Pirelli & C Spa Azioni

Q1 2023 results confirmed the resilience of our business model, with performance that is improving year on year and among the best in the industry. Scenario we foresee for 2023 remains characterized by a slowdown in economic growth, substantially in line with February expectations, and an inflation rate staying high, especially of consumer prices, despite a reduction in energy transportation and raw material costs. All 2023 targets are confirmed and supported by the delivery of our strategic programmes. On Golden Power, final measures are expected to be issued after the 4th of June, termed for filing the slates for Board of Directors' renewal. In compliance with the best corporate governance principles, today the Board has resolved to submit to the AGM taking place on June 29, the proposal to postpone the renewal of the Board after the conclusion of the Golden Power Procedure. A subsequent General Meeting will be called, presumably before July 31, and consequently current Directors will remain in power until the renewal of the Board. The update of the Industrial Plan is postponed and is now due before the end of 2023. The deleveraged target of a net debt and adjusted EBITDA ratio of one time by 2025 is confirmed. Let's go to the results. Pirelli closes the first quarter of 2023 with a solid economic and financial performance. Top-line growth, 12% year-on-year plus, driven by price mix and strengthening on high value, now equal to 75% of the group revenues. Adjusted EBIT of 248 million, with a margin of 14.6 in line with full-year target. Net income of 115 million, growing by 5%. Net cash absorption in line with the same period last year, and is counting the build-up of investments in the fourth quarter of 2022. Efficient inventory management, particularly of raw materials, continued in the quarter. I remind you that the high incidence of these inventories in 2022 was due to both rising inflation and actions to contain supply chain risks. Moving on, I would like to give you an update on sustainability. Our commitment to health and safety at work is continuing, with the launch of a global awareness campaign on the World Day promoted by the International Labour Organization on April 28th. On product sustainability, we will introduce new product lines with high content of renewable and recycled materials already in 2023. While the collaboration with the key stakeholders is being intensified in view of the introduction of the Euro 7 tire wear regulation, which will come into force in June 2025. On the industrial front, the decarbonisation of plants through the transition to renewable energy and energy efficiency programs continues. Our commitment to the fight against climate change has once again been recognized by CDP, which confirmed the A rating for Pirelli last February. I now leave the floor to Mr. Casalucci.

