Ladies and gentlemen, welcome to Pirelli's conference call, in which Pirelli's top management will present the company's full- year 2022 preliminary 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.
Thank you. Good evening, ladies and gentlemen. 2022 was characterized by high volatility in the macroeconomic scenario, further stressed by geopolitical tensions and COVID in China. Despite these headwinds, Pirelli closed the year with results exceeding November targets and among the best in the industry, thanks to the resilience of our business model. 2023 scenario is still uncertain and even more volatile, where the main concerns are consumption trend, inflation on input costs like energy, labor cost, and raw materials. Pirelli is navigating this scenario by relying upon its assets, seizing market opportunities in the segments offering the highest value and growth. For us, 19 in and above and electric. At the same time, taking all the actions to deal with the volatility of the external context. In 2023, we were progressing in our deleverage path to a solid cash generation.
Before commenting 2022 results and 2023 outlook and targets, I believe I should inform you that the shareholder CNRC has indicated that it will submit a notification pursuant the law 21/ 2012, so-called Golden Power regulation, in relation to the renewal of the shareholders agreement entered into on 16th May 2022. By and between, among the others, CNRC, Marco Polo International Italy S.r.l., Camfin SpA, and Marco Tronchetti Provera & C. SpA, which will come into force with the convening of the shareholders meeting for the approval of the financial statement at 31st December 2022. 2022 results are confirmed to be among the best in the industry. Top line growth, supported 24%, by a strong improvement of the price mix, plus 19.7%, better than the average of our peers.
Profitability at 14.8%, the highest in the Tier 1 panel and the most resilient in the context of high inflation, thanks to the effectiveness of internal levers. Sound cash generation before dividends above our targets and higher than our peers as a result of an efficient working capital management. 2022 marked the end of the first phase of the industrial plan with a strong outperformance, both against the industrial plan targets presented in March 2021 and against our peers. Over the last two years, we recorded an average annual revenue growth of 24%. 14%, +14% versus the plan and +4 percentage points versus our peers.
Supported by a strengthening in High Value, we're in line with the plan to increase our global market share by 1 percentage point, fully seizing the strong demand recovery over the last two years. Our price mix was above the plan expectations and our peers through price increases and continuous mix improvement. We achieved also better than peers profitability trend over the two years with strong margin recovery in 2021, where we fully seized the post-COVID market rebound and the resilient EBIT margin in 2022 in a context of high volatility and inflation, thanks to our business model. It should be noted that the lower profitability in 2022 versus our industrial plan is affected by different macroeconomic and market scenarios, namely demand slowdown, more specifically in the Standard segment with a high inflation environment.
The diluting impact of exchange rates and the higher material and inflation impact eight times higher than in our industrial plan assumption. More than offset by the strong price mix improvement. Finally, cash generation approximately EUR 950 million in the two years, EUR 90 million higher than in our industrial plan, thanks to our better operating performance and efficient working capital management. Hence, we accelerate our deleveraging process, ending 2022 with a level of 1.8x the Adjusted EBITDA, better than our industrial plan target of 2x . We remind you the update plan up to 2025 will be presented in the second quarter of 2023. Moving to sustainability achievements, we are progressing in 2025 targets. In line with our towards zero accident at work vision, we start to decrease our accident frequency index through prevention and training.
We also achieved considerable results in our eco and safety product roadmap, which aims at significantly cutting the environmental impact of our products without compromising on safety. Mr. Casaluci is going to update you with more details. 2022 was another year of strong progress in decarbonization. As much as 74% of the electricity purchased around the world by Pirelli comes from renewable sources, with North America and Europe at 100%. Absolute CO2 emissions from our plants went down 41% compared with 2015, and emission from the supply chain decreased by 8.9% compared with the base year 2018. We are therefore working already at new science-based targets, always in line with the 1.5 Celsius degree scenario and with our commitment to net zero.
As for sustainable finance, in 2022, Pirelli positioned itself as global leader in relevant ESG Indeces, like the global sector top score in S&P Dow Jones Indices, and was included in CDP Climate 'A' List. Pirelli also obtained a top rating in the sector of FTSE4Good, EcoVadis Platinum Indices, and others. I leave the floor to Mr. Casaluci. Please, Mr. Casaluci.
Thank you, Mr. Tronchetti, and good evening. Now, let's analyze both the market dynamics and Pirelli's performance. In 2022, the global car tyre demand declined by 1.7% year-on-year. Car 18 in and above confirmed its resilience with a demand growth of +5.4 percentage point compared with a -3.4 for the 17 in and below. Pirelli outpaced the market, thanks to the strong performance on 18 in and above segment. More specifically, on the original equipment, we sized the market rebound due to easing supply chain tensions, keeping a more selective strategy with a focus on 19 in and above and electric. On replacement, we gained market share, particularly in North America and Asia Pacific. The reduction of the exposure to Standard continued because of better focus on product mix and the greater selectivity in the original equipment.
In this channel, we were also impacted by the halting of car production in Russia. In the fourth quarter, the negative car market trend, -7.1% year-over-year, was mainly related to weight replacement demand, -9.9%, which was heavily impacted by the lockdown in China and the late start of Winter campaigns in Europe due to mild weather. Positive OE momentum also slowed down to a +0.6 percentage point. Pirelli's performance was broadly in line with the market in total car tyre, with a better performance on 18 in and above. Let's turn to the results achieved in 2022 on the key programs of our industrial plan. On the commercial program, we have enhanced our positioning on the High Value.
