Sustainable Growth Strategy: Industrial Plan 2013-2017 with sustainability targets 2020

The top management of the Group presented the Industrial Plan 2013-2017 to the financial community in London on November 6 2013. This plan includes the Sustainability Plan with Vision to 2020. ECONOMIC AND FINANCIAL TARGETS

The Industrial Plan forecasts revenues to grow by an average growth rate of approximately 7.5% between 2013 and 2016, enabling Pirelli to reach 7.5 billion euro by the end of the period. Growth in value-added segments and an incisive efficiency plan underpin the expected improvement in profitability: ~15% Ebit margin before restructuring costs expected in 2016, +2pp growth with respect to 2013.

The expected strong cash flow generation will be used to fund investments, distribute dividends and reduce indebtedness to reach a target ratio between net debt and Ebitda of 0.3x in 2017 as compared with 1.2x in 2013.

RESEARCH AND DEVELOPMENT

To Pirelli, “Premium” means cutting edge technology coupled with product excellence.

Pirelli R&D can count on:

  • More than 40 years of experience in the Premium segment;
  • HQ in Milan and 10 Regional centres, 1400 engineers and numerous ‘open innovation’ projects with University research centres and car makers;
  • R&D budget totally dedicated to Premium equals 7% of Premium sales;
  • Global partnerships with the most prestigious car makers to meet the more demanding requirements in terms of performance, safety and product customization, which are key for the Replacement market development.

Meeting the 2013-2017 targets calls for an additional push in innovation, as follows:

  • CAR: Development of 14 new product lines, of which 6 for the Winter season, designed for the global market and taking into consideration the specific Regional peculiarities. Focus on niche products, like Runflat, Seal Inside and Noise Reduction;
  • MOTO: Launch of 10 new Pirelli and 11 Metzeler products, including a new Radial line for the South American market and Metzeler Custom Touring line for North America;
  • TRUCK: 11 new Tyres, including the new Regional with a greater mileage and tread reconstruction technology, Highway and City with top rolling resistance and completion of the Winter range. A further development of Cyber Fleet service range is also envisaged;
  • AGRO: Renewal of the product range and cooperation with major brands - John Deer, CNH and AGCO – in OE, with the further aim of developing products meeting local requirements.

EfFICIENCY PROGRAMME

A continuous search for efficiencies is one of the elements making Pirelli an increasingly profitable company. Between 2010 and 2013, Pirelli profitability almost doubled, also due to a cost reduction amounting to 322 €/mln.

According to the Plan, further efficiencies of approximately 350 €/mln are to be achieved by 2017, equal to approximately one percentage point of revenues every year.

Of these:

  • approximately 320 €/mln will come from efficiencies in industrial and product activities (materials, labour cost, cost control and production picking up in countries with low industrial costs);
  • 30 €/mln will come from SG&A, including projects for the optimisation of the sales structure and for central and regional overhead cost reduction.

INVESTMENTS AND PRODUCTION CAPACITY

The investments made until 2013 allowed Pirelli to achieve the adequate plant size. Plants are characterised by:

  • a progressive technological upgrade, consistent with our focus on Premium;
  • a location in countries with low industrial costs (100% of Industrial and 78% of Consumer production capacity).

Having reached the investment peak in 2011, Pirelli is embracing a whole new phase of value generationand benefits from past investments and from the reorganization of the production setup, including the opening of high-mix plants in Mexico, China and Romania. The new Plan provides for investments up to 1.6 €/bln over the next four years, accounting for 5% of revenues in 2017 as against 7% in 2013.

Through these investments, the overall capacity of the Consumer Business will grow from the current 69 mln pcs per year to 81 mln in 2017, with the Premium segment forecast to increase to 63% of the total production compared with the current 48%. In the Industrial Business, capacity will grow from the current 6.2 mln to 6.8 mln in 2017.

GENERATION OF CASH FLOW

Strong cash generation to be used for investments, dividend distribution and to reduce indebtedness Between 2014 and 2017, Pirelli envisages a gross cash generation, before investments and dividend distribution, equal to 3 billion euro, in addition to the sale of financial assets for 150 million euro.

These resources will be used to:

  • Fund 1.6 billion euro to be invested over the four years of the Plan;
  • Distribute more than 700 million euro in dividends, with a payout confirmed at 40% of consolidated net profits;
  • Reduce our net financial position, with what is left, i.e. 850 million euro of net cash flow.

The strong cash generation will improve our net financial position from the estimated <-1.4 billion euro at the end of 2013 to approximately -500 million euro in 2017, with the resulting improvement of the net debt/EBITDA ratio going from 1.2x to 0.3x.

SUSTAINABILITY TARGETS

The Sustainability Plan 2013-2017 includes selected targets for 2020.

It integrates, supports, accompanies and protects the Group Industrial Plan and was developed according to the “Value Driver” model developed by UN PRI (United Nations Principles for Responsible Investment) and the UN Global Compact to promote dialogue between investors and companies on Sustainability issues. G growth, productivity, governance and risk management are the development guidelines used in defining the targets for 2020.

Inter alia, the Plan forecasts:

  • Green Performance product net sales to be 48% of Tyre net sales in 2017;
  • a rolling resistance reduction that in the Car segment will reach -40% in 2020 as compared with 2007;
  • further expansion of Pirelli technology to produce silica from risk husks, which will also be applied to premium tyres by 2017;
  • the results of research on alternative sources of natural rubber from Hevea are expected by 2016, with possible use of rubber from guayule (project conducted with Versalis – ENI Group);
  • the use of innovative, function-enhancing polymers is expected by 2015, guaranteeing reduced environmental impact, improved driving safety and process efficiency;
  • a reduction by 90% in the workplace accident frequency rate by 2020 compared to 2009 figure. This target will be achieved by investing in increasingly safe machinery and programmes to reinforce the safety culture among Group employees;
  • reduction of 15% in CO2 specific emissions and of 18% in energy specific consumption by 2020 compared to 2009 level, with an expected saving of about euro 25 million and 400,000 tons of CO2 during the 2014-2017 period;
  • reduction of 58% in the specific water withdrawal by 2020, with an expected saving of 2,700,000 water cubic metre during 2014-2017;
  • Towards zero waste to landfill: 95% waste recovery rate by 2020, with an expected savings of about euro 60 million by 2017 due to the reuse of industrial wastes;
  • keeping research and development spending for premium products at 7% of net premium products sales, with the aim to further develop and increase premium products safety while lowering the environmental impact;
  • growing investment in risk mitigation and prevention of business interruption: CAGR -8.3% by 2017 as compared with 2013;new proxy to monitor gender equal remuneration, including performance, rank and labour market seniority parameters;
  • investment in employee training equivalent to average of seven man days by 2015 and ≥ 7 in the following years;
  • adoption of increasingly advanced models for management of economic, social and environmental responsibility in the supply chain, in view of shared development.