
Europe, Pirelli mitigation action on potential Russian gas shortage. Finally, gas emergency in Europe, with Germany and Italy being the countries most at risk. Germany imports over 50% of gas from Russia and Italy has significantly reduced its procurement of Russian gas from 40% in 2021 to 15% in 2022, thanks to the diversification of its sources.
To respond to these risks, Pirelli immediately established a cross-functional committee and a final contingency plan aimed at ensuring the continuity of production activity. The plan provides the use of alternatives to natural gas like diesel oil, GPL, et cetera, by converting when necessary, thermal energy production plants and ensuring the supply of such alternative fuels, the acceleration of projects to cut energy consumption, the containment of risks related to suppliers; in short term, by verifying their exposure to risk and an increase in inventories of products and semi-finished goods, if needed, and included in our numbers. And in medium term, by supporting suppliers in developing mitigation plans in the case of more disruptive scenarios.
As was the case during the COVID emergency and the Russian-Ukrainian crisis, we leveraged the flexibility of our production and logistics structure to ensure a suitable level of service to our customers. The actions taken make us confident that we'll not have any major impacts on business continuity in the coming winter.
We are going to see our first half results are confirmed to be among the best in the industry, with a 25% growth in top line, supported by the price/mix and improved profitability with an adjusted EBIT margin at 15.1% and net result of EUR 233 million, up by 77% year-on-year and improved cash absorption compared to the first half of 2021 and the cash generation in the second quarter at EUR 209 million.
An update on sustainability. In the first half of the year, we continued our commitment to sustainability. Let us start from safety. In line with our Towards Zero Accidents At Work this June, we promoted activities of continuous improvement in every brand and the development of our global excellence in safety projects. As for the environment, we made big progress towards decarbonization.
At June, we formalized our net zero commitment with the Science Based Target Initiative, the international body that defines best decarbonization practices. Last May, the same body also validated our new objectives for the reduction of greenhouse gas emissions by 2025 after reaching our previous targets 4 years in advance. Our new goals require action consistent with the objective of containing the global average temperature increase within 1.5 degrees in addition to the reduction of emissions from the raw material supply chain.
Important results were achieved as part of the -- of our Eco & Safety [ performance ] roadmap with the launch of new products such as the new Scorpion Summer with a high level of performance in terms of labeling for rolling resistance, wet grip and noise. Research and development and innovative materials is benefiting from virtual processes using artificial intelligence through which we have achieved significant results.
Material development time has been reduced by 30%. Material prototypes have gone down by 20%. [ Pirelli tires ] are also obtaining the reduction of tire wear rate, with improvement up to 33% for the new product lines compared with previous [ launches ].
Finally, we increased the weight of ESG objectives in the value of remuneration of managers, placing the focus on gender balance, proposing the higher presence of women in the company, revenues deriving from Eco & Safety performance products, a reduction of absolute CO2 emissions and Pirelli positioning with Dow Jones Sustainability Index [indiscernible] auto component sector.
I now leave the floor to Mr. Casaluci. Mr. Casaluci, please.
Thank you, Mr. Tronchetti, and good evening, everybody. Let us analyze both the market dynamics and Pirelli's performance. In the first 6 months of 2022, the global car tire demand declined by 1 percentage point with a very different trend by segments. Car, 18 inches and above, plus 5%, benefiting from the rebound of the original equipment tire demand in the second quarter, plus 2% in first half and plus 5% in second quarter due to the easing of supply chain tensions and the sound replacement demand, plus 8% in the first half, plus 2% in second quarter, despite the impact of lockdown in China. Car, 17 inches and below, instead was down 3% in first half, minus 6% in second quarter, discounting the impact of COVID in China and the Russia-Ukraine crisis. In this context, we increased our market share on car, 18 inches and above, fully sizing the recovery of the premium car production and the solid demand trend in Europe and North America, which I will illustrate in a couple of slides.
And first half results reflect the implementation of the key programs of the industrial plan. On the commercial program, consistent with our strategy, we have strengthened our positioning on car, 18 inches and above, outperforming the market, plus 8% versus a plus 5% of the market, particularly in the replacement channel, where we gained almost 1 percentage point of market share; increased exposure on original equipment, 19 inches and above, and electric vehicles; reduced exposure on standard equal now to 40% of car volumes, 3 percentage points compared to minus -- the first quarter of 2021.
