Sustainability Channel

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Sustainability Channel is the communication channel towards our stakeholders interested in Sustainable approach to the business.

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BOARD OF PIRELLI & C. S.P.A. APPROVES RESULTS FOR YEAR ENDED 31 DECEMBER 2016

- Growth of all main economic indicators in 2016

- Further strengthening of Premium: volumes grow by 14.2% and revenues represent 64.0% of the Consumer business (61.5% in 2015)

- Improvement of price/mix: +5.0% thanks above all to the sales mix

- Progressive improvement in volumes, growth of 2.1% (+5.1% in fourth quarter)

- Efficiencies of 90.5 million euro: reaching 79% of 4-year 2014-2017 target of 350 million euro

- Profitability growth, with a total Adjusted Ebit margin of 14.8% (14.4% in 2015 on like-for-like basis). Record profitability for the Consumer business with an adjusted Ebit margin of 16.8% for the year (16.2% in 2015 on like-for-like basis)

- Significant improvement of net financial position

- Europe sees increased profitability. Apac and Nafta remain most profitable areas

- Investment in Research & Development of 228.1 million euro, equal to about 4% of total revenues (6% of Premium segment revenues)

- The process of Pirelli’s transformation continues

***

As an effect of the acquisition by Marco Polo Industrial Holding S.p.a. of Pirelli and its subsequent merger by incorporation of Marco Polo Industrial Holding S.p.A. into Pirelli, following the Purchase Price Allocation (PPA) conducted on the basis of that which is established in the relevant accounting principles, greater amortizations were booked mainly referable to immaterial assets identified in the context of this operation. The “EBIT adjusted” excludes – beyond non-recurring and restructuring charges – also amortization that refer to intangible assets identified in the PPA.

***

The Board of Directors of Pirelli & C. S.p.A. has reviewed and approved the group’s results for the year ended on December 31, 2016. The results for 2016 show growth in the main economic indicators.

Revenues amounted to 6,058.4 million euro, with organic growth of 7% at the annual level (on a like-for-like basis and net of forex effects, which were negative 5.4%) and of 8.7% in the fourth quarter. The revenue trend benefitted from strong growth – both in the Consumer and Industrial businesses – of the price/mix component (+5.0%) in particular thanks to improvement in the sales mix, as well as price increases in emerging markets.

Volumes’ performance was positive (+2.1% in 2016, +5.1% in the fourth quarter) thanks to the Consumer business (+3.5% during the year, +4.8% in the fourth quarter). The performance of Industrial volumes, negative at the annual level (-3.8%) as a result of the weakness of the South American market, registered growth in the fourth quarter of 6.5% thanks to the business’s recovery in the region, above all in the Replacement channel.

Premium saw improvement with volume growth of 14.2%, above the Premium market’s global trend (+9.4%). The segment posted organic growth of 12.3% to 3,244.6 million euro, accounting for a total of 64% of Consumer revenues, up from 61.5% in 2015 on a like-for-like basis.

The Adjusted Ebit (operating result before non-recurring and restructuring charges and amortization of intangible assets identified in the context of PPA) was 896.6 million euro (860.5 million in 2015 on a like-for-like basis), with an Adjusted Ebit margin growing to 14.8% compared with 14.4% in 2015 on a like-for-like basis. The improvement can be attributed to internal levers such as volumes’ growth, price/mix and efficiencies achieved to contrast forex volatility, increased raw material costs and inflation in emerging markets. Efficiencies totaled 90.5 million euro, bringing the total of efficiencies achieved since 2014 to 277.3 million euro, equal to 79% of the 4-year 2014-2017 target of 350 million euro.

The operating result (Ebit) was 724.2 million euro (compared with 786.1 million in 2015 on a like-for-like basis) and mainly reflects 66.6 million in non-recurring and restructuring charges linked to rationalization processes and costs related to reorganization activities of the Industrial segment and 105.8 million euro relative to amortizations for intangible assets resulting from the acquisition of Pirelli assets by Marco Polo.

The total net result was 147.6 million euro compared with -383.5 million in 2015. This figure included a loss of 559.5 million for the de-consolidation of Venezuela and a negative impact of 14.6 million euro deriving from the operational activities disposed of. The result from equity investments was negative 20 million euro (-41.4 million euro in the same period of 2015).

