Pirelli & C SpA
MIL:PIRC
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Pirelli & C SpA
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Welcome to Pirelli's conference call, in which Pirelli's top management will present the company's 9 months 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 Mr. Marco Tronchetti Provera. Please go ahead, sir.
Good evening, ladies and gentlemen. The first 9 months of 2022 were characterized by a growing volatility of the macroeconomic scenario, worsened by the Russia-Ukraine war and the COVID emergence in China. Despite these headwinds, Pirelli closed the first 9 months with a clear year-on-year improvement. Our performance proved the resilience of our business model as highlighted by the strengthening of high-value market segment growing the most, where we gain share despite price increases. Our price mix, one of the best in the industry, that offset the growing impact of raw materials and inflation. A sound cash flow trend in the cash generation in the third quarter resulting from an efficient management of the working capital.
These results allow us to upgrade our 2022 targets and close the first part of our industrial plan in the 2021, 2022 period. The cash generation before dividends of approximately EUR 910 million versus the planned target of EUR 700 million, EUR 800 million. The scenario planning for 2023 is uncertain and yet more volatile. The major uncertainties are the trend of the demand and inflation rate of input costs from energy to labor costs and raw materials.
Pirelli is ready to navigate this scenario by relying on its assets, namely its price/mix and efficiencies and on its ability to react to the external headwinds with the objective of minimizing them. Our 2023 targets are to be disclosed to the market next February, together with 2022 primary results. Then, in the first half of next year, we will update the plan up to 2025, confirming the deleverage target of a net debt adjusted EBITDA to approximately 1x by the end of 2025.
Let's see now the 9 months results. In the first 9 months of 2022, our results rank among the best in the industry, with a 26% top line growth supported by the price/mix, a 15% profitability and net income at EUR 359 million, up 52% year-on-year. Net cash absorption improving against the same period of 2021, and the cash generation before dividends in the third quarter at EUR 141 million. Our performance confirms the resilience of our business model. Our commercial strategy allowed us to seize the growth opportunities in the high-value market in all the regions and strengthen our positioning, especially in the replacement.
Price/mix and efficiencies more than offset input cost inflation and preserved profitability. Our lean organization, together with a flexible production and logistics structure, allowed us to promptly deal with the impacts of various emergency, the Russia-Ukraine conflict, the lockdown in China and the gas shortage in Europe. We were able to ensure the proper service level to our customers and an efficient inventory management.
Finally, on debt, we continue our deleverage process that will take our net debt EBITDA -- adjusted EBITDA to approximately 1.9x at the end of this year. In the first half of 2022, we refinanced our debt and diversified our funding sources. We can count on a liquidity margin to [ maidenize ] debt maturities. A balanced exposure between fixed and variable rates enable us to deal with the current interest rates increase.
Before addressing our economic and financial performance, I'd like to draw your attention to an important achievement on sustainability. In 2022, Pirelli is confirmed a global leader in the auto component sector by S&P Global Sustainability Assessment. This is an outstanding acknowledgment of our commitment in promoting sustainable growth. Pirelli is the global leader, with a definitely higher score compared to the last year and a significant gap versus our competitors, 85 points compared to an average of 24 points by our peers. Pirelli got a top score in a number of areas of management like health and safety policy, due diligence as to human rights, natural resources management and CO2 emission reduction. Top score also in innovation, cybersecurity and on sourcing environmental reporting. I leave now the floor to Mr. Casaluci, please.
Thank you, Mr. Tronchetti, and good evening. Let us analyze both the market dynamics and Pirelli performance's. In the first 9 months of 2022, the global car tire demand was flat year-over-year, with a very different trend for each segment. Car 18 inches and above is up 6.8 percentage points, benefiting from the rebound of original equipment tire demand, plus 9.2% in 9 months, particularly market in third quarter, plus 25.2 percentage points due to the easing of supply chain tensions and the mid-single-digit replacement demand, plus 5.3% in 9 months, which, however, slowed down in the third quarter in all geographies.
Car 17 inches and below instead was down 1.4% in 9 months; positive trend in the third quarter, plus 1.6 percentage points, supported by the strong recovery of car production; plus 21.2%, the original equipment demand, which is expected to continue in the last quarter. Replacement demand was still down minus 3.1% in third quarter. In this context, we increased our market share in Car 18 inches and above as I will tell you in a couple of slides.