On the innovation program, over 300 technical homologations were achieved, focused on the 19 in segment and above, specialties and EV. Nine new car products were introduced, of which four for the SUV segment, with a specific focus on EVs and hybrids. We have also expanded our offerings on the two- wheels business with three new model and 10 cycling products. On the competitiveness program, the second phase of the program was concluded, recording gross efficiencies of EUR 136 million, in line with our target. On the operations program, the saturation level of High Value plans stood at approximately 90%, and the external headwind mitigation program was also implemented to guarantee business continuity in a volatile external scenario.
Our commercial strategy let us seize the growth opportunities in the High Value segment, while in Standard segment, we continued our strategy of reducing exposure to lower profitability product segments. In the car 18 in and above segment, the +7.6 percentage point growth was driven by high-tech and high-end products. More specifically, 19 in and above rim sizes accounted for 70% point of the total 18 in and above, 4 point year-over-year of growth. Specialties increased by 10 percentage point year-over-year, mainly driven by EV. The 18 in and above replacement channel was supported by pull products, volumes, particularly in North America, Europe, and EV products, and push products, volumes where new lines for this channel show a 15% growth.
On original equipment, the growth was also driven by EV, whose weight reached 17% of the 18 in and above original equipment volume, + 10 percentage point year-over-year. In 2022, Pirelli's innovation program continued to feature offerings with a greater focus on consumers' needs and regional differentiation. Out of the nine products launched in 2022, six in 2021, three are part of the all-season, two Winter and four Summer segments. In North America, Pirelli entered in the All Season Snowflake segment with high grip products on snow and wet surfaces. In Europe, the renewal of the SUV Scorpion line has been achieved with the launch of the Pirelli Scorpion, featuring an asymmetrical tread pattern for better braking on both dry and wet surfaces.
Scorpion All Season SF2, guaranteeing top performance also in Winter, and Scorpion Winter 2, with tread sides changing shape based on the degree of wear of the tread, and which help tyres last longer. Our innovation program places sustainability at the core of our strategy, with the goal of achieving high braking performance in dry and wet conditions while improving environmental performan
ce. 50% of our new products are in line with the top classes, A or B, of rolling resistance according to the parameters of the European labeling regulations. Furthermore, the average rolling resistance of Pirelli tyres decreased by 3 percentage points versus 2021, and by 13.6 percentage points versus 2015. 93% of our new products are in line with the top European labeling classes, A or B, in terms of wet grip.
These results were reflected on sales, which we are monitoring as eco and safety performance revenues, which grew by 4 percentage points to 67% on total car tyre sales. Innovation in materials is the key of all. The weight of innovative materials such as bio-based and circular materials reached 38% in some products, up 5 percentage point versus 2021. This weight is expected to increase to 48% by 2025. Research and materials virtualization and test under real driving conditions allowed us to make important steps also on the wear rate of our tyres. The new product lines launched in 2021 and 2022, mainly the Cinturato and the Scorpion families, show an improvement up to 30% versus the previous generation. In the two-wheels business, moto and cycling, we keep on working on product innovation to confirm our High Value positioning.
On moto, Pirelli is the global leader on top range with its two brands, Pirelli and Metzeler. In 2022, we expanded our product range with three new products. DIABLO ROSSO IV CORSA, dedicated to the Supersport segment. Metzeler Tourance Next 2, dedicated to modern crossover, which represents the most relevant segment of the market. Metzeler KAROO 4 for the off-road segment. In our cycling business, we continue to grow. We have started production in our Bollate plant in Italy and the launch of 10 new products in different segments with a target of over 30 products in three years. In 2022, we established partnership with Team Trek-Segafredo to enhance our brand impact on young people and cycling amateurs. Further collaborations with the key partners in the High Value segment are now in place with Pinarello, Colnago, and Stromer.
In 2022, through our competitiveness program, we achieved EUR 136 million worth of efficiencies, in line with our target of approximately EUR 140 million. Taking a closer look to the performance of each project, in the product cost area accounting to approximately 31% of the efficiencies, we continue to follow our modularity and design to cost approach. In the manufacturing area, 43% of efficiencies, we kept on optimizing our industrial footprint as well as the implementation of efficiencies programs. In the SG&A, 13% of the efficiencies, we achieved our targets through actions on several levels, such as optimizing the logistic network and our warehouses, as well as negotiations on purchases. Finally, in the organization area, 13% of efficiencies, the digitization process and upskilling programs continue.
Thank you so much for your attention, and I now leave the floor to Mr. Bocchio.
Thank you, Mr. Casaluci. Good evening to all. Let's now review the dynamics that had an impact on our 2022 results. Pirelli closed the year with revenues growing by 24.1% compared with 2021. Volumes declined slightly, -1%, because of the weak demand in the last quarter of the year. On the other hand, High Value recorded a positive trend and grew in line with our targets, +4.7%, with a market share gain in car 18 in and above, and a lower exposure to Standard. Price mix recorded the top of the industry +19.7%, underpinned by price increases to compensate for the headwinds coming from the inflation in raw materials and other input costs.