The net cash flow from operations shows a net improvement, passing from 701.4 million in 2015 to 882.7 million euro in 2016, thanks to the management of working capital, and after having sustained investments of 372.2 million euro (391.4 million in 2015), mainly earmarked for increases of Premium capacity in Europe, Nafta and China, as well as improvements in the mix.

The total net cash flow – before dividends and the effects deriving from the merger with Marco Polo Industrial Holding and from the re-organization of the industrial activities – was positive for 383.1 million euro (192.1 million euro in 2015) and include approximately 200 million euro of inflows deriving from the sale of some shareholdings (mainly the disposal of the investment held by Eurostazioni S,p.A. in Grandi Stazioni Retail) and real estate assets.

The net financial position on 31 December 2016 was negative 4,912.8 million euro, an improvement of 418.2 million compared with 5,331.0 million euro at the end of 2015. The positive performance stems mainly from the high level of cash generation, as well as an inflow of 266 million euro deriving from the entry, with a stake of 38%, of the Chinese fund Cinda into the capital of Pirelli Industrial in the context of the reorganization project of the industrial business.

Investments in Research & Development totaled 228.1 million euro, equal to about 4% of total sales, of which 191.0 million euro for activities linked to Premium products (about 6% of the segment’s sales).

At the geographic level, Apac registered, together with Nafta, the highest profitability of all the macro-areas, remaining at the twenties level. Revenue performance improved (organic growth +12.1% in 2016 and +25.4% in the fourth quarter) which include the sales of Jiaozou Aeolus Tyre from October 1, 2016. On a like-for-like basis, growth was 9% at the annual level and 17.9% in the fourth quarter, thanks to the positive performance of the Consumer business and the strengthening of the Original Equipment channel thanks to new homologations with European and local brands.

Nafta posted an Ebit margin at the twenties level, in line with 2015, with organic revenue growth of 12.0% in 2016 (+18.6% in the fourth quarter) thanks to the good performance of Premium and Super Premium.

Profitability in Europe improved to mid-teens level thanks to the 10.0% Premium revenue growth, supported by the good performance of sales both in the Original Equipment and Replacement channels. Organic revenues grew by 5.1%.

Meai registered stable profitability at the high-teens level, with organic revenues growth of 7.2%.

The reduction of profitability in South America (mid-single-digit) was mainly due to the performance of the Industrial business which discounted the market’s weakness, while profitability in the Consumer segment was confirmed at the high single-digit level. During the year, revenues at the organic level registered progress of 6.0% (-6.6% including forex effect of -12.6%). There was a marked improvement in performance in the fourth quarter with revenues growing 12%, in particular in the industrial business, with a volume increase above the market’s.

Forex volatility and the weakness of the market had a negative impact on the results in Russia (revenues down 1.0% net of forex) with profitability at break-even level, an improvement compared with the first nine months of 2016 thanks to a marked recovery in the fourth quarter (organic revenue growth of 9.6%, underpinned above all by the good performance of price/mix and a forex effect of +6.5%.

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Board of directors meeting: the process of reorganization of Pirelli industrial continues

INDUSTRIAL PLAN 2016-2018 WITH VISION TO 2020 PRESENTED

NEW PIRELLI DIGITAL GENERAL MANAGEMENT, ENTRUSTED TO BY LUIGI STACCOLI, CONSTITUTED

PAOLO DAL PINO NOMINATED CEO OF PIRELLI INDUSTRIAL

IPO LAUNCH SEEN BY FIRST HALF 2018

FUTURE GOVERNANCE ALIGNED TO INTERNATIONAL BEST PRACTICE

The Board of Directors of Pirelli & C. S.p.A. met today and was updated on the activities under way with regard to the proposed integration of Pirelli Industrial and Aeolus, acknowledging with favour its progress.

The Board then analyzed the guidelines of the industrial plan for the Industrial segment.