Let's now discuss the key programs of the industrial plan and their results in the first 9 months of 2022. In the commercial program, in line with our strategic focus on high value, we strengthened our positioning in the Car 18 inches and above and outperformed the market, plus 9.4% in the volume growth compared with 6.8% of the market, increased our exposure to original equipment in 19 inches and above and electric vehicles, reduced our exposure to standard tires that now account for around 39 percentage points of car volumes 3 percentage points compared -- minus compared with the same period of 2021.
In the innovation program, we achieved approximately 230 technical homologations, 76 percentage points of yearly target, concentrated in the 19 inches and above, roughly 80%, specialties and EVs. We introduced 8 new high-performance products with a special focus on the regional needs of consumers. In addition, we expanded our offering in the 2-wheel business, Motorbikes and Cycling, now accounting for 8 percentage point of our revenues. In the competitiveness program, we progressed to Phase 2 of our efficiency plan and achieved 60% of yearly target, in line with the objectives and the development of the different projects.
In the operations program, the saturation level of high-value plans remains above 90%, 73% in Standard due to lower production levels in Russia. Finally, we launched the capacity increase program in North America that will reach 8.5 million high-value tires by 2025, in line with our industrial plans. Our commercial strategy allowed us to fully seize high-value growth opportunities. At the same time, we kept decreasing our exposure to the least profitable segments of the Standard business.
In Car 18 inches and above, we recorded a plus 9.4 percentage point growth driven by the most technological and high-end products. Namely, rim sizes 19 inches and above contribute 94% of the growth posted in the Car 18 inches and above segment. Specialties account for over 77 percentage points of volume increase in the 18 inches and above in the first 9 months, with a major contribution of EV products accounting for approximately 14% of volumes in OE 18 inches and above.
The replacement channel 18 inches and above is the driver of this growth in pull volumes, especially in North America and Asia Pacific and in EV products, as well as in push volumes, where the new dedicated lines of this channel showed very good results in the 3 high-value regions. In Original Equipment 18 inches and above, on the contrary, Pirelli is taking an approach of growing selectivity of OE projects, with particular care of electric vehicle products.
Pirelli innovation program continued in third quarter 2022, with an offering covering the different needs of consumers in all regions. In North America, we expanded our offering with the launch of 2 new all-season products, weather active Cinturato for the sedan segment and weather active Scorpion for the SUVs. These 2 product lines comply with high performance and safety standards. Both are suitable for different weather conditions as certified by the Three-Peak Mountain Snowflake certification. Both have a warranty linked to mileage. Both offer extraordinary wet performances and are 2 decibels more silent than competitors' products. In Europe, our Cinturato Winter 2 launched in second quarter, was pointed out by major magazines like Auto Bild as the best winter tire due to its high performance and safety standards.
Our EV portfolio is growing steadily. Now it includes over 300 homologations with the most innovative and well-known brands in the world in both premium and prestige. Our EV positioning is unique in the industry, as the vast portfolio of EV market products proves. Pirelli offering is approximately 2.5x wider than the average of our competitors. Electric vehicles make up the fastest-growing segment, with Pirelli aiming at doubling its sales in the segment. In the first 9 months of this year, 3 years earlier than expected, we already achieved our market share target in a high-value EV equal to approximately 1.5x that of premium and prestige vehicles with antenna combustion engines.
In the 2-wheels business, Motor and Cycling, high-value product innovation is continuing. In the Motorbike top of the range business, Pirelli is the leader with 2 premium brands, Pirelli and Metzeler. In the first 9 months, we expanded our product range. In the Pirelli brand, we introduced Diablo Rosso IV Corsa devoted to the super sports segment and motor bikes with high displacement.
In the Metzeler brand, we launched Tourance Next 2, with very good performance in wet, and Karoo 4 for off-road driving. In Cycling, we keep on our growth journey by leveraging on the expansion of our product range with the launch of 10 new products in the first 9 months, the ramp-up of our Bollate plant in Italy, commercial partnerships with Trek and the ongoing cooperation with the key partners in the high-value and electric segments such as Pinarello, Colnago and Stromer.