On the innovation program, achieved 160 technical homologations, 48% of annual target concentrated on 19 inches and above, about 80% specialties and EV; introduced 4 new high-performance products, including 3 dedicated to SUV segment and 1 to Winter Extreme for North American, Japanese and Scandinavian markets.
On the competitiveness program, Phase 2 of the efficiency plan continues with 35% of the annual target achieved in line with objectives and project development. On the operations program, plant saturation level is at 90%. In addition, energy containment programs have been launched in Europe. And finally, the implementation of industrial IoT to improve the efficiencies of our production facilities continues.
In the first half, the results in terms of volumes are consistent with both our commercial program, which is strongly focused on the top of the range and selectivity in original equipment. In the car, 18 inches and above, an 8% growth was recorded, driven by the most technological and high-end products. Ring sizes, 19 inches and above, contributed 92% of the growth observed in the car, 18 inches and above. Specialties account for over 60% of the volume increase in cars, 18 inches and above, in the first semester, mostly due to electric vehicles products, responsible for approximately half of the volume increase in 18 inches and above.
No doubt that the driver of the first half growth on 18 inches and above is the replacement channel, both in the pull volumes, especially in Europe and North America and EV products and in the push volumes, where the new dedicated lines show very good results in the 3 high-value regions. On the other hand, in original equipment, 18 inches and above, the growing selectivity in projects leads to volumes in line with the previous year with a higher incidence of electric vehicle products.
Pirelli innovation program proceeded in the second quarter of 2022 with an increasingly richer offering for the winter season, paying special attention on the different needs of consumers around the world. Particular care was devoted to SUVs. For this segment of vehicles, bound to become the most widespread around the world, Pirelli developed 2 further solutions: Scorpion Winter 2 focusing on safety in all weather conditions of the winter season. Its wet grip sets new standards of excellence with a whole range ranking in Class A of European labeling. The product is also certified with the prestigious TUV SUD performance mark.
Then we have the Pirelli Ice Zero Asimmetrico, also ensuring safety and comfort designed to offer outstanding performance even in the most extreme conditions through an excellent traction and breaking on ice and snow with reduced noise emissions. This product, originally developed for the Japanese market, is going to be also marketed in North America and Scandinavia.
Our electric vehicle portfolio is growing with over 280 homologations, thanks to new partnerships with the most innovative and well-known brands in the world. The Elect marking offering was further improved and can now cover the 3 seasons with our well-known and appreciated product families like zero Cinturato and the above mentioned Scorpion. The EV segment records the strongest growth with Pirelli confirming its targets, namely doubling its sales in this segment and reaching already in 2022, that is to say, 3 years in advance, a market share in original equipment of approximately 1.5x that of premium prestige internal combustion vehicles.
In the first half of the year, the competitiveness program produced EUR 52 million efficiencies in line with expectations and accounting for around 35% of the yearly target, the latter being confirmed at approximately EUR 150 million.
Looking closely at the first half performance by the single projects. In the product cost projects, contributing approximately 34% of efficiencies or about EUR 18 million, the adoption of a modular design and value-driven approach has proceeded. In the manufacturing projects, around 32% of the first half efficiencies, we continued increasing flexibility, digitization and sustainability actions in our plans. In the SG&A project, 19% of the first half efficiencies were achieved by using different levers like the redesign of distribution networks, the optimization of warehouses, use and renegotiations with our suppliers. Finally, in the organization project, 15% of the first half efficiencies, we made progress in our digitization processes and upskilling of our employees.
I'll now give the floor to Mr. Bocchio. Thank you.
Thank you, Andrea, and good evening to everybody. Let's analyze the dynamics of the top line in the first half. Volumes were slightly down, minus 1% at group level with a different trend between car up by 1% and motorcycle down by 9%, discounting the impact of the strategic decision of reducing the presence in the standard motorcycle business and consequently, the closure of the factory in Brazil in quarter 3, 2021.