The Board, further, approved the industrial plan 2016-2018, with vision to 2020, for Pirelli Consumer, the sole global player entirely focused on the Consumer business. The strategy calls for:

  1. 1. strengthened leadership in the high profitability Prestige and Premium segments;
  2. 2. a business model always more focused on the end consumer (‘Consumer Centric Approach’)
  3. 3. oversight of new business opportunities offered by new and sustainable mobility (Cyber Tyre and Vélo);
  4. 4. total digitization of industrial, commercial and management processes, more efficient and based on predictive models made possible thanks to the deployment of big data and analytics.

To support this course, the Board adopted an organizational model which calls for:

- the constitution of General Management Pirelli Digital, entrusted to Luigi Staccoli, supervising all activities aimed at the digitization of the company;

- the aggregation of all technical structures (R&D, homologations, technologies, manufacturing, quality, motorsport) and sales to Original Equipment under the responsibility of General Manager Technology, Maurizio Boiocchi;

- the attribution of the management of all commercial structures (marketing, supply chain,  aftermarket sales) and the Business Unit Moto to the Chief Commercial Officer Consumer, Roberto Righi, in support of the ‘Consumer Centric Approach’;

- the General Management Operations will be superseded from January 1, 2017. Gregorio Borgo, who has announced his decision to leave the company to pursue a new important professional path, will remain with the company until December 31, 2016 to support the  Ceo, Marco Tronchetti Provera, with the implementation of the new organizational model;

- the nomination of Paolo Dal Pino, currently Ceo of the Latin America region, as Chief Executive Officer of Pirelli Industrial;

- attribution of responsibility for Human Resources Management given to Gustavo Bracco with the role of Chief Human Resources Officer.

The Company extends to Gregorio Borgo its appreciation for the important contribution made to the growth of Pirelli through his 24 years of service.

On the basis of these assumptions, the Board shared the desire to accelerate the course to the company’s listing, immediately launching all the necessary actions. It is foreseen that the preliminary phases for the preparation of the IPO (Initial Public Offering) can be completed during the first half of 2017, with the objective of proceeding, in accordance with the best opportunities offered by the market, with the launch of the IPO by the first half of 2018 on the Milan stock exchange or, however, on one of the leading stocks exchanges at the international level.

Among the elements underpinning the success of the listing, the Board identified:

- the alignment of governance to international best practice, through a Board of Directors and board committees composed of a suitable number of independent directors;

- a shareholder structure that, although beginning with a concentrated shareholder structure, which emerged during the Public Tender Offer, foresees an evolution which ensures a suitable free-float level and one able to satisfy the expectations of international investors;

- a system of incentives that guarantees the alignment of the interests of management with those of all shareholders.

The Board further took note with favour of the decision of the board of Marco Polo International Italy (‘Marco Polo’), which also met today, to share and approve the course decided by Pirelli and the elements underpinning the success of its listing. The Board of Marco Polo confirmed its desire to accelerate the implementation of the shareholders’ agreements signed on March 22, 2015, which have as their basis the creation of value by Pirelli and its relisting.

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PIRELLI AND MILAN BICOCCA UNIVERSITY CONTINUE TO JOIN FORCES IN DEVELOPING TYRES THAT ARE EVEN MORE ECOLOGICAL

RENEWAL OF THE CORIMAV AGREEMENT: A CONSORTIUM BETWEEN PIRELLI AND THE UNIVERSITY FOR RESEARCH INTO ADVANCED MATERIALS

ONE PATENT PER YEAR HAS BEEN REGISTERED SINCE CORIMAV WAS FOUNDED IN 2001

One patent deposited every year, 44 student scholarships and 36 doctoral scholarships: all in the arena of research into advanced innovative materials. This is the end result of the CORIMAV partnership, created in 2001 as a joint venture between Pirelli and Milan Bicocca University, which was recently renewed at an event attended by Pirelli’s CEO Marco Tronchetti Provera, and the rector of the university, Cristina Messa.

The CORIMAV project was born 15 years ago with the objective of developing cutting-edge technologies using new materials, supporting research and development into eventual patent applications, and promoting training and career development opportunities for young researchers. Now, this exciting project opens up its next chapter.

Over the last few years, CORIMAV has evolved considerably, in the same way that the nature of research projects has constantly evolved and Pirelli itself has evolved significantly as a company.