Thank you, Mr. Tronchetti, and good evening, everybody. Let us analyze both the market dynamics and Pirelli's performance. In the first three months of 2023, the global car tire demand declined by four percentage points year over year, with a very different trend by segments and channels. Pirelli outperformed the market thanks to our faster strengthening in high value. Original equipment market growth plus 3% year-over-year was supported by easing supply chain tensions, particularly in semiconductors. More specifically, in the high-value segment, Pirelli saw over 7% volume growth year-over-year in line with the market, while in standard, Pirelli's performance reflects greater selectivity in this channel and halting of car production in Russia due to the Ukraine conflict. Replacement demand remained weak, minus 7% year over year, reflecting the volatile macroeconomic environment. In 18 inches and above, Pirelli outpaced the market by around 3 percentage points, Pirelli plus 3% versus a flattish market. driven by market share gain, mainly in North America. In 17 inches and below, Pirelli minus 11 versus a market minus 8, we continue to focus on a mix more oriented towards higher range sizes. The first quarter results reflect the implementation of the key programs in the industrial plan. On the commercial program, Consistent with our strategy, we have outperformed the car 18 inches and above market by gaining sharing replacement, particularly in North America, increased exposure to original equipment 19 inches and above, reaching 82% of car 18 inches and above original equipment volumes, which is nine points above last year, and electric vehicles. Reduced exposure to standard, which accounted for 36% of car volumes in Q1. On the innovation program, achieved 60 technical homologations concentrated in 90 niches and above, about 85%, and specialties, about 70%. Strengthened EV positioning and focus on sustainability. while the two wheels business saw the launch of two products based on racing experience. On the competitiveness program, gross benefits of about 10 million were achieved, in line with expectations and project development schedules. On the operations program, the saturation level of the plants stands at about 90%, more than 95% on the high value. in view of the lower level of production in Russia. In addition, the program to decarbonize plants through the use of renewable energy sources and energy efficiency programs continues. Let's start from the commercial program. In the car 18 inches and above segment, we recorded growth of 5% compared to plus 2.6% of the market. driven by products with higher technological content, the 19 inches and above and specialties. In the original equipment, car 18 inches and above, our performance, plus 7.5 volumes versus a plus 7.1 of the market, is characterized by an increasing selectivity in favor of electric vehicles. 100% of their year-on-year volume growth is related to EV homologations. In the replacement 18 inches and above channel, volume plus 3% compared to a minus 0.2 of the market, growth was driven mainly by the replacement product lines introduced in 2022, particularly in North America. On the product innovation front, our activity continued in the first quarter, with an increasing focus on sustainability and performance. In CAR, our EV portfolio stands at more than 350 homologations worldwide, mainly in 19 inches and ABO and specialties, with an OE market share of 1.5 times that of premium and prestige internal combustion engine vehicles. In addition, the sustainability roadmap continues with a strong focus on renewable and recycled materials. In 2023, our products will already have a sustainable material content well above our standards and becoming a benchmark for the industry. As for motorbikes, Pirelli has been confirmed sole supplier for all classes of the Superbike World Championship until 2026. and our portfolio was further expanded with an introduction of the new Diablo Supercorsa, the result of 20 years of experience in racing. Finally, in cycling, the Pizzero Rosso tubeless ready was introduced, produced in Italy and aimed at performance with low rolling resistance and excellent handling. The competitiveness program in the first quarter recorded gross efficiencies of 10 million, equal to 10% of the annual target and in line with the timing of project development. The contribution of the efficiencies will be more evident starting from the second quarter. Reviewing our performance in the first quarter, in the product cost area, the adoption of a modular design and design-to-cost approach continued. aimed at reducing structure complexity and tire weight. In the manufacturing area, the results of which will be visible starting in the second quarter, projects are being implemented. Said projects are aimed at improving the production process by leveraging on industrial IoT, predictive maintenance, and energy efficiency programs. In the SG&A, the process of optimizing the logistics network and supply chain continues. And finally, in the organization area, the process of digitization and staff upskilling is progressing. Thank you so much, and I now leave the floor to Mr. Bocchio.

