The economic and financial results reached in 2007 increased from 2006 and can be summarized as follows:

Pirelli tyre (in millions of Euros)

12/31/2007

12/31/2006

Net sales

4,161.7

3,949.5

Gross operating profit

548.6

533.7

- % of net sales

13.2%

13.5%

Operating profit

358.1

342.3

- % of net sales

8.6%

8.7%

Earnings (losses) from investments

1.5

(2.4)

Operating profit (loss) incl. earnings (losses) from investments

359.6

339.9

Financial income (expenses)

(55.2)

(54.1)

Income taxes

(93.9)

(86.5)

Income

210.5

199.3

- % of net sales

5.1%

5.0%

Net financial (liquidity)/debt position

559.6

601.5

Capital expenditures

262

224

R&D expenditures

148

147

Employees (number at year-end)

27,224

25,169

Factories (number)

24

24

Net sales

Net sales exceeded the threshold of Euros 4 billion, reaching Euros 4,161.7 million, with an increase of 5.4 percent compared to Euros 3,949.5 million in 2006 (organic growth, net of exchange differences, is 6.5 percent). The increase in net sales was driven by higher volumes (+1.8 percent), despite the sluggish performance
of the Winter segment in Western Europe in the last quarter, and especially the price/mix trend (+4.7 percent), due especially to the increasing concentration on segments with high added value.
The foreign exchange component was a negative figure (-1.1 percent), mainly due to the loss of value of the U.S. dollar.

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Pirelli P Zero is confirmed as the benchmark tyre for supercars.

The distribution of net sales by geographical area and product category is as follows:

Geographical Area

2007

2006

Italy

10%

11%

Other European countries

38%

40%

North America

8%

8%

Central and South America

28%

26%

Africa/Asia/Pacific

16%

15%

Product Category

2007

2006

Car tyres

61%

62%

Truck tyres

28%

28%

Motorcycle tyres

8%

8%

Steelcord/Other tyres

3%

2%

Sales growth continued in markets with a higher growth rate, most in particular as a result of higher production capacity in those areas (particularly China, South America and Romania to support development in Eastern Europe).
Sales in North America are higher on a comparable exchange basis but remain unchanged in percentage terms due to the cited foreign exchange effect.

The composition of sales remains more or less the same in the various product categories.

Gross operating profit

Gross operating profit (EBITDA) is Euros 548.6 million (13.2 percent of net sales), an increase of 2.8 percent compared to Euros 533.7 million in 2006.

Operating profit

Operating profit is Euros 358.1 million, up 4.6 percent compared to Euros 342.3 million in 2006, with the percentage of operating profit to net sales at 8.6 percent, which is basically in line with the prior year.

The growth of volumes and the price/mix trend, combined with actions to raise productivity and reduce costs, more than compensated, in amount, the higher price of production factors and the negative exchange effect. In spite of the actions undertaken, the Company maintained a high level of R&D expenditures.

Details of the growth in the operating profit of Euros 15.8 million compared to 2006 can be summarized as follows (in millions of euros):

Operating profit 2006

342.3

Foreign exchange effect

(6.1)

Prices/mix

84.6

Volumes

33.1

Production factors per unit cost

(57.6)

Efficiencies

15.5

Depreciation and other

(53.7)

15.8

Operating profit 2007

358.1

Income

Income in 2007 is Euros 210.5 million (after earnings from investments equal to Euros 1.5 million, financial expenses of Euros 55.2 million and income tax expenses of Euros 93.9 million), compared to income of Euros 199.3 million (after losses from investments equal to Euros 2.4 million, financial expenses of Euros 54.1 million and income tax expenses of Euros 86.5 million).

Net financial position

Cash flows continued to be generated by the company, with net financial debt at the end of 2007 equal to Euros 559.6 million, a decrease of Euros 41.9 million compared to the end of 2006 (Euros 601.5 million), after the payment of dividends for Euros 69.9 million to the shareholders (Speed S.p.A. Euros 27.2 million and Pirelli & C. S.p.A. Euros 42.7 million). The reduction in debt occurred despite undertaking an investment plan that is higher from a financial standpoint compared to prior years, particularly at the new manufacturing sites.