Focusing on the 2 segments, high-value and standard, it is important to highlight the continuous improvement in high-value volumes, plus 5.8%, in line with the first quarter, supported by the share gained on the replacement car, 18 inches and above, despite price increases. In standard, volumes were down 8.8%, impacted by increased selectivity on original equipment car, the Russian-Ukrainian crisis and the aforementioned closure of the Gravatai motorcycle factory. At a record level, price/mix, plus 20.4%, in line with the first quarter, thanks to price increases to offset rising inflation in raw materials and other input costs, improved mix across all its components, product/mix, meaning migration from standard to high value, channel mix, better trend at replacement versus original equipment and region mix, increased sales in Europe and North America, positive impact of foreign exchange, plus EUR 135 million or plus 5.2%, reflecting the strong appreciation of the main currencies against euro.
In the first half of 2022, adjusted EBIT was equal to EUR 482 million, up year-on-year by EUR 105 million, with a margin of 15.1% compared to 14.7% in the first half of 2021, thanks to the strong contribution of internal levers that more than offset the impacts of the external scenario. In particular, the trend reflects the positive impact of price/mix, plus EUR 435 million and efficiencies, EUR 52 million, which covered, by as much as 1.3x, the increase in the cost of raw materials, minus EUR 236 million, including the related exchange rate impact and other input costs, minus EUR 141 million, mainly energy and logistics. The contribution of volumes, minus EUR 11 million, while foreign exchange, plus EUR 15 million, offset the increase in depreciation and amortization for EUR 9 million and other costs for EUR 1 million.
Adjusted EBIT was EUR 253 million in the second quarter, up 21%. EBIT margin was 15.1%, stable compared to the first quarter of 2022, but down slightly from 15.8% in the second quarter of 2021 due to the dilutive impact of foreign exchange, the lower increase in finished products inventories compared to 2021 with an impact of about minus EUR 8 million, which allowed us to keep the overall level of inventory under control. The application at the end of June with effect from January 1 of hyperinflation accounting in Turkey with an impact of about minus EUR 6 million. The impact of inventories and hyperinflation are both included among the other costs.
Let's look at the net income dynamics for the first half. Net income strongly increased year-on-year. The trend takes into account the already mentioned improvement in the operating performance, lower restructuring and nonrecurring costs. The year-on-year increase of the net financial charges reflects the rise of interest rates in Brazil and in Russia, partially counterbalanced by the reduction of financial charges at the parent company level. We'll discuss this trend in a couple of slides.
The EUR 38 million increase in tax charges relates to the higher operating results as tax rate is stable at about 27%. Net income adjusted, meaning excluding all the one-offs and nonrecurring items, is positive for EUR 288 million at the end of June. Pirelli closed the first half of 2022 with a negative net financial position of EUR 3.5 billion with a pre-dividend cash assumption of EUR 463.7 million, lower than the figure for the first half of 2021. It's worth noting the strong EUR 108 million improvement in the operating net cash flow versus first half 2021, which reflects the growth in EBIT, lower investment also related to a different timing expected in the implementation of the 2022 projects, and mainly attributable to the geographical reallocation of the same as an effect of the changed external environment, a higher cash absorption of working capital due to the increase in inventories, mainly raw materials, both due to inflation and the response to the need to mitigate supply chain risks in an extremely volatile external environment.
On the other hand, inventories on finished products, with a weight of 16% on revenues, recorded a limited increase and significantly lower than that recorded in first half 2021, thanks to the increasing visibility of the stock in the trade, based on the solid partnership with our distributors. The general increase in inventories was mitigated by the trend in trade payables and receivables, reflecting business growth. To be noted, the significant reduction occurred in nonrecurring and restructuring charges, EUR 35.5 million in first half 2022 versus EUR 69.3 million in first half 2021, which partially offset the increase in financial expenses, plus [ EUR 18 million ] year-on-year equal to EUR 89.6 million in first half 2022 and higher taxes, plus EUR 32 million, as well as dividends paid to minorities for EUR 24 million and the negative impact of foreign exchange of minus EUR 45 million. It was plus EUR 1 million in first half 2021, attributable to the revaluation of the Russian ruble and the Brazilian real.
