Pirelli & C.

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Directors' report on operations

The restructuring already begun in 2008 and continued in 2009 to counter the effects of the international crisis enabled the Pirelli Group to end the year with decidedly improved overall results, thanks to the effectiveness of the measures adopted to safeguard efficiency and competitiveness and of the strategy outlined with the 2009-2011 three-year business plan.

The Group thus managed to end the period with better results than the targets for 2009, which, besides, had already been revised upwards last November, on the occasion of the announcement of the results for the third quarter.

With reference to the Group’s targets we can note:

  • net sales: 4,462.2 million euro compared with the target of “more than 4.3 billion euro”, already revised upwards at the end of third quarter 2009. Of these, 25% derive from “green” activities (20% at the end of 2008), in line with the objectives of the plan;
  • EBIT margin after restructuring expenses: 4.9% compared with the target of “approximately 4.5%” envisaged at the end of third quarter 2009, despite the impact of additional restructuring expenses with respect to the initial assumption of more than 50 million euro (approximately 80 million euro in 2009);
  • net financial position: negative 528.8 million euro compared with the target “of approximately 700 million euro”, already improved at the end of third quarter 2009.

Overall, the Pirelli Group ended the year with consolidated net income attributable to the equity holders of the company of 22.7 million euro compared with a net loss of 347.5 million in 2008. There was a total consolidated net loss of 22.6 million euro, a significant improvement on the loss of 412.5 million in the previous year.

Operating income after restructuring expenses, which amounted in the period to 79.6 million euro (144.2 million euro in 2008), was 217.4 million euro, a five-fold increase on the 43.2 million euro of 2008, with a ratio to revenues of 4.9% compared with 0.9% in 2008. Revenues in the period were 4,462.2 million euro, down 3.3% in like-for-like terms net of the exchange rate effect (4,660.2 million euro in 2008). The Group’s net financial position at 31 December 2009 was negative for 528.8 million euro, an amount almost halved with respect to the net debt of 1,027.7 million euro at December 31, 2008 (691.4 million euro at September 30, 2009), thanks to the positive contribution of the Pirelli Tyre cash flow, income from the disposal of non-strategic assets and the success of the Pirelli & C. Real Estate S.p.A. capital increase.

The performance of the core tyre business of Pirelli Tyre was particularly positive and achieved results decidedly better than the targets:

  • net sales: 3,992.9 million euro compared with the target “of approximately 3,900 million euro”, already improved at the end of third quarter 2009;
  • EBIT margin after restructuring expenses: 7.7%, decidedly better than the target “of 7% or more”, which had already been adjusted upwards at the end of third quarter 2009;
  • net financial position: approximately one billion euro (negative 1,027.3 million euro) after dividends, compared with the target of 1.3 billion before dividends.

The efficiencies achieved thanks to restructuring actions, the signs of recovery visible on the market (in particular in the ‘Consumer’ segment) and the positive impact of the reduction in the cost of raw materials, in fact, enabled Pirelli Tyre to end the year with a moderate reduction in net sales (-1.6%, like-for-like) and a marked improvement in all profit indicators: the EBITDA margin before restructuring expenses came out in 2009 at 13.5% compared with 10.8% in 2008; the EBIT margin before restructuring expenses at 8.7% compared with 6.1% in 2008 and the EBIT margin after restructuring expenses at 7.7% compared with 3.7%.

In the fourth quarter, the best of the entire year, Pirelli Tyre’s gross operating margin (EBITDA) before restructuring expenses more than doubled to 155.2 million euro (62.9 million in the corresponding period of 2008), with a margin up to 15% from 7.2%, and operating income before restructuring expenses up to the record level of 104.7 million euro (18.9 million euro in the corresponding period of 2008), with a margin of 10.1% (2.2% in 2008). Boosted by a recovery in volumes, net sales exceeded the threshold of one billion euro, with like-for-like growth of 13.9% to 1.03 billion euro.

During 2009 the continual improvement of efficiency in the management of working capital also made possible a positive flow from operating activities of 561.5 million euro (negative by 18.1 million euro in 2008); the net financial position was negative for 1,027.3 million euro, an improvement on the 1,266.8 million euro at end of 2008.