Employees

There are 27,224 employees at December 31, 2007 including 2,665 employees with temporary contracts and 816 temp employees.

Compared to December 31, 2006, there was an increase of 229 management and staff due mostly to an increase in operations in China and Romania.

As regards the blue-collar work force, the number increased by 1,826 (of whom 1,535 are in permanent positions and 291 with temporary contracts and temp work) due basically to the growth of operations in Brazil, Romania and China.

Consumer market

The Consumer line includes tyres for vehicles generally used by private individuals: for example, tyres for cars, SUVs, vans and motorcycles.

In 2007, there was an overall growth in sales and profitability compared to 2006, thanks to higher volumes and a better price and product mix.

In particular, sales amount to Euros 2,862 million (+4.6 percent) and operating profit from ordinary operations reached Euros 252.5 million (+4.9 percent), with a ROS of 8.8 percent.

In the Car/Light Truck segment, Pirelli’s business grew in North America in a context of a substantially steady demand for replacements and a decline in original equipment. On the other hand, the segment benefited from higher demand in South America where growth was particularly evident in the original equipment segment.

In Europe, as well, volumes increased in original equipment and in the premium segments of the replacements channel. The only exception was the winter tyres segment which was affected by the contraction in the demand, especially in the last quarter.

Sales in the Asia/Africa/Pacific area increased significantly, reflecting investments in the area.

In November 2007, the Pirelli Group’s second Chinese production unit was inaugurated in Shandong Province and is entirely devoted to car tyre production.

Investment in the new factory amounts to almost USD 100 million and, during the initial phase, should ensure the Group a capacity of 3 million pieces a year and provide work for about 1,000 employees.

The production of the new factory will mainly be earmarked for China and the Asia/Pacific markets, but thanks to the fact that the products can be totally integrated, they will also be sent to other areas, including North and South America.

2007 saw the launch on the world market of P Zero the Hero, the new ultra high performance tyres developed for ‘supercars’.

Since its launch, the new P Zero has been awarded numerous homologations as original equipment for the latest and most prestigious supercars, including the Ferrari 599 GTB Fiorano, the Lamborghini Murciélago and Gallardo, the Audi R8 and S8, the Aston Martin DB9, the Maserati Quattroporte, the Jaguar XK and the Mercedes AMG.

Sales in the Motorcycle segment increased in 2007 at a rate that was higher than the average for the market, which nevertheless grew compared to the prior year.

In the replacements channel, the most significant growth was reported in North and South America, Europe and Japan.

There was a positive sales trend in the original equipment channel, especially in South America and Europe, with important homologations such as the Kawasaki ZX 10 R, the Ducati Hypermotard S and the KTM 990 Super Duke, the Buell 1125R (fitted with Diablo Corsa III), the MV F4 312, the KTM RC8 (with Dragon Supercorsa PRO), the Aprilia Mana 850 (with Scorpion Sync), and the Ducati 1098R (with Diablo Supercorsa SP). Other homologations for scooters included the Gilera GP800, the Gilera Fuoco 500 and the Honda SH 300.

The Metzeler brand received homologations for the Honda Transalp 700 fitted with the Tourance, the Moto Guzzi Bellagio 940 fitted with the Roadtec Z6, the Triumph Speed Triple and the Aprilia Shiver 750 fitted with the Sportec M3 and the Yamaha XT660Z Tenere fitted with the Tourance.

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The Belgian Kevin Strijbos with Suzuki in the MX1 World Motocross Championship.

In the product line for top racing models, Pirelli again headed the field. The most important results include confirmation of Pirelli’s role as Official Tyre Supplier for the World Superbike Championship and the breaking of one record after another, confirming that Pirelli tyres are constantly improving their performance.