In the first 9 months of the year, the competitiveness program posted efficiencies worth EUR 86 million, equal to approximately 60% of the yearly target. This target has been updated to around EUR 140 million against the initial EUR 150 million in consideration of the new volume estimates and the resulting production levels. Let us review the performance of each single project in the first 9 months.
In the product cost project, which contributes around 34% of efficiencies, we made progress in the adoption of a modular and design-to-cost approach. In manufacturing, 41 percentage of efficiencies, we continued optimizing our industrial footprint and the implementation of efficiency programs. In SG&A, 13% of efficiencies. We achieved efficiencies by using different levers like the optimization of the logistics and warehouse network and purchasing negotiation actions. Finally, in the organization, 14% of efficiencies, we went ahead with process digitization and people upskilling.
Finally, our update on the energy issue and the mitigation plan. As known, the lower supply from Russia has produced a hike of gas price, with the resulting impact on energy costs, which are estimated to be 3.7% of revenues in 2022, 1 percentage point higher than 2021. From the operational point of view, gas shortage risks are limited to Germany and Italy, where Pirelli has a capacity of 8 million tires, equal to 11% of the group's capacity. Therefore, our exposure appears to be definitely lower than our peers.
To minimize both economic and production impacts, Pirelli immediately established a cross-functional committee and set up a contingency plan. The plan sets out the use of alternative energy sources to natural gas already available for our plant in Italy and Germany, containment of risks connected with suppliers. Based on our assessment, exposure to the risk of shortage is limited, and where needed, we increased the stocks of products and semifinished products.
As to economic impacts to date, over 40% of our global energy cost for 2023 has already been fixed, also based on hedging actions, while we are accelerating the implementation of our projects to reduce energy consumption, working on the curing and mixing processes in order to reduce thermal energy consumption and waste, encouraging the introduction of photovoltaic panels, the use of LED lamps, and more generally accelerating the use of renewable energy sources. Thank you, and I now give the floor to Mr. Bocchio.
Thank you, Mr. Casaluci, and good evening to all. Let's analyze more in detail our economic and financial performance, starting from top line dynamics in the first 9 months of 2022. Volumes were flat year-over-year, yet with a different trend between Car business with a 2% growth and the Motor business with a minus 7.5%, discounting the reduction of our exposure to the Motor Standard segment and consequently, the shutdown of our Brazilian plant in the third quarter of 2021.
Focusing on high-value and standard segment for car and auto, the following factors should be highlighted: a continuous high value volume improvement, plus 6.6% in the first 9 months and plus 8.2% in the third quarter, supported by the original equipment demand rebound as well as by a higher market share in Car 18 inches and above replacement despite price increases. Standard volumes are indeed declining, minus 7.6% in the first 9 months and minus 5.7% in the third quarter, impacted by a greater selectivity in car original equipment, the Russian-Ukraine crisis and the already mentioned shutdown of our multi-tire plant in Gravatai.
Price/mix, plus 20% in 9 months and plus 19.4% in the third quarter, due to price increases to compensate for higher inflation on raw materials and other input costs; mix improvement, mainly product mix from both the migration from standard to high value as well as the micro mix improvement in both segments; the positive exchange rate, plus EUR 257 million or plus 6.5%, reflecting the strong appreciation of the major currencies versus the euro.
In the first 9 months, adjusted EBIT was EUR 754 million with a year-on-year growth of EUR 155 million with a 15% margin, flat year-over-year due to the strong contribution of the internal levers, which more than compensated the impact of the external scenario. More specifically, this trend reflects the positive price/mix, plus EUR 677 million; and efficiencies impact for EUR 86 million; which have more than compensated for the increased cost of the raw materials, minus EUR 365 million, including the exchange rate impact; and of the other input costs, minus EUR 227 million, mainly energy and logistics; as well as higher depreciation and amortization charges for EUR 20 million and of other costs for EUR 25 million, all concentrated in the third quarter; a positive exchange rate contribution plus EUR 28 million and a flat volume contribution due to the dynamics mentioned above.
In the third quarter, adjusted EBIT is up EUR 272 million with a 23% growth. The 14.8% EBIT margin marks a slight decrease versus 15.7% in the third quarter of 2021 due to the dilutive effect of the exchange rate and an increase of the other costs, mainly connected to the impact of the reduction in stocks and higher provisions for the short-term management incentive plan.
