Tougher scenario where value will drive our greater profitability
Recent developments in key macroeconomic data seem to confirm market expectations for a general economic slowdown in 2012. In particular:
- RECESSION IN THE EUROZONE
Business cycle indicators, hard data and recent decisions taken by the ECB and national governments hint to the fact that the Eurozone has already entered a new recessionary phase, which will be particularly severe in the Euro Area periphery. Sovereign bond market tensions remain a crucial risk factor for the Eurozone and its neighbouring countries in the foreseeable future.
- SLOWDOWN IN US
Recent developments in key economic indicators hint to a slowdown in the economic recovery. Indeed, labour market have constantly surprised the market on the downside during Q2, whilst growing uncertainty arising from the impact of the fast-approaching fiscal cliff may keep consumer spending at bay in the foreseeable future. These latter developments have played a key role in darkening the US economic outlook (+2% in 2012-13).
- CONTINUED GROWTH in ASIAN-PACIFIC
Despite the almost-certain Eurozone recession, economic growth in the Asian region should remain rather robust. Although risks of a Chinese hard landing (due to the housing market downturn and a local debt crisis) have somewhat diminished, market’s expectations are still subject to a high degree of uncertainty.
- SOUTH AMERICA: LIMITED EXPOSURE TO EUROZONE SLOWDOWN
Latam should maintain a reasonably vigorous growth rate – albeit slower than in 2011 – due to the lower exposure of emerging economies to a recession in the Eurozone. A hard-landing of the Chinese economy remains one of the major risk factors for both Brazil and Argentina, given the pivotal role played by Beijing in the commodity market.
Against the backdrop of a macroeconomic slowdown, it should be noted that the tyre market is historically more profitable and less cyclical than the car market.
Sales are driven by the replacement channel (which accounts for 74.5% of 2011) and are less vulnerable to possible contraction in the automotive sector and consequent demand in the original equipment channel.
Even during the last recession, the global market for premium tyres (replacement channel) posted growth of +2.9% in 2008 and +6.8% in 2009 (source: Europool, RMA, Anip, CRIA). Furthermore, premium tyres are increasingly seen as products associated with sustainability and safety, areas dominated by Pirelli with its cutting-edge know-how and technology. Finally, Pirelli’s major presence – as measured in terms of revenue – in rapidly developing economies, especially Latin America and in Russia from 2012, reduces the possible impact stemming from any slowdown in European countries.
The Tyre activities, which at 99% of sales represent the group’s core business, saw growth in economic results thanks to Pirelli’s strategic focus in the Consumer business in the Premium segment, which as well as presenting higher profit margins confirmed its resilience as a sector even in areas hit hardest by the macro-economic crisis. This strategy effectively offsets the overall slowdown in demand linked to the deterioration of the macro-economic scenario, the repercussions of which in terms of volumes are particularly noticeable in the Industrial business with its greater exposure to economic cycles.
Please see below the geographical breakdown of Pirelli’s H1 2012(and the preponderancy of the premium segment on the overall revenues and EBIT).
Fast Forward on Value Strategy in the current macro-economic scenario
leveraging on Premium growth
Absent any presently unforeseeable events, Pirelli confirms its 2012 profitability target at 800 million euro at least with an Ebit margin above 12% (compared with 580 million euro in 2011, margin 10.3%), despite the critical macro-economic context. This result will be achieved thanks to the value strategy based on a focus on Premium products (volumes of which are expected to grow by approximately 20%), the expected growth in price/mix of +11/+12% and on a more incisive efficiencies plan. As a consequence of the faster exit from the standard segment, the volume target in the Consumer business has been revised for the year to -2.5%/-3.5% (previous target -0.5/-1.5%). In the industrial business, with its greater exposure to the economic cycle and further penalized by non-recurrent events such as the just concluded strike at the Egypt factory and delays linked import licenses in Argentina, the volume target has been reduced to -5/-6% (previous -2/-4%). The overall volume target has been this lowered to -3/-4% from the prior -1/-2%.
A Contingency Plan always ready to kick in
However, if global macroeconomic conditions should deteriorate further, Pirelli has prepared a contingency plan to deal with the change in context as flexibly as possible. If demand in the auto original equipment channel should fall more than 10%, if the truck business contracts more than 20%, and if distributors’ inventories increase more than 10%, the contingency plan would aim to keep cash flow and profitability under control by adjusting planned investments within the flexible range of about 20%, by carefully managing working capital, by taking measures to improve internal efficiency and implementing a programme to reduce fixed costs.
Taking the slowdown in demand into account, Investments for the year are seen at below 500 million euro (prior target approximately 500 million euro) and will be predominantly destined to the expansion of Premium capacity, and quality and mix improvements.
Enhanced Efficiency Plan
In light of the current economic environment, Pirelli has widened its contingency plan by approximately 30 million euro to approximately 150 million euro (previous target 120 million euro). The greater efficiencies together with the lower impact of raw material costs (by 30 million euro, from 90 to 60 million euro), will permit the absorption of costs linked to the acceleration towards Premium products and the reduction of output of standard, and low profitability, tyres which are more greatly impacted by the present economic crisis.
Investments for the year are seen at below 500 million euro (prior target approximately 500 million euro) and will be predominantly destined to the expansion of Premium capacity, and quality and mix improvements.