In the off-road segment, there were more victories in the MX1 category of the World Motocross Championship and in the European MX3 category. For the third year running, the Metzeler brand won the World Enduro Championship in all three of the E1, E2 and E3 categories. There were significant results in Road Racing in the National European Championships and in championships held outside Europe. In North America, Pirelli is the exclusive supplier of the Canadian Superbike Championship and the SunTrust MOTO-ST series organized by Grand Am.

Industrial market

The Industrial line is for vehicles for the professional transportation of goods or passengers. Products of this line include tyres for trucks, buses, earth-moving equipment and farm machinery. The Industrial line also includes the production of steelcord, the technological component used to produce high-performance radial tyres, mainly for this line.

In the Industrial business area, net sales amount to Euros 1,300 million, with an increase of 7.1 percent compared to the prior year. The operating profit from ordinary operations is Euros 105.6 million, an increase compared to 2006 (+3.8 percent). As a percentage of sales, this represents 8.1 percent, slightly less (-0.3 percent) than in 2006, mainly due to the cost of natural rubber and steel, which was not totally compensated by the price/mix trend.

In the segment of tyres for Trucks, in Europe, the replacements channel reported strong growth during the first half and fairly steady growth during the second, whereas original equipment reported constantly high growth throughout the year.

In both channels, the increase was mainly driven by the growth of the Eastern European markets.

In South America, the market reported significant growth rates, both in the replacements channel, driven by the strong demand from the agricultural sector, and especially in the original equipment channel, with a high demand for new vehicles, especially in Brazil, thanks to the agricultural sector and the overall positive economic situation.

In Africa and the Middle East, the trend of replacing conventional tyres with radial tyres continues, while, in China, the market continues to report growth of more than 10 percent.

Steelcordpag37.jpg

Steelcord sales up by 4% in 2007.

In this context of global demand, Pirelli succeeded in significantly increasing its volumes in the South American and Asia/Pacific markets, and undertook a further selection of the mix/focus on the premium lines in Europe, Africa and the Middle East.

The price of natural rubber, which stabilized in the second and third quarter, increased again (although attenuated by the progressive loss of value of the U.S. dollar) in the last quarter of the year, and especially at the beginning of 2008, partly due to the continuous rise in the price of oil.

Sales volumes and production of the steelcord line increased by 4 percent in 2007 compared to the prior year. The increase also involved third-party customers and was focused on products with complex applications and a high technological content.

Demand worldwide increased by about 6 percent, driven principally by the Chinese market, where consumption increased by almost 25 percent. Strong growth rates were also reported in South America and Eastern Europe, supported by the continuous process of relocation and expansion of production facilities to those areas. The absorption of mature markets such as North America and Western Europe was again down, whereas consumption was constant in Japan and South Korea.

From the standpoint of technological evolution, high-resistance cords made with special steel and special treatments are continuing to become more widespread. The ever-growing focus of the Steelcord business unit in cord with high added value is consistent with the maximum commitment that is being placed on know-how.

In the industrial area, growth continues in low-cost areas, where, in 2007, these accounted for more than 70 percent of finished product capacity. During 2007, work continued on the large-scale expansion of the production capacity of the plants at Sumarè in Brazil and the plant opened in 2005 at Slatina in Romania.

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Production stage in the Yanzhou factory.

The company S.C. Cord Romania, in collaboration with Continental, not only constitutes an opportunity to develop European production capacity at a competitive cost, but also consolidates an industrial and commercial partnership which began in 1972 with Drathcord Saar in Germany.

Capital expenditures

Capital expenditures in fixed assets amounted to Euros 262 million, compared to Euros 224 million in 2006.

Capital expenditures in factories represent 92 percent of the total (the remainder was absorbed by other corporate functions and by the commercial subsidiaries and associates). In line with the strategy of the Group and market demand, investments were made in the development of innovative processes, expansion of production capacity, especially in low-cost areas, and in the continuous increase of high-performance tyre production and the launch of new products.

