Group performance and results in 2013

In addition to the financial performance measures established by the International Financial Reporting Standards (IFRSs), this report presents alternative performance indicators that are derived from IFRSs. These performance indicators are used to facilitate understanding of Group operating performance. These indicators are: Gross Operating Profit, Non-current assets, Provisions, Operating working capital, Net working capital, and Net financial (liquidity)/ debt position. Please refer to the section “Alternative performance indicators” for a more analytical description.

Following the entry into force of the newly revised standard IAS 19 – Employee Benefits on January 1, 2013, the 2012 figures have been restated.

The following table summarises the impact of this change on the main statement of financial position and income statement items in each quarter and their totals for all of 2012. Please refer to the notes to the consolidated financial statements for additional details

(in milioni di euro)
  03.31.2012   06.30.2012   09.30.2012   12.31.2012   
2012  reported 2012  restated change2012  reported 2012  restated change2012  reported 2012  restated change2012  reported 2012  restated change
Income statement impact
Operating income - quarter 209.4  212.7  3.3  191.3  192.6  1.3  192.1  195.5  3.4  188.0  191.7  3.7 
Operating income - cumulative  - - - 400.7  405.3  4.6  592.8  600.8  8.0  780.8  792.5  11.7 
             
Net income (loss) - quarter 125.3  123.6  (1.7)  96.4  94.9  (1.5)  86.6  84.8  (1.8)  89.9  88.2  (1.7) 
Net income (loss) - cumulative  - - - 221.7  218.5  (3.2)  308.3  303.3  (5.0)  398.2  391.5  (6.7) 
Statement of financial position impact
Reserve 851.5  853.2  1.7  681.9  685.1  3.2  677.3  682.3  5.0  647.9  654.6  6.7 
Net income (loss) - cumulative 125.3  123.6  (1.7)  221.7  218.5  (3.2)  308.3  303.3  (5.0)  398.2  391.5  (6.7) 
Equity 2,320.1  2,320.1  - 2,246.9  2,246.9  - 2,328.9  2,328.9  - 2,389.4  2,389.4  -

In this document, comments on changes from December 31, 2012 always refer to the restated amount, unless otherwise indicated.

The macroeconomic situation was still difficult in 2013, with the European business cycle beginning to recover at a moderate pace and emerging country exchange rates growing volatility (Brazilian real, Argentine peso, Turkish lira and Egyptian pound).

This situation is reflected in the performance of the markets where Pirelli operates. Europe reported volumes that were stable at their 2012 levels, while the soft market in Russia mainly affected the original equipment and summer segments. The premium segment, which is at the centre of Group strategy, continued growing and outperforming the market average, rising by about 9% (car tyres).

Notwithstanding this general situation, exposure to the most dynamic markets and focus on value segments allowed Pirelli to expand its volumes in the consumer business by 4.6% and its premium segment volumes by 15.3%, higher than the 2013 target of more than 13%. Volumes also increased in the industrial business as compared with 2012, mainly due to the positive performance of sales on South American markets during the first part of the year.

Consolidated net sales in 2013 totalled euro 6,146.2 million, up 1.2% in spite of the large, negative translation effect (-7.2%). This was accomplished thanks to the increase in premium segment sales (49.3% of consumer business net sales, up 2.3 percentage points as compared with 2012) and the growing contribution made by emerging markets (55.7% of tyre sales, with its share increasing by about 1.6 percentage points on an annualised basis).

Consolidated operating income totalled euro 791.0 million, with Ebit margin of 12.9%, virtually unchanged from 2012 (operating income of euro 792.5 million, Ebit margin 13.1%). Aside from the growth in volumes, this level of profitability benefits Pirelli, alone in its industry during 2013 to have improved its price/mix, due to its value strategy. The improvement in operating variables, together with efficiency gains, offset higher industrial costs (start-up in Mexico and Russia, conversion of the Settimo Torinese plants) and commercial costs – as investments in future business growth – including higher amortisation and depreciation.

Just like net sales, the net result was impacted by the unfavourable changes in exchange rates, which generated a negative change of nearly euro 63 million in consolidated net income.

Net income for 2013 was euro 306.5 million, compared with euro 391.5 million in 2012. The net total was impacted by higher net financial expenses, up by about euro 45 million to euro 195.8 million. The change is attributable to the higher average level of debt, mainly during the first six months of 2013, the different mix of geographical areas of financing, the negative impact for euro 8.5 million resulting from the devaluation of the Venezuelan currency on the accounts of the local subsidiary, and euro 13 million less financial income from the loan to Prelios S.p.A. Finally, the comparison with the previous year reflects the recognition in 2012 of non-recurring exchange gains amounting to euro 8.7 million, related to the start-up of activities in Russia.