Improvement in the product mix due to an increasing demand for larger rim sizes, especially those equal or above 19 in, and a greater technological content. Exchange rates had a positive impact, + EUR 287 million or +5.4%, reflecting the strong appreciation of the major currencies against the Euro. Pirelli closed 2022 with an Adjusted EBIT of EUR 978 million, with an increase of EUR 162 million compared with 2021, and a 14.8% margin, thanks to the strong contribution of internal levers, price mix and efficiencies, that more than offset the negative external scenario. More in detail, the Adjusted EBIT growth is the result of the price mix EUR +891 million and efficiencies EUR +136 million.
That more than compensated for the increase in the cost of raw materials, EUR -492 million. The inflation of input costs, EUR -327 million increasing in quarter four. Volume decline, EUR -22 million due to a weak market demand in the fourth quarter. The increase in depreciation and amortizations for EUR 30 million and other costs, EUR -25 million. Forex had a positive effect amounting to EUR 31 million, however, with a dilutive impact on marginality. In the fourth quarter of 2022, Adjusted EBIT grew by 3.2% compared to previous year to EUR 222 million, EUR 224 million. Adjusted EBIT margin was 14.2%. It was 16% in the fourth quarter of 2021.
It reflected the mentioned demand decline and a greater impact of the inflation of input costs, mainly energy and transportation, compared with the previous quarter. Let's move now to net income dynamics. Net income strongly increased by EUR 114 million in 2022 compared to 2021. The trend takes into account the already mentioned improvement in operational performance, lower restructuring and non-recurring costs. The result from equity participation was EUR +6 million compared to EUR 4 million in 2021. The net financial charges increased by EUR 57 million year-on-year, reflecting the rise of interest rates and currency hedging costs in Brazil and Russia, partially counterbalanced by a reduction of the parent group's financial charges thanks to an improvement of the economic conditions as contractually foreseen by the reduction of the financial lever.
The EUR 45 million increase in tax charges was impacted by the higher operating results as tax rate is stable at around 27%. Adjusted net income, meaning excluding all the one-offs and non-recurring items, is positive for EUR 570 million in 2022. Pirelli closed 2022 with a negative net financial position amounting to EUR 2.55 billion, and a cash generation before dividends of EUR 516 million. The operating net cash flow improved by EUR 215 million compared with last year to EUR 1 billion as a result of EBITDA growth, greater investments to increase High Value capacity and improve the mix, better management of the working capital through a careful management of finished products inventories, and raw material reduction in the fourth quarter.
At the end of the year, overall stock reached an incidence on revenues of 22%, a reduction of 1 percentage point compared with September 2022. Working capital was also affected by the increase in the value of trade payables as a result of input cost inflation. In a reduction, though, as a percentage of sales versus prior year from 30.5% to 29.8%, and an improvement in trade receivables as a result of good collections from customers and lower sales growth in the fourth quarter, +17%, compared to the first nine months of the year, +26.5%, thus reducing the percentage of sales to around 10% compared to around 12% in the previous year.
It should be noted that non-recurring and restructuring charges decreased significantly compared with 2021, when the figure included the cost relating to the transfer of motor production in Brazil from the factory in Gravataí to the one in Campinas, and the costs linked to rationalization plans for the structures.
This reduction partially offset the increase in financial charges, EUR +57 million year-on-year, recording a total value of EUR 202 million in 2022, and higher taxes, EUR +80 million year-on-year, and the dividends paid to minorities for EUR 24 million, as well as the negative effects impact of EUR -4 million. In the fourth quarter, the net cash flow before dividends was positive and amounted to EUR 839 million, increasing by EUR 31 million compared to EUR 808 million in 2021 due to the trend of the operating net cash flow. The group gross debt in December 2022 amounted to approximately EUR 4.5 billion. Taking into account the EUR 2 billion of financial assets, the net financial position is EUR 2.55 billion.
Despite market volatility, Pirelli maintained a solid liquidity margin throughout 2022. At the end of the year, confirms that maturity coverage until the end of the first quarter of 2025. The 2023 maturities were fully refinanced during last year. Using available cash, Pirelli also repaid in advance the five-year Schuldschein tranche, whose original maturity was in July 2023. In January 2023, Pirelli started managing the refinancing of the 2024 debt maturities, thanks to the issue of a EUR 600 million bond with ESG features, the first in the world of venture size in the tyre sector. This bond, the first since Pirelli obtained a rating, was positively received by the market with an oversubscription which exceeded six times the offer.
This transaction proves the ability of the Pirelli Group to be able to always assess the market at the best conditions. In addition, this issuance confirmed once again the core relevance of our sustainability strategy. Already in December 2022, approximately 50% of our gross debt was linked to ESG targets. The cost of debt is 4.04%, with an increase of 166 basis points compared to December 2021. Such increase reflects the rise in interest rates and hedging costs due to low liquidity in financial markets to cover risks, especially in Brazil and Russia. Thank you. Now I give the floor back to Mr. Tronchetti.
