Pirelli & C Spa Azioni

Ladies and gentlemen, welcome to Pirelli's conference call in which Pirelli Top Management will present companies first half 2024 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 to all. The result for the first half of 2024 confirmed the effectiveness of our strategy. We strengthened our positioning on high value, now 77% of revenues, fully seizing growth opportunities across both channels and markets, and leveraging innovation and brand strength. We've increased profitability among the base in the industry thanks to the effectiveness of internal levels, price mix and efficiencies. Finally, we have improved the cash trend compared to the first half of 2023. A careful management of working capital is a result of structural improvements made over time to reduce the impact of external risks. Outlook for full year 2024 is confirmed. We expect a moderate economic growth in 2024. However, geopolitical uncertainties and fears of new international trade tension still persist. High value, our reference market, confirms its resilience with growth exceeding that of standard by about seven percentage points. In this scenario, thanks to the implementation of strategic programs, we confirm the guidance indicated last 6th of March targeting the upper end of profitability range. And now I'll turn the floor over to Mr. Casalucci, please.

Thank you. Thank you, Mr. Tronchetti. And good evening, everyone. Pirelli closes the first half of 2024 with a solid performance in line with the targets. plus 4.6% to the organic growth of the top line, thanks to a solid commercial performance. EBIT adjusted at 539 million euro, plus 4% versus last year, with plus 15.6% profitability, improving by half a percentage point year on year. A net result of 231 million euro discounting a non-monetary impact on financial charges of approximately 69 million euro connected with a hyperinflation accounting. A negative net financial position of approximately 2.98 billion euro in sharp reduction compared to June 2023. in spite of the payment of dividends for €415 million in the last 12 months, €218 million paid in the third quarter of 2023 and related to 2022 fiscal year, and €197 million paid in the second quarter of 2024 and related to 2023 fiscal year. the first six months of 2024 net cash absorption before dividends was 519 million euro in line with the seasonality of the business and including the impact from the acquisition of heavy attack roughly 23 million euro on the sustainability side we achieved important results that confirmed pirelli's leadership and strong commitment in implementing the plans People are our priority. In the first six months, we have reduced the frequency index of accidents at work by 35% compared to last year, thanks to actions on prevention and awareness. We launched the Pirelli Manufacturing Excellence Program, in which skill development plays a central role and will progressively involve all factories. The decarbonisation plan continues in line with all expectations. We have reduced our CO2 emissions by 18% compared to the first half of 2023, thanks to our energy efficiency and machinery electrification projects in our factories. The involvement of our suppliers allowed us to gain lifecycle assessments covering 60% of the emissions related to purchased raw materials. By the end of 2024, over 90% of the electricity purchased by the group will be from renewable sources, compared to 80% at the end of 2023. As to product sustainability, in the next few slides, we will comment the latest news introduced at the Tire Column 2024, at the goodwood festival of speed as well as on the introduction of fsc certification in formula one and cycling finally as part of the nature program reducing dependence on water resources is playing a primary role in the first half of the year pirelli recorded a 15 reduction in specific water withdrawal at the group level compared to the first half of 2023 let us now analyze in detail our operating performance with our commercial program we have further strengthened our positioning in the high value segment and over perform at the market in the car 18 inches and above strengthening on high rim sizes on innovation we have increased our original equipment portfolio with approximately 150 new homologations, mainly in the electric vehicle segment and bigger rims. We launched six new products in the car segment, of which one global, the P0 Winter II, and five which met specific regional requirements in terms of performance, mileage, and seasonality. On the operations program, We achieved gross benefits worth 71 million euro, which fully compensate for the inflationary impact. We implemented actions to mitigate the impact of the Red Sea crisis through alternative roads and means of transportation, as well as supplies of raw materials from new South American and African suppliers. Finally, We are working together with our suppliers to guarantee the availability of natural rubber in compliance with the new European deforestation regulation. Let us now analyze each program in more detail. We further reinforced our positioning in the high value segment and achieved in both quarters a plus 7% growth. More specifically, in the second quarter, we overperformed the market In the regional equipment, Pirelli plus 4% versus market plus 3%, thanks to the growth of demand in the Asia-Pacific region. And in the replacement channel, Pirelli plus 8% versus a market plus 7%, where we gained shares in the major regions, thanks to the strong pull-through of the regional equipment and renewal of product range. our exposure to the standard segment is being reduced volumes of pirelli cast 17 inches and below minus eight percent versus a minus one percent of the market we are counting to pursue our strategy based on a higher selectivity in the regional equipment channel and growing focus on higher rim sizes in the replacement channel The reduction of the standard channel was higher in the second versus the first quarter, also taking into account the weakness of South America, which is one of the Pirelli's major standard markets. Overall, in the second quarter, our performance was in line with the cartile market, which remained positive plus 1%. yet with a smaller growth than the first quarter, given the weakness of the standard segment I just mentioned. Talking now about our innovation program, we increased the range of our products with a high content of sustainable materials. After P0E, the new P0 Winter II has launched, which is the outcome of our collaboration with BMW. These winter ties stands out for its content of natural and recycled materials, which exceeds 50% of the total. It is the first of its category to be awarded with class A in terms of rolling resistance, which is a fundamental feature for electric vehicles that can therefore save energy and have a longer mileage with a battery charge. Furthermore, Our commitment in developing and supplying tires with FSC certified natural rubber contains. I wish to remind you that these certifications confirm that plantations are managed so as to preserve biodiversity and provide benefits to the locals who work in those areas. During the Festival of Speed in Goodwood in July, Pirelli announced its collaboration with Jaguar and Rover to supply tyres made of FSC-certified forestry materials on a wide range of luxury cars. This is a new achievement in the collaboration started in 2021. In the first half of 2024, FSC-certified tyres were introduced in the Formula One Championship. as well as in cycling with the new Pirelli P Zero Race RS. From 2026, 100% of the natural rubber used in the European factories will be FSC certified. As to connectivity, Pirelli's journey continues. After agreements with McLaren and Dodi, Pirelli has developed a new cyber tire solution with Pagani. presented in mid-July at the Goodwood Festival of Speed. This opens up a new phase in tire connectivity. For the first time, data collected by a sensor will be integrated directly with the vehicle's control systems to improve performance and safety depending on the tire fitted. This continuous dialogue between tires and vehicle is made possible by software developed by Pirelli and integrated into the car's electronic control system, representing a major improvement in terms of performance and safety. For example, when the car is fitted with winter tires, the ABS can modulate its action to minimize braking distance. Also, with the same slick ties, the stability and traction control systems can take advantage of the increased grip to ensure a higher performance. Finally, let's move to the efficiency program. 71 million euro were achieved in the first half, approximately 50 percent of the full year target, which fully compensated for inflation. The main contributions come from the product cost projects, more specifically through design to cost programs and efficiencies achieved with the virtualization of tile development. SG&A through the optimization of logistics and supply chain and the organization project, driving the digitization of internal processes and employee upscaling. Lastly, the manufacturing project is generating, as expected, most of the benefits in the second half of the year as a result of plant automation, curing electrification and reduction of energy consumption. And now leave the floor to Mr. Bocchio.