Specifically with regard to capital expenditures by major product line:

  • Car: In the field of innovative processes, installation began of the new Next MIRS production plant, an outgrowth of Pirelli’s robotized tyre production system (MIRS).

With regard to traditional processes, in European factories, concentration of the production capacity on the ‘high-performance’ product range and the upgrading of installed machinery continued.

With the aim of meeting increased market demand while at the same time reducing production costs, a greater boost was given to increasing production in geographical areas with low costs. In particular, a new factory was opened at Yanzhou in China and expansion continues in order to augment the capacity of the factory at Slatina in Romania. In Turkey, a new production unit for Motorsport tyres was opened at the factory in Izmit.

  • Truck – all steel: In line with Group strategy, the increase of production capacity was concentrated in the low-cost areas of Brazil, Egypt and China with actions aimed at debottlenecking.

In the sphere of innovative processes, at Settimo Torinese, the installation of machinery for producing products with the innovative SATT (Spiral Advanced Technology for Trucks) derived from MIRS technology continued. Installation of this production process has begun at the factory in Izmit.

  • Steel Cord: The expansion plan continued to move forward, especially in the new factories in Romania and Brazil, whereas the activities to develop prototypes for new products and materials are concentrated in Italy.

Research & Development expenditures

In 2007, R&D expenditures amount to Euros 148 million. Traditionally this activity has focused on the development of new high-performance products (e.g. UHP, Winter, Runflat, SUV and motorcycle tyres), by exploiting technological components and very advanced know-how which are the result of intensive research in the areas of materials, design, profiles, tread patterns and processes.

To sustain improvement and innovation of the product portfolio, research continues to find innovative solutions through the study and application of new types of polymers and nanotechnologies and new textile and hybrid fibers which make it possible to further increase the performance level of the product. In 2007, much effort was also devoted to augmenting tyre safety.

During the year, new research agreements were signed with some of the most prestigious universities worldwide. A far-reaching collaboration agreement was reached with the Faculty of Industrial Automation at the University of Craiova (Romania) which, among other things, includes the development of RFID, a system for monitoring tyre production phases (remotely by radio waves from a chip).

Furthermore, in the sphere of open innovation (technological collaboration between Pirelli, its most significant suppliers and customers in terms of technology and numerous universities around the world), an important five-year agreement was signed with the Politecnico University di Torino with the aim of further developing hi-tech production processes and products based on Pirelli technology. With regard to processes, they will be working on the next generation of MIRS™ (Modular Integrated Robotized System), the revolutionary robotized production system patented by Pirelli, and the CCM™ (Continuous Compound Mixing system). With regard to products, they will be concentrating on developing the Cyber Tyre, the intelligent tyre capable of ‘communicating’ with the vehicle and created to augment safety on the road.

PIRELLI P4 - P6 VIZZOLA

Developed in 2007, the new Cinturato tyre was launched at the beginning of 2008.

In the sphere of car tyres, in 2007, Pirelli R&D activities generated products with a high level of technological content.

February saw the launch on the world market of the P Zero the Hero on the racetrack in Dubai. This new ultra high-performance tyre was developed for ‘supercars’ and derives directly from Pirelli’s experience on the racetrack. In 2007, Pirelli celebrated a century of participation in motor sports. Since its debut, the new P Zero has been enthusiastically received by car manufacturers, many of which have adopted it as original equipment for their top-performing models. In doing so they are taking advantage of a whole range of innovative solutions developed by Pirelli, and protected by five exclusive patents.

Another important milestone was reached in 2007 with the Pirelli Sottozero: for the first time ever, a winter tyre was homologated for speeds of up to 270 km/h. Since 2007, the Pirelli Sottozero has been fitted on a number of supersports cars:
Bentley and Aston Martin homologated the Winter 270 SottoZero, respectively for the GT Continental and the DBS.