Thank you, Mr. Bocchio. Let us now discuss the 2023 outlook within a reference framework which remains extremely volatile, also in consideration of the growing geopolitical tensions. Global GDP is expected to grow by 2%, slowing down versus the 3% in 2022, with risks of recession in U.S. and Europe in the first part of the year due to increased interest rates, while in China, the economy is expected to recover with a 5.2% GDP growth due to the lifting of the zero-COVID policy. Inflation remains high, with a 5.3% increase in consumer prices globally, which is lower than the 7.6% in 2022 due to the impact on the supply chain normalization process, the reduction of energy cost, and the shrinking of consumers' demand. A set of pressures remain on input costs.
More specifically, high volatility is expected in oil prices given the current geopolitical tensions. The cost of energy in Europe, although lower than the peak reached in 2022, remains high with an upside risk connected to the supply in the second semester of this year, as well as a growing demand in Asia. Finally, cost of labor discounts contract renegotiations in the major countries. Forecast made on the overall Car Tyre segment indicate a substantially flat demand year-over-year. Resilience in the High Value segment is confirmed. Car 18 in and above growing mid-single digit and Standard segment decreasing by 2%. More specifically, in the car 18 in and above, we expect a high single digit growth in the original equipment segment, supported by the backlog from European production as well as a gradual normalization of the supply chain.
A low single digit growth is expected in, for the replacement, + 3% year-on-year, with the first quarter substantially flat year-on-year that compares with demand, which was particularly strong in the first three months of 2022 in Europe and in North America. Demand in replacement channel is expected to gradually recover starting from the second quarter of 2023 due to the recovery in China and on the major markets.
Given this scenario, Pirelli will count on the resilience of its business model, thanks to its distinctive position in the High Value segment, increasing focus on specialties 9 in and above and electric vehicle, with the aim of overperforming the market in both channels through an increasingly rich homologation portfolio with over 300 homologation, of which approximately 60% on EVs, 40% in 2022, and the renewal of our power range with the launch of six new lines for both channels and a strong focus on sustainability. The recent increases in price announced in Europe in December and North America in January confirm our solid price discipline.
We are deploying the third phase of our efficiency plan in line with our forecast in the 2021, 2025 industrial plan with benefits worth approximately EUR 100 million, also from the digitization of all our corporate processes, as well as a high level of saturation of our capacity in spite of the reduced level of production in Russia. Price mix and efficiencies will allow to offset the impact from the increase in raw materials, inflation and Forex. On cash generation, we will continue to leverage on a careful management of the working capital, specifically on stock management, whose weight or revenues is expected to go back to the levels of 2021, mainly due to a reduction of raw material stocks.
Based on 2022 result as well as the scenario previously discussed, expectation for 2023 are revenues between EUR 6.6 billion and EUR 6.8 billion, volumes between flat and +1% year-on-year, with mid-single digit growth in the High Value segment, while exposure in the Standard segment keeps on being reduced. Price mix improvement between approximately 4.5% and +5% due to the price increases in 2022, and those announced earlier on this year, as well as a continuous product mix improvement. Exchange rates between -4.5% and -3.5%, potentially assuming a greater EUR to USD volatility, as well as for the currencies in the emerging countries.
Profitability at Adjusted EBIT margin between more than 14% and approximately 14.5%, with mid-range Adjusted EBIT substantially flat year-on-year and where the price mix and efficiencies will offset the growing impact of the raw materials, inflation and exchange rates. Investment of approximately EUR 400 million, 6%, around 6% of revenues for technology upgrade at the factories, improving the mix and increasing High Value capacity in Romania and North America, where the expansion will be completed by 2025. Expect a net cash flow before dividends between around EUR 440 million and around EUR 470 million due to the operational performance and efficient working capital management.
This target includes the payment of management's long-term incentives relating to the three-year period 2020, 2022, and based on shareholder return, cash and sustainability targets, the last two calculated at the maximums. 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 around EUR 2 billion 350 million, with leverage between around 1.65x and 1.7x Adjusted EBIT, in line with the leverage process outlined in 2021, 2025 industrial plan. This ends our presentation, and we open the Q&A session. Thank you.
Excuse me. 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 a touch-tone telephone. To remove your question, please press star and two. Please pick up the receiver when asking questions. The first question comes from Giulio Pescatore of BNP Paribas Exane.
Hi. Thanks for taking my question. Being the first one, I guess I have to address the elephant in the room. We saw headlines in the last couple of weeks, saying that your Chinese shareholders are looking for an exit. Can we just please have a comment from your end on this? I know that the shareholders in question have denied, but what is in your mind the long-term game for this, for the shareholders, and is there any truth to those headlines? I'll follow up with my other questions later. Thanks.
Thank you for the question. The shareholder made a clear statement, so nothing changes. I have nothing to comment because all comments have been made by the shareholder. Thank you.
Okay.
The next question is from Monica Bosio of Intesa Sanpaolo.
Yes. Good evening, thanks for taking my questions. The first one is on the competitive environment in the Replacement segment. Are you seeing some trading down in your core business? I know that there is some trading down between Tier 2 and Tier 3. I'm just wondering if you are seeing some trading down also in inches and above. As the second question is on the guidance on the price mix, which looks to me quite robust, +4.5%-+5.5%. I was wondering if you can tell us how much is the price and how much is mix. The very last question is on the guidance, still on the guidance. What is your level of confidence in meeting the top end of the guidance? What are the assumptions behind the potential achievement of the top end of the guidance? Thank you very much.
