Pirelli Tyre

The consolidated economic and financial results for 2008 compared to 2007 are as follows:

(in millions of euro)

 

12/31/2008

12/31/2007

Net sales

4,100.2

4,161.7

Gross operating profit before restructuring expenses

441.2

548.6

- % on net sales

10.8%

13.2%

Operating profit before restructuring expenses

250.7

358.1

- % on net sales

6.1%

8.6%

Restructuring expenses

(100.0)

-

Operating profit

150.7

358.1

- % on net sales

3.7%

8.6%

Earnings from investments

27.8

1.5

Operating profit including earnings from investments

178.5

359.6

Financial income (expenses)

(82.8)

(55.2)

Income taxes

(70.1)

(93.9)

Income

25.6

210.5

- % on net sales

0.6%

5.1%

Net financial (liquidity)/debt position

1,266.8

559.6

Capital expenditures

285

262

R&D expenses

145

148

Headcount (number at year-end)

28,601

27,224

Factories (number)

23

24

NET SALES

Net sales amount to Euros 4,100 million, with a reduction of 1.5 percent compared to the prior year. Instead, the organic change is a growth in net sales of 1.3 percent, with volumes down (-6 percent) particularly in the last quarter (-19 percent). The price/mix shows a positive change (+7.3 percent), thanks primarily to the continued focus on higher-end product segments and price increases made to partly compensate the increase in per unit costs. The exchange rate change is negative (-2.8 percent).

The single components of the change in net sales are as follows:

Volumes

-6.0%

Prices/mix

+7.3%

Change on a like-for-like basis

+1.3%

Foreign exchange effect

-2.8%

Total change

-1.5%

In the last quarter, the change in sales is a negative 10.2 percent compared to the corresponding period of 2007, with a negative exchange rate effect of 5.2 percent and an organic reduction of 5 percent (-19 percent in volumes and +14 percent in the price/mix).

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

GEOGRAPHICAL AREA

 

2008

2007

Italy

9%

10%

Other European countries

36%

38%

North America

7%

8%

Central and South America

33%

28%

Oceania, Africa, Asia

15%

16%

100%

100%

Product category

 

2008

2007

Car tyres

60%

61%

Truck tyres

29%

28%

Motorcycle tyres

9%

8%

Steelcord/other tyres

2%

3%

100%

100%

Sales continue to grow in South America in response to a positive market trend and an increase in the currency value in the first three quarters while the overall reduction in sales volumes is mainly due to the contraction of markets in Europe and North America.

The composition of sales remains the same in the two business segments: Consumer (68 percent) and Industrial (32 percent).

OPERATING PROFIT

In 2008, operating profit was basically influenced by the following factors:

  • a strong and gradual growth of all production cost factors (raw materials, energy, etc). Raw materials, in particular, grew by Euros 195 million compared to 2007 (of which Euros 150 million in the second half);
  • a downturn in the second part of the year (in particular, in the fourth quarter) in the Original Equipment market;
  • the decision to initiate restructuring actions for a total of Euros 100 million to combat this negative scenario.

Operating profit before restructuring expenses is Euros 250.7 million (6.1 percent of net sales). This is a decrease of 30 percent from Euros 358.1 million in 2007, which represented 8.6 percent of net sales.

The reduction in Operating profit before restructuring expenses, compared to the prior year, can be summarized as follows (in millions of euros):

Operating profit 2007

 

358.1

Foreign exchange effect

(15.4)

Prices/mix

263.2

Volumes

(72.4)

Production factors per unit cost

(267.5)

Efficiencies

(4.6)

Depreciation and other

(10.7)

Total

 

(107.4)

Operating profit 2008

 

250.7

Despite the positive contribution made by the price/mix, the operating profit was sharply impacted by the increase in production costs, in particular, raw materials and energy and by the highly negative market scenario which affected the trend of sales volumes.

Partial excess production capacity was caused by the negative market picture particularly during the last part of the year. As a result, Pirelli Tyre further stepped up its restructuring actions and placed renewed emphasis on efficiency and improvement of the industrial structure. Fixed overheads were also adjusted to reflect the changed market scenario, by activating measures that will benefit future years. This all had a negative impact on results for the year 2008 of Euros 100.0 million, bringing the Operating profit after restructuring expenses to Euros 150.7 million.

The actions are mostly based on reductions of the staff and rationalization of the industrial structures to increase competitiveness in this negative market scenario. The effect will be a 15-percent reduction in the workforce in Western Europe by the end of 2009.

Staff reductions particularly took place in all the major European countries and it was also decided to totally suspend production at the Manresa factory in Spain by the end of 2009 where production had already been reduced by 40% starting from February 2009.

Instead, Pirelli Tyre has kept its R&D expenditures at basically the same level (Euros 145 million compared to Euros 148 million in 2007), maintaining the focus on all activities in progress involving product and process innovation.

NET RESULT

The net result is income of Euros 25.6 million (after financial expenses and earnings from investments equal to Euros 55.0 million and income tax expenses of Euros 70.1 million) compared to Euros 210.5 million in the prior year (after net financial expenses and earnings from investments equal to Euros 53.7 million and income tax expenses of Euros 93.9 million).

During the year, the minority stakes in the holdings in Turkey were purchased for Euros 43.3 million, with a positive impact on earnings from investments of Euros 27.3 million due to the positive difference between the cost of acquisition and the net assets acquired.

NET FINANCIAL POSITION

The net financial position is a net debt position of Euros 1,266.8 million compared to Euros 559.6 million at December 31, 2007.

The increase in the net debt position is mainly due to the following factors:

  • Euros 93 million for the payment of dividends;
  • Euros 452 million for the consolidation of Speed S.p.A.’s net debt (Euros 409 million) after the merger with Pirelli Tyre S.p.A. at the end of the year, and the purchase of the minority stakes in Turkey in August (Euros 43 million);
  • Euros 161 million for cash used for ordinary activities, particularly concentrated in the management of investments / depreciation-amortization (cash used for Euros 106 million) and higher working capital with cash used for Euros 156 million, mainly due to the increase in inventories, recorded primarily in the last quarter, and the abrupt slowdown of the markets, especially in the Original Equipment channel.

FACTORIES

The number of factories fell to 23, highlighting the transfer of the Cinisello Balsamo factory to inside the Bicocca area.