Let's look at the net income dynamics for the first 9 months of the year. Net income strongly increased year-over-year. The trend takes into account the already mentioned improvement in operating performance and the lower restructuring and nonrecurring costs. The year-on-year increase of the net financial charges reflects the rise of interest rates and the currency hedging costs in Brazil and in Russia, partially counterbalanced by the reduction of financial charges at the parent company level. We will discuss this trend in a couple of slides.
The EUR 46 million increase in tax charges relates to the higher operating results, as tax rate is stable at about 27%. Adjusted net income, meaning excluding all the one-offs and nonrecurring items, is positive for EUR 446 million at the end of September 2022.
Let's look now at the net financial position. Pirelli closes its 2022 9-month report with a negative net financial position of EUR 3.4 billion, and the cash absorption before dividends of EUR 323 million, lower than the one of the 9 months of previous year. The net operating cash flow has improved by EUR 172 million compared to last year, reaching EUR 87 million and reflecting the EBITDA growth, lower investments connected to a different timing expected in the implementation of the 2022 projects due to the geographical reallocation, as well as delays in delivering some equipment due to electronic components shortage and limited working capital absorption due to an efficient finished product stock management with a reduction of approximately 600,000 car tires, while raw material stocks increased due to inflation and in response to the need to mitigate supply chain risks.
At the end of September, overall stocks accounted for 23% of revenues, minus 0.5 percentage points versus the first 6 months of the year. The stock reduction process will continue in the fourth quarter with a target of reaching at the end of this year a weight of revenues between 21% and 22%, a figure closer to 2021 results. The working capital was also influenced by the growth of trade receivables, in line with our business seasonality, and increased the trade payables, which reflect the growth of our business as well as the increase in stock.
It is important to point out the significant reduction of nonrecurring and restructuring charges, which partially offset the increase in financial charges and higher taxes as well as dividends paid to minorities and the negative impact of the exchange rate of minus EUR 43 million due to the devaluation of the Russian ruble and Brazilian real, partially offset by the positive impact on liquidity because of the devaluation of the Chinese renminbi. The net cash flow before dividends in the third quarter of 2022 was positive, plus EUR 141 million with a EUR 37 million increase year-on-year, thanks to our operating management.
The group gross debt as of September 2022 is up approximately EUR 5.4 billion, while our net financial position is up EUR 3.4 billion due to EUR 2 billion worth of financial assets. During the first 9 months of 2022, our group subscribed to banking lines indexed to sustainability targets worth EUR 2 billion and refinanced the debt due in 2023 as well as established a EUR 2.5 billion liquidity margin, which allows to cover maturities due by the first quarter of 2024. The liquidity so generated allowed to early repay in October '22 the EUR 553 million bond originally due in January 2023.
The refund of the notes occurred last October 25, as part, therefore, with no financial penalty for our group. Because of that, is at 3.51% or 113 basis points more than in December '21, mainly due to the interest rate dynamics and hedge management of the exposure to financial risks of both Brazil and Russia. Finally, as for next year, we have already set 50% of our euro denominated debt at a fixed rate to cope with the current interest rate increases. Thank you for your attention, and now I give the floor back to Mr. Tronchetti.
Thank you, Mr. Bocchio. Let us now discuss the 2022 outlook. Based on the trends in these first 9 months, we have updated our expectation in the car market for this year. We are now forecasting a slightly declining demand. It's 0.4 versus flat previous outlook due to a more cautious view on replacement, both in Europe following a late start of the winter season and in China due to several lockdowns. On the contrary, the recovery in our OE segment continues and is now also led by the standardized segment.
Resilience in terms of high-value demand is confirmed, a 6% growth in the Car 18 inches and above segment, the clear cut of our performance compared to the Car 17 inches and below segment, which is expected to decline by 2%. More specifically, on Car 18 inches and above segment, we expect a 10% growth in Original Equipment, in line with the previous estimates and mainly driven by China due to subsidies and adds by the government, a 4% growth in replacement due to the dynamics mentioned before.