Net cash flow before dividends was positive for second quarter 2022, EUR 209 million, an improvement of EUR 37 million compared to the previous year due to the improved operational management. The group's gross debt as of June 2022 amounted to approximately EUR 5 billion, while the net financial position was EUR 3.5 billion, thanks to EUR 1.5 billion in financial assets.
In the first half of 2022, we signed 2 bank lines with a pool of leading domestic and international banks amounting to EUR 2 billion, both of which are parameterized to ESG objectives in the decarbonization area. These lines contribute to the liquidity margin of EUR 2.4 billion, enabling coverage of financial debt maturities until the second half of 2024.
The cost of debt at the end of June was 3.03%, up 65 basis points from the end of 2021 and was affected by the dynamics of interest rates in Brazil and Russia, where comparing the first half of '22 to the first half of '21, key rates and management costs for risk hedging activities increased on average by 10 and 9 percentage points, respectively.
We do not expect, during '22, significant effects related to rising interest rates in the Eurozone, which accounts for about 80% of our debt due to a wellness profile between fixed and [Technical Difficulty] rates and the positive effect of deleveraging that will mitigate the impacts of rising rates.
I now leave the floor back to Mr. Tronchetti.
Thank you, Mr. Bocchio. Let us now discuss the outlook for 2022 in a persistently an extremely volatile context. Global GDP is expected to grow by 2.7% compared to 3.2% that was the previous estimate for 2022. However, risks of slowdown are increasing in Europe, particularly due to Russia and energy needs, in the U.S. due to the very aggressive monetary policy, and in China due to the risk of lockdowns resulting from new COVID outbreaks.
Global inflation remains extremely high at 7.3%, with strong pressure on the prices for all production factors also because of the persistent criticalities in the global supply chains. In this context, global consumer confidence deteriorated, already reflecting the expectation of an economic slowdown and the reduction of spending capacity. The expectation for the total car tire segment are of a stable demand year-on-year due to a more cautious approach to replacement, mainly in the standard segment and geographically, China and Russia, partially offset by original equipment recovery. Car tire demand for rim sizes, 18 inches and above, confirms its resilience, plus 7% growth, in line with our previous guidance and a [ clear away ] performance, plus [ 9.0% ], compared with products, 17 inch and below, now expected at a minus 2% compared with minus 1% as in our May guidance. More in detail on car, 18 inches and above.
In original equipment, we estimated 10% growth, higher than previously expected, plus 8%, driven by China due to the government incentives and [ Europe ]. In replacement, we expect a 5% growth in 18 inches and above. The slowdown in Chinese demand caused by lockdowns will be offset by weather trend on sales in the other regions, especially in Europe.
The effectiveness of our business model, as shown by the results of the first half of the year, makes us confident that we can cope with the scenario I've just described. Thanks to our distinctive positioning, the high value original equipment, increasingly focused on specialties, 19 inches and above and EVs, we shall be able to fully sail the strong market recovery expected in the second half, while pull-through and the renewal of our product range, we guide our overperformance in the high-value replacement. New price increases announced in June will be fully implemented in the second part of the year. Price/mix and efficiencies will offset raw materials and inflation. Actions on costs are underway, in particular, energy costs in Europe.
As for cash generation, we continue our careful management on working capital, with particular regard to inventories with weight on revenues is expected to go back to 2021 levels, mainly due to the reduction of finished products -- sorry, finished product stocks.
The solid performance recorded in the first half of the year and the changed external scenario have led us to update our expectations for the full year 2022. Revenues between approximately EUR 6.2 billion and EUR 6.3 billion, about EUR 300 million more than in the previous target, with growth year-on-year between plus 17% and plus 18%. Volume target confirmed between plus 0.5% and plus 1.5%, but with better high value performance, mainly price/mix, plus 13.5% or plus something between 13.5%-plus and plus 14.5%, 3.5 percentage points more than in May target, mainly driven by higher prices. Exchange rates on the rise by 2.5%, simply assuming a high volatility of emerging currencies in the second half of the year. The profitability target is confirmed at approximately 15% and we're [Technical Difficulty] in absolute value due to the growing mix, which more than offset the [ high ] raw materials and inflation that had no cash costs linked to inventories reduction, the impact related of hyperinflation in Turkey.