Thank you, Mr. Casalucci, and good evening to all. Let us analyze the dynamics of the top line in the first quarter. The volume trend, minus 3.1% at group level, reflects the weakness of market demand. As Mr. Casalucci already explained, we gained share in car 18 inches and above despite price increases, while we reduced our exposure to standard in line with our strategy. Strong improvement in price mix, plus 15.1%, supported by a solid price discipline to counteract input cost inflation, and the continued improvement of the product mix through increased exposure to high value and improved micro-mix. The forex impact was broadly neutral, minus 0.3% in first quarter, or minus 4 million euro, where the year-on-year devaluation of renminbi, Argentine peso, was offset by the dollar's appreciation. In the first quarter, 2023, the adjusted EBIT amounted to €248 million, up 9% year-on-year, with a margin of 14.6%, in line with the full-year target. The contribution from internal levels more than offset the weakness of the external scenario. In particular, price mix plus €198 million and efficiencies plus €10 million More than covered, the drop in volumes, worth minus €20 million, linked to the weak market demand, and the increase in the cost of raw materials, minus €78 million, including the related exchange rate impact, which was particularly significant in the first quarter. This impact, which reflects the growth in the oil price, its derivatives and rayon, is expected to improve in the coming quarters. The internal levels also offset the inflation of other production factors, such as energy, labour and transport, for an amount of €69 million, and the negative exchange rate effect, minus €15 million, due to the revaluation of the currencies in our main production hubs, particularly in Mexico, whose currency appreciated by 15% against the euro. Let's look now at the net income dynamics for the quarter. Net income increased 5 million year-on-year. The trend takes into account the already mentioned improvement in the operating performance, the 2 million higher restructuring and non-recurring costs, the year-over-year increase of the net financial charges reflecting the rise of interest rates in the Eurozone and high cost of hedging forex risks in Russia, we will discuss this trend in a couple of slides, the 6 million increase in tax charges related to the higher operating results, as the tax rate is at 28.5%, reflecting a different mix of result generation by country. Net income adjusted, meaning excluding all the one-offs and no recurring items, is positive for 142 million euro at the end of March. Net cash flow in the first three months was negative €691 million, in line with the seasonality of the business and with the first quarter of 2022. The change in operating net cash flow mainly reflects the improvement in operating performance, absorbed by higher investment activity and higher working capital. The trend reflects the usual seasonality of the business, with the increase in trade receivables following the start of the summer campaign, and the reduction in trade payables linked to the trend in investments and raw materials. The careful management of inventories is to be highlighted, with an incidence on sales that is reduced to 21.5 percent, thanks to the actions on raw materials. It should be remembered that in 2022, the high incidence of these inventories was due to both rising inflation and actions to contain supply chain risks. On the other side, Finnish product inventories are stable. The group gross debt as of March 2023 stands at approximately €4.9 billion. Considering the approximately €1.6 billion of financial assets, our net financial position is equal to €3.2 billion. 2023 debt maturities have already been fully managed, and liquidity margin allows the coverage of maturities until Q2 2025. During the first quarter of 2023, Pirelli early repaid both a should-shine financing originally coming due in July 2023 for an amount of 223 million euro, and a bilateral bank loan original coming due in August 2023 for an amount of €125 million. Pirelli also issued a €600 million five-year bond, which was very well received by the market. This issuance marked a debut for Pirelli in the investment-grade rating space. It was also the first sustainability-linked benchmark-sized bond from a time-maker company. ESG financing now represents 57% of our gross debt, confirming the centrality of the sustainability strategy. Finally, our last 12 months' cost of debt stands at 4.31%, 27 basis points up from December 2022. This increase reflects both the rise in interest rates, mainly in the Eurozone, and the higher cost for hedging against currency risks, in particular in Brazil and Russia. I now leave the floor back to Mr. Tronchetti.

Thank you, Mr. Bocchio. Let us now turn to the outlook for 2023. The framework remains extremely volatile with a general slowdown in the economy and consumption. We confirmed last February outlook. The car tire market is expected to be broadly stable year on year, but with opposite trends between high value and standard. High value confirms its resilience with growth in car 18 inches and above mid-single digit compared to a 2% drop in standard. More specifically on car 18 inches and above, expectations are for high single digit growth in original equipment, supported by the progressive normalization of the supply chain. The replacement channel, on the other hand, is expected to grow at a low single-digit rate with a gradual recovery in demand in the second half of the year, thanks to recovery in China and other major markets. Based on the results achieved in quarter one and the scenario just described, we confirm all 2023 targets. Revenue between 6.6 billion euros and 6.8 billion euros. Volumes between flat and plus 1% year-on-year with mid-single-digit growth on high value while continuing to reduce exposure on standard. Place mix improving between plus 4.5 and about plus 5.5, benefiting from price increases in 2022 and those announced earlier this year, as well as continued improvement in product mix. Exchange rates declining between minus 4.5 and minus 3.5. Profitability in terms of adjusted EBIT margin between more than 14% and around 14.5%. We adjusted EBIT in the mid-range. Essentially, flat year-on-year, and where price mix and efficiencies will offset the impact of the external scenario. Investments of around 400 million, around 6% on revenues, in technology upgrades and factories, mix improvement and increase in high value capacity in Romania and North America, the expansion of which will be completed by 2025. Expect a net cash generation before dividends between around 440 million and around 470 million due to operational performance and efficient working capital management. This target includes the payment in the second quarter of 2023 of management's long-term incentives relating to the three-year period 2020 and 2022 and based on shareholder returns. cash and sustainability targets, the latter being the maximum. Please note that from 2024, following the transition to the rolling system, incentive payments will be on an annual basis with a substantial alignment expected between impact on the income statement and cash outflow. Net financial position of about minus 2.2%. 2,350,000,000 with leverage between around 1.65 and 1.7 times adjusted beta in line with the leverage process outlined in 2021-2025 business plan. This ends our presentation and we can start the Q&A session.