Our solid performance led us to upgrade our 2022 full year target. Revenues are now expected to be of approximately EUR 6.4 billion, almost EUR 250 million more than the previous targets with a 22% year-on-year growth. Volumes are expected to be flat, with high value growing approximately 5%. The reduction of the exposure to the Standard segment continues with volumes at minus 6%; the lower growth of total volumes compared to the previous guidance reflects a slowdown of demand in the replacement channel; price/mix more or equal to 17%, over 3 percentage points more than our August target due to price increase as well as a better trend in terms of product mix; exchange rates increasing by 5%, with a cautious forecast of the devaluation of the Argentinian pesos in the last quarter of the year; and more generally, higher volatility of the currencies in the emerging countries.
The profitability target is confirmed at approximately 15%, yet with an absolute value increase due to the growing contribution of the price/mix, which more than offsets a stronger headwind on both raw materials and inflation and a lower volume contribution. CapEx confirmed at approximately EUR 390 million or approximately 6% of revenues. Net cash generation before dividend is now expected to be EUR 480 million due to an improved operating performance and an efficient management of the working capital. Expect a net financial position at EUR 2.6 billion with an improved leverage, which is now expected to be approximately 1.9x the adjusted EBITDA compared to 2.4x at the end of 2021. And this ends our presentation, so we may open the Q&A session.
[Operator Instructions] The first question is from Monica Bosio with Intesa Sanpaolo.
The first is on the Replacement segment. Looking at the market scenario, I was wondering if you are seeing any sign of trading down. And if yes, if you could elaborate more on this...
Sorry, sorry. There is a problem in -- can you please repeat because we lost the first part of your -- okay.
Okay. Can you hear me well now?
Yes. Yes. Thank you.
Okay. The first question was on the replacement market and the market scenario. I was wondering if you are seeing any sign of trading down. And if yes, if you can elaborate a little bit more. And if it's possible to have a rough idea of the current dealer inventories level.
The second question is on the market share gains in Replacement, which were quite significant and impressive. Do you expect a similar trend also even in 2023? And if yes, could you elaborate more on this and on the pricing mix associated to potential for the share market gains? And the very final question is on the Standard segment. If I remember well, the group is expecting to approach a double-digit margin. So is this target still valid on the back of the cost inflation and of the trend in the Standard segment?
Thank you. Mr. Casaluci, please?
Yes. Thank you for the questions. Trade-down was the first question. There is a trade-down in a period of crisis as far as we see concentrated on the Standard segment, where the weight of the Tier 1 in the high-value market is decreasing, while in the high-value segment, where we focus 18 inches and above and mainly specialties, the weight of the Tier 1 brands is stable. So we don't see a major risk in our focus market.
Stock in the trade is back to normal level in United States, so it's normalized, is also in what we do consider a healthy position in Europe and as far as the Standard is considered, and Russia as well. While if we look at the winter, due to the weather conditions, the stock today is quite high. And so we all wait for the sell-out performance based on the weather conditions of the coming months to have a clear and better understanding. But for the time being, after a good and successful selling season, we have a delay in the sell-out, so stock is quite high.
China stock level is below the average because the lockdown and the restriction on the mobility are affecting also sales. And as a consequence, we are working destocking our partner and distribution in order to protect our business there. Market share on the high-value, of course, is our main focus, and so we target to continue our growth in the replacement channel in all the high-value markets with a clear focus on North America, where we are -- we still have a lot of opportunities to growth in all regions, but in North America, even more because we are growing in the local original equipment, and we are enlarging our product portfolio in the replacement channel as we are presenting in the different calls with new offers.
We are going to be a bit more selective in the market share of the original equipment, mainly in Europe, where we focus more and more on EV, the specialties and most profitable businesses. So the market share in the EV OE could be more or less stable, with a declining share in Europe and a growing share in Asia Pacific and North America. Profitability of Standard, of course, we do confirm our target of double digit. We have a small delay in 2022 because of the Russia crisis, and so the reduction of production and factory saturation over there, but we are very close to the double digit, and we plan to reach this target in 2023 with, I would say, 6 months delay. But the target is remaining a double digit as we presented in our plan. Thank you.
The next question is from Martino De Ambroggi with Equita.
