The Group

ALTERNATIVE PERFORMANCE MEASURES

In this report on operations, in addition to the financial performance measures established by IFRS, certain non-IFRS measures originated from the latter are presented although they are not required by IFRS (Non-GAAP Measures).

These performance measures are presented for purposes of a better understanding of the trend of operations of the group and should not be construed as a substitute for the information required by IFRS.

Specifically, the Non-GAAP Measures used are described as follows:

  • Gross operating profit: this financial measure is used by the group as the financial target in internal business plans and in external presentations (to analysts and investors). It represents a useful unit of measurement for the evaluation of the operating performance of the group as a whole and for each single segment, in addition to the Operating Profit. The Gross Operating Profit is an intermediate performance measure represented by the Operating Profit from which depreciation and amortization are excluded.
  • Earnings (losses) from investments: earnings (losses) from investments consist of all the effects recorded in the income statement referring to investments that are not consolidated line-by-line. These include dividends, the share of the earnings (losses) of companies accounted for using the equity method, impairment losses on available-for-sale financial assets and gains (losses) on the disposal of available-for-sale financial assets. Changes in the fair value of available-for-sale financial assets which are recognized directly in equity are excluded.
  • Net financial (liquidity)/debt position: this performance measure is represented by the gross financial debt less cash and cash equivalents as well as other interest-earning financial receivables. The Notes present a table that shows the balance sheet amounts used to calculate the net financial (liquidity)/debt position.

The Five-year summary of selected consolidated financial data published at the beginning of the report includes other measures formed by an aggregation of IFRS performance measures.

In particular:

  • Fixed assets: this measure is the sum of the line items “Property, plant and equipment”, “Intangible assets”, “Investments in associates and joint ventures” and “Other financial assets”.
  • Provisions: this measure is the sum of the line items “Provisions for other liabilities and expenses (current and non-current)”, “Employee benefit obligations” and “Deferred tax liabilities”;
  • Net working capital: this measure is formed by all other line items not included in the two above measures, in “Equity” and the “Net financial position”.

INCOME (LOSS) FROM DISCONTINUED OPERATIONS

The Photonics business and the Integrated Facility Management business of Pirelli RE which were sold during the course of 2008 are considered "discontinued operations" and consequently contribute solely to the net result for the year. Therefore, for purposes of comparison, the income statement figures relating to 2007 are presented excluding the results of the discontinued operations.

GROUP CONSOLIDATION

The highlights of the Group’s consolidated financial statements for the year ended December 31, 2008 can be summarized as follows:

(in millions of euro)

 

12/31/2008

12/31/2007

Net sales

4,660.2

6,075.6

Net sales (excluding DGAG deconsolidation)

4,660.2

4,780.0

Gross operating profit before restructuring expenses

396.1

572.8

% of net sales (excluding DGAG deconsolidation)

8.5%

12.0%

Operating profit before restructuring expenses

187.4

364.0

% of net sales (excluding DGAG deconsolidation)

4.0%

7.6%

Restructuring expenses

(144.2)

-

Operating profit

43.2

364.0

% of net sales (excluding DGAG deconsolidation)

0.9%

7.6%

Earnings (losses) from investments

(366.5)

148.6

Operating profit (loss) including earnings (losses) from investments

(323.3)

512.6

Financial income (expenses)

(80.0)

(133.8)

Income taxes

(72.6)

(123.0)

Income (loss) from continuing operations

(475.9)

255.8

% of net sales (excluding DGAG deconsolidation)

(10.2%)

5.4%

Income from discontinued operations

63.4

67.8

Total income (loss)

(412.5)

323.6

Income (loss) attributable to the equity holders of Pirelli & C. S.p.A.

(347.5)

164.5

Earnings per share (in euros)

(0.065)

0.031

Total equity

2,374.4

3,804.1

Equity attributable to the equity holders of Pirelli & C. S.p.A.

2,171.8

2,980.2

Equity per share (in euros)

0.405

0.555

Net financial (liquidity)/debt position

1,027.7

(302.1)

Capital expenditures

311

287

R&D expenditures

156

173

Headcount (number at year-end)

31,056

30,823

Factories

23

24

PIRELLI & C. S.p.A. shares

  

ordinary shares (number in millions)

5,233.1

5,233.1

of which treasury shares

3.9

2.6

savings shares (number in millions)

134.8

134.8

of which treasury shares

4.5

-

Total shares

5,367.9

5,367.9

For a better understanding of the Group’s performance by business segment, the following income statement data and the net financial position are presented by business segment.