The first phase of the CORIMAV programme provided scholarships aimed at three principal areas: nano-composite materials, energy transfer (superconductivity and distributed generation) and molecular modelling. These academic partnerships between Pirelli and the university anticipated a ground-breaking Italian government initiative three years ago designed to promote the creation of research doctorates in collaboration with industry.

Since 2005, CORIMAV has provided doctoral scholarships to broaden the range of research and put in place continuous and structured programmes. From 2010 onwards, the focus has been specifically angled towards tyres: a sector that is obviously at the heart of Pirelli and its strategy. As a result, the consortium has become a natural think-tank of knowledge and ideas from the university to Pirelli and vice versa.

One of CORIMAV’s greatest strengths is its ability to train highly-specialised engineers with specific skills, which can allow these people to become immediately employed in Pirelli’s research and development division.

So it’s no surprise that since the initiative started, around 20% of the scholarship recipients have gone on to be employed by Pirelli, and that the company has funded a full-time researcher tasked with co-ordinating the work of the CORIMAV scientists: a role that has been held by Barbara Di Credico since 2015. Specifically, the research activities funded by Pirelli target the study of inorganic materials that can be used in the vulcanisation of tyre compounds.

Among the recent success stories are Luciano Tadiello and Antonio Susanna. They are two researchers who have joined Pirelli’s research and development department and contributed to two patent deposits by CORIMAV, to do with new materials for tyres that consume less energy.

Research into new materials to produce increasingly ecological tyres has been the main focus of CORIMAV’s activities in recent years. This includes one of the most innovative projects from CORIMAV, which is also patent-protected: the use of lignin in the production of tyres with a low environmental impact. Lignin is a natural material that has intrinsic antioxidant properties, which when altered by appropriate chemical and physical means, can benefit the mechanical performance of a tyre and become a substitute for fossil-derived products (such as carbon black).

CORIMAV’s green philosophy is not just limited to the production phase and use of a tyre but also to the tyre at the end of its life. Researchers have discovered a process of bio-devulcanisation in which bacteria and other biological agents are used to treat tyres at the end of their life. Thanks to recent research, it has been possible to isolate bacteria with the capacity to remove sulphur-carbon bonds, which can be used to treat tyre constituents at the end of their life with a view to subsequent recycling.

Enrico Albizzati has been the director of CORIMAV since it was created. At the time he was in charge of Pirelli’s materials innovation department, and currently he is the company’s scientific advisor.

CORIMAV is a concrete example of the excellence of the newly created Bicocca District within the university: a centre that unites research, culture, and industry. The consortium currently funds three doctoral scholarships per year in material nanotechnology and research. It also organises courses in management and intellectual property for other science students, as well as courses on specific aspects of science, delivered by Pirelli employees. This is yet another way of fostering increasingly integrated collaboration between the worlds of academia and industry.

The university is very close to Pirelli physically, to the point that there used to be a bridge linking Pirelli’s main building to the one that will now house part of Milan Bicocca University. These days, the bridge is formed of ideas, knowledge and innovation that will form a vital link to the future.

Cristina Messa, the rector of Milan Bicocca University, said: “With the renewal of the CORIMAV consortium, we’re underlining the commitment both from ourselves and Pirelli to invest in research and development of new materials. For 15 years now, CORIMAV’s activities have allowed us to carry out sophisticated industrial research projects and activate advanced levels of professional training, such as the industrial doctorate. This close collaboration, with CORIMAV at its very heart, forms an integral part of a wider strategy to showcase the knowledge and innovation that Milan Bicocca University and Pirelli, together with other partners, are pioneering thanks to the Bicocca District project: a brand new network of academic institutions and companies working together to exchange know-how and opportunities, as well as improving services and enriching professional development.”

Marco Tronchetti Provera, Pirelli’s vice chairman and CEO, commented: “The experience of the partnership between Pirelli and Milan Bicocca University has underlined how companies and academic institutions can together trigger initiatives that promote both professional and economic growth. We are collaborating with a number of different departments within the university that represent excellence at international level, and which help us to turn our most innovative projects into reality, as well as improving our product.

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