Thank you, Mr. Casalucci, and good evening. Let's now get into the detail of the financial performance during the first half. Sales amounted to 3.45 billion euro plus 4.6% organic growth due to a solid commercial performance in both quarters. We recorded a volume growth of 1.8% in line with the full-year target of plus 1.5% to 2.5%. As already pointed out by Mr. Casalucci, the lesser contribution from volumes in the second quarter discounts the standard weakness, whereas high value growth was similar to the first quarter. The price mix is clearly improving, plus 2.8% in the first half, above the full-year target announced in March of around plus 2%. This trend was supported by the steady improvement in the product mix, and the regional mix, which was especially positive in the second quarter, when you consider the temporary weakness of South America. Exchange rates had a negative impact of minus 4.3% in the first half. However, this trend was more limited in the second quarter, minus 3.7%, mainly discounting the volatility of emerging currencies. In the first half of 2024, the adjusted EBIT amounted to €539 million, up 4.2% year-on-year, with a 15.6% margin. The improvement by half a percentage point compared with the first half of 2023 is due to internal levers. More in detail, we recorded a positive impact of the commercial performance, volumes plus €24 million, and price mix plus €60 million. Efficiencies equal to €71 million fully offset in post-cut inflation equal to minus €68 million, while the lower cost of raw materials for €36 million contributed to cover the impact of exchange rates equal to minus €62 million. Finally, the amortization impact was equal to minus 14 million euro, while the other cost impact, minus 25 million euro, was mainly related to marketing, research and development, and inventory reduction. In the second quarter, the adjusted debut margin was 15.8%, a 0.3 percentage point improvement year over year, thanks to the effectiveness of our internal levers. Let's now review the net income trend compared with the first half of 2023. Operating performance, whose dynamics has just been described, improved by €22 million. The non-recurring infrastructure costs and the result from equity participations also improved. Net financial charges discounted the non-monetary impact of forex and hyperinflation. Out of the 176 million euro net financial charges, approximately 69 million euro are non-monetary. This phenomenon is due to the misalignment between inflation and exchange rates in high inflation countries. A realignment without expectation is expected over the course of the year. Finally, The tax reduction for €22 million reflects the patent box benefits not included in the first half of 2023. In the first half, the cash flow before dividends was negative €519 million, in line with the business seasonality. It improved by approximately €38 million compared with the first semester of 2023 when we exclude the impact of heavy attack acquisition that was worth about 23 million euro. The net operating cash flow minus 279 million euro compared to minus 302 million euro in the first half of 2023 reflects the operating performance improved compared to last year, investments of 144 million euro while it was 124 million euro in the first half of 2023 mainly going into high value mix and quality improvement and to support the sustainability plan The working capital, minus 863 million euro compared to minus 876 million, is in line with the business seasonality and it reflects a careful inventory management with an incidence on sales of 21% despite the impact of the Red Sea crisis and the usual seasonality of trade receivables, 14% weight on revenues and trade payables. 22.5% weight on revenues. In the second quarter of 2024, the net cash flow before dividends was positive by €154 million, basically in line with the second quarter of 2023, when it was €157 million, despite higher investment, €90 million in the second quarter of this year against €70 million in the same period of last year. Finally, it is noticeable the impact of dividend distribution. 197 million euro in the second quarter, while in 2023 dividends were paid in the third quarter. As of June 2024, the Group's gross debt amounted to 4.16 billion euro. Considering financial assets of approximately 1.18 billion euro, The net financial position is equal to approximately 2.98 billion euro. Liquidity margin amounted to around 2.4 billion euro, of which 1.5 billion in committed credit lines not drawn. Our liquidity margin allows us to cover financial debt maturities until Q1 2027. The cost of debt calculated over the last 12 months is 5.29%. mainly discounting the negative impact of Euro interest rates compared to the first half of 2023. Lastly, our fixed variable mix remain balanced with approximately 50% of our debt at fixed rate. Sustainable finance accounted for approximately 69% of the group's gross debt, that is 85% when we consider financial debt at holding level. After June 30th, a sustainability-linked bond of 600 million euro has been issued with a five-year tenor. The notes have a 3.875% coupon and the yield of 3.95%. Demand from investors exceeded 4.6 times the offering. In July, Pirelli used the proceeds of the bond to prepay financial debt with maturities in 2024 and 2025 for the same amount. All the above considered, the liquidity margin on a pro forma basis would cover maturities until Q1 2028. Finally, We are glad to share that in June Standard & Poor's confirmed our rating to BBB- and improved our outlook from stable to positive, while more recently Fitch upgraded our credit rating one notch to BBB- with stable outlook. I now leave the floor back to Mr. Casalucci.