Finally, 2007 saw the development of the Pirelli Cinturato, the tyre used in F1 racing by Manuel Fangio. Thirty-two years later, the tyre is being relaunched in the name of environmental performance and economy of use. The new Cinturato already conforms to new standards which will come into force in two years time banning the use of highly aromatic oils. Thanks to the development of a new structure, resistance to rolling is significantly reduced in all its components (compounds and strengthening materials), thus contributing to reducing fuel consumption and carbon dioxide emissions. Meanwhile, thanks to the materials and structure of the tread, the new tyre lasts longer in terms of mileage. The Cinturato was launched at the beginning of 2008 and was immediately enthusiastically received by the international Press, having successfully passed the most rigorous tests.

In 2007, in tests organized by the specialized international Press, Pirelli achieved excellent results in terms of performance, both in the summer segment of HP and UHP and in the Winter segment. With regard to the latter, the tests conducted by the ADAC (German automobile club) selected Pirelli for all the applications, from the city-car to the best-performing sedans.

With regard to development activities, Pirelli continues to have close links with car manufacturers. This can be seen in the fact that products of the P Zero range are used on the most recent models of the world’s top car companies.

At the Geneva International Motor Show, 20 percent of the cars exhibited were fitted with Pirelli tyres.

In Frankfurt, Bentley fitted the P Zero Rosso on all the models at the show, including the prestigious Brooklands coupè. Audi selected the P Zero for its sports models R8 and RS6.

Pirelli also received important homologations for its ultra-high-performance P Zero Corsa System tyres developed for drivers of supersports cars. These tyres guarantee excellent performance, with excellent roadholding on bends, and good acceleration and braking, whether on dry or wet roads or on the racetrack.
Having been selected as the ‘sport tyre option’ on the Aston Martin V8 Vantage, it was chosen by Ferrari which presented, in Frankfurt, the F430 Scuderia for the Ferrari Challenge (where Pirelli contributed to the success of driver Bruno Senna, nephew of the legendary Ayrton Senna). Porsche then presented it on its powerful 997 GT2.

In Frankfurt, Pirelli renewed its longstanding alliance with Volkswagen with the new version of the Golf GTI Pirelli, one of the top cars of the ’80s, now fitted with the P Zero.

The list of final homologations obtained in 2007 by Pirelli continues with:

the Porsche Cayenne; the Audi Q7 and A4 (also the R8 and RS6); the Mercedes C-Class, S-Class and CLK AMG; BMW’s sports models; the FIAT Grande Punto, Cinquecento and Grande Punto Sport Abarth; the Ford Lincoln MKX, Edge, Expedition, Explorer and F150; the Land Rover Range and the New Freelander; the Saab 9-3; the Volkswagen Tiguan, Touran, Golf and Golf GTI Pirelli; the Skoda Octavia Scout and Superb; the Volvo S80, XC70, XC90 and V70; and several Peugeot and Hyundai models.

In 2007, Pirelli technology achieved resounding success in the racing world, especially at the highest level, and demonstrated improved product quality both on the racetrack and in rallies.

On the racetrack, Pirelli continued to win international championships: the FIA GT with the Maserati MC12, Ferrari 430 and Aston Martin BMS, the Le Mans Series and in various national championships.

Finally, the Grand Am series, one of the most exciting championships for prototypes and one of the most popular in the United States (the Daytona myth is part of it), selected the Pirelli P Zero and Pirelli as exclusive supplier for the three-year period 2008-2010.

Pirelli continues its role as partner of the Ferrari Challenge and other single-brand championships (Trofeo Maserati, the Lamborghini Gallardo Challenge, national Porsche Club championships, the Porsche Cup, V8 Supercar championships).

Pirelli is exclusive supplier to the World Rally Championship for the three-year period 2008-2010. At the beginning of 2007, the world council of the FIA accepted Pirelli’s offer to supply tyres, in recognition not only of its capacity for technological innovation but also its ability to promote young talent and national championships. Pirelli already participates in about 20 national and international rally championships and the IRC (Intercontinental Rally Challenge). One of the many reasons for the decision of the FIA was Pirelli’s century-long involvement in motor racing and especially rallies.