12/31/2008 (in millions of euro)

 

Tyre

Real
Estate

Broadband
Access

Other

Businesses

Other

Total

Net sales

4,100.2

365.1

124.6

71.6

(1.3)

4,660.2

Gross operating profit (loss) before restructuring exp.

441.2

(17.6)

4.8

(17.4)

(14.9)

396.1

Operating profit (loss) before restructuring exp.

250.7

(27.0)

3.9

(18.3)

(21.9)

187.4

Restructuring expenses

(100.0)

(44.2)

-

-

-

(144.2)

Operating profit (loss)

150.7

(71.2)

3.9

(18.3)

(21.9)

43.2

Earnings (losses) from investments

27.8

(168.5)

-

(1.0)

(224.8)

(366.5)

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

178.5

(239.7)

3.9

(19.3)

(246.7)

(323.3)

Financial income (expenses)

(82.8)

(26.0)

(2.6)

(1.7)

33.1

(80.0)

Income taxes

(70.1)

(1.9)

0.7

0.2

(1.5)

(72.6)

Income (loss) from continuing operations

25.6

(267.6)

2.0

(20.8)

(215.1)

(475.9)

Income (loss) from discontinued operations

-

74.6

(10.9)

-

(0.3)

63.4

Income (loss)

25.6

(193.0)

(8.9)

(20.8)

(215.4)

(412.5)

Net financial (liquidity)/debt position

1,266.8

289.5

(15.0)

23.1

(536.7)

1,027.7

12/31/2007 (in millions of euro)

 

Tyre

Real
Estate

Broadband
Access

Other

Businesses

Other

Total

Net sales

4,161.7

1,724.4

112.5

71.4

5.6

6,075.6

Net sales (excluding DGAG)

-

428.8

-

-

-

4,780.0

Gross operating profit (loss)

548.6

40.7

1.9

(7.6)

(10.8)

572.8

Operating profit (loss)

358.1

33.1

0.9

(8.5)

(19.6)

364.0

Earnings (losses) from investments

1.5

139.4

-

(0.3)

8.0

148.6

Operating profit (loss) including earnings (losses)

from investments

359.6

172.5

0.9

(8.8)

(11.6)

512.6

Financial income (expenses)

(55.2)

(37.5)

(3.5)

(0.5)

(37.1)

(133.8)

Income taxes

(93.9)

(23.6)

-

(0.5)

(5.0)

(123.0)

Income (loss) from continuing operations

210.5

111.4

(2.6)

(9.8)

(53.7)

255.8

Income (loss) from discontinued operations

-

49.5

(14.8)

-

33.1

67.8

Income (loss)

210.5

160.9

(17.4)

(9.8)

(20.6)

323.6

Net financial (liquidity)/debt position

559.6

289.7

21.5

5.6

(1,178.5)

(302.1)

NET SALES

Net sales in 2008 amount to Euros 4,660.2 million and are in line (-0.1 percent) on a like-for-like basis and net of the exchange effect (-2.5 percent including the exchange effect) compared to 2007.

A percentage breakdown of net sales by business segment, on a like-for-like basis, excluding the effect of the deconsolidation of DGAG in 2007, is as follows:

 

2008

2007

Tyre

88.0%

87.1%

Real Estate

7.8%

9.0%

Broadband Access

2.7%

2.4%

Other

1.5%

1.5%

100%

100%

A percentage breakdown of the change in net sales by business segment on a like-for-like basis is as follows:

Tyre

+ 1.3%

Real Estate

- 14.9%

Broadband Access

+ 10.8%

Other Businesses

+ 0.3%

Total group

- 0.1%

Foreign exchange effect

- 2.4%

Net sales for DGAG deconsolidation

- 20.8%

Total change

- 23.3%

OPERATING PROFIT

Operating profit (EBIT) before restructuring expenses amounts to Euros 187.4 million compared to Euros 364 million in 2007.

The restructuring expenses, equal to Euros 144.2 million, are in connection with employee reductions and the rationalization of the production structures in Europe for Pirelli Tyre and staff cutbacks for Pirelli RE.