Thank you, Fabio. Thank you, Mr. Rocchio. Let's move on the outlook for 2024. We confirm our expectations on a high value to grow mid single digit. In the replacement channel, growth is being driven by high value regions. In original equipment, growth is being driven mainly by Asia Pacific. In the standard segment, we are forecasting a decrease in demand minus 1%, discounting a greater weakness than expected. both in original equipment due to a reduction in car production at global level and in replacement because of weak demand in standard regions. The total full-year 2024 car tire market is therefore expected to remain flat year over year, with a slight decrease in the second half, minus 1% versus a plus 1% of the first half, due to the standard segment minus two percent versus a flat first half on the contrary high value trend is positive with a mid single digit growth rate in line with the first half of the year in this scenario we confirm our strategy to gain more share in high value segment and cap the exposure to the standard Based on the results achieved in the first half of 2024 and the scenario described, we confirmed 2024 targets and expected profitability to be in the upper end of the range, thanks to mixed improvement. More in detail, we expect revenues between 6.6 and 6.8 billion euro volumes up between plus 1.5% and plus 2.5% with high value growing at the mid single digit rate, while our exposure to standard keeps on decreasing. Price mix between last 2% and 2.5% and taking advantage from the ongoing improvement of product mix. Forex confirmed between minus 4% and minus 3%. Adjusted EBIT margin now expected to reach the upper end of the previous guidance, approximately 15.5%, with the same margin as in the first half of the year. Investments of approximately 400 million euro, around 6% of revenues, devoted to technologically upgrade of our plans, mix improvement and sustainability. Net cash generation before dividends expected between 500 and 520 million euro, thanks to operating performance and efficient working capital management. Net financial position equal to minus 1.95 billion euro with an expected leverage of approximately 1.3 against the 1.56 in 2023. And now leave the floor to Mr. Tronchetti for the final remarks.