Increasing efficiency on employment costs, usage of materials and procurement processes and savings on the cost of raw materials net of the exchange rate effect also enabled cost cutting of approximately 200 million euro (of which approximately 100 million euro resulting from the reduction of raw material costs net of the exchange rate effect) in line with the 2009 target - 200 million euro at considering the same exchange rates - envisaged for Pirelli Tyre in the Group’s 2009-2011 business plan.

It must be stressed that in a year which required close attention to costs, Pirelli Tyre also reduced the ratio of research and development expenses to net sales, from 3.5% to 3.3%, but this level still keeps the company at the top in the industry worldwide in terms of process and product innovation, which have always been central elements for the competitive position in the sector.

During the year Pirelli Eco Technology consolidated its leading position on the particulate filter market. The approvals obtained, in particular in key markets such as Germany and China, as well as the recent resumption of programmes for the introduction of low pollutant emission zones, place the company among those with the best growth prospects in the industry.

In 2009, however, the difficult economic situation, the delay in operational implementation of the existing legislation on traffic pollution and the longer-than-expected times for the achievement of approvals to develop new markets had negative repercussions on performance and on the execution times of development plans compared with those initially envisaged. Net income was negative in 2009 of 13.7 million euro, which is substantially in line with 2008 (negative 13.2 million euro).

In the real estate segment, during the year Pirelli Real Estate continued its turnaround process involving a cost cutting plan and the recovery of efficiency, an organizational review and reinforcement of the asset structure, together with refocusing of the business model on the asset & fund management business and specialist services, with the aim of increasing recurrent results. Confirming the validity of the action taken up to now, the cost-efficient plan led in 2009 to the achievement of savings on overheads of approximately 68 million euro, much more than the original target of 50 million euro, while on the capital side gearing improved to 0.7 (compared with 2.4 at December 31, 2008) thanks to the success of the share capital increase carried out during the year.

Even though the year was significantly affected by the context of international economic recession, the main economic and financial indicators showed a clear improvement: the net loss in financial year 2009 was almost halved (-104.3 million euro compared with -195 million euro in 2008), while operating income (EBIT), including net income from equity investments and before restructuring expenses and property value adjustments, was negative for 26.1 million euro. The loss was more than halved compared with the 59.7 million euro of 2008, and at the better end of the range (-25/-35 million euro) communicated to the market.

In other businesses, particularly noteworthy was the positive performance of Pirelli Broadband Solutions, the group company providing broadband access solutions which ended the year with net sales up 6% to 132.1 million euro and net income of 4.6 million euro compared with 2 million euro in 2008.

In keeping with the guidelines of the 2009-2011 business plan, during the year the group concentrated on:

  • focusing on the core business: with the aim of reinforcing its position as a leader in the automotive industry, the Group focused more on the core business of tyres and on the similar business of particulate filters brought together in the “Tyre and Parts” Division. In this sense, the Group also disposed of non-strategic assets, including the stake held in Alcatel Lucent Submarine Networks, a sale completed in March 2009 and, through progressive sales made during the year and completed during the third quarter, the stake held in Telecom Italia S.p.A..
  • “Green performance”: during the year the Group concentrated on the development of innovative products and solutions in the field of the green economy, achieving the target of increasing the ratio to net sales to 25% from 20% in 2008 (40% of the 2011 target).

All the new tyres of the Cinturato line, an historic Pirelli Tyre brand recently relaunched, are in keeping with the “Green performance” strategy, as are the very advanced tyres of the “Winter” family.

As regards sustainable mobility and the reduction of atmospheric pollution, Pirelli Eco Technology proposes technologies for the containment of pollutant diesel vehicle emissions. The particulate filters offered by Pirelli Eco Technology can reduce the emission of particulates by more than 90% and that of nitrogen dioxide by more than 50%, with significant reductions in fine dusts.

Also worthy of note was the work done by Pirelli Ambiente, the Group company specialized in technologies and solutions for sustainable development operating in the sectors of renewable energy resources, environmental regeneration and the energy efficiency of buildings, and also, in the real estate field, the solutions offered by Pirelli Real Estate to reduce the potential environmental impact deriving from the occupation of buildings, in particular with the launch of the environmentally sustainable building programme, Ecobuilding.