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star then 1 on their touch-tone telephone. To remove yourself from the question queue please press star then 2. Please pick up the receiver when asking questions. Anyone who has a question may press star then 1 at this time. That's star and 1. We will pause for a moment as callers join the queue. Our first question is from Giulio Pescatore with Exxon BNP Paribas. Please go ahead.

Hi, good evening, everybody, and thanks for taking my question. The first one on the guidance, very strong results from price mix in the first quarter. I'm just looking at this guidance for 5% price mix on the full year thinking that it does imply a big drop in the second part of the year. Now, I do understand the pricing comes under pressure, but can you maybe help us understand how you get from 15% in Q1 to 5% then on the full year? And if you went back to Q1, can you maybe share some colours on how much was pricing and how much was mixed within the 15%? And also on the various drivers of the mix effect. I'm just trying to understand how sticky the mix effect we saw in Q1 will be in the coming quarters. And then maybe the last one on the governance. I understand that you might not be able to share anything incremental on the Golden Power Agreement, but this is creating significant or certain level of uncertainty. So anything you can share in addition to your initial remark with regard to potential implication of this adverse decision from the Italian government or anything like that would be much appreciated. Thank you very much.

I start with the answer to the golden power question. So we just know until now that there will be a postponement because of question raised by other countries, which is normal in such a process. And so that's why we split the AGM in two parts. And about the outcome, of the golden power, it's really impossible to say anything because it's an ongoing process and we will be aware of the outcome not before, let's say, the end of May, beginning of June. So until then, really, there is nothing we can add to the fact that the procedure is an ongoing procedure. Mr. Casalucci for the other question, please.

Yes, thank you. Price mix of the Q1, 15.1 percentage point, roughly is two-thirds coming from price performance and one-third coming from mix performance. Now, the first question is related to the expectation of the price mix for the coming quarters. To lend it to what we do consider today the most comfortable performance of 5.5, it means on the upper range of our guidance. We do expect in the coming quarter surprise mix, which is a mid-low single-digit performance. This will be driven by roughly a price positive performance of 2-3 percentage point, mainly driven by the rollover of the price increase of last year and also the price increase applied in North America in January up to 10% and in Europe end of 2022. The price performance is below the performance is expected to be below the performance of the Q1 simply because of the less favorable comparison year over year. Because in 2022 we started to apply the price increase starting from Q2. And also some minor impact of the original equipment cost matrix in the second half. All in all, the price will be maintained. There is a full price discipline in our segment, in the high value, and so we keep on performing as we are doing till now. Maximum level of price discipline and price control is a priority one of the commercial campaign. If we move to the mix, We do expect the usual four or five points of positive product mix, mainly driven by the micro-mix effect, and so the growth in specialties and the reduction of standard, and the negative impact of two, three percentage points related to channel and region mix, because as we saw, the regional equipment market is expected to perform better than the replacement, and because the replacement demand in North America and Europe is expected to be weakening, and these two regions have normally a positive impact on the region mix. Thank you.

Thank you very much. Our next question is from Monica Portio . Please go ahead.

Yes, good evening, and thank you for taking my question. I hear Nico. I hope you can hear me.

Can you hear me? Yes, we can hear you.

Yes, good evening. I was wondering if you can update us with the total impact of headwinds from inflation and raw material for the fully... I remember that in occasion of the full year 2022 release, you gave an indication in the region of 250 million euro, if I'm not wrong. The second question is on the dealer network in the replacement channel in Europe. I was wondering if there are some pricing pressures, some signs, more visible signs of trading down. And the very last question is on the EV tires. On occasion of the full year 2022 results, I remember that EV tires reached 17% of the original equipment in tires above 18 inches. I was wondering if you can give us an update for the full year 2023, if you have it. Thank you very much.