Thank you, Mr. Casalucci. The results of the first half and the outlook for the whole year confirm the strength of Pirelli within the tire industry. In a highly volatile external context, we are leveraging on our distinctive characteristics. Leadership in high value, a segment which is confirming its growth trend, a strong drive to product and process innovation, an iconic brand, a solid partnership with OEMs, both traditional and innovative, based on our ability to always meet increasingly challenging requirements. and an efficient manufacturing footprint, less exposed to supply chain disruption risks due to our local-for-local strategy. These characteristics and our business model make us confident in delivering the plan and achieving a better performance than peers. So this ends our presentation, so we may open the Q&A session.

Thank you, we will now begin the question and answer session. As a reminder to enter the queue for questions, please click on the Q&A icon on the left side of your screen and then press the raise your hand button. Please do not mute your microphone locally. If you are on the phone instead, please press star one on your keypad. The first question is from Michael Aspinall of Jefferies. Please go ahead.

Thanks. Good evening, gentlemen, and everyone on the call. Michael here from Jefferies. Well done on the quarter and higher guidance. Just starting on the new margin guidance, it implies slightly lower margins in 2H versus 1H. Is there anything specific that would drive that, or is that just allowing some room in the case that raw materials continue to increase or volume softened or something else, for example?

Hi, hello. Thank you for the question. I will take this question. Raw material for this year have a peculiar trend because we saw in the first half a positive impact. This positive impact of the raw material in the first half compared to previous year was coming from commodities with some negative impact coming from the forex side. For the second half of the year, we expect a different trend, both in the quarter three and in quarter four, because we expect a negative comparison basis, a negative variance on the commodity side, and this coming mainly from from natural rubber and from oil derivatives and butadiene and on top there will be we are expecting still some negatives impact on the forex so overall we are expecting a full year on the raw material which is going to be probably slightly negative on the full year base compared to previous year okay great thanks for that and um one more from me

Factory saturation is at 88%. Should we see that as something that you need to take action to change or should we see that as there to provide room for growth as high value continues to grow at the single digit level?

Yes, thank you for the question. Of course, we keep on growing with our high value capacity in order to be able to catch any possible opportunity of growth in the high value. But just to fix a couple of numbers today in 2024, our high value capacity represents roughly 57% of our total, sorry, 57 million out of 75 of our total capacity. and we always use around 10 million so 30 less than 30 percent of this capacity to produce standard this is allowing us from one side to have always the highest possible saturation of our plans on the other side to be ready to catch also in the short period of time any further opportunity to grow on the high value which remains our priority thank you thank you

The next question is from Monica Bosio of Intesa San Paolo. Please go ahead.