Thank you. We leave the floor to Mr. Casaluci for the answer. One point, Our target price mix is between 4.5% and 5%. Now, it's not 12%. What we see is not trading down in our segment. Please, Mr. Casaluci.
Thank you, Mr. Tronchetti. Starting from the trade down, there is a trade down effect in the market, but is related to the Standard segment. If we focus on our addressable market, which is the 18 in and above, and the High Value itself, the impact of the trade down is very, very limited. If we stay for a while on the market tyres, where there is a high content of technology, today, more than 95% of the European market is Tier 1, we don't see any kind of trade down in this segment, not at all. Moving to the price mix, l et me say, if we consider the average point of 5 percentage point of growth in the price mix expected for 2023, around 60% is expected to be price coming from the rollover of the price increase already announced during 2022, plus the one announced in Europe in December and the one announced in January in United States. 40% is expected to be mix with the usual good performance on the pure product mix of 3.5%, and the negative impact on the channel mix, because the expectation is to have Original Equipment market and demand growing more than the replacement channel because of the rebound of the shortage in the supply chain.
All in all, today, we, of course, we will try to do our best and to match the high part of the guidance, but there is still a high level of volatility in the market because of different elements in input costs, inflation, demand, and so on. We maintain our guidance, of course, targeting to do as much as we can. Thank you.
Thank you. Sorry if I insist, which is the main issue that could prevent the achievement of the top end of the guidance? Inflation and the cost energy or the renegotiation on the labor cost side? Sorry if I insist.
We think that it's linked really to the macroeconomic scenario. If Europe and U.S. they are able to to serve on inflation and on the recession in a way that lately has been forecasted, we feel comfortable with the numbers. Obviously, if something unexpected happen, the scenario changes and the profitability can be affected. In an average scenario we see today, we are confident we can achieve these targets.
Okay, thank you very much. Thank you.
Thank you.
The next question is from Philipp Koenig of Goldman Sachs.
Good evening, and thank you so much for taking my questions. My first question is just on the costs. Can you maybe provide a bit more of a detailed breakdown, sort of what you're expecting between raw materials and inflation and maybe sort of the total headwind that you're currently seeing for this year? My second question is on the price mix. Does the 4.5%- 5.5% that you're forecasting, does it imply any further price increases this year? Or does that basically imply that prices stay where they are from this point onwards? My last question is just on the volumes again, c an you maybe just comment on Europe in particular, where your inventories are sitting? Thank you so much.
Mr. Casaluci, please.
Yes. Oh, thank you. Cost side and inflation, as Mr. Bocchio presented, we do expect a headwind in terms of inflation of around EUR 350 million all in all. The building blocks of this inflation are mainly, inflation of raw materials. Just to give you a rough number, is around between EUR 70 million-EUR 80 million of inflation on EBIT level on raw materials that will count for, 37% on sales of our total cost. Around EUR 40 million is expected to come from the logistics inflation, mainly the land transport in Europe and United States, where we still see some negative impact, coming from the shortage of drivers and trucks. Some positive signals are coming from the international freights on the sea freights.
We have an expectation of around EUR 100 million of inflation on EBIT level coming from the energy costs, where we have already edged around 75% of the total cost for 2023, which is in a way protecting ourselves from further eventual volatility on this market that is not expected to be stabilized yet. All in all, around between EUR 90 million and EUR 100 million of negative impact coming from labor cost, where we are renegotiating the labor contracts in the majority of the countries where we are present. These are the headwinds, as we said before, compensated, more than compensated by the sum of efficiency plans and price mix. I move to the second question, price mix.
5 percentage point are including already the announced price increase of Europe in December, up to 3%, and United States in January, up to 10%. No further price increase are included in our numbers, so only the rollover effect of the already announced price increase. Eventually, further price increase will depend on the trend of the demand and the global inflation. So far, we don't see major changes in the price scenario. Last point related to volumes. Well, the start of the year in Europe has not been very positive. January recorded in negative market, double-digit negative market, around 10%. There are good reasons that fill our confidence that the recovery of the market will come from the second quarter.
The main reasons of the slowdown of the demand in Europe are related to a not favorable comparison versus last year, because in 2020, end of 2021 and beginning of 2022, there was a strong rush to pre-buying and pre-booking because of the expectation of inflation on the price. Today is more stabilized. There is a Winter season that is not performing as expected, generally speaking, in the market because of the weather conditions that is leading to a high level of stock in the trade. All in all, Pirelli is gaining market share. Despite the tough environment, we are overperforming the market, and we expect from the second quarter an improvement of the external scenario. Thank you.
The next question is from Mr. Giulio Pescatore of BNP Paribas, who was inadvertently removed from the queue. Please go ahead, sir.
Hi, thank you. It's me again. I had a second question and a third one as well. The second question on volumes. Based on the market assumptions you're making, I just struggle to reconcile your guidance for flat to +1% when you see the High Value market actually growing at 4%. Are you being conservative? Are you expecting potential market share losses as you focus on the higher end of High Value, if that makes sense, so 19 in and above? The second one is a bit more long term. It's on regulation. Unlike for car makers, the regulator has so far chosen to let tyre makers set their own standards in terms of emission.