Operating profit in 2008, including restructuring expenses, amounts to Euros 43.2 million compared to Euros 364 million in the prior year.

The change in operating profit by business segment is the following:

(in millions of euro)

Operating profit 2007

 

364.0

Tyre

(107.4)

Real Estate

(60.1)

Broadband Access

3.0

Other Businesses

(9.8)

Restructuring expenses

(144.2)

Other

(2.3)

Total

 

(320.8)

Operating profit 2008

 

43.2

OPERATING LOSS INCLUDING EARNINGS (LOSSES)

FROM INVESTMENTS

The result for 2008 is an operating loss including earnings (losses) from investments of Euros 323.3 million, which also comprises the effect of earnings (losses) from companies accounted for by the equity method and dividends from unconsolidated holdings, compared to a profit of Euros 512.6 million in 2007.

The figure is significantly below that of 2007 and not only reflects the changes in operating profit (EBIT) but also a lower contribution from Pirelli Real Estate’s investment holdings owing to the downturn in the real estate market and impairment losses recognized on those holdings for Euros 136 million. In addition, impairment losses were also recorded on the investments in listed companies (Telecom Italia S.p.A. for Euros 173 million, RCS Mediagroup S.p.A. for Euros 66 million and Avanex Corporation for Euros 24 million).

NET RESULT

The net result from continuing operations is a loss of Euros 475.9 million, compared to income of Euros 255.8 million in 2007.

The income from discontinued operations is Euros 63.4 million and includes the positive effects associated with the sale of the Facility Management business by Pirelli Real Estate (Euros 74.6 million, of which Euros 71.4 million relates to the gain on the sale). This is offset in part by the negative effect generated by the sale of the Photonics business (Euros 11.2 million).

The income from discontinued operations last year included the results of operations of the Facility Management business (Euros 49.5 million, of which Euros 41.4 million relates to the gain on the sale of the 49 percent stake) and the loss reported by PGT Photonics (Euros 14.8 million). It also comprised the negative effect connected with the sale of Olimpia S.p.A. (Euros 53.8 million), the gain (Euros 91 million) on the disposal to Goldman Sachs of the warrants obtained as part of the July 2005 sales agreement of the Energy and Telecom Cables and Systems activities and associated with the economic benefits on Prysmian (Lux) S.à.r.l. and an adjustment to the provision on the guarantees provided as a result of this last sale (Euros 4 million).

The total loss in 2008 is Euros 412.5 million compared to income of Euros 323.6 million in 2007.

The loss attributable to the equity holders of Pirelli & C. S.p.A. is Euros 347.5 million (a negative Euros 0.065 per share) compared to income of Euros 164.5 million in 2007 (Euros 0.031 per share).

EQUITY

Equity at December 31, 2008 is Euros 2,374.4 million, compared to Euros 3,804.1 million at the end of 2007.

The equity attributable to the equity holders of Pirelli & C. S.p.A. at December 31, 2008 is equal to Euros 2,171.8 million (Euros 0.405 per share), compared to Euros 2,980.2 million at the end of 2007 (Euros 0.555 per share).

The change can be summarized as follows:

(in millions of euro)

 

Group

Minority interest

Total

Equity at December 31, 2007

2,980.2

823.9

3,804.1

Translation differences

(134.6)

(2.1)

(136.7)

Loss for the year

(347.5)

(65.0)

(412.5)

Dividends paid to minority interest

(93.2)

(74.8)

(168.0)

Acquisition of minority stakes in Pirelli Tyre

-

(459.8)

(459.8)

Change in fair value of other financial assets/derivatives

(150.7)

(30.1)

(180.8)

Net actuarial gain (loss) on employee benefits

(84.9)

(0.1)

(85.0)

Acquisitions/sales of interests from minority interest

-

17.0

17.0

Other changes

2.5

(6.4)

(3.9)

Total changes

(808.4)

(621.3)

(1,429.7)

Equity at December 31, 2008

2,171.8

202.6

2,374.4

The reconciliation between the equity of the Parent, Pirelli & C. S.p.A., and the consolidated equity attributable to the equity holders of the Parent is as follows.