Two questions on price/mix. The first is on the main reasons for the revision from the previous quarter and the drop-through for the full year to be expected. And the second always on price/mix is, I clearly understand it's too early to think about next year, but are you confident to be able to offset the raw mat probably lower and inflation next year with further price/mix improvement? And why not? If you want to talk about it, but 15% adjusted return on sales is achievable in the current environment based on the current visibility. And on Russia, you didn't quantify any figure. Could you just give us some figures in Q3 -- about the Q3 performance. And in the last call, you mentioned EUR 25 million, EUR 30 million as the negative effect at the operating level, just to check if it is confirmed.
Thank you for the questions. But starting with Russia, is confirm what we had, but we were able to offset the negative impact, thanks to the performance we had in price/mix in general. So this negative impact, obviously, was there because we had to cut the production and to increase in Turkey and Romania the production of some standard. But all in all, is included in our numbers.
The second question was about the 2023. 2023, we have to see that -- to say that we continue to see growth in the Premium and Prestige segment. So our segment, even in an environment that is today very uncertain, but we expect to see growth. Considering the inflation, we have already embedded in our prices a positive impact on Replacement in 2023. And also, in Original Equipment, there is some positive impact on prices because of the cost metrics. So what we see today, and it's obviously too early to say, that at least half of the inflation that we can foresee today is already protected by what we have in our portfolio. And then as you correctly mentioned, there is the obvious continuity in our business model embedded in our business model on the mix. And so we are building the plan for 2023 with the uncertainties that everybody knows, but with some protection embedded in the business model. For the first question, I'll leave the floor to Mr. Casaluci.
So thank you. I will compare the price/mix performance of full year with the price/mix performance expected for the last quarter to explain the difference between the two. So price/mix full year 17.7%. As a consequence, the last quarter is roughly 11%. The biggest difference is related to price because of the comparison year-over-year. So in the last quarter of 2021, we already started to increase the price. And so if we saw the price increase of the 2 years, we confirm the performance of the first 9 months of the year. Having said that, the weight of the price performance on a full year base is roughly 67% out of the 17.7%, while in the last quarter is 73% out of the 11%. As a consequence, the drop-through of the full year is 86%, and the drop-through of the price/mix of the last quarter is 90%.
The next question is from Pierre Quemener with Stifel.
I guess the key concern for Pirelli on the tire space into 2023 is the non-raw material cost inflation for both energy costs, and thanks for quantifying impact in '22 and labor costs. Could you roughly quantify the additional hurdle you will have in '23 regarding energy after the rise to 3.7% of sales in 2022? And maybe staying on the labor cost [indiscernible], the claim from wage increases are close to double digit in Italy, if I'm not mistaken. So to try and gauge the additional hurdle you will face in 2023.
Thank you. So as I was saying before, part of the inflation that you rightly mentioned on raw material, on energy, on labor is protected by the prices we have already in -- for our products globally and also part of it by the cost metrics on original equipment. So in the full package of the expected, let's say, growth in inflation and on cost, at least half of them is already protected. We consider that energy cost that will have a weight on our balance sheet of around [ 60.7% ] of our turnover, could have a growth in 2022 and 2023 of a couple of points, which means that it could be something between 5% and 6%.
And so in that scenario, we consider that we can definitely add also, obviously, labor costs both in Europe, Latin America and Mexico. But considering even this impact and the impact of the cost of transportation, we start 2023 with half of it already done with what we did in 2022 on prices. Obviously, there will be other actions. There are the efficiencies coming. And there is, let's say, the support that the new product lines are providing, and they are protecting the mix that is structurally our profit origin. And considering that in a mix, we have, let's say, within the product portfolio protection from -- coming from specialties, the growth of our market share this year in the high-value was more than 70% coming from specialties, and specialties we expect to represent even in 2023, more or less 70% of the profitability of the 18 inches and above. So this model should protect our, let's say, the increase -- the obvious increase in inflation that we are going to face.
Just a quick follow-up on the pricing side. Would it be reasonable to model a mid-single-digit price/mix increase in '23 after what you have achieved already on a 2-year stack in '21 and '22? Or is it too optimistic?
Mr. Casaluci?
No, it's not too optimistic, but all will depend on the stability of the demand. So we are quite confident that our business model will be more resilient than the average of the industry because of the mix and because of the resiliencies on price of the segment where we play. So today is a reasonable assumption what you are doing, but it's too early to have a clear understanding because a lot will depend on the development of the demand and the market of the coming months.
