Directors' report on operation

  • Transforming process of the the Pirelli group into a pure tyre company
  • Higher sales and operating results
  • Investments to about 3% of sales in 2010: one of the highest in the industry
  • Financial position improvement

The process of transforming the Pirelli group into a pure tyre company was completed in 2010. This transformation was undertaken in accordance with the 2009-2011 business plan and completed in 2010 with the spin-off of Pirelli & C. Real Estate (now Prelios) and the disposal of non-strategic assets, including Pirelli Broadband Solutions and Oclaro (formerly Avanex). Conclusion of this process, together with the achievement of the 2011 targets a year earlier than scheduled in the 2009-2011 business plan, resulted in the preparation of the new business plan for 2011-2013 with a forward view to 2015, which was presented to the financial community on November 4, 2010.

This plan focuses on the production for the premium segment, which is growing faster than the market as a whole, and on the development of business in rapidly developing economies. Two such countries are Mexico, where Pirelli is building its first local plant, and Russia, where agreements are being finalised as envisaged in a memorandum of understanding signed with the local partner Russian Technologies and local producer Sibur Holding, for the development of joint activities in the tyre and steelcord sectors. There are also plans for making an agreement with these Russian partners for the supply and high-technology production of synthetic rubber. This venture would fall in the framework of initiatives undertaken by Pirelli to identify raw materials to be used as alternatives and/or in addition to natural rubber.

Additionally there are plans for an official opening of the new industrial centre at Settimo Torinese in 2011. This will be the most technologically advanced and efficient Pirelli plant for the production of high-performance, ultra high-performance and lower environmental impact tyres, as part of the group's established "green performance" strategy.

Pirelli has always been committed to research and development, continuous process and product innovation, and it has also been involved in motorsports since 1907. All these qualities contributed to it being named in 2010 as exclusive supplier to the Formula 1 championship for the three-year period 2011-2013.

The value of its investments in research and development activity amounted to about 3% of sales in 2010, one of the highest levels in the industry. This has enabled Pirelli to continue turning out new patents (currently over 4,500), maintain its capacity to turn out innovative premium products, continue perfecting innovative processes for the mixing of materials and building of tyres in all product segments, and develop alternative materials to replace traditional ones, in view of reducing costs and pursuing environmental sustainability.

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Pirelli finished the year with sharply higher operating results, bettering the targets announced on October 14, 2010, which had in turn been repeatedly revised upwards over the course of the year. This outstanding earnings performance was due to the efficient operating management and the recovery in tyre sector demand, which began at the end of 2009 and continued through 2010.

The positive performance of operating results was sustained by volume growth at Pirelli Tyre, which now accounts for 98.4% of Pirelli group sales, and effective measures impacting the price/mix component. The 19.5% growth in Pirelli Tyre sales (+16.2% on a comparable exchange rate basis) stemmed from a 7.3% contribution by volume and 8.9% by the price/mix component. The price component made it possible to offset the growth in costs for productive factors, particularly raw materials, while the mix component permitted expansion of the product range in the premium segment, on which the Company has focused its business.

Based on volumes, sales recovered in all geographical areas, in both sales channels (Replacement and Original Equipment) and in the different business units. Consumer segment sales climbed by 16.7%, while Industrial segment sales jumped by 26.3%, with ROS (i.e. the ratio of operating income after restructuring expenses on sales) improving to 9.6% (from 7.4% in 2009) and 9.2% (from 8.5% in 2009), respectively. Overall, the ROS of Pirelli Tyre (EBIT/sales) was 9.5%, up decisively from 7.7% in 2009.

In regard to group results, the activities connected with Pirelli & C. Real Estate (now Prelios) and Pirelli Broadband Solutions are considered discontinued operations and included in the net income (loss), so that the comparative figures for 2009 have been restated. The highlights for 2010 are as follows:

  • sales: euro 4,848.4 million, compared with the target of "about euro 4.8 billion," up 19.2% from 2009. Of this amount, 37% was generated by "green" activities (25% at December 31, 2009);
  • EBIT margin after restructuring expenses: 8.4% as compared with the target of "over 7.5%;
  • net financial position: negative for euro 455.6 million, compared with the target of "less than euro 700 million."

Over the year, the refocus on the group's industrial activities in the tyre sector led to the spin-off of Pirelli & C. Real Estate (now Prelios) from the Pirelli & C. S.p.A. group (concluded on October 25, 2010 with the assignment of Pirelli & C. Real Estate S.p.A. (now Prelios S.p.A.) shares to the shareholders Pirelli & C. S.p.A. and a consequent voluntary reverse stock split by the latter) and disposal of Pirelli Broadband Solutions S.p.A.

Even when the impact of these discontinued operations is included (aggregate net loss of euro 223.8 million), consolidated net income (loss) amounted to euro 4.2 million at December 31, 2010, compared with a consolidated net loss of euro 22.6 million in 2009. Consolidated net income (loss) attributable to owners of the parent was euro 21.7 million, compared with euro 22.7 million in 2009.
Consolidated net income (loss) before the effect of discontinued operations
was euro 228.0 million, almost three time the amount of euro 77.6 million reported in 2009.

Consolidated operating income, which reflects euro 24.7 million in restructuring expenses (euro 55.2 million in 2009), was euro 407.8 million, compared with euro 249.7 million in 2009, and the ROS was 8.4%, compared with 6.1% in 2009.

Consolidated net financial (liquidity)/debt position at December 31, 2010 is negative for euro 455.6 million (after having paid euro 81 million in dividends to shareholders), compared with a negative net financial position of euro 528.8 million at December 31, 2009. This reduction reflected the proceeds from disposal of non-strategic assets and especially the contribution made by Pirelli Tyre operating cash flow (positive euro 167.7 million, compared with euro 395.4 million in 2009), despite the near doubling in capital expenditure (euro 405.0 million in 2010, compared with euro 217.4 million in 2009), in particular on projects to expand production capacity.

Growing sales volumes, continuous price/mix adjustments, and continuing cost-cutting measures enabled Pirelli Tyre to counter effectively rising costs for product inputs, specifically raw materials, and conclude the financial year with positive results that easily topped targets:

  • sales: euro 4,772.0 million, compared with the target of "over euro 4.7 billion," up 19.5% from 2009
  • EBIT margin after restructuring expenses: 9.5%, higher than both the target of "more than 8.5%" and the 7.7% achieved in 2009