CapEx are confirmed at approximately EUR 390 million at around 6% of revenues. Net cash generation before dividends between approximately EUR 450 million and EUR 470 million, about EUR 450 million is the previous target. This is thanks to a solid operating performance and an effective working capital management. The leverage target is confirmed with a leverage yield equal or below 2.
So this ends our presentation, and now we may open the Q&A session.
[Operator Instructions] The first question is from Monica Bosio of Intesa Sanpaolo.
The first question is on 2023. I know it's really early to say. But in front of the deterioration of the macro scenario and looking at 2023, how do you feel confident with the group's pricing power going forward? I mean do you see as reasonable the maintenance of at least a mid-single-digit price/mix for the next year? And my second question is on the increase in expectation in the original equipment segment. So I was just wondering if you can give us a flavor on the drop-through on the full year basis, given the higher weight of the original equipment? And the third question is still on the price/mix. How much is the price and how much is the mix in the second quarter? And I remember that in the last conference call, the company was expecting a weight from price by the end of -- over the year in the region of 80%. Is it still true?
Thank you. Starting with the 2023 scenario, it's obviously early to say and there are many variables ongoing. What we can see now or for the visibility we have in the market is that, on one hand, stocks of the distribution are not, let's say, higher than 2019. So the situation is back to normal. And the demand and the sellout is -- we've been okay until now. The demand for the winter season is -- the orders we have are strong. So we expect to have a positive second half on winter seasonality and look into 2023, there is no overstock on the trade or on our side. So that makes us confident that until now, there are no signs of a weakening of the demand.
Looking to the original equipment side, this reduction on expectation of volumes has to be matched with the delay in delivering the new cars. So we see, in any case, that there will be a stronger original equipment looking forward, even if weaker than the valuation that was made by analysts until now. This is the overall picture. So no risks for the time being on the distribution and original equipment in -- less stronger but still higher volumes looking forward. So no concerns, more details on original equipment and on price/mix, I leave the floor to Mr. Casaluci. Please, Mr. Casaluci.
Thank you, Mr. Tronchetti. Back to the last of your questions, and second half price/mix, we assume it will be mainly price, so around 80%, 100% price with a flat mix. This is mainly due to negative region mix because of the replacement demand in China that is going back to a normal level slowly, slower than what was expected in the previous quarter and also the higher weight of the original equipment. So you can assume that the price/mix performance of second half will come mainly from price. And as a consequence, the drop-through will be around 100%. While the drop-through of the full year is -- we can assume as price/mix around 90%.
The next question is from Michael Jacks of Bank of America.
Congratulations on a very strong set of numbers, given the environment in Q2. I have 2 questions, if that's okay. The first one is just on the price/mix as well. I know you've just upgraded the guide to 13.5% to 14.5%. But if I look at the 20.4% you booked in the first half, that's around 11% higher than what you booked in the second half of last year. So I'd expect around 11% in the second half of this year just from base effects before considering price increases that you've made in Q2, which would suggest that the full year price/mix could be somewhere in the region of around 16%. Are you perhaps expecting a negative channel mix? I know you just commented on mix in the previous question. Or is this just building in some added conservatism to the guide? That's the first question.
And then my second question is just on the OEM market outlook in Europe for the second half of this year. We had [ at peace ] warning today that production schedule point was the weakest second half for light vehicle production, which seems to go against what the other OEMs and suppliers have said over the past 2 weeks about volumes recovering strongly in the second half. Could you perhaps give us a sense for what your OEM order intake are suggesting for the second half?
Thank you. So for the price/mix, I leave, afterwards, the floor to Mr. Casaluci. On [ BA ] Europe, the warning, yes, there is a warning, but anyhow, the volumes were very weak before. So something not negative will happen in the original equipment market. The number of cars expected to be sold are lower when compared to the previous forecast. And in terms of, let's say, improvement compared to the past, there will be an improvement. Anyhow, we are rebalancing the mix of our clients of original equipment, having a reduction average of the weight of the European carmakers and an improvement with the Americans and Asian carmakers. So the forecast we make is taking into account our position in the market being a bit rebalanced. So this weakening of Europe is not creating, let's say, something that is affecting our forecast. And now I leave the floor to Mr. Casaluci for the price/mix question.