[Operator Instructions]
So if we were so clear in our information and if there are no more questions, we...
Excuse me, we do have questions. We just hear silence. So the next question is from Giulio Pescatore with BNP Exane.
The first one on the efficiencies you mentioned, I mean your program has run out, as we kind of ended in 2022. I mean can you quantify how much more can you do on the efficiency side and where these efficiencies are coming from? And then the second one, on working capital, it's really impressive that you managed to limit the increase in working capital on the inventory side, especially compared to your peers. I mean how do you manage that? How did you manage to offset the price increases? And then the last one, on interest rates, there was a significant rise in the last quarter. What should we expect for 2023? Can you maybe help us with the modeling of interest rates?
Mr. Bocchio for the working capital.
Yes. Thank you. I will take the question on the working capital. In 2022, what we are forecasting is a tight management of the working capital. So with the decrease of the finished product cash stock ultimately going back to 2021, in spite of the increase in the sales volumes improving, thus the inventory efficiency, counterbalancing the decrease in the unitary value, obviously, as a consequence of the high inflation recorded in '22 on the raw materials. What we see for sure, it is an increase instead on the other side of the raw materials incidence on net sales because of the inflation of the cost and an increase even in quantity in order to mitigate the supply chain risk.
Based on the above, what we expect for 2022 inventory is to increase absolutely in absolute value, but remaining substantial is stable year-on-year in terms of incidence on sales. Last year, we ended the full year 2021 with an incident on the inventories on sales of 20.5%. What we expect at the end of 2022 will remain at about 21% to 22%. Our target is to keep the working capital under strict management, strict control because, obviously, cash generation is target number one for us.
Mr. Bruno on the interest rates.
Okay. Related to the 2023, we are expecting a cost of debt at least between 3.5% and 4%, taking into account that we are achieving a deleveraging, as mentioned by Mr. Tronchetti. Our position in terms of fixed and floating is between [ 15% and 50% ]. And we -- our expectation related to the debt maturities until 2024, that we have already managed, let me say, our maturities for 2022 or 2023. And so we are also -- in our position, we have EUR 2.5 billion in terms of liquidity margin that can cover maturity till the first half of 2024.
Mr. Casaluci?
Yes. As far as efficiencies, we don't have the final number for 2023 because we are going to review our plans of efficiencies in order to be able to compensate together with price/mix as much as possible of the inflation that you mentioned before, mainly labor and energy that will affect mainly the region of Europe. So we are redesigning the plan of efficiencies, mainly focusing on Europe at 360 degrees, taking advantage of the acceleration of our digitization program. So we will be able to give you a clearer number of the final efficiency plan with the 2023 target. Thank you.
The next question is from Michael Jacks with Bank of America.
If I can just go back, please, to the question on working capital. So there's been an increase -- a net increase in absorption of around EUR 900 million this year. Based on your free cash flow guide, around EUR 300 million of that could potentially come out in the fourth quarter, which still leaves around EUR 600 million of debt absorption. Given that raw material prices are coming down, I would imagine at some point that, that could potentially drive some unwind in the inventory balance. Receivables also is up, I think, almost 2x year-on-year. So it strikes me that perhaps there's more in the receivables balance than just pricing. So how should we think about the magnitude and timing of the potential working capital unwind? That's my first question. I'll ask the second one after that.
Mr. Bocchio for the working capital. Mr. Bocchio?
Okay. Yes, you're right. Absolutely. If raw material will reduce the value, there will be a positive impact on the value of the stock in 2023, but it's not really in our control. What we can control, for sure, is the tight management of the internal KPI in terms of number of pieces of finished product that we manage in our stock, where we have great visibility, thanks to the link to our customer. And as we head this year in 2022, we'll have the same strict management in 2022. And then there will be possibly in 2023 a possible upside on the raw material stock. If the tensions between Russia, Ukraine and the logistics and the supply chain tension will ease a little bit in the second half of 2023, there will be the possibility to manage, in a more efficient way, the raw material stock that we have in the 9 months, and we already foresee a slight decrease for the full year of 2022. It is still a little bit early to evaluate in terms of euro how much will be the impact.
Thank you. You have a second question.
