Industrial plan and first quarter results
2002-2004 INDUSTRIAL PLAN LAUNCHED:
AFTER TIMELY DIVESTMENT OF PHOTONICS AND RE-INVESTMENT OF PROCEEDS IN OLIVETTI-TELECOM,
THE GROUP'S STRATEGY ENVISAGES THE STRENGTHENING OF ITS COMPETITIVE POSITIONING IN ALL SECTORS BY LEVERAGING ON PRODUCT AND PROCESS INNOVATION AND GREATER EFFICIENCY
OUTLOOK FOR THREE-YEAR PERIOD:
HIGH TECH PRODUCTS ACCOUNT FOR OVER 40% OF REVENUES
3% AVERAGE ANNUAL GROWTH OF REVENUES
STRONG RISE IN EBIT: +25% AVERAGE PER YEAR
DEBT OF 1.300 MILLION EUROS AT END 2004
ENERGY CABLES AND SYSTEMS SECTOR: EBIT +65% AVERAGE PER YEAR, PRODUCTIVITY +28%,
TELECOM CABLES AND SYSTEMS SECTOR: EBIT +16% AVERAGE PER YEAR,
THANKS TO DECISIVE COST CUTTING AND MARKET RECOVERY;
TYRE SECTOR: EBIT +19% AVERAGE PER YEAR, FOCUS ON HIGH PERFORMANCE RANGE AND MIRS TECHNOLOGY
1ST QUARTER FINANCIAL STATEMENTS APPROVED:
1st QUARTER 2002 DIFFICULT BUT SIGNIFICANTLY BETTER THAN PREVIOUS QUARTER; FURTHER GROWTH EXPECTED ALSO IN 2ND QUARTER
RESULTS IMPACTED BY THE HALVING OF WORLDWIDE DEMAND FOR TELECOM CABLES AND SYSTEMS WITH 92 MILLION EUROS EBIT EROSION 83 MILLION OF WHICH DUE TO TELECOM CABLES AND SYSTEMS ACTIVITIES
GOOD TYRE SECTOR PERFORMANCE
GROUP SALES REVENUES: 1.688 MILLION EUROS, -12.7%
CONSOLIDATED GOI: 137 MILLION EUROS, -40%
NET INCOME BEFORE OLIMPIA: - 12 MILLION EUROS
NET INCOME AFTER OLIMPIA: - 39 MILLION EUROS
WITH START OF THREE-YEAR PLAN EFFICIENCY DRIVE, 2002 EBIT EXPECTED TO BE AT LEAST IN LINE WITH 2001, NET OF NON RECURRING ITEMS
Milano, 9 May 2002 - At today's meeting the Board of Directors of Pirelli S.p.A. examined and approved the Group's Industrial Plan for the 2002-2004 three-year period and the report on performance at 31 March 2002.
The Group's new strategic course
In recent years the Pirelli Group has undertaken a massive relaunch and development process, based on improving efficiency, increasing profitability and focusing on technology investments in order to strengthen its competitive positioning and presence in its various markets.
In 2001 the Group took a highly significant strategic step by investing a total of 3.170 million euro in Olimpia - the Company established together with Edizione (Benetton Group), Intesa-BCI and Unicredito - to launch the wide-ranging Olivetti-Telecom Italia business project. The operation followed the timely disposal of Terrestrial Optical systems to Cisco and Optical Components to Corning; two minor activities sold at record multiples, with net proceeds of around 4 billion euros which, in addition to the above investment in Olimpia, were used to distribute an higher dividend as well as for other acquisitions and restructuring.
The investment in the Olivetti-Telecom Italia Group, which did not call for new funds from the shareholders, is in keeping with a long term industrial logic based on:
the presence in a primary and profitable telecommunications operator, a strategic, anticyclical sector, with good profitability prospects;
a strong focus on advanced technology in the field of fixed and mobile telephony, Internet access and web services, in optical fiber access networks (fiber to the home) and in other niche technologies;
the possibility of developing significant industrial synergies between the two Groups;
the possibility of leveraging on the Group's professional competencies.
The Pirelli Group consequently intends to go ahead with the plans, initiated in all sectors, directed at value growth and enhancement, thereby setting aside the previously announced disposal Plan, in view of the fact that:
Pirelli is capable of best managing and developing its assets, as witnessed by its better performance versus major competitors in the different sectors;
there is no need for disposals, given the Group's ability to self-finance its own growth;
the acceleration of restructuring initiated in the Pirelli Group and the new three-year Plan provide favourable prospects, in terms of profitability and cash flow.
The 2002-2004 Industrial Plan
The guide-lines of the Pirelli Group's three-year Industrial Plan are:
ongoing commitment to product range innovation
aggressive approach to the more profitable market segments
a more efficient organizational structure
strong focus on the needs of customers.
On the basis of the above guide-lines the targets of the 2002-2004 Plan are
high tech activities to account for over 40% of total sales at the end of the period, compared to the current 35%;
an average annual sales revenues growth of 3%;
a sharp increase in ebit, equal to 25% average per year;
an ebit/sales return of 7% at the end of the period.
The Pirelli Group's net debt, which amounted to 1.089 million euro at the end of 2001, will rise at the end of 2002 - primarily due to the residual tax effect from the Corning operation amounting to almost 300 million euros and to the effect of restructuring provisions (150 million euros) in the 2001 financial statements - but will then fall again. At the end of 2004 a net debt of around 1.300 million euros is envisaged.