Thank you. So you're right. There is a huge difference between the price/mix performance of first half and second half. We can assume based on the last guidance, 14% on a full year basis with 20% in the first half and 8% in the second half. I will try to simplify the major impacts of this difference. 12 percentage points, 4 points will come from the price performance. The increase of price will remain in the market.
We are fully confident to maintain the performance, but the comparison versus last year in the second half will be less favorable. And so 4 points out of these 12 points will come from a less favorable comparison on the price performance. The remaining part is mix, half related to a worsening of the region mix, as I mentioned before, is mainly due to replacement demand in China, less brilliant than what was expected before.
So the remainder is recovering but at the pace of growth below our expectation because the lockdowns on the COVID, the impact are still here and there present. And half related to the channel mix because the rebound of the original equipment in the second half is evident and is already in our numbers in terms of call-offs.
So also, back to what Mr. Tronchetti said before, we see the recovery compared to last year in Europe with a sound market growing at a pace of growth of 22%, 23% in the second half versus last year, consistent, because of the recovery of the shortages in the supply and even stronger the rebound in China. Well, thanks to the support of the government, the demand on the original equipment, mainly in the electric vehicle, is growing faster than what was expected in our previous guidance.
That's very clear. Just maybe just ask one question to clarify just on -- back on the first question. So are you then seeing current production levels for the second half in line with the current IHS forecast of somewhere around 81 million units of global light vehicle production?
The market expectations even reducing the forecasts that were made before, thanks to them, lately to the announcement made by the carmakers has reduced a bit the second half expectation. But there is, looking to the entire picture, the rebalancing between what is happening in Europe and what is happening in China. And so the overall picture for us remains the one that we underlined a few minutes ago. And the [ 80 million, ] you mentioned maybe a bit more, maybe a bit less, but this is what the market is expecting. These numbers are not affecting much our segment in which we see that the call-off we have are confirming the, let's say, the forecast we have in our numbers. And the growth in China and the growth we have in America is providing us a quite safe number in our expectations.
The next question is from Gabriel Adler of Citi.
I have 2 questions. Firstly, Tronchetti, could you comment on how resilient you think tire replacement market is at this point [ to the ] macroeconomic pressures that you've spoken about, especially the high-value segment? Because I think we're now trending about 2019 levels in replacement tires. And given the higher fuel prices and other pressures on the consumer, stats we're seeing are probably close to peak for those volumes. And if that is the case, then what levers does Pirelli have to offset these pressures, given prices are already elevated and you're making very significant progress on the efficiency program? That's my first question on the sort of outlook for replacement market.
And then my second question is just on the working capital because the gap between payables and receivables widened, I think, by about 4 percentage points in the quarter which supports free cash flow. So I just wanted to better understand how you're managing the increased payables. Is this all coming from reverse factoring? And how should we expect this trend of net payables/receivables to go -- to develop going forward.
Thank you. So before leaving the floor to Mr. Casaluci, I want to underline that the working capital has been kept in the last 12 months in much better control, thanks to the transparency we have with the trade where we have more than 60% of the trade that is providing us all data regarding what they have in their stocks.
And so we can handle better our programs for production and our level of stocks. And this is embedded now in our structure. And talking about the replacement market, the high-value is continued to be strong. And more than this, we have to underline that close to 2/3, more than 60%, anyhow, of our replacement market is made by specialties. And specialties is a market and specialty is run-flat, is seal-inside, is noise canceling system and is EV.
And also, there is a part of the Winter 19 inches and above, that is like a specialty where the competitive arena is modest. So these are reasons why we continue to see a market in which there are no weaknesses coming not only from the demand but from competition because the trading down that we've seen in the standard between Tier 1 and Tier 2 in some regions, mostly in America and something else in Europe, is not affecting the high-value segment. But anyhow I leave the floor to Mr. Casaluci to go deeper into this.