Yes, please, if I may. And if I can just go back to the comment on becoming more selective on [ dev ] tires into OE channels. Can you please elaborate a little bit more on the reasons for that? Is this because pricing pressure is growing in the segment? Is competition growing? Or are you more worried about using up capacity on lower-margin sales?
Mr. Casaluci?
So thank you for the very good question. What is driving the choice of the Original Equipment project is basically profitability, but not the profitability of the Original Equipment itself but the profitability of the integrated business, Original Equipment plus Replacement. So based on the past year's figures, we have a quite clear understanding of our pull-through rate, so the capability to maximize the aftersales in the Replacement. And so we are able to be more selective today.
For example, an internal combustion engine car that will start production in 3 years from now. And this is today the time to choose this project as Original Equipment project for the company. Most probably in 5 years from now, whether it will replace tires, the residual value of the car will be much lower than what is expected today. This is one reason, for example.
Another reason is that new customers are coming in the arena of the car industry, premium as well, prestige as well. And so we target to enlarge our customer base to the risk and to catch opportunity in the new premium segment that is coming. And so today, we have in our customer portfolio, newcomers like the one that we mentioned before, use the Tesla, Rivian, Neo. So newcomers all playing in the premium and prestige segment targeting EV. And that's the reason why we decided to be more selective mainly in Europe and enlarge our customer base in U.S. and Asia Pacific, targeting always specialties, EV, where there is a value and the expectation of the pull-through is as high as possible. Thank you.
All right. Understood. I just have one more question, if I may. I know this is less of a concern for Pirelli relative to some of your peers. But can you please comment on the impact of Asian tire imports, or the strong increase that we've seen in Asian tire imports on the standard tire channel inventories? And if you're seeing any impact on pricing power in the standard tire segment?
Well, yes, there is an impact. It's mainly in Europe for the car industry, but is -- as it was for the trade-down, is mainly focused on the standard segment, where the Chinese, the Asian brands are importing in the last month more than what happened in the first half of the year because of less logistic cost and also better availability. And so there is -- you are right, but it's not affecting our segment. Thank you.
The next question is from Sanjay Bhagwani with Citigroup.
My first question is maybe on the bigger picture, can you please provide some color on how the business mix and the competitive position of Pirelli has changed compared to, let's say...
Excuse me. Excuse me. We can't hear you well. The line is not so good. Could you please? Hello?
Sorry, is this any better now?
Now it's a bit better. Yes, yes, yes. Go ahead.
So my first question is, maybe can you please provide some bigger picture color on how the business mix and competitive position of Pirelli has changed compared to the prior crisis? So more on the top line and the mix side, but also on the operational resilience side. So what could be, let's say, the volume drop-through in a market declining replacement tire market? That is my first question. And I'll just follow up with the next one.
You mean the drop-through, as Mr. Casaluci was mentioning, in the last quarter were close to 90%. And so this is the effect of prices that, as you know, goes down straight to the bottom line and also of the mix. Then there is part of the exchange rate that is obviously also affecting. And what we see is that the business model that we have set is focused on the high value, where the profitability is obviously higher and where the pull-through effect is evidently supporting our business model. And we expect that, thanks to the market share we are getting in the high-end electric vehicles, it will be, in the future, even more profitable because there is a price premium on the electric -- on tires on electric vehicles because of the technology embedded in our products.
That is very helpful. And my second question is, just could you please provide some color on how big is the freight and logistic costs for you, basically the transportation costs? And are you seeing any signs of these actually becoming a tailwind next year? I mean the spot rate that's in the U.S. specifically have been coming down this quarter. So do you expect this to be probably a tailwind for next year? That is my question.
On logistic cost, it is in our business model to transfer them to the trade and to the end users. So we did it in -- during the 2022. I think for some months, it was very, very high level. We expect a growth also in 2023. But our business model is protecting us because we have 80% of our sales that are local for local. So we produce where we sell the product. So we have less exposure than our competitors to the maritime costs. And this is something that will continue to be the protection of our business model, and we expect for next year that also if there will be some increases, we will be able to protect the profitability.
Mr. Tronchetti Provera, there are no more questions registered at this time. I turn the conference back to you for the closing remarks.
Thank you, ladies and gentlemen. This will conclude today's program. Thank you for your attendance, and I wish you, to all of you, a very good evening.