Good evening, everyone, and thanks for taking my questions. I have three. The first is on China. The car market in China is expected to decrease by 6% in the third quarter and to be flat in the fourth quarter. So I was wondering, the original equipment challenge should be negative. I was wondering if you can give us any color on the replacement market trend in China in the second half. And do you expect to further growth in the region thanks to your customer mix? Or should we expect that the market share gains will occur more in USA? Just any color would be useful. My second question is on the dealers' situation. Overall, and mostly in Europe, and especially for the winter tires, are your inventories low? And the very third is the price mix drop through on the year, if you can give any indication on this. Thank you very much.

thank you for the questions and i will start from the first one uh the the chinese market i always talk about the high value market of course the chinese market in the second half is expected to slow down compared to the first half you're right in the original equipment But this is mainly due by a less favorable comparison versus last year. And it will anyhow remain positive market in the range of the mid single digit. And also the high value market is expected to have in the second half a less favorable comparison versus last year, but remains anyhow a positive market, while the standard is expected to be negative in China. we target to get market share as we are doing in the first alpha these will remain our priority and we have so far a good pace of growth in the chinese market thanks to our pull-through strategy and also to the enlargement of our distribution network okay as far as winter is concerned so the second question I have to say that the winter season is a bit early to arrive to a conclusion, of course, because we just started the pre-booking phase, but the first signals are very positive as far as the Pirelli performance. The winter stock was quite low at the beginning of the pre-booking season, thanks to a very good sell-out season in the first quarter in Europe in winter. And so the order collection is moving in the positive directions. That is opening good expectation for the third quarter. While the last quarter of the year, as always, it will depend on the weather conditions. So it's not possible to have a clear understanding now. The drop through is expected to remain around 60% stable during the year.

Thank you very much. Thank you.

The next question is from Martino de Ambrogio of Equita. Please go ahead.

Thank you. Good evening, everybody. The first is a follow up on the price mix. Could you split the price and mixing Q2 and for the rest of the year? And I suppose the increase, let me double check if I understood correctly. The change in the price mix for the full year just slightly improved is essentially because of region slash standard weakness in South America. So this is my first question.

You are right, the good performance of the second quarter, the 3.3 that we just presented, is based mainly on mix, with a solid performance of the product mix, which is confirmed from first to second quarter, and is also expected to remain stable in the second half, which is the core of our business model. On top of the usual product mix, a positive performance in the second quarter, we had the positive contribution coming from the reduction of the standard, mainly driven by South America. We don't expect to have the same positive contribution on the region mix in the second half. uh because the comparison versus last year will be more favorable in south america while of course we we will confirm we confirm the positive performance on on the product mix aside also in the second half as far as the price is concerned in this in the first half the performance has been more or less stable compared to last year in both channels thank you

Okay, thank you. And my second question is focusing on the standard tires because they are constantly declining in the last four quarters and the market is going worse than initially expected. So the 7-8% rate of non-sales is still achievable for this year and still on standard. Could you provide what is the breakeven point in terms of sales roughly and the contribution of Russia?

Yes, of course, we confirm the profitability on standard that you mentioned. We are not where we would like to be, around the 10% double digit profitability, but we will maintain the target for the following two years. And we will accelerate as much as possible the exit from the standard. But that's because it is a volatile segment, it is decreasing and is exposed to the trade down and the price pressure. Just to give you a number, today in Europe, 55% of the standard market is on the hands of Tier 2 and Tier 3 brands. So the standard market in Europe is a Tier 1 market for no more than 45% of the total volume. 10 percentage point below the situation of 2019. So the trade down is there. And that's the reason why we want to exit and we want to keep the focus on the high value market, introducing more and more specialties and technologies on our product and basing our strategy on the innovation and technologies as always.

And the weight of Russia and what is I changed the question, not referring to the breakeven point, but constantly declining. But what is the end game for the standard? So the arrival point one day.

But the arrival point is to remain. But let's also consider that the definition of standard itself will change in the future. But for the foreseeable future, in the following two, three years, We want to target no more than 10 percent of standard in our high value regions. We are very close to this target, so we still have opportunities to decrease the standard presence. But in North America, Europe and the Asia-Pacific, we want to to arrive at the weight of volume of 90 percent in a high value. That's the target. Of course, South America and Russia are mainly standard markets, so it's a completely different story. In these markets in South America, we target to improve more and more efficiency of our industrial footprint and to be there in order to catch any opportunity of growth in the high-value markets that will come. The car park of Brazil is accelerating in the direction of the premiumization. This will take time. But the weight of SUV, mainly SUV, is growing year after year. And a lot of investment has been announced by the car makers in the region, mainly in Brazil. And so we remain with our leading position and we target the double digit profitability on the region, of course. Thank you.