The aggregate impact resulting from long-term investments, which totalled a negative euro 78.3 million (negative euro 52.2 million in 2012) is tied to the investments in RCS MediaGroup S.p.A. and Mediobanca S.p.A. for about euro -20 million, fair value adjustment on the Prelios S.p.A. “convertendo” equity instrument by euro -44.3 million and the parent company share in the result of its associate Prelios S.p.A. for the last quarter of the year, as determined based on the current available information (euro -12.8 million).

The consolidated net financial (liquidity)/debt position was a negative euro 1,322.4 million, compared with a negative euro 1,205.2 million at December 31, 2012.

The planned conversion of the financial receivable from Prelios S.p.A. into shares and equity instruments (the “convertendo”) was carried out in 3Q 2013 following completion of the debt restructuring and capital increase process at the real estate company. The aggregate impact of these operations on the net financial (liquidity)/debt position of the Group was negative by about euro 193 million, including the cash payment of approximately euro 23 million for its share of the capital increase executed through Fenice S.r.l.

The allocated euro 21.3 million contribution by Pirelli to the capital increase of RCS MediaGroup S.p.A. was made in 3Q 2013, while the parent company paid approximately euro 157 million of dividends to its shareholders in 2Q 2013.

Net operating cash flow totalled a positive euro 720.1 million in 2013, up sharply from euro 281.1 million in 2012, due to better management of working capital. This figure received a big boost in the last quarter of the year, which is seasonally more favourable.

Before payment of the parent company dividend to shareholders and the impact from conversion of the Prelios credit, the Group as a whole had net positive cash flow of about euro 232 million.

Net sales of the Tyre Business, which generates 99.5% of Company’s net sales, totalled euro 6,115.8 million at December 31, 2013, with an increase of 1.4% (+8.6% net of the translation effect), being sustained by higher volumes (+5.7%) and improvement in the price/mix component (+2.9%).

Both businesses reported higher volumes: +4.6% in the consumer business, driven by sales in South America and good performance of the premium segment in China, Nafta and Europe, and +8.7% in the industrial business, where growth was focused on South America.

In geographical terms, the growth in revenue on emerging markets (+4.3%) more than offset the decrease in net sales in Europe and Nafta (-2.2% and -1.5%, respectively). In particular, net sales in South America increased by 5.2% (including the translation effect), and +14.5% in Asia-Pacific, while net sales in Russia were substantially stable from 2012, and down by 5% in Middle East Africa, impacted by highly volatile exchange rates.

Net sales in the premium segment totalled euro 2,210.0 million, up 6.5% from 2012, and grew over the course of 2013 after a negative first quarter.

Growth was greater in emerging countries, where premium segment net sales rose by +21.9% from 2012.

In Nafta, premium segment net sales grew by 3.1% and Europe, although impacted by recession, reported a 1.7% increase in premium segment net sales. This was the result of performance during the last two quarters of the year (+7.2% in 3Q 2013 and +17.2% in 4Q 2013).

Operating income was euro 822.0 million in 2013, with an Ebit margin of 13.4% (euro 820.8 million in the previous year, equal to 13.6% of net sales).

Focusing on the different business segments, the consumer business was more impacted by the performance of the European and Russian markets, which were stable and down slightly, respectively. Net sales in 2013 totalled euro 4,478.9 million, +1.3% from 2012 (including the 6.5% negative translation effect). Operating income was euro 596.4 million, with an Ebit margin of 13.3%, down by 1.2 percentage points from 2012, mainly due to the negative translation effect, the costs of converting the Settimo Torinese truck plants to premium car tyre production, the start-up costs of activities in Mexico and Russia, and higher commercial costs for development of the premium segment.

The industrial business, focused mainly in South America and the Middle East Africa and India area, had net sales of euro 1,636.9 million, up 1.6% from 2012 (net of a negative 9.2% translation effect). Operating income improved by 26% to euro 225.6 million, with the Ebit margin growing from 11.1% to 13.8%, partly due to production capacity being located entirely in countries having low industrial costs.

