Welcome to Pirelli's conference call, in which Pirelli top management will present the company's nine-month 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 nine months of 2022 were characterized by a growing volatility of the macroeconomic scenario, worsened by the Russia-Ukraine war and the COVID emergency in China. Despite these headwinds, Pirelli closed the first nine 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, the 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 with a cash generation in the third quarter, resulting from an efficient management of the working capital.
This result allows us to upgrade our 2022 targets and close the first part of our industrial plan in the 2021-2022 period with a cash generation before dividends of approximately EUR 910 million, versus the planned target of EUR 700-EUR 800 million. The scenario outlining 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 cost and raw materials. Pirelli is ready to navigate this scenario by relying on its assets, namely 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 preliminary results.
In the first half of next year, we will update the plan up to 2025, confirming the deleverage target of a net debt to adjusted EBITDA to approximately 1x by the end of 2025. Let's see now the nine- months results. In the first nine 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 are at under EUR 41 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 emergencies, the Russia-Ukraine conflict, the lockdown in China, and the gas shortage in Europe. We were able to ensure the appropriate service level to our customers and an efficient inventory management. Finally, on debt, we continue our deleverage process that will take our net debt to 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 meet the next 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 the 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 social and 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's performance. In the first nine months of 2022, the global car tire demand was flat year-over-year, with a very different trend for each segment. Car 18 in and above is up 6.8 percentage points, benefiting from the rebound of original equipment tire demand. +9.2% in nine months, particularly the market in third quarter, +25.2 percentage points due to the easing of supply chain tensions and the mid-single digit replacement demand. +5.3% in nine months, which however, slowed down in the third quarter in all geographies. Car 17 in and below instead was down 1.4% in nine months.
Positively, the trend in the third quarter, +1.6 percentage points, supported by the strong recovery of car production, +21.2%, the original equipment demand, which is expected to continue in the last quarter. Replacement demand was still down -3.1% in third quarter. In this context, we increased our market share in car 18 in 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 nine months of 2022. In the commercial program, in line with our strategic focus on high-value, we strengthened our positioning in the car 18 in and above, and outperformed the market +9.4% in the volume growth compared with 6.8% of the market.
Increased our exposure to original equipment, 19 in 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 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 in and above, roughly 80%. Specialties in EVs. We introduced eight new high- performance products with a special focus on the regional needs of consumers. In addition, we expanded our offering in the two-wheel business, motorbikes and cycling, now accounting for 8 percentage points of our revenues. In the competitiveness program, we progressed to phase II 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 plan. Our commercial strategy allowed us to fully size 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 in and above, we recorded a +9.4 percentage point growth, driven by the most technological and high-end products, namely rim sizes 19 in and above contribute 94% of the growth posted in the car 18 in and above segment.
Specialties account for over 77 percentage points of volume increase in the 18 in and above in the first nine months, with a major contribution of EV products accounting for approximately 14% of volumes in OE 18 in and above. The replacement channel 18 in 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 show very good results in the three high-value regions. In original equipment 18 in 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 two new all-season products: Cinturato WeatherActive for the sedan segment and Scorpion WeatherActive for the SUVs. These two 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 two decibel more silent than competitors' products. In Europe, our Cinturato Winter two, 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's offering is approximately 2.5 times 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 nine months of this year, three years earlier than expected, we already achieved our market share target in a high- value EV, equal to approximately 1.5 times that of premium and prestige vehicles with internal combustion engines. In the two- wheels business, moto and cycling, high- value product innovation is continuing. In the motorbike top- of- the- range business, Pirelli is the leader with two premium brands, Pirelli and Metzeler. In the first nine months, we expanded our product range. In the Pirelli brand, we introduced the DIABLO ROSSO IV Corsa, devoted to the super sport segment and motorbikes 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 nine 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 segment such as Pinarello, Colnago, and Stromer. In the first nine 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 nine 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% 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 risk 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 semi-finished products. As to economic impacts, to date, over 40% of our global energy costs 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 nine 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 -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 segments, car and moto, the following factors should be highlighted.