Thank you for... The inflation impact is around 310 million. Anyhow, I leave the floor to Mr. Casalucci for the other questions.

Yes, thank you. So, the inflation already answered by Mr. Tronchetti has been lowering on 35 million compared to the previous guidance, and it the positive impact that together with price mix has been basically compensated by the Forex effect. On the retail channel price, as I said before, there is a good level of price discipline in the market in our reference segment, which is the high value. We keep on growing in market share, but always having the price discipline as the priority one in our commercial policy. As far as the weight of the EV into the original equipment today in the 18 inches and above, it's been around 25% in the first quarter. So the weight of the electric vehicle in the 18 inches and above segment in original equipment. and is expected to arrive within the end of the year around 31, 32 percent. So it's the fastest-growing segment inside our original equipment sales in high value.

Okay. Thank you very much. Very helpful. Thank you.

Thank you.

Our next question is from Martino D'Ambrogi with Equita. Please go ahead.

Thank you. Good evening, everybody. Just to complete the previous answer, this is for original equipment. Just to clarify, are you referring to volumes sales for the original equipment, Bev, and aftermarket is still 1%, 2%, maybe 3% or maybe a little bit more?

I was referring to the volume impact. Yes, and if we move to the replacement, it's still very low. It's around 3%, and within year-end, it's expected to go up at 3.54%, so we are still waiting for the impact on the pull-through rate in the after-sales. That is expected to grow significantly from 2024 on.

Okay, the second question is on price discipline. It's very clear, you already mentioned it, in high value is always respected. But what is going on on the standard segment overall? So let's say also how your competitors are acting in this business.

Well, thank you for the question. In the high value, we are also supported, I forgot to mention before, from the high level of saturation of our production capacity. In the high value and mainly the specialty segment, the demand is still higher than the installed capacity. And this is supporting the price discipline and the resilience of the demand. While in the standard, some negative impact in the market are visible, also accelerated by the trade-down of the 16 inches and the bull segment. Let's consider that the Tier 1 weight on the 16 inches and the bull segment today is around 35-34% of the entire market. So today is an arena of Tier 2 and Tier 3 brands. That's the reason why we accelerated the phase-out from this segment since years ago, and now we have the less exposure inside the tire industry to the segment. Thank you.

Thank you. And the last is from a geographical perspective. If you could elaborate on China, how the market is going on. And in Russia, you mentioned the utilization capacity was penalized by Russia. current utilization capacity in Russia, and is it still profitable for the full year?

So in terms of market, in China the market has been during the first... I refer always to the 18 inches and the bull market, so our reference market in the first quarter has been positive, around 4%, more or less with the same pace of growth in original equipment and in the after sales. While we do expect a recovery, a fast recovery in the second quarter, because of the comparison versus last year. The expectation is for an 18 inches and above market in the second quarter of a positive around 23%. Again, more or less with the same speed, original equipment and replacement. But we have to remind that in last year, in 2022, in the second quarter, China was basically, was strongly affected by the lockdowns related to the COVID and the restriction to mobility. The Russia market today counts for less than 3% of our total result, so it is less and less meaningful. The capacity is utilized at around 65% of the total capacity available and fully dedicated to the local market. Thank you.

Okay, your guidance, you still have Russia as a profitable entity this year.

Slightly, slightly profitable.

From Sanjay Bhagwani with TV. Please go ahead.

Hi, thank you very much for taking my question also. I have got three questions as well. My first one is on pricing. Could you please remind us what proportion of your volumes are tied to the index pricing? And when we talk about the indexing, then what components are included in the indexing? Is it just the raw materials, or it's the other inflationary components like energy and logistics are also indexed? So what I'm trying to assess is, like, if the raw material prices are going down, then when do we start to see this coming into the lower index prices? So that is my first question.