Sorry, Raj.

russia yes i was forget forgetting russia we we maintain the same approach so as we declared we we have completely stopped any kind of investment with the sole exception of uh of hsc and uh and we it the weight on our result of russia is uh is below the four percent around four percent so it's not meaningful anymore in our total results and the saturation of the factory is running around 70-75%. We manage by cash the company, so we basically generate cash flow to pay salary and suppliers, and we are balancing between debt and and and and cash in in the country so that's the way and we monitor continuously the the the development of the situation that's all thank you the next question is from harry martin of bernstein please go ahead

Oh, yeah. Hi. Good evening, everyone. A couple of questions, please. The first one is on your industry outlook. So you say that you expect the premium replacement volumes to grow at mid to high single digits, led by demand in all high-value regions. I noticed from the monthly data that you released that the North America 18-inch and above market was negative in June at minus 1%. So do you see that as a one-off, or is there anything else in North America that we just need to keep an eye on? And then the second question is really a longer-term value one. We're clearly in a period where OEM product launches are slowing down, but getting the OE fitments on premium vehicles remains very important for you and competitors to access the very high-value first and second replacement. So my question is, it feels like that dynamic with less production is going to make competing for those OE fitments even more competitive than ever on premium vehicles. So should we worry at all about pricing and margins in the OE channel? Or do you feel like there's still a lot of discipline in the market? Thank you.

sorry i lost the second question the first is yeah can you repeat please okay both questions or just attacking no no only this the first one is related to the north american market and the third and the third the the price on the e is clear the second

Yeah, so the final question was a broader question. Does the reduction in OE production volumes and the fact that it is still a really, really important part of your strategy give any risk to pricing and margins and rationality in the OE channel?

Okay. Okay, thank you. So starting from the first question, North American market, you're right. We do expect a slowdown in the second half of the year, but this is basically due to the comparison versus last year. So there is no major impacts on the North American market that we are worried about. It's simply a less favorable comparison versus last year. The second half of 2023 was extremely good in North America. While our selective approach on the regional equipment is mainly driven by our evaluation of the integrated profitability of the regional equipment and the replacement. After years and years on this business model, we understood our capability to have the put rate in the in the replacement channel so we we know we assume to know the capability of each original equipment project to generate pull through demand in the after sales and so every time there is the opportunity to enter in the original equipment business we try to understand both the profitability of the regional equipment and the expected demand and profitability on the replacement and we make these integrated evaluation of the business That's the reason why we decided to accelerate our exit strategy from some synergic original equipment business, mainly Europe, while we are accelerating our growth in Asia and in North America, mainly driven by EV players and also a business with high content of technology, like extended mobility solution, like noise cancelling system solution. This is driving our regional equipment strategy. But we don't see major pressure on the price. On the contrary, being focused where there is a technology, we try to protect as much as possible the value of our product because the competition is concentrated on capability to create innovation, technology and performance instead of pricing. Thank you.

Thank you very much.

The next question is from Michael Jacks of Bank of America. Please go ahead.

Hi, good evening. Thank you for taking my questions and congrats for the robust set of earnings in a difficult market. On the cost side of the equation, you've done really well on efficiencies, but production inflation was a little bit higher than expected. Could you please share some color on what the main driver was there? Was it mainly due to higher shipping costs due to the Red Sea situation? And how do you expect this to develop in the second half of the year? And then my next question is on Forex. EBIT in Q3 and Q4 last year was very negatively impacted by that. What is your latest expectation for H2 at an EBIT level? And then finally, just on raw maths, just want to confirm, you now expect a net negative raw math impact for the year, meaning that the headwind in H2 will more than offset the tailwind in H1. I'm wondering, is this just a planning assumption or is that based on actual current raw material prices? And finally, if that is the case, are pricing increases a potential consideration to cover format inflation? Thank you.