I really appreciated all the colors you decided to share today, on, in terms of recycled materials and all the rest. Do you see this changing in terms of regulation? Do you expect the regulator to become more kind of prescriptive in terms of what tyre makers can produce themselves? Do you think this is a potential opportunity for Pirelli, given how well you do on this level? Thank you.
The market for 2023, yes, we do confirm the expectation is for a flat market. It's important to remind that in this market, the High Value is expected to be more resilient. Despite the flat market on the High Value replacement is expected to be between +3% and +4%, and the High Value original equipment is expected to be a +7%. All in all, we are confident that this market is reflecting this slowdown of the demand all in all, but mainly concentrated in Standard. We feel confident that this market is the best estimation we can do for the foreseeable future. On the second point, to be honest, we see opportunity for Pirelli due to the acceleration of the EV car registration.
Also, if we see the acceleration on the regulation in Europe that target the within 2035, the disappears of internal combustion engines is supporting the acceleration all in all of the EV penetration, starting from the premium and prestige segment. EV, High Value EV represents for a tyre maker, a premium tyre maker like Pirelli, an enormous opportunity because it means tyres with a higher level of content of technology because of rolling resistance, because of load index, because of noise control, because of grip, and as a consequence, we see it as an opportunity. We see the pace of growth of EV tyres is higher than expected. Thank you.
The next question is from Christoph Laskawi of Deutsche Bank.
Good evening. Thank you for taking my questions as well. The first one would be on the energy cost. You show in the presentation that you expect the cost relativity sales to move up by 100 b[s. You also said that 75% of that is hedged. Is that expectation of 100 bps higher based on the current spot or on other prices potentially a bit higher in case the prices move up again? On the volume trends in the regions and your Q4 performance, there was slightly weaker than thought. Is there anything that is spilling over outside of the general market into Q1? Did you have to adjust your production run rate as a reaction to the volume that you saw in Q4?
For example, also the logistical issues on the road freight in Europe and the U.S. impact your production footprint. Just lastly, on the phasing of the year, could you give us a rough sketch of how the margin will be phasing throughout 2023? Thank you.
Thank you for the question. Talking about energy cost, we. You're right. As we said, we had hedged roughly 75% of the total energy cost for 2023. We do consider that this is the right level to enter into this year. Hedging this level, we paid more than the spot price of today. That's right, but we assured the stability of the cost for the entire year. So we stay at this level, and we will monitor the volatility of the market. But we are protected because with the 75% of hedging already including the number we presented, we are protected from the volatility. What we can do more and more is to accelerate the reduction of energy consumption.
There is a set of projects that we have in place, mainly in Europe, curing machines, equipmentation, lightening, all we can do to reduce the gigajoule per ton that we consume in our factories. We will never stop because this is also consistent with our roadmap of carbon neutrality. Market wise, the trend of the first months of 2023 are expected in line with the last quarter of 2022 in terms of market speed, with the slowdown of the replacement, mainly in Europe, because of the reasons I mentioned before, a tough comparison versus last year and a weak Winter season, and also in North America because of the tough comparison versus last year.
While we do expect a recovery in China after the Chinese New Year, where we see first positive signals coming from the demand of China. Pirelli performed in line with the market in the last quarter because we decided not to accept any compromise in the price performance and not following wholesalers that were looking for pre-buying based on our already announced price increase in January and December. We expect and we target to overperform the market for the entire 2023, as we did in the last three quarters of 2022. I have to say that January already started with the right speed.
Thank you. A quick follow-up, if I may, just on the energy cost, because I have been after the 25% that you didn't hedge. Is the expectation that you gave in the presentation for the 100 bps uptick factoring a certain assumption for the unhedged part already, or is it basically at current spot? Thank you.
Is already included, of course. Our estimations includes the hedging we did at the price we know because it's already fixed in our numbers and an expectation for the 25% not covered already, to be honest, a bit higher than what is the spot price today. The spot price today is around EUR 50 per MW. Is the lowest of the last two years and a half. We do prefer to be more conservative on this, in this forecast.
Understood. Thanks a lot.
The next question is from Michael Jacks of Bank of America.
Hi. Good evening. Thanks for taking my questions. I have two. Perhaps just going back on your cost assumptions for 2023. Firstly, are there any materials that you would point to specifically that are materially higher year-on-year? Just sort of looking at spot prices for materials such as natural rubber, butadiene, and oil. It seems as if they're actually tracking lower versus the 2022 level. Secondly, could you just please comment on the magnitude of the sea freight related headwinds that you incurred in 2022? I would have imagined as a cost item that this component would be larger than road transport. Thank you.
Well, on the cost side, I assume our expectation on labor cost, energy cost, and logistic cost, we are confident that we are on a safe side. We don't expect major changes because of what I said before. We are already hedged, this is 75% of energy. Half of the labor contracts we have to negotiate in 2020 are already closed or close to be finalized in the coming weeks. Logistics is going in the right direction, we see positive signals on the logistic cost all in all compared to our numbers.
Where we can expect more volatility are the raw material. Every time that there is a movement, significant movement in the raw material cost, then we can, in our segment, the High Value, and with the price discipline we apply, we can always pass through the increase of cost into the selling price.