Yes. Thank you, Mr. Tronchetti. I will try to give you a few numbers just to support the message of Mr. Tronchetti. The 18 inches and above market in the second half replacement is expected to grow from 2% to 3%, replacement only, while the standard market is expected to decrease around 2.5%. So the replacement market in the 18 inches and above will remain more resilient. If we go bit more in detail by regions, this 3% is confirmed in Europe is the same trend of Europe and North America between 3% and 4%. While in China, that's the reason why we reduced a bit our expectation, is expected to be flat, the replacement market second half, 18 inches and above, while slightly negative, minus 2%, 3%, the standard market. And this is due to, as I mentioned before, still some effect of restrictions in mobility. But if we compare with Asia Pacific, the market expectation of second half with the performance of the first half, we see the rebound. The first half was minus 9%, the market replacement, 18 inches and above, while the second half is expected to be flat.
The next question is from Martino De Ambroggi of Equita.
Focusing on Russia, could you quantify what's the difference between your expectations of profitability from Russia for the full year now in the new guidance compared to the guidance you had at the beginning of the year? And if you could quantify the profitability that you got in the first half this year.
Thank you. So in Russia, we have, let's say, in numbers, the impact is mostly related to the export from Russia of 3.3 million tires, out of which half of it was sold in the first half. And in the second half, it will be partially recovered by what we produce in Turkey and in Romania. So overall, the impact, if we consider all costs related to Russia, let's say, repositioning, which means logistics and industrialization in other factories, we are in a range between EUR 25 million and EUR 30 million to give you a number. This number has been partially offset by the better performance of other regions. And I think that by year-end, this number will be fully offset. That is the, let's say, the performance, that's why we provided the guidance, a better guidance now than what we presented the last time because we embedded in this result, there is a growth in the top line, and we maintain the level of EBIT margin, which means an improvement that takes into account that we are able to offset the impact -- the negative impact of the cost related to the Russian crisis.
Just to understand, the EUR 25 million, EUR 30 million is only for the repositioning costs or is it already -- does it include also the operating -- the lower operating profitability in Russia?
It includes the lower profitability in Russia, which is, in part, offset by the contribution margin of Turkey and Romania and, in part, offset by the, let's say, the growth better than what -- in our forecast last time in Europe and the rest. These are the reason why we are rebalancing our results.
Okay. Okay. And always on Russia, probably a more difficult question, but some of your competitors decided to leave Russia. What are the differences making you sure you will not take the same decision going forward?
They were, let's say, less structured in Russia. They -- in internal markets, their presence includes a minor presence. So we have distribution in Russia that is consistent. And that's why we can guarantee what we said since day 1 that we stay there producing cash and have to pay wages and salaries and social securities. And that is confirmed because we -- the other competitors you mentioned Michelin and Conti, they are sometimes saying they go there, sometimes they say they stay. And now lately, Michelin said that they will stop the production, but they were much less structured in the market. So they didn't have distribution channels as we had and it's reasonable that they have their own reasons and -- but they were in a different position in Russia compared to us.
Okay. But Nokian has a stronger distribution network in Russia, and they also decided to sell.
That is a totally different story. So they had 80% of their production -- investment, which is obviously a total restructuring of the business model that is their decision. And so they -- what they said is that they left the management handling the operation in Russia. And they are, let's say, making programs to replace what they used to export from Russia from other sources. And -- but they had the largest part of their business that was produced in Russia. So that is their strategic decision, nothing to do with us.
Okay. And last question on changing the subject on CapEx. You are confirming the guidance, but you spent EUR 40 million less in the first half compared to last year, and you are still guiding for EUR 40 million more on a full year basis. Am I right in thinking that you will likely be lower than EUR 390 million or probably you will be low?
No, we will be more or less in line. There are part of these investments that were due to be made in Russia, we stopped them. And we moved this investment to Turkey and to Romania and to other things. And so the delay is due to the fact that stopping what we are making in Russia so we will have a higher concentration in the second half is only due to this.
The next question is from Christoph Laskawi of Deutsche Bank.
The first one will be on your energy hedging comments and also moving into 2023. You said you're largely hedged for Europe for the remainder of the year. Could you give a rough comment on how much is still open? And are there any hedges in place into '23? And then considering that the gas shortage really hitting Europe, could you switch the industrial usage of gas into oil or other energy sources? And in case you need to source this energy then in the market, would you be buying at spot?