The consolidated financial highlights for the Group are summarised as follows

(in milions of euro)
 12.31.2013 12.31.2012 restated 12.31.2012 reported 
Net sales 6,146.2  6,071.5  6,071.5 
Gross operating profit before restructuring expenses 1,105.4  1,102.9  1,091.2 
% of net sales 18.0%  18.2%  18.0% 
Operating income before restructuring expenses 816.5  831.6  819.9 
% of net sales 13.3%  13.7%  13.5% 
Restructuring expenses (25.5)  (39.1)  (39.1) 
Operating income 791.0  792.5  780.8 
% of net sales 12.9%  13.1%  12.9% 
Net income (loss) from equity investments (78.3)  (52.2)  (52.2) 
Financial income/(expenses) (195.8)  (150.5)  (129.5) 
Pre-tax income (loss) 516.9  589.8  599.1 
Income tax (210.4)  (198.3)  (200.9) 
Tax rate %  40.7%  33.6%  33.5% 
Total net income (loss) 306.5  391.5  398.2 
Net income attributable to owners of Pirelli & C. S.p.A. 303.6  387.1  393.8 
Total net earnings per share attributable to owners of Pirelli & C. S.p.A. (in euro) 0.622  0.793  0.807 
Non-current assets 4,043.0  3,877.2  3,877.2 
Inventories 987.3  1,102.6  1,102.6 
Trade receivables 666.4  704.6  704.6 
Trade payables (1,244.5)  (1,268.7)  (1,268.7) 
Operating Net working capital 409.2  538.5  538.5 
% of net sales 6.7%  8.9%  8.9% 
Other receivables/other payables 3.0  11.0  11.0 
Total net working capital 412.2  549.5  549.5 
% of net sales 6.7%  9.1%  9.1% 
Net invested capital  4,455.2  4,426.7  4,426.7 
Equity 2,436.6  2,389.4  2,389.4 
Provisions 696.2  832.1  832.1 
Net financial (liquidity)/debt position 1,322.4  1,205.2  1,205.2 
Equity attributable to the owners of Pirelli & C. S.p.A.  2,376.1  2,337.4  2,337.4 
Equity per share attributable to the owners of Pirelli & C. S.p.A. (in euro)  4,869  4.790  4.790 
Total Tyre - net sales 6,115.8  6,031.3  6,031.3 
% of net sales total 99.5%  99.3%  99.3% 
Total Tyre - operating income 822.0  820.8  809.1 
% on total tyre - net sales 13.4%  13.6%  13.4% 
Total Tyre - net sales Consumer 4,478.9  4,419.8  4,419.8 
% on total tyre - net sales 73.2%  73.3%  73.3% 
Total Tyre - net sales Industrial 1,636.9  1,611.5  1,611.5 
% on total tyre - net sales 26.8%  26.7%  26.7% 
Total Tyre - net sales Premium 2,210.0  2,075.9  2,075.9 
% on net sales Consumer 49.3%  47.0%  47.0% 
Capital expenditure  413.1  470.9  470.9 
Research and development expenses  199.2  178.9   178.9 
% of net sales 3.2%  2.9%  2.9% 
Research and development expenses - Premium  163.3  141.9  141.9 
% on sales Premium 7.4%  6.8%  6.8% 
Headcount (number at end of period) 37,979  37,338  37,338 
Industrial sites (number)  23   23   23 

To facilitate understanding of Group performance, the table below sets forth the income statement broken down by business segment

(in milions of euro)
  Total Tyre Other business
 
Total
 
2013 2012  restated 2013 2012  restated 2013 2012  restated 
Net sales 6,115.8  6,031.3  30.4  40.2  6,146.2  6,071.5 
Gross operating profit before restructuring expenses 1,130.3  1,126.5  (24.9)  (23.6)  1,105.4  1,102.9 
Operating income before restructuring expenses 845.4  859.9  (28.9)  (28.3)  816.5  831.6 
Restructuring expenses (23.4)  (39.1)  (2.1)  - (25.5)  (39.1) 
Operating income 822.0  820.8  (31.0)  (28.3)  791.0  792.5 
% of net sales
13.4%  13.6%      12.9%  13.1% 
Net income (loss) from equity investments         (78.3)  (52.2) 
Financial income/(expenses)         (195.8)  (150.5) 
Pre-tax income (loss)         516.9  589.8 
Income tax         (210.4)  (198.3) 
Tax rate %          40.7%  33.6% 
Total net income (loss)         306.5  391.5 
Net financial (liquidity)/debt position       1.322.4  1.205.2 

Group performance broken down on a quarterly basis is shown next

(in milioni di euro)
  1° Q2° Q3° Q4° QTotal
2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 
Net sales 1,536.3  1,556.5  1,594.8  1,465.3  1,518.8  1,552.3  1,496.3  1,497.4  6,146.2  6,071.5 
yoy  -1.3%  11.1%  8.8%  5.5%  -2.2%  5.3%  -0.1%  5.3%  1.2%  7.5% 
Gross operating profit before restructuring expenses 255.3  279.1  278.2  271.2  279.9  267.6  292.0  285.0  1.105.4  1.102.9 
% of net sales 16.6%  17.9%  17.4%  18.5%  18.4%  17.2%  19.5%  19.0%  18.0%  18.2% 
Operating income before restructuring expenses 183.0  214.7  205.1  205.1  208.8  199.2  219.6  212.6  816.5  831.6 
% of net sales 11.9%  13.8%  12.9%  14.0%  13.7%  12.8%  14.7%  14.2%  13.3%  13.7% 
Operating income 179.8  212.7  200.9  192.6  201.0  195.5  209.3  191.7  791.0  792.5 
% of net sales
11.7%  13.7%  12.6%  13.1%  13.2%  12.6%  14.0%  12.8%  12.9%  13.1% 
Pre-tax income (loss) 114.6  188.9  137.1  155.9  158.5  126.3  106.7  118.7  516.9  589.8 
Total net income (loss) 72.1  123.6  78.0  94.9  108.0  84.8  48.4  88.2  306.5  391.5