Mitsubishi Lancer Travaglia.jpg

Renato Travaglia’s Mitsubishi Lacer Evo IX in the 2007 World Rally Championship.

2007 also confirmed Pirelli’s propensity to focus on technological innovation and extend its product offering by producing systems for controlling correct tyre pressure. After marketing the K-Pressure Optic, an extremely simple device to install (it is screwed onto the valve of the tyre instead of the cap) and just as simple to use (if the pressure of the tyre is sub-optimal, the end of the device changes color), Pirelli is continuing the development, after passing the operating tests, of the Cyber Tyre: a transponder that can detect the temperature, pressure and vertical load of a tyre in real time. Using a resin, it is applied to the whole inner surface of the tread. It requires no batteries, since it produces the energy it needs itself, thanks to a piezoelectric system and the fact that it rotates inside the tyre. It has acquired the rights to a Fioravanti patent which makes it possible to develop a system able to transmit information about the real-time forces which regulate the dynamics of the vehicle through wireless miniature electronic sensors. The aim is to improve the drivability of a vehicle, even in severe conditions, in complete safety.

In the sphere of giant tyres, Pirelli is strengthening its relationship with leading truck manufacturers by working on innovative solutions which make it possible to intervene on such aspects as safety and comfort, but also toughness, reduced resistance to rolling and mileage. Pirelli’s longstanding partners in this field are Iveco, FIAT Professional, Mercedes-Benz and DAF.
Numerous models are fitted with Pirelli tyres as original equipment. They include best-sellers such as the Iveco Stralis and Trakker, the Mercedes Actros, the MAN TGA and the DAF XF105, the last of which won the prestigious ‘Truck of the year 2007’ award. Yet another confirmation of the high quality of Pirelli’s production came from the performance of the PS22: this normally marketed tyre won rally-raid races such as the Baja Aragon in Spain, and came third in its category in the 2007 Lisbon-Dakar.

In the field of motorcycle tyres, in 2007 Pirelli completed development of the Diablo Rosso: a new-generation tyre using EPT (Enhanced Patch Technology) designed to maximize the area of contact between the bike and asphalt. The new compounds and optimum tread design mean that these tyres are ideal for the latest superbikes thanks to a patch without tread cuts on the shoulder of the rear tyres.

The Metzeler brand launched the Feelfree Wintec at an event in Sweden. This is the best tyre on the market for maxi-scooters in winter conditions or wet roads.

Diablo_Rosso_strada_1.jpg

Development of the Diablo Rosso was brought
to a close in 2007.

Thanks to its technological contribution, in the sphere of racing Pirelli won the 48th world title in Cross MX3 with Yves Demaria, repeating the success of Steve Ramon in MX1. Pirelli is exclusive supplier to the World Superbike Championships and, in 2007, also became the exclusive supplier of the British championship of the same category.

Tyre system and vehicle dynamics

In 2007 various public events featured the presentation of the Cyber Tyre Lean (CTL) which monitors tyre pressure on cars. The device was jointly developed with Schraeder, and is scheduled
for production in 2012 to be fitted on a model of a leading European car manufacturer. This product, which is highly innovative and, so far, quite unique, does not require a battery because, thanks to a system patented by Pirelli, it can generate the energy it requires from the mechanical vibrations transmitted by the tyre to the actual device while the car is moving.

The CTL is the first step in a process of technological development begun, thanks to collaboration with many universities (Berkeley, Politecnico di Milano, Politecnico di Torino) and leading companies worldwide in the field of electronics. The aim is to produce an ‘intelligent’ tyre, that is, a tyre capable of supplying information to the vehicle about the interaction between the tyre and the road, in the hope of radically improving road safety.

Outlook for the current year

Despite the difficulties in the global economy and the sector as a whole, the continuous increase in the prices of production factors and the strengthening of the euro, Pirelli Tyre expects to record a slight growth during the current year compared to 2007.