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5. Pirelli Tyre S.p.A. Business Report FY ended Dec. 2017

Pirelli Tyre S.p.A. Business Report FY ended Dec. 2017

Factors
1) Net Sales
-Group net sales amounted to euro 5,352.3 million, which represented a growth of +7.6%, +7.9% in organic terms, or rather net of the impact of the exchange rate effect (-0.7%), and for the consolidation of the Aeolus Tyre Car business (+0.4%). Organic growth for the fourth quarter was equal
to +8.3%.

Restructuring

-Aeolus Tyre Co., Ltd. announced that it will establish Jiaozuo Ailuchi Tyre Co., Ltd., a wholly owned subsidiary in Jiaozuo, Henan, by investing CNY 100 billion. After the establishment, Aeolus Tyre plans to transfer its passenger car tire business' assets and liabilities to the new company. This move is part of the company's plan to reorganize its business after China National Chemical Corporation (ChemChina), which is Aeolus Tyre's parent company, acquired Pirelly Tyre Co., Ltd., the Chinese unit of Italy-based Pirelly Tyre. Meanwhile, Pirelly Tyre will also create a subsidiary, and will transfer all the assets of its industrial tire business to the new company. After that, Aeolus Tyre will transfer the assets of its passenger tire business and acquire Pirelly Tyre's industrial tire business through a stock swap between the two new subsidiaries. (From news releases issued by multiple sources on March 23, 2016)

Out look for 2018

-Major policies:

• Target of Revenue growth is higher than 6% compared with 5,352.3 million euro in 2017
• Growing weight of the High Value component, which will be equal to about 60% of total revenues at the end of 2018
• Start-up costs declining to about 40 million euro (50 million in 2017)
• CapEx at about 8% of revenues (9.1% in 2017).

R&D Activity

-The company and the Lombardy Regional Government signed a competitiveness agreement which calls for a free grant regional contribution of EUR 1.9 million for the “Total Safety System” R&D project conducted by Pirelli at its research center in Milan, Italy. The project, which is being developed by Pirelli Tyre and will last 24 months, has a total cost of EUR 5.35 million and is part of the activities linked to the development of a new generation of tires based on the concept of “total safety.” (From a press release on February 9, 2016)

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.

Investment Outside Italy

-Pirelli announced that it is investing EUR 250 million in the modernization of its factories in Latin America over the 2018 to 2020 period with new equipment and data integration. The primary objectives are to adopt industry 4.0 practices that connect manufacturing equipment and plants, increase plant efficiencies, and enable production of more expensive tires for larger wheel sizes. While Pirelli also produces in Argentina and Venezuela, the largest portion of the investment will be in Brazil. Pirelli has been supplying run flat for the Mercedes-Benz GLA assembled in Iracemapolis, Brazil. The company also provides high-performance tires in Brazil for Audi, Fiat, Jeep, Hyundai, Land Rover, Toyota and Volkswagen.

-The company will strengthen its position in Mexico by investing an additional USD 200 million in a new factory, in addition to the existing car tire plant in Silao. The new USD 200 million investment will begin in 2016 and will be in addition to the USD 360 million invested to date and the 50 million already earmarked for the 2016-2017. At the end of 2018, Pirelli’s total investment in the two plants in Silao will be above USD 600 million. The new plant is scheduled to begin production in 2017. The Silao plant, built in 2012, has been focused from the start on the Premium segment, with production centered on High Performance and Ultra High Performance tires for cars and SUVs, for the local and all Nafta area markets. Pirelli’s production hub in Silao, which covers 140,000 square meters, with an annual output at the end of 2015 of around 3 million tires, will boast an annual production capacity of five million pieces at the conclusion of the initial phases of investment. Thanks to the new USD 200 million investment, which will permit the production of about 2.5 million tires, Silao’s total production capacity will reach 7.5 million pieces by the end of 2018. Further, with this additional investment the workforce, which today stands at 1,400 employees, is forecast to grow to over 1,800.

-The company invests around EUR 200 million through 2021 at the Slatina production hub in Romania. By that year, Pirelli’s investment will have reached a total of around EUR 740 million, creating around 500 new jobs and bringing annual production capacity up to 15 million units, from the present 10 million. Overall, the factory’s floor space will be extended to 260,000 square meters from the present 210,000.