A continuous high-value volume improvement, +6.6% in the first nine months, and +8.2% in the third quarter, supported by the original equipment demand rebound, as well as by a higher market share in car 18 in and above replacement despite price increases. Standard volumes are indeed declining, -7.6% in the first nine months and -5.7% in the third quarter, impacted by a greater selectivity in car original equipment, the Russia-Ukraine crisis, and the already mentioned shutdown of our motorcycle plant in Gravataí. Price mix, +20% in nine months and +19.4% in the third quarter, due to price increases to compensate for higher inflation of 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, EUR +257 million, or +6.5%, reflecting the strong appreciation of the major currencies versus the euro. In the first nine 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, EUR +677 million, and efficiencies impact for EUR 86 million, which have more than compensated for the increased cost of the raw materials, EUR -365 million, including the exchange rate impact, and of the other input costs, 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, EUR +28 million, and a flat volume contribution due to the dynamics mentioned above. In the third quarter, adjusted EBIT is 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 nine 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 non-recurring costs. The year-on-year increase of the net financial charges reflects the rise of interest rates and 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 non-recurring 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 nine-month report with a negative net financial position of EUR 3.4 billion, and a cash absorption before dividends of EUR 323 million, lower than the one of the nine 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 six 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%-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 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 non-recurring 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 EUR -43 million due to the revaluation of the Russian ruble and Brazilian real, partially offset by the positive impact on liquidity because of the revaluation of the Chinese RMB.
The net cash flow before dividends in the third quarter of 2022 was positive, 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 approximately EUR 5.4 billion, while our net financial position is EUR 3.4 billion due to EUR 2 billion worth of financial assets. During the first nine months of 2022, our group subscribed 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 2022 the EUR 553 million bond originally due in January 2023. The refund of the notes occurred last October 25th at par, therefore with no financial penalty for our group. The cost of debt is at 3.51%, or 113 basis points more than in December 2021, 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 nine months, we have updated our expectation in the car market for this year. We are now forecasting a slight decline in demand of 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 standard segment. Resilience in terms of high-value demand is confirmed, with a 6% growth in the car 18 in and above segment, with a clear cut-over performance compared to the car 17 in and below segment, which is expected to decline by 2%.
More specifically, on car 18 in 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 aids 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 targets. Revenues are now expected to be 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%. Reduction of the exposure to the standard segment continues which, with volumes at -6%. The lower growth of total volumes compared to the previous guidance reflects the 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 dividends 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. This ends our presentation, so we may open the Q&A session.
Thank you. This is the conference operator. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touch tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Monica Bosio with Intesa Sanpaolo. Please go ahead.
Good evening, everyone. Thanks for taking my question. I have three. The first is on the replacement segment. Looking at the market scenario ahead, I was wondering if you are seeing any sign of trading down, and if yes, if you could elaborate more on this. If you have a rough-
Sorry. There is a problem. Can you please repeat because we lost the first part of your of-
Okay.
Okay. Thank you.
Can you hear me well now?
Yes. Thank you.
Okay. The first question was on the replacement market and the market scenario ahead. I was wondering if you are seeing any sign of trading down, and if yes, if you can elaborate a little bit more. If it's possible to have a rough idea of the current dealers 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? If yes, could you elaborate more on this and on the pricing mix associated to a potential further market share gains? A very final question is on the standard segment. If I remember well, the group was expecting to approach a double-digit margin.
Is this target still valid on the back of the cost inflation and of the trend in the standard segment? Thank you.
Thank you. Mr. Casaluci, please.
Yes. Good evening. Thank you for the questions. Trade down was the first question. There is a trade down in period of crisis as far as we see concentrated on the standard segment, where the weight of the tier one in the high-value markets is decreasing. While in the high-value segment where we focus 18 in and above and mainly specialties, the weight of the tier one brands is stable. 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. It's also in what we do consider a healthy position in Europe, and as far as the standard is concerned, 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 sellout performance based on the weather conditions of the coming months to have a clear and better understanding. For the time being, after a good and successful selling season, we have a delay in the sellout, 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 the stock in our partner in distribution in order to protect our business together.
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 still have a lot of opportunities to grow in all regions. 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 the EV specialties and most profitable businesses.
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.