I will take the questions. So, the inflation impact in the first half has been of about 68 million euro and it was pretty aligned with the expectation because at the end of the day, for the full year, we are expecting an overall value of about 140-138 million euro. So, pretty aligned with the expectation. The driver of the inflation were mainly two. The first one is related to labor cost. So with the labor contract renegotiation that took place in the second part of 2023 and now at the beginning of 2024. And the second main offender on the inflation is related to the local logistic cost. not really related to the international transportation but the local logistic cost this is due mainly to the labor labor cost and the impact of gasoline cost on the uh on the local transportation this impact is expected to be pretty stable quarter of quarter so in h1 as i was saying we had an impact of 68 million euro negative and we are expecting a roughly similar impact for the second part of the year. So overall, we're expecting about €140 million of negative impact from inflation on imposed costs, which will be roughly compensated by the efficiency program that we have in place. On the second point of your question related to the effects, as you saw, the impact of the effects on the top line in the second quarter has been negative by 3.7%. which was a slight decrease compared with the 4.8% of the first quarter of the year. And this was due to the very high volatility in Latin American currencies, especially from the Argentinian peso, which is representing about 3% of the sales of the group. And then given the devaluation of the Russian rubble, partially mitigated by a re-evaluation, a partial re-evaluation of the US dollar. For the second part of the year, we are expecting a second half with an impact on the top line, which will be still negative, but better than in the first half. So overall, Forex on the top line in the first half has been minus 4.3%. What we are expecting for the second half is to be between minus 2.5% to minus 3%. we confirm the range of the guidance for the full year, which is a negative impact between minus four and minus three percent. I have to say that we are expecting a different trend in this impact between quarter three and quarter four, because we are expecting a quarter three, which is going to be more aligned with the values that we saw in the first half, while we see we expect a softening of the negative impact on the effects for quarter four. Last one was related to the raw materials. Yes, that's correct. Yes, on the raw materials. I was saying previously that we are expecting for the full year a slightly negative impact on the raw materials. That means that for the first half, we accounted for a positive impact of 36 million. out of which about 55 coming from the pure commodity impact, and 18 million coming from the negative impact of the forex related to the raw material. On the second part of the year, we are expecting commodities impact to be negative, and this negative is related to the trend of the natural rubber. natural rubber on the butadiene and even on the all oil derivatives because the brand is stable at about we foresee 84 85 dollars and obviously we are taking into consideration that there is a time lag between the commodity price we see on the market and the impact of these commodities in our cost of goods sold and usually depending on the raw material we have a time lag which is between three to five months. On top of that, we are still expecting a negative impact from the Forex on the raw material for the second part of the year, a little bit less negative than in the first part, but still negative.

Thank you. That's all very clear. Could I just ask you if you could also just please comment on the expected impact of Forex on EBIT in the second half of the year? Thank you.

Sure, the forex on EBIT, On EBIT, we are expecting a less negative impact compared to the first half. On the first half, we had an impact on EBIT by Forex for about 62 million euro. For the second part of the year, we are expecting a lower impact, even considering the fact that on the EBIT, for us, it is significant, the impact coming from the Mexican peso. And as you may remember, starting from the end of May, beginning of June, there has been a significant devaluation of the Mexican peso following the election in Mexico. So for the second part of the year, we are expecting still a negative impact, but much less negative than compared to the first half of the year. Thank you very much.

The next question is from Akshat Kakkar of JP Morgan. Please go ahead.

Good evening. Thank you for taking my questions. Two, please. The first one on pricing. If you can just talk about the overall pricing levels on the high-value replacement side of the marketplace. One of your competitors recently warned of heavy promotional activities in the U.S., and they're seeing overall higher pressure on the industry, both in U.S. and Europe. So just interested in understanding how confident are you of maintaining that price stability in the market in the second half of the year? And the second question is on your high value OE business. You grew volumes by 1% in the first half. Could you just talk about how do you see the second half progressing in terms of volume growth and what regions are driving that growth, please?