Okay. Thank you. I will answer to this first question. When I talk about price indecision is only referred to the original equipment channel, and to the 70% of the total channel. The channel weights for 25% of our sales, so 70% out of 25, it means that no more than 16, 17% of our total sales are affected by the indices in the . Thank you. And the index is fully related to raw material, no more than raw material. And if the raw material will go down, we have after from three to six months, depending by customers of delay, the impact on our price. So we can consider that the impact on original equipment price is already fully factorized, fully included in our actual guidance. Thank you.

Thank you. That is very helpful. And my next question is on the Q2 volumes. Could you please maybe provide some update on what are you expecting for the volumes going into the Q2? And finally, last question on EV tires. So could you please provide some latest update on what the price difference is between the light for light EV versus combustion engine tires?

and uh how do you see this uh train developing in the next few years uh and i mean depending on the on the other other pipeline you have thank you thank you so kuwan volumes market i guess is expected to be more or less equal to the first quarter in europe and north america with the positive original equipment, around 10% positive, from 8% to 10% positive in both regions. And as always, more resilient in the 18 inches and above. That goes up normally four or five percentage points more than the overall market. While we do expect a rebound of the market in China, as I said before, compared to the first quarter, the first quarter the market was slightly positive, while in the second quarter in China we do expect a total market of, as I said before, 12-13% of growth year over year, more or less same pace of growth in original equipment and replacement, and the 18 inches and the boys expected to grow average 20%. Moving to the electric vehicle, a very important question for us because EV is going to represent one of the most important opportunities we have in front of us as a high-value leader in the tire industry. The average selling price on an electric vehicle in replacement is around 15 percentage points higher than the equal size for the internal combustion engine. And the weight on our sales, as I said before, starting from original equipment and then moving to replacement, is expected to grow year after year. We have already reached the 1.5 times our market share in EV compared to the internal combustion engine, and this is expected to be reflected in the replacement channel starting from 2024.

Thank you. That's very helpful. So and this 15 percent price gap, do you see this remain for the next two, three years?

Well, our estimation is not. This price gap will remain for the coming two, three years because the technology is still in the growing phase. And so even if in the high-value segment in the regional equipment, the car registration is expected to grow significantly, going up to the 50% or even more of the car registration, in the car park, the weight of the EV will remain relatively small. And so the introduction of the technology and being less competitors in this arena will protect the price gap between internal combustion engine and the electric vehicle. I'm always talking about the high value segment, of course, premium and prestige car park.

Thank you. That is very, very helpful.

Our next question is from Michael Jackson with Bank of America. Please go ahead.

Hi, good evening. Thank you for taking my questions. The first one, apologies if you've already answered this, I joined the call slightly late, but what was the split between price and mix within the Q1 15% price mix tailwind? And perhaps just touching on the guidance with 15% in the bag for Q1, it would appear that you should have a carryover effect of at least seven or eight percentage points for Q2 which assuming that the second half is zero would suggest that the 4.5% to 5.5% is already basically achieved for the year. I'm just wondering if that's a fair assessment or if there is something that I'm missing there. And then on Forex, should we expect a similar negative FX impact at an EBIT level for the coming quarters? And then one final question, I hope it's a quick one if I may. Can you please just comment on the expected development of raw materials for Q2, as I'm sure you already have visibility on this in your inventories? Thank you.

Yes, so back to the question of the price mix. We expect to land at the end of the year at the upper range of our guidance, so around 5.5, starting from a very positive Q1 of 15. It means in the following nine months a mid-low single-digit price mix, but always positive. always positive price mix. The positive price mix of mid-low single digit will be driven, as I said before, with a positive price. We keep on with the price discipline. That's a priority one of our commercial policy. And so we will have a positive price effect of two, three percentage point for the following nine months. This is mainly driven by the rollover of the price increase of last year. is expected to be lower than Q1, the impact, simply because the less favorable comparison with last year. The vast majority of the price increases last year have been applied starting from the second quarter. That's the reason why you see this reduction in the percentage impact. Then we will have the usual positive impact of the product mix driven by specialties and growth in the micro-mix, partially compensated by a negative channel and region mix. Because as we saw before, the original equipment market is expected to perform much better than the replacement. And because the slowdown of the demand in Europe and North America will negatively affect the region mix. But that's how the measure impact. Important to remind that price will be priority one and maximum level of price discipline in our product software. Thank you. Sorry, the second was related to raw material. No, we don't expect measure changes in the raw material market for the second quarter. Let's also consider that the impact on our cogs is covering the following from four to six months, depending by raw material. So we can consider that in 2023, the potential impact of raw material movement and volatility for the coming months is for the vast majority already included in our cost base.

