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5. Pirelli Tyre S.p.A. Business Report FY ended Dec. 2014

Pirelli Tyre S.p.A. Business Report FY ended Dec. 2014

*Figure for FY ended Dec. 2013 is restated because Steelcord business have been reclassified as "net income (loss) from discontinued operations".

Factors
1) Overall
-For FY ended Dec. 2014, net sales decreased by 0.7% year-on-year. Excluding the negative effect of exchange rate, sales growth was +5.9%. It was driven by the growth in the Consumer Business (cars, motorcycles) while the Industrial business (trucks, buses and farming vehicles) was affected by the slowdown in the South American market.

2) Tire Sector
-For FY ended Dec. 2014, net sales of tire sector, covering 99.8% of the Company's total net sales, decreased by 0.4% year-on-year. Excluding the negative effect of exchange rate, sales growth was +6.2%. Consumer segment was supported by the good performance of the business in all major markets and particularly by the continued growth of Premium. The improvement in the price/mix proves the success of the Group's value strategy oriented towards value creation through the gradual improvement in the mix and the price increases in emerging markets.

Acquired by ChemChina

-On March 23, 2015, China National Chemical Corporation (ChemChina) announced to acquire Pirelli. The purchase amount is expected to reach EUR 7.1 billion. ChemChina through its wholly owned subsidiary China National Tire & Rubber Co. (CNRC) signed with Camfin S.p.A. and its shareholders the agreement with respect to the purchase at EUR 15 per share of stake representing 26.2% of the share capital held by Camfin in Pirelli, and the joint tender offer by ChemChina, Camfin and other investors on the remaining stake following the completion of the purchase. CNRC is a domestic industrial leader in the manufacturing of all steel radial tires and off-the-road tires, and the largest producer of auto brake hose in China, with export markets in more than 140 countries and regions. (From ChemChina press release on March 23, 2015)

Divestitures

-The Company and N.V. Bekaert S. A. have closed the acquisition by Bekaert of the Pirelli steel cord plant in Izmit (Turkey), Figline (Italy), Slatina (Romania), and Sumare (Brazil). As a part of this transaction, a long-term supply agreement will come into effect for the delivery of Bekaert tire cord products to Pirelli. The agreement also includes Pirelli's steel cord activities in Yanzhou (Shandong Province, China). The deal has an enterprise value of EUR 255 million. (From a press release on February 6, 2015)

Mid-term Industrial Plan (FY ended Dec. 2013 - FY ending Dec. 2017)

-Major policies:

• Premium tire is expected to account for 60% of revenues in the Car business in 2016. (55% in 2014)
• A more competitive offering in the medium car tire segment with a focus on specialty products such as winter and self-sealing tires.
• Maintaining leadership of the industrial business in the key markets of South America, Middle East and Africa.
• Continuous innovation in products of total 46 lines, including 14 new lines for Car products, 21 of Motorcycle products and 11 of Truck products by the end of 2017.
• Capex： EUR 1,600 million in the 2014 - 2017 period.

-Financial Target of FY ending Dec. 2017:

• Operating income: over 15%　(14% in 2014)
• Return on Investment (ROI): 28% (20% in 2014)

Contracts

-Bespoke tire for Premium & Prestige sector "P Zero" has got approvals from 380 car models since 2007. "Cinturato P7", green high performance tire for medium to large displacement engines, has received approvals of 170 car models within 5 years. (From a press release on March 5, 2014)

Awards

-The Company has received "2014 Best Innovation in Quality Award" from BMW. Real Dynamic Curing technology in vulcanization process on tires receive recognition. This process has already been installed in all of the Company's plants. This technology utilizes temperature sensors to find the most suitable vulcanization conditions for each tire. (From a press release on October 7, 2014)

R&D Activity

-The Company now operates one research centre in Italy and ten application centres around the world. Its Research and Development Department has over 1,400 employees. (As of Dec. 2013)

Joint Development

-The Company and Rosneft, in the context of the Memorandum of Understanding signed in 2014, have identified Synthos, a manufacturer of chemical raw materials based in Poland, as their technological partner for the development of research, production and supply relating to synthetic rubber in Nakhodka, Russia, in the context of the FEPCO (Far East Petrochemical Company) petrochemical cluster. The party will further develop in the rubber sector, including Styrene-Butadiene Rubber (SBR), in that region. (From a press release on April 16, 2015)

Product Development

"Cyber Tyre" with microchip inside
-The microchip contained int the Cyber Tyre reads conditions of vehicles, road, and of the tire itself, and transmit the data to the driver or ECUs to improve driving safety and efficiency. The new Ferrari "FXX K Hybrid" has been fitted with this new tire. (From a press release on October 31, 2014)

"Cyber Freet" monitoring system for truck fleet
-The system consists of telematic box and special sensors applied on the inner surfaces of tyres. The system transmits to the central infrastructure the value of the state of the tyres. This way, they monitor the main operating parameters such as pressure and temperature in real time reporting the situation to the fleet manager warning also in case of a puncture or other hazardous events.

New 18-inch tire for Formula One
-The Company has been confirmed the sole supplier for the FIA Formula One World Championship until 2016. In July 2014, in Silverstone, UK, the first track test was held for the new 18-inch tire concept.

-The investments made to 2013 allowed the Company to achieve its optimal plant set up, including the opening of plants in Mexico, China and Romania. Production is now mainly located in countries with low industrial costs (100% of Industrial and 78% of Consumer production capacity.)

-The Mid-term industrial plan says, the Company will invest EUR 1,600 million in the 2014 - 2017 period.

Investments Outside Italy

-The Company and the Minister of Investment of the Arab Republic of Egypt signed a Memorandum of Understanding, the object of which is the evaluation of the possible expansion of the Alexandria Tire Co. (Atco). Atco is over 90% controlled by the Company and produces radial truck tires in Alexandria, Egypt. On the basis of the MOU, it is foreseen that Atco would invest around USD 107 million (about EUR 85 million) in the expansion and further technological upgrade of its factory. The investment is expected to take place over a 36 month period. When completed, this would result in up to 250 new direct jobs at Atco, and an annual production increase of about 300,000 radial truck tires. (From a press release on November 25, 2014)