Understood. Sorry, if I could maybe just follow up on the raw materials. I mean, just in terms of your planning assumption, are you using estimates for natural rubber and butadiene and some of the other inputs that are higher than the current spot prices?
We look at the future. We expectation of the futures in the market, and we consider the best estimation coming from our internal analysis, banks analyst, and we take the best estimation for the next months. We have covered on our costs, the coming three months, so we can assume that the cost of the natural rubber till April are already fixed in our numbers and the best estimation we can do for the following months. Again, the cost increase on raw material in our segment, the High Value is easily to be transferred to the price, selling price, as we did in the last years.
That's very clear. Thank you.
The next question is from Martino De Ambroggi of Equita.
Thank you. Good evening, everybody. The first one is very quick. On price mix, you didn't mention the drop-through or I missed it, I don't know. The second is on Russia. Just to understand what was the contribution in 2022, because you mentioned 4% of sales. Just to understand if it was still profitable in terms of EBIT and what is the net financial position and what you have embedded in your 2023 guidance from Russia. Still on Russia, I'm a little bit surprised hearing you do not mention any negative effect due to the need to transfer part of your capacity from Russia to other countries. Should we consider it a minor cost or, could it have weighted quite a lot on 2022 results? How is progressing the transfer of capacity?
Before leaving the floor to Mr. Casaluci, there is an impact that is in the numbers of 2023 of the reduction of the results coming from Russia in the second part of the year. The first part we had the export coming to Europe, convenient and profitable. In the second part, there wasn't, obviously. This year there will be the full year impact of the Russian situation. Now I leave the floor to Mr. Casaluci.
Staying for a while to the Russia and then moving to the price mix question. As Mr. Tronchetti said, we are discounting in our numbers the not full saturation of our operations in Russia. We target to have a saturation around 70%-75% of our factories. Is difficult to have a clear understanding because the environment, as you can see, is not stabilized at all. With the 70%-75% of saturation, we have a negative impact on the efficiencies plan included in our numbers. It means that we target basically 100% of the production for the local market, a local market under strong pressure because it's a shrinking market, is a trade-down market, but is a purely 90% Standard market.
We stay there to keep the operation running, protecting our people and our asset, and nothing more than that. We already reduce the expectation of the result. Moving to the price mix. Price mix, sorry. Price mix drop-through is between 60% and 65% the mix and between 40% and 45% the volume or the drop-through. Thank you.
Yeah. If I, if I may on Russia. It was, well, EBIT in 2021 was positive at EUR 29 million. Should we assume in your guidance it's basically zero in 2023 or still profitable, or maybe negative?
Is, in between 2% and 3% of our total EBIT results. Is positive, but very limited.
Positive. Okay. The last question is on BEV, because I remember in your last call, you mentioned 14% of your original equipment sales for 8 in and above was already equipped for a BEV cars. What is your projection? What was in full year 2022, and what's your projection for this year? When you believe the aftermarket will become visible in terms of contribution to sales and obviously margins?
Well, the EV replacement will start to give positive contribution to the result in 2023. It will be limited. We expect around 700,000-800,000 pieces sold in the replacement in EV in 2023, while we plan to go around 5 million in the original equipment. Start to be visible already this year. From 2024 on, we will take the pull-through of the original equipment sold in 2021 and 2022. What is positive is we confirm the 15 percentage point of average selling price in the replacement higher compared to the internal combustion engine, which is the way we see the good opportunity coming from EV.
Very last, if I may, profitability for the Standard products, in 2022.
We confirm our target to reach the double-digit ROS on the Standard. As we said last time, we have a delay in this target because of the Russian effect. Both because we run with not saturated plants that generate inefficiencies 100% linked to the Standard. Secondly, because we lost the Russian source for the European sales. We transferred the demand to Romania and Turkey, but today, we discount the delay. High single-digit for 2023.
Okay, thank you.
The next question is from Sanjay Bhagwani of Citibank.
Hi. Thank you very much for taking my question also. I have got three questions as well. My first one is on your free cash flow, and it is actually very impressive that you are able to meet your free cash flow target, whereas some of your peers actually missed their targets. Just wanted to know that, what do you think you did differently versus your peers? Were you more efficient on the ground in terms of, like, proactively getting the receivables? Any color on that will be very helpful. My second question is on price mix. Sorry, this is a bit more confirmation than a question, if I understood it correctly. Yeah.
First of all, can you please remind me what portion is coming from the price and what is from the mix? If I understood this correctly, price is already just based on the price increases you have already done, so no further price increase is required to meet this price mix target, right? That is my second question. My final question is a bit more structural. I think you just mentioned that the EV tyres will be making somewhere around 15% higher on the average selling price. My question is like, how sustainable do you think this is? Do you expect this to remain for like next five to 10 years, or do you expect this can eventually normalize? Thank you.
I will start from the last questions. EV is a new technology, we are in a growing phase of the technology, both for the carmakers and the tyre makers. The premium price is recognized and is expected to be recognized for the coming years. To be honest, I'm not able to say if 10 years will remain the same price gap or not. What is sure that in 10 years from now, the internal combustion engine and the electric vehicle will coexist in the market more than 10 years, for a couple of decades at least. This will create more complexity, more differentiation in the commercial offer, and as a consequence, more opportunity for us to leverage on this in terms of innovation, technology and, as a consequence, in price point.