We are very close to the double- digit, and we plan to reach this target in 2023 with, I would say, six months delay. The target is remaining a double- digit as we presented in our plan. Thank you.
Thank you very much.
Thank you.
The next question is from Martino De Ambroggi with Equita. Please go ahead.
Thank you. Good evening, everybody. 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. 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 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. Very last on Russia, you didn't quantify any figure.
Could you just give us some figures in Q3 about Q3 performance? In the last call, you mentioned EUR 25-EUR 30 million as the negative effect at operating level. Just to check if it is confirmed.
Thank you for the questions. Starting with Russia, it's confirmed what we had, but we were able to offset the negative impact, thanks to the performance we had in price mix in general. 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. All in all, it is included in our numbers. The second question was about the 2023. 2023, we have to say that we continue to see growth in the premium and prestige segment. 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. Also in the original equipment, there is some positive impact on prices because of the cost matrix. What we see today is 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. Then, as you correctly mentioned, there is the obvious continuity in our business model, embedded in our business model on the mix. 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 leave the floor to Mr. Casaluci.
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. Price mix, full-year, 17.7%. As a consequence, the fourth quarter is roughly 11%. The biggest difference is related to price because of the comparison year-over-year. In the last quarter of 2021, we already started to increase the price. If we sum the price increase of the two years, we confirm the performance of the first nine 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%.
Okay. Thank you.
The next question is from Pierre-Yves Quemener, Stifel. Please go ahead.
Yes, good evening. Buonasera a tutti, and thanks for taking my question. Pierre-Yves Quemener with Stifel. I guess the key concern, really, on the timeframe into 2023 is the non-raw material cost inflation for both energy costs and labor cost, and thanks for quantifying impact in 2022. Could you roughly quantify the additional hurdle you will have in 2023 regarding energy after the rise to 3.7%?
Of sales in 2022. Maybe same on the labor cost side, but wage increases are close to double- digit in Italy, if I'm not mistaken. To try and gauge the additional hurdle you will face into 2023. Thanks very much.
Thank you. 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 for our products globally. Also, part of it by the cost matrix on the original equipment. In the full package of the expected, let's say, growth in inflation and on cost, half, at least half of them is already protected. We consider that energy cost that will have a weight on our balance sheet of around 3.6%, 3.7% of our turnover, could have a growth in 2020 through 2023 of a couple of points, which means that could be something between 5%-6%.
In that scenario, we consider that we can definitely have also obviously labor costs both in Europe, Latin America, and Mexico. 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 efficiencies coming. There is, let's say, the support that the new product lines are providing and are protecting the mix that is structurally our profit margin.
Considering that in the mix, we have, let's say, within the product portfolio protection coming from specialties, the growth of our market share this year in the high-value was, say, more than 70% coming from specialties. Specialties we expect to represent even in 2023, more or less, 70% of the profitability of the 18 in and above. This model should protect our, let's say, the obvious increase in inflation that we are going to face.
Thanks very much. Just a quick follow-up on the pricing side. Would it be reasonable to model a mid-single-digit price mix increase in 2023 after what you have achieved already on a two-year stack in 2021 and 2022, or is it too optimistic? Thanks so very much.
Mr. Casaluci.
No, it's not too optimistic, but all will depend on the stability of the demand. 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. Today is a reasonable assumption what you're doing, but is 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. Thank you.
Thank you.
May I take the next question?
If we were so clear in our information, and if there are no more questions.
Excuse me, we do have questions.
Okay.
We just hear silence. Okay, can I take the next question?
We are ready.
Okay. The next question is from Giulio Pescatore with BNP Paribas Exane. Please go ahead.
Well, thanks very much for taking my question as well. 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? The second one is on working capital. It's really impressive how you managed to limit the increase in working capital on the inventory side, especially compared to your peers. I mean, how did you manage that? How did you manage to offset the price increases? 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? Thank you.
Mr. Bocchio for the working capital. Go ahead.
