Pirelli Tyre S.p.A. Business Report FY ended Dec. 2015

Financial Overview

(in million EUR)
FY ended Dec. 31, 2015 FY ended Dec. 31, 2014 Rate of
change (%)
Factors
Overall
Net Sales 6,309.6 6,018.1 4.8 1)
Operating Income 850.3 837.9 1.5 2)
Sales by tire segment
Consumer tire sales 5,048.2 4,610.3 9.5 -
Industrial tire sales 1,252.6 1,397.2 (10.3) -


Factors
1) Net Sales
-The Company’s net sales for the fiscal year ended December 31, 2015 totaled EUR 6,309.6 million, an increase of 4.8% over the previous year. The increase in sales came primarily from growth in the Company’s Consumer business, which was partially offset by weakness in the Industrial business and negative effects of currency exchange rates. Improved sales in the Consumer business was due to growth in sales of premium products in all markets, though this was slightly offset by losses caused in the non-premium segment by weaker demand in Latin America and Russia. Declining demand in South America and market slowdowns in China contributed to the decrease in sales for the Industrial business.

2) Operating Income
-In the fiscal year ended December 31, 2015, the Company’s operating income increased 1.5% from the previous year to EUR 850.3 million. The tire business contributed EUR 7.9 million in increased operating income, while the Company’s other businesses added EUR 4.5 million in gains. The increase in operating income came from improved price mix and efficiencies, and lower costs of raw materials. These gains were partially offset by declining sales volumes in emerging markets, inflation increases in factors of production, and increased one-time restructuring expenses.

Restructuring

-On March 23, 2015, China National Chemical Corporation (ChemChina) made an announcement to acquire the Company. 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 stakes 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 automotive brake hoses 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 Company’s steel cord plant in Izmit, Turkey. The entity will be renamed Bekaert Kartepe Celik Kord Sanayi ve Ticaret A.S. The deal closing in Turkey follows the ownership transfer of the steel cord plants in Figline, Italy; Slatina, Romania; and Sumare, Brazil as announced in December 2014. The agreement also includes the Company’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 for fiscal years ended December 31, 2013 through December 31, 2017

-Major policies:

  • The Premium tire segment is expected to account for 60% of revenues in the Car business in 2016. (55% in 2014)
  • The Company will focus on a more competitive offering in the medium car tire segment, especially on specialty products such as winter and self-sealing tires.
  • The Company will maintain leadership of the industrial business in the key markets of South America, Middle East and Africa.
  • The Company expects to develop new and innovative products across 46 lines, including 14 new lines for Car products, 21 for Motorcycle products and 11 for Truck products by the end of 2017.
  • The Company expects to have capital expenditures of EUR 1,600 million in the 2014-2017 period.

-Financial targets for the fiscal year ending December 31, 2017:

  • Operating income: over 15% (14.6% in 2015)
  • Return on Investment (ROI): 28% (20.3% in 2015)

Awards

-In June 2015, Ford awarded the Company with the “Green Pillar Award”, recognizing its commitment to sustainability and its ability to manufacture high-performance, quality tires.

-In November 2015, the Company’s facility in Yangzhou, China received the “Quality Through Excellence Award”.

-In December 2015, the Company’s plant in Voronezh, Russia received the “Ford Q1 Award” from Ford for reaching high quality product standards.

R&D Expenditure

(in million EUR)
FY ended Dec. 31, 2015 FY ended Dec. 31, 2014 FY ended Dec. 31, 2013
Overall 214.4 205.5 199.2
% of Sales 3.4 3.4 3.3

R&D Activity

-The Company’s research and development activities have traditionally focused on the development of premium products. However, the Company has been increasing its efforts in developing products with reduced environmental impact, in keeping with societal trends of sustainability.

Technological Alliance

-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 rubber compounds, including Styrene-Butadiene Rubber (SBR), in that region. (From a press release on April 16, 2015)

Product Development

CYBER FLEET truck fleet monitoring system
-To supplement the Company’s use of microchips in tires which monitor road conditions, the Company developed the CYBER FLEET monitoring system for truck fleets. CYBER FLEET acts as a central hub and gathers data collected by vehicles utilizing tires with embedded electronics. This allows a fleet manager to monitor the status of deployed vehicles.

Tires made from Guayule tree rubber
-The Company developed high performance tires made from natural rubber of the Guayule tree, the first time that the tree has been used in the production of performance tires. After two years of laboratory testing, the prototype tire was tested on a Maserati Ghibli and recorded the same level of performance as tires made from petroleum sources.

Cinturato All Season tire
-In 2015, the Company launched the new Cinturato All Season tire. The tire can be used in the summer without the typical performance loss of winter tires in heat, and utilizes an internal seal to continue operations in the event of a puncture. The design features a directional tread pattern to improve performance both in wet and snowy conditions, and also reduce noise generated by the tire.

Capital Expenditure

(in million EUR)
FY ended Dec. 31, 2015 FY ended Dec. 31, 2014 FY ended Dec. 31, 2013
Overall 391.4 378.1 413.1
% of Sales 6.2 6.3 6.8


-The increase in capital expenditure for the fiscal year ended December 31, 2015 was primarily due to an increase in production capacity for premium tires in Europe, NAFTA and China.

-In the fiscal year ended December 31, 2015, the Company has a production capacity of 75 million Consumer segment tires and more than 6 million Industrial segment tires. Production from emerging countries makes up 100% of the production output for the Industrial segment and 77% of the production for the Consumer segment. Capacity expansions in Russia, Mexico, Romania, and China will increase low-cost production in the Consumer segment to 80% in 2017.

-Based on the Company's Mid-term Industrial Plan, capital expenditures are expected to increase production capacity in the Consumer segment to 81 million units and in the Industrial segment to 6.8 million units in 2017.