Thank you. sorry the growth versus the market has been one percentage point so we we we over perform at the market by one percent point but sorry percentage point but uh the grow on the high value itself was uh was higher um i give you the seven percent right seven percent yes that's the growth and we want thank you so much and we want and we want to target as we did in the first half to over perform the market also in the second half how we will reach this target we have different strategies region by region but the core of our business model remains the same we we want to improve more and more the content of technology and innovation of our products, partnering with the most important car makers in the world of premium and prestige all around the world and leveraging on the pull-through rate. On top of that, we are introducing replacement product lines to match the needs of the different consumers region by region. For example, in North America, we know that there are customers that look for mileage and old season products, sometimes preferring this choice to the original equipment homologation. And that's the reason why we introduced in North America a new old season plus lines to match these needs. And today our old season plus lines, both in the Cinturato and Scorpion, are leading the ranking of evaluation of the most important magazines in terms of mileage performance, and this is allowing us to gain market share. Mainly in the United States, that is one of the most important targets of growth for the coming years. It's not only a question of products, it's also a question of brands, where we are growing in terms of awareness and consideration in the United States. Thanks also, not only, but also to the growing popularity of the Formula One, where Pirelli since 2011 is the sole supplier. And also growing in terms of production capacity and enlargement of our distribution network. As far as price is concerned, we know, of course, the promotions of our competitors in the last years, but we have a different strategy. I try to explain our strategy so we stay focused on the high value segment, where there is value and where the technology and the brand of our products make the difference. And that's what we do. Following our leadership in this segment, we try to keep the most efficient strategy in terms of also price power. So we don't give detailed information on the price performance by market in the future. We can give you the detailed performance of the past months. Thank you so much.

Thank you so much for the details. Just a quick clarification. The first question I was trying to get to your high value growth expectations in the second half.

Well, in the regional equipment, in the second half, we expect a performance better than the first half. So all in all, the market is a high value market is expected to perform in the second half, the same level of the first half, I would say around six, 7% growth of the total market. But while in the first half, we had a novel performance of the replacement running with a pace of growth of around 9%, while we had a wake original equipment in the range of 3%. We do expect in the second half to see the two channels more rebalanced with both channels running more or less with a pace of growth of 6%. This is mainly due to a more favorable comparison, mainly in Europe, where we do expect the recovery of the regional equipment high-value market, and also less favorable comparison in the replacement channel, mainly due, as we said before, to North America.

That's very clear. Thank you.

The next question is from Eduardo Spina of HSBC. Please go ahead.

Good evening. Thank you for taking my question. The first one is on if you can remind us the revenue exposure to winter tires for 2023 and how that was split across the quarters. So we have a better idea what to expect. And the second questions are on the cyber tire. I actually have three on this. First, if I can ask at the moment that The three car models you show, McLaren, Audi, and Pagani are the only ones with the cyber tire. If not, can you give us an indication for the exposure? The second question is more to understand why is this product not more popular already with the higher volume car makers? Is that because the technology is not ready? Is it a matter of very high cost? Can we expect a significant growth from this at some point in the future? The very last question on this is about the data. Do you get any access to data if you install a SAGR tire, either on the aggregated data or specific by vehicle? If not, can you reach this data at some point by the consumer, the carmaker, in order to have a better management of the supply chain? Thank you very much.

I'll take the question about the winter tires. Looking at the numbers of last year, I can say that on the total, the winter tires accounts for about 11% to 12% of the overall net sales and volume of the company. Obviously, there is a significant difference between half one, which is much lower, and the second half of the year, which is much higher, but on average, you may consider between 11 and 12%.

Thank you. I will move to the very interesting question on the cyber tire. Thank you so much. We trust a lot on this project, and we do understand that we are, despite a lot of investment we did in the last year to develop this technology, we do understand we are still in the introducing phase of the technology. So the technology, the more will become mature, the more will be able to penetrate in the car industry. Of course, we see this technology fitting the prestige and premium segment more than the synergy, which is perfectly aligned with our strategy. We are in the McLaren, the Audi and the Pagani. But in 2024, we have been able also to introduce in Tesla this technology. And so this is a premium segment. So this is helping to enlarge the presence of the product. And I'm sure you will see in the coming years, maybe also months, an acceleration on the introduction of this technology. Data are different. project by project, and this is strictly related to the requirement of the car makers. For some car makers, the cyber technology is useful to improve safety, for example, aquaplano or braking distance. For others, it's useful to improve service, for example, introducing the concept of predictive maintenance related to the tire wear measurement. and so on. So this is depending on the carmaker priorities and the product specification that we define project by project. Thank you.

Thank you.

I think there are no more questions. Can you confirm it?

Mr. Tronchetti-Provera, there are no more questions registered at this time.

Thank you. Thank you very much. And thank you to everybody and have a good evening. Thank you. Bye bye. And also good holidays for the lucky guys that are going on holiday.

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