The Covid-19 health emergency stifles the economy and Pirelli revises its industrial plan

Back to the drawing board. Pirelli corrects its industrial plan, presented only a few months ago, and downgrades its growth estimates for 2020. The health emergency from Covid-19 and the consequent impact on the global economy has led the Milan-based group to revise its objectives. The Board of Directors, at the beginning of April, in fact, prepared new guidelines for the current year, providing for further cuts, lower investments, a reduction in top management compensation and the cancellation of the 2019 dividend payment. According to Pirelli, these operations were necessary to cope with a 2.8% fall in global GDP expected in 2020 (the February plan forecast +2.7%), and consequently in production and consumption. A forecast that points towards revenues in the region of 4.3 and 4.4 billion euro for the group at the end of the year (5.4 billion euro in previous estimates). In this scenario, expectations for the global car tire market in 2020 point to a drop of about -19%, with -21% for the Original Equipment channel (-2.4% the previous estimate),  due to the global drop in new vehicle production, and -18% for the Spare Parts channel (+0.5% the previous estimate). Expectations in the new premium car segment (car tires over 18'') are down by approximately -14%, a little less than the -20% (approximately -2% over the previous estimate) expected for the standard segment (car tires under 17'').

The 2020 forecast

Based on a new economic scenario, Pirelli expects revenues of between 4.3 and 4.4 billion euro, with total volumes down between -18% and -20% (previous estimates were between 0% and +1%). In the high value segment, the expected fall is in the region of 14% (+8% the previous indication) with a performance in the new premium car segment of approximately -11.5% (-14% the expected decrease in the New Premium market) and a decrease of approximately -26% in the standard segment (-6% the previous indication). In order to sustain profitability and cash flow, the Board of Directors reduced investments to 130 million euro - 300 million were previously planned - for plant management and product improvement. In the new forecast Pirelli confirmed its net financial position at around -3.3 billion euro, with a net cash generation of around 230-260 million euro.

The targets of the 2020 industrial plan

In the 2020-2022 business plan, waiting to see what will be changed in the fourth quarter of the year as far as the outlook for 2022 is concerned, Pirelli has confirmed the vital role played by premium tires (sizes equal to and above 18 inches). On the other hand, the Milan group will continue on reduction path of its standard segment (sizes equal to 17 inches or smaller) with an average annual decrease in terms of volumes of 4.2% during the 2019-2022 period. In the latter case, however, the company made it clear that the intention is to continue to take advantage of opportunities related to the 17-inch size alone, where annual growth is expected to exceed 1% over the next three years. Analysing in more detail the commercial aspect of the plan, the program developed by Pirelli’s management should result in an overall net growth in volumes of approximately 5 million pieces between 2019 and 2022, with a significant contribution from the high value segment (+9 million pieces).

The success of top of the range products will depend much on the actions the company plans to take both in the spare parts channel - 80% of volumes will focus on specialties and sizes over 19 inches - and on OEMs. The strategy for the standard segment will be of a different nature. In this case, the planned reduction in the number of products below 17 inches as well as second brands, will be partially compensated by a renewal of the 17-inch lines. To ensure the success of the operation, Pirelli has also planned to strengthen its distribution network, with an increase in the number of sales outlets to over 20 thousand from the current 16 thousand.

Technological innovation

Over the next three years Pirelli plans to introduce 20 new product ranges on the market, 5 of which as OEMs and 15 for the replacement channel. The new products, currently on the drawing board, will feature a greater application of new technologies. In fact, the company plane, over the next few years, to launch new special products with PNCS, Seal Inside and Run-flat technology. Greater focus will be given to new trends related to mobility and connectivity. In fact, Pirelli is currently working on innovative tires for electric vehicles - Pirelli currently boasts 74 patents and is working on 286 other projects - while it has just completed the first phase of testing its Cyber Tire. The company's idea is to develop products for premium car manufacturers on a large scale, and simultaneously, create a connectivity system aimed at promoting safety, vehicle control and emission reduction. Consistent with the digital transformation underway, the company has introduced virtual product development techniques to shorten 'time to market' by 30% and reduce by 20% the number of prototypes produced. This is the case of the static simulator, inaugurated in the Milan Research and Development Centre, which makes it possible to optimise the development and testing phases of new tires (road and motorsport) thanks to the use of virtual prototypes. Special attention was also paid to the use of raw materials and the circular economy. The three-year programme forecasts an increasing use of materials deriving from renewable and recycled sources (end-of-life tires), with the objective of using over 40% of renewable materials in new product lines by 2025.

Brembo and Chinese billionaire Niu Yishun Join Pirelli’s shareholder base

Brembo joins Pirelli. The group controlled by Alberto Bombassei and active in the production of braking systems has acquired a 2.43 share of the company led by Marco Tronchetti Provera. In addition to Brembo, Niu Yishun, the Chinese billionaire founder of the Hixih Rubber Industry Group, already a partner of Pirelli with a joint venture started in 2005, has also announced its intention of entering the shareholder base of the Milan-based company. According to Consob communications, Niu has acquired 5.19% of Pirelli's capital through its subsidiary Longmarch Holding. In the meantime, ChemChina, already shareholders of the Milanese group, has decided to strengthen its position within Pirelli by purchasing, through Marco Polo International, a further 0.5% and thus reaching 46.036%.