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. With the decrease of the finished product cash stock quarterly compared to 2021, despite the increase in the sales volumes, improving thus the inventory efficiency. Counterbalancing the increase in the unitary value obviously as a consequence of the high inflation recorded in 2022 on the raw materials. What we see for sure is an increase instead on the other side on 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 inventories is to increase absolutely in absolute value. Remaining substantially stable year-on-year in terms of incidence on sales. Last year, we ended the full-year of 2021 with an incidence of inventories on sales of 20.5%, what we expect at the end of 2022 to remain at about 21%-22%. Our target is to keep the working capital under strict management, strict control, because obviously, cash generation is target number one for us. Thank you.
Mr. Bruno, on the interest rate.
Okay. Related to the 2023, we are expecting a cost of debt at least between 3.5% and 4%. Take into account that we are achieving a deleveraging as mentioned by Mr. Tronchetti. Our position in terms of fixed and floating is between 50% and 50%. Our expectation related to the debt maturities until 2024 that we have already managed our maturity for 2022 or 2023. 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 all our plans of efficiencies in order to be able to compensate together with price mix as much as possible of the inflations that you mentioned before. Mainly labor and energy that will affect mainly the region of Europe. We are redesigning the plan of efficiencies, mainly focusing on Europe at 360 degrees, taking advantage of the acceleration of our digitization program. We will be able to give you a clear number of the final efficiency plan with the 2023 target. Thank you.
Thank you very much.
The next question is from Michael Jacks with Bank of America. Please go ahead.
Hi, good evening. Thanks for the presentation. If I can just go back please, to the question of working capital. 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 net absorption. Given that raw material prices are coming down, I would imagine at some point, that could potentially drive some unwind in the inventory balance. Receivables also is up, I think almost two times year-on-year. It strikes me that perhaps there's more in the receivables balance than just pricing. 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. This is 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 have had this year, in 2022, we'll have the same strict management in 2022.
Then there will be possibly in 2023, a possible upside on the raw material stock if the tensions between Russia and 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 nine 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, yes please, if I may.
Sure.
Philip, if I can just go back to the comment on becoming more selective on best 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.
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. Based on the past year's figures, we have a quite clear understanding of our pull-through rate, so the capability to maximize the after sales in the replacement. We are able to be more selective today. For example, an internal combustion engine car that will start production in three years from now, and is today the time to choose this project as original equipment project for the company. Most probably in five 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 rest and to catch opportunity in the new premium segment that is coming. Today we have in our customer portfolio newcomers like the one that we mentioned before, Lucid, Tesla, Rivian, Nio. Newcomers all playing in the premium and prestige segment, targeting EV. 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. Thank you.
Well, yes, there is an impact. It's mainly in Europe for the car industry, but is, as it was for the trade down, mainly focused on the standard segment, where the Chinese, Asian brands are importing in the last months, more than what happened in the first half of the year because of a less logistic cost and also better availability. You are right, but it's not affecting our segment. Thank you.
Thank you.
The next question is from Sanjay Bhagwani with Citigroup. Please go ahead.
Hi. Thanks for taking my question as well, gentlemen. 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. Hello. Sorry.
Huh?
We can't hear you well. The line is not so good. Could you? Hello?
Sorry, is it any better now?
Now is a bit better. Yes. Yes. Yes.
Okay.
Go ahead.
Yeah. Thank you. 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 prices, so more on the top line and the mix side, but also on the operational resilience side. What could be, let's say, the volume drop through in a 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%. This is the effect of prices that, as you know, goes down straight to the bottom line and also of the mix. There is part of the exchange rate that is obviously also affecting. What we see 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.
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.
Thank you. That is very helpful. My second question is, just, could you please provide some color on how big is the freight and logistic cost for you, basically the transportation cost? Are you seeing any signs of these actually becoming a tailwind next year? I mean, the spot rates that in the U.S. specifically have been coming down this quarter. Do you expect this to be probably a tailwind for next year? That is my question.
On logistics costs, it's easy in our business model to transfer them to the trade and to the end user. We did it during 2022. I think for some months was 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. We produce where we sell the product. We have less exposure than our competitors to the maritime costs. This is something that will continue to be the protection of our business model.
We expect for next year that also if there will be some increases, we will be able to protect the profitability.
Thank you very much. That is very helpful. Thank you.
Thank you.
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.
Ladies and gentlemen.