And the second question would be on the volume side in Q2. Your competitors said that they have been observing essentially pre-buy affecting other brands because of price hikes that have been conducted in Q2. Did you see any pre-buys on your end? Can you confirm that or everything trended as normal?
So in 2022, we almost hedged against all energy and gas costs. In 2023, only partially as of today because it's not adequate, market condition is illiquid, obviously. In September, October, we will evaluate the opportunities considering price hikes in the next 2 to 3 months. What we are doing is we are storing alternative products and investing to update our plants mostly in Germany in order to guarantee the continuity even in the first months of next year. So we -- the action taken by the committee, that is following carefully this in February, the matter, is now reaching a very solid, let's say, business model where, first, we guarantee the continuity. On prices, we will align as we did in the past, our price, in the market to the hikes if there will be hikes in the market or in the energy market. But first, we have created a model that is safe in Italy and in Germany, which was the priority. But Mr. Casaluci can provide more color on this, please.
Thank you, Mr. Tronchetti. You did the key comments. We are covered for the 2022. So we have -- the full impact of the cost of energy for 2023 is -- there are not the conditions. In September, we will see that there is no liquidity in the market. We have less than 5% -- around 5% of coverage for 2023. So -- but we will work on it.
As far as the business continuity, we are -- we already adapted our boilers to different alternative to gas, diesel oil mainly, both in Germany and Italy. We are ready. So Germany is ready and Italy will be ready within the month of October. So we can assure the continuity of the production, and we are working with our suppliers in order to analyze their mitigation plan to help the suppliers that need the support.
And we are buying, increasing the safety stock on the most critical SKUs. And these raw material stock is already in our numbers in order to assure also the continuity of the supply of raw materials. So we don't see major risk for the winter season '22, '23. As far as the full environment of 2023, we need to wait the development of the market environment, but we are monitoring on a daily basis.
The next question is from Philipp Konig of Goldman Sachs.
My first question is just coming back to your margin guidance. You mentioned that you see price/mix coming down to around 8% in the second half of the year. However, you still expect to do around 15% margins. Is that because you're sort of expecting raw materials and inflation to come down? I think they were around -- together, they were around 14%, 15% in the first half. What's the latest update there in terms of the full year guidance for these 2 headwinds?
And then the second question is coming back to Russia. How far have you already shifted capacity to Romania or to Turkey in terms of the incremental cost that is associated to that? How much was already reflected in the first half? Or are there any further headwinds coming up in the second half?
Thank you. I'll start with the second question, then I'll leave the floor to Mr. Casaluci for the price/mix. So we -- as we said before, the cost -- total cost of moving from Russia -- out of Russia, including transportation cost was in the range of this EUR 25 million. The marginality, the contribution we have from Turkey and from Romania is obviously in the range of 30% less than the marginality we have at least for the second part of the year. But this is in the numbers we mentioned before, the EUR 25 million included also a different contribution margin. So these numbers are offset by the better performance of other units. So this gap should be reduced in 2023 because now we have the cost of industrialization and the volumes are low compared to the full year volumes. And so we expect in 2023, contributor margin from the other units that is not the same of Russia, but is much better than what we have this year. But all of this is in the numbers until the year-end. And now I leave the floor to Mr. Casaluci for the price/mix question.
Yes. So just to clarify, when I mentioned 8% before, 8% is the price/mix of the second half expected performance, while the profitability of the company, the EBIT margin percentage, we do expect that will remain around 15% in the second half. And so we will have a less positive balance between price/mix and efficiencies with inflation. Nevertheless, we will more than cover all the inflation with some of price/mix and efficiencies of the second half.
Can I just follow up there? Can you give us -- can you quantify the percentage headwind from raw materials and inflation? I think previously it was around 12%. Are you confirming that? Is it now a bit higher or a bit lower?
You mean inflation on net sales. Yes, it's around 13% on a yearly basis. So EUR 700 million in absolute value and this is including old inflations, raw material, logistics, labor costs, energy.
Gentlemen, at this time, there are no more questions registered.
So thank you. Thank you, everybody. Thank you for your attention, and I wish to all of you a very good evening. Bye-bye.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.