RECONCILIATION BETWEEN EQUITY PIRELLI & C. S.P.A. AND CONSOLIDATED EQUITY ATTRIBUTABLE

TO THE EQUITY HOLDERS (in millions of euro)

 

Share capital

Reserves

Income (loss)

Total

Equity - Pirelli & C. S.p.A. at December 31, 2008

1,554

321

(190)

1,685

Results for the year of consolidated companies (pre-consolidation adjustments)

-

-

(245)

(245)

Capital and reserves of consolidated companies (pre-consolidation adjustments)

-

1,744

-

1,744

Consolidation adjustments:

- carrying amount of investments in consolidated companies

-

(1,050)

-

(1,050)

- intragroup dividends

-

127

(127)

-

- other

-

(176)

214

38

Consolidated equity - Group at December 31, 2008

1,554

966

(348)

2,172

NET FINANCIAL POSITION

The net financial position at December 31, 2008 is a debt position of Euros 1,027.7 million compared to a liquidity position of Euros 302.1 million at December 31, 2007.

The net financial position at the corporate level is, instead, a liquidity position of Euros 537 million. The most important factors affecting the net financial position in 2008 are the repurchase of the 38.9 percent stake in Pirelli Tyre (Euros 835.5 million) and the purchase of the minority stakes in Turkey as part of the strategy to build up the tyre business (Euros 43.3 million), in addition to the payment of dividends (Euros 168 million).

The change during the year can be summarized by the following cash flows:

(in millions of euro)

Net financial position at December 31, 2007

 

302.1

Cash flows used in ordinary activities

(146.7)

Financial and tax income (expenses)

(152.6)

Effect of Speed S.p.A. acquisition

(835.5)

Dividends paid to minority interest

(168.0)

Equity investments:

(100.2)

- acquisition of minority stakes in Turkey

(43.3)

- investment in CyOptics Inc.

(12.7)

- PRE Investment in Highstreet

(59.8)

- purchase of Pirelli & C. Real Estate S.p.A. shares

(22.1)

- other equity investments

(31.1)

- sale of PRE Facility Management

68.8

Change in scope of consolidation

81.3

Other

(8.1)

Total changes

 

(1,329.8)

Net financial position at December 31, 2008

 

(1,027.7)

The composition of the net financial position by business segment is as follows:

(in millions of euro)

 

Tyre

PRE

Other

Businesses

Corporate

 

Consolidated

Gross debt *

1,610

915

29

531

2,114

Financial receivables

(121)

(590)

(17)

(959)

(716)

Cash and cash equivalents and securities held for trading

(222)

(36)

(3)

(109)

(370)

Net financial position

1,267

289

9

(537)

 

1,028

* of which with Corporate

432

492

27

-

 

-

The analysis of the composition of gross debt, divided by type and due date, is the following:

(in millions of euro)

 

Financial statements

12/31/2008

Expiration / Maturity date

2009

2010

2011

2012

Drawdown of committed lines

1,070

150

170

69

681

Other financing

894

434

136

92

232

Bonds

150

150

-

-

-

Total gross debt

2,114

734

306

161

913

At December 31, 2008, the Group has unused committed credit lines available for a total of Euros 785 million, which, together with the liquidity in the financial statements (Euros 370 million) means that the group will not have need to refinance for the next two years.

CAPITAL EXPENDITURES

Capital expenditures for property, plant and equipment total Euros 311 million, of which Euros 285 million relates to the tyre sector. The ratio of capital expenditures to depreciation is 1.56.

HEADCOUNT

At December 31, 2008, headcount is 31,056 (including 2,913 with temporary contracts) compared to 30,823 at December 31, 2007 (including 3,642 with temporary contracts).

 

12/31/2008

12/31/2007

GEOGRAPHICAL AREA

    

Europe:

- Italy

5,095

16.41%

6,681

21.68%

- Other European countries

9,174

29.54%

8,789

28.51%

North America

265

0.85%

265

0.86%

Central and South America

11,819

38.06%

10,548

34.22%

Oceania, Africa and Asia

4,703

15.14%

4,540

14.73%

 

31,056

100.00%

30,823

100.00%

Sectors

    

Tyre

28,601

92.09%

27,224

88.33%

Real Estate

1,558

5.02%

2,692

8.73%

Broadband Access

113

0.36%

94

0.30%

Other Businesses

247

0.80%

197

0.64%

Other

537

1.73%

616

2.00%

 

31,056

100.00%

30,823

100.00%