The price mix, as I said before, is 60% price, so around 3% out of the 5%, and 40% mix. Of this 2% of mix, there is a 3 percentage point positive of product mix and roughly 1 percentage point negative of channel mix. As you see, the original equipment is growing. Is expected to grow, to rebound in 2023 more than the replacement. I'll leave to Mr. Tronchetti for the cash flow question.
Cash flow, we have to consider compared to our competitors that the EBIT adjusted was higher. We were more efficient in handling the cash flow. We comment last time that we have more visibility on our dealership. We have a better forecast on stocks. We can handle better the stock. That is why. Thank you.
Thank you. That is very helpful.
The next question comes from Edoardo Spina of HSBC.
Good evening, and thank you very much for taking my questions. I have three. First, on the midterm in 2025, I mean, inflation was higher than forecast for the cost and revenue in the last two years. I wonder if you reviewed your internal plans for the midterm and how you look at the 2025 targets. The consensus believe that EBIT and net target are still achievable, if I'm not wrong. The second question is on the, still on the midterm, what is your outlook for volume growth after 2023 for Pirelli? Do you still expect an acceleration toward mid-single digit growth at some point, or has this view changed for the moment?
Finally, on the cost of debt, what is the forecast for 2023 and for 2024 debt maturities, if you plan to refinance soon, or you prefer to wait for lower interest rates later? Thank you.
Related to the 2025, we will give to the market our revised plan in June. It's early to say. As far as inflation is concerned, we just can summarize what the best, let's say, analysis are providing today. That is decreasing inflation both in U.S., in Europe, and, but it's really early to say. I leave the floor to Mr. Giorgio Bruno about the cost of debt.
Good evening. Related to the cost of debt, what we have in mind is for 2023, we have already managed all the debt maturities, we are targeting cost of debt is at least 20% higher compared to 2022. For 2024, we are working now in order to manage the maturities related to 2024 because as you have seen lastly, we have launched an ESG bond. Our approach is to maintain a well-balanced profile between debt capital market and the bank loans. All in all, we are taking opportunistic approach. We see for sure that also counting on the cash flow that we are generating, we are targeting for 2025 a net debt EBITDA ratio at least 1x. We are quite confident to handle the, also the, let's say, a volatile scenario in terms of interest rates, so.
Next question is from Gianluca Bertuzzo of Intermonte SIM.
Hi. Good evening, and thank you for taking my question. First one is on what is the level of inventories on Winter All Season and Summer tyres? Second question is on North America, where it seems that your action are getting grip as you're gaining market share. Do you plan further growth in 2023, and what are your expectations? Last question is on the CapEx plan. Can you give us the split maybe between capacity increase, transformation, and other elements? Thank you.
Starting from the stock in the trade in Winter is a high level above average of the season because of the weather conditions that has not been as severe as expected in Europe, in North America, in Canada mainly, and in Russia as well. We need to wait another month to see, to have a final conclusion on the level of stock and as a consequence, the expectation of the coming Winter season. While on Summer and all season, the stock is, let me say, consistent with the seasonal average.
We see that there are opportunities to increase the stock and the trade in China that is quite low, while North America and Europe, both Summer and all season, are in line with the average of the season. In U.S., you are fully right, our target is to grow. We see that we have a lot of opportunities in the U.S. market because we have a lower market share compared to the other regions in the High Value markets, in the High Value segments. We were able to gain share in 2022, and we target clearly to gain share in 2023 and the coming years. We are planning everything to do it in terms of new product launches. The vast majority of the new product lines have been launched in United States.
We have, we are entering in U.S. original equipment partners that were not customers of Pirelli five years ago. The GM, the CHRYSLER, the Tesla, all the most important and iconic cars of U.S., like the F-150, the Dodge Ram. We are enlarging our customer base with long-term agreements with the most important distributors in the region. Last but not least, we are investing in the production capacity, as we already announced it, in our Mexico plant, up to 8.5 million within 2025. As far as CapEx, in 2023, I would say more or less 30% will be related to capacity increase, mainly concentrated in Europe and North America on the already announced projects in Romania and Mexico.
Around 44%-45% is related to technology upgrade and digital transformation, which is always the most important part of our CapEx, concentrated in technology, innovation, sustainability and digital. The remaining part, around 25%, is what we call business continuity, is basically base load, molds and things like that. Thank you.
Thank you very much.
The next question is from Valentin Mory of AlphaValue.
Yeah. Good evening, everyone. Thanks for taking my questions. I have, actually one question remaining. I was wondering if you could share your thoughts on the price sustainability versus decreasing costs. In other words, what would make you consider any price decreases? Thank you.
As far as we see today, there are no reason to decrease the price in our segment. The price can be affected only by very by a strong recession. For the time being, there are obviously pressure in many areas, but the volatility of the raw materials keeps everybody quite stable. That's why we don't see short-term any, anything happening. I remind you that in our segment, in general, the price is more resilient than average.
Mr. Tronchetti Provera, there are no questions registered at this time, sir.
Thank you. Thank you, so thank you, ladies and gentlemen. This conclude our today's program. Have a good evening.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.