Understood. Thank you. So should we expect a raw material headwind, incremental raw material headwind again in Q2?

Yes, is expected in headwind. That is the result of commodity price versus last year and forex impact on the purchasing of commodities, even if is expected to be less than what has been in the first quarter, much less.

And then my final question was just on the Forex impact. If we should expect a similar high drop-through rate at an EBIT level for the coming quarters?

Mr. Bocchio.

Yes, thank you. Thank you for the question. And the answer is yes. considering in our guidance a negative impact of the effects on EBIT even higher in the coming quarters. It is already a factor in the guidance. But for 2023, on the full year, we are expecting the drop through of the effects to be a little bit higher than what we experienced in 2022 due to the mix of currencies. And we are taking into consideration an evaluation of the United States dollar. revaluation of the Mexican peso and some uncertainty related to the Latin America currencies. Particularly, we are imagining taking into consideration the valuation of the Argentine pesos. So all of this is included, but the answer is yes, we are forcing a similar negative impact even more for the next quarters.

Very clear. Thank you.

Our next question is from Thomas Besson with Kepler Shepard. Please go ahead.

Good evening. Thank you. Two questions, please. First, could you comment on the level of inventories for your main dealers in North America and in Europe? And tell us whether you believe there is a kind of waiting game or them waiting basically for potential price cuts. or whether you think there is already an excess level of inventory at dealer levels, for instance, in winter tars in Europe. The second question, I'd like to come back to BEV tars. Can you tell us what you have learned over the last 12, 18 months about the driving patterns of the customers who have bought a BEV and what you expect in terms of replacement cycle compared with someone driving a Is there in terms of months or kilometers driven? Thank you.

Okay. About stock in the trade, I would say to simplify that the stock we see is at the normal level, basically no markets and regions with the sole exception of winter in Europe. The stock in winter in Europe is above the average of the season. Normally at this point of the year, we have a 15 from 15 to 20% of leftover. And what we measure today is from 2025. So despite the winter has been longer than normal, the stock is still high. About the EV, this is a very important question again. What we see is that the tyre for the electric vehicle will cover a more and more important role in the driving experience of our end users. The electric vehicle is an easier car. It requires less maintenance than an internal combustion engine with the sole exception of tyre. because tire is going to influence the comfort in terms of noise control. The safety in terms of grip, because the torque momentum is much stronger in terms of load index because EV are heavier. And also, the durability of the battery is affected by the tire maintenance. And so all in all, what we see, and also the consumption of the trip pattern is expected to be from 15 to 20 percentage point higher than the internal combustion engine. All in all, the maintenance of tyres and the role of the trade and the retail in this process becomes more and more important. That's also one of the reasons we see this huge opportunity. But we need, together with the current makers and the trade partners, to educate the consumer more and more in this process of maintenance. Thank you.

So you have no equation in mind in terms of... driven or time it takes between the first purchase and the first replacement as an average to indicate us?

It's faster. It's faster than the internal combustion engine.

Thank you.

Our next question is from Philippa Koeniger with Goldman Sachs.

Yeah, thank you very much for the presentation and for taking my questions. My first one is on the standard segment. You're clearly reducing the exposure quite quickly with another 4% reduction compared to last year. Just can you give us a bit of a guidance around at what point Do you see sort of a floor for your standard exposure where you want to land, you know, and how much more capacity or much more exposure are you willing to take out? And at what point, you know, will you have to invest more to convert some of the standard capacity into high-value capacity if it takes up more share within your business? And then my second question is just on Russia. I know it's only 3% of the sales, but according to your release, it's 8% of the production. Is that production just being redirected to other regions in the world where you can sell export from Russia, or what is sort of the strategy that you're pursuing there if you are not only supplying the local market? Thank you very much.

Well, the first question is, the standard for us is mainly the 17 inches and below. In 2023, it's expected to reach, in terms of sales, a maximum of 25 million. A reasonable landing point for us in the coming two years, as we always explained, is around 20 million. In terms of market share, it means below 2% of the global market share, mainly concentrated in South America, and always keeping the most profitable products inside this segment. um moving to russia yes you are right we were used to export in the past around 3.5 million ties from russia today the export is finished we are not exporting anymore and the ties that we were used to export mainly to europe and today are delivered from local production in romania europe for europe increasing the local for local percentage and so the risking of the company and partially from TARKEY through an offtake agreement. Thank you.

Thank you.

Our next question is from Ralph McDonald with Morgan Stanley. Please go ahead.

Hi there, thanks. Ross McDonald at Morgan Stanley. Maybe I can ask Philip's earlier question slightly differently. It looks like high-value tyres are now 75% of group revenues, up 1.4 percentage points. Is there a target internally that you're shooting for in terms of high-value revenues versus standard over the medium term? Secondly, you mentioned in your slides that Pirelli is working to reduce tire emissions as part of Euro 7. I'm just curious how much further you have to go in that process and if that's driving higher R&D spend or if the change towards lower abrasion products. It is relatively straightforward for Pirelli. And then finally, on the Wave 3 competitiveness program, obviously this is currently 10 million of savings in the first quarter, 100 million for the full year. Do I infer correctly that this should now rise in the second quarter to around about the 30 million euro mark? And perhaps you can comment on the key drivers, that mostly energy consumption or something else. Thank you.

So for the local for local in our business model is today around 85%. This is a strategy we have since decades and it continues like this. It increased lately. In emissions, so all targets are public. We have a continuous process. It's an endless process. Renewable electricity will be, by 2025, 100%. So energy will come from renewable electricity. In 22 was 74%. CO2 emission, our target is to, so is minus, in 2025 is minus 42% compared with 2015. And CO2 emission is target 2025 is minus 9% versus 2018. So we target always the leadership on the action on climate change. It's confirmed by CDP with an A rating. For sustainable finance, we have made the first ever tire sector benchmark sustainability link bond placed in January 2023. And the third question was, there was another question. The euro, we are quite balanced between dollar and euro. In fact, if the euro is increasing slightly, it's better for us. And so we are very much etched, but all in all, for us, a neuro a bit stronger is better. We lost you.

Mr. McDonald, your line is still open, sir.

I think that covers things. I'll maybe follow up separately. I mean, the real thing I'm interested in is on this tire abrasion, the Euro 7 regulations specifically. You talk about a 30% improvement across your products in recent years. Is that costing significantly more in terms of R&D spend? And is that extending the duration or the replacement cycle for your products? That would be my one key question. Thanks.

No, this is equal. So we don't have a higher cost for it. What is worth underlining is that being the high end and producing ties with specific materials, the PM10 in our products are less dangerous because the size is a bit bigger. So that is all in all our situation. Thank you. Thank you.

Our next question is from Gianluca Bertuzzo with Inter Montesinos. Please go ahead.

Hi, everybody, and thank you for taking my question. I have just one. Given the positive set of results, do you feel more confident on reaching the high end of the guidance? Thank you.

We will fight for it, obviously. A bit of cautiousness is better to keep in an environment that is very volatile. But as it was explained before by by Mr Casalucci, in our segment, in the high end, we see we have opportunity to deliver the best part of our range. But anyhow, it's early to say, it's the first quarter, so we still have to see what is going to happen in the future. For the time being, we stick to prices, and so we see opportunities looking forward. But it's really a very volatile market. Thank you. Thank you.

Mr. Tronchetti-Provera, there are no further questions registered at this time. Thank you for any closing remarks.

Thank you. Thank you, ladies and gentlemen. This concludes today's program. Thank you for your attendance. Have a good evening.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephone. Thank you.