Energy Cables and Systems
During the next three years the Plan, underpinned by technological and market leadership, follows the development guide-lines set out below:
completion of production optimization action plans and manufacturing plant rationalisation;
introduction of innovative products and solutions leveraging on the synergies with Pirelli Labs;
increasing presence in high value added market segments.
On the basis of the guide-lines described above, the Plan targets are:
sales revenues to rise an average annual rate of 3% ;
a marked rise in ebit, at an average rate of 65% per year and a return on sector sales of 6% at the end of the period.
Furthermore the 2002-2004 Plan envisages for the sector an important production capacity optimatization plan ,to be implemented also by reducing the number of plants worldwide; as a result, there will be a 40% increase in output by plants at the end of the period. Charges in respect of this plan will be limited because they were largely accounted for in the year 2001.
The Energy Cables and Systems Sector will continue to pursue its significant efficiency recovery and cost containment targets which, in the three-year period, envisage:
a 28% increase in productivity;
a 7% reduction in variable cost per sales unit;
an 8% cut in fixed costs.
The plan also envisages that in 2004 the contribution from new products will rise above 50% in comparison with the present level of around 30%
Telecom Cables and Systems
After the 2001 year that ended with an exceptionally negative market situation, which Pirelli faced better than its competitors managing to maintain profitability, the new scenario before the Sector is a radically different one compared to the outlook of a few months ago; expectations of recovery by end 2002 - beginning 2003 are now limited.
Pirelli will face this new market context by leveraging on its traditional strengths, i.e. technological leadership, a comprehensive product portfolio, a competitive cost structure, a broad customer base and global market presence.
Thanks to these strengths Pirelli aims to:
strengthen its share of major customers' business and in areas with greater growth potential;
innovate products and processes, such as high performance cables, new optical fibers and new generation optical and opto-electronic components in particular;
develop a strong presence in access network markets through advanced optical solutions and an extensive connectivity supply capability;
further increase profitability through a more extensive use of Pirelli optical fibres.
On the above basis, the three-year Industrial Plan targets are:
an average annual increase in ebit of 16%;
a strong increase in ebit/sales revenues, which will rise to 10% from the current 6.2%.
In particular, Pirelli expects to increase sales of new products based on advanced technologies (e.g. microcables, very high density fiber optic cables, " AirBag" protection cables, special fiber to the home cables and new generation optical and opto-electronic components) from the present 20% of total sales to 35-40%.
Action plans under way, directed at improving efficiency, allow the Sector to expect the incidence of fixed costs on sales to fall from the current 24% to 19%.
Tyre Sector
After a period characterized by major investments in process innovation and a better performance in comparison with competitors, the three-year plan is concentrated around a strategy focused on the high performance range, where Pirelli is among the leading players.
The principal guide-lines which will be followed by the Sector are:
a major innovation drive, thanks to the focus on new products based on distinctive technologies (MIRS, Run flat, PAX);
greater focus on the consumer market, leveraging on high performance products with specialties in Motorcycle tyres and runflat;
growth in the European market and focus on NAFTA markets, with sales rising significantly in the period;
more competitive cost structures.
On the basis of the above, guide-lines Plan targets are:
an average annual growth in sales revenues of 4.5%;
an average increase of 19% per annum in gross operating profit
a return on sales rising from 6.1% to 9.1%;
In this Sector too Pirelli intends to confirm its technological leadership capabilities, placing particular emphasis on MIRS (Modular Integrated Robotized System) through:
the opening of the four operating units started up in the time span of three years in Italy, Germany, UK and USA,
the improvement in quality, flexibility and productivity with a positive impact on value creation.;
the extension of the application to the SUV and radial motorcycle tyre segments.Pirelli Labs
Pirelli Labs, the Group's center of technological excellence, has launched numerous research projects, also by co-operating with leading specialist international partners, that focus on the following fields of activity in particular:
New generation optical components and chips;
New materials;
Alternative energy sources;
Electronic automotive integration sensors.
The main research projects will be capable of generating a significant proportion of additional value for the Group in the three-year period.
Report on performance at 31 March 2002
The new Industrial Plan launches in a phase of unprecedented difficulty as far as the reference markets of the Energy and Telecom Cables and Systems Sectors are concerned; a phase which heavily impacted first quarter 2002 performance. The recession, which started to be felt in mid 2001, practically halved worldwide demand; the collapse in volumes was accompanied by a marked drop in prices. This market phenomenon was of such proportions as to distort the comparison between first half 2001 and current year performances, particularly as regards the first months of 2001 when the Group reported record figures.
These phenomena resulted in a considerable erosion of the operating result for first quarter 2002 - equal to 92 million euros, 83 million euros of which was attributable to Telecom Cables and Systems activities - which, however, showing an improvement over last quarter 2001, demonstrates the Group's strong capacity to react to such conditions. The second quarter too is expected to show further improvement, thanks to efficiencies. The Energy Cables and Systems Sector is, in turn, suffering from a decidedly negative international market environment, while Tyre Sector is continuing to hold up well, with further growth in the " high performance" segments.
In the last two years the Group has shown, in its different sectors, levels of efficiency and profitability consistently above those of its main competitors which leads it to view expected near term developments positively.
The Group
The Group's consolidated sales at 31 March 2002 amounted to 1.688 million euros (-12.7% compared to same period previous year), mainly on account of the negative effect of volumes/mix (-8.5%), prices (-2.6%) and exchange rate variations (-1,6%).
The gross operating result amounted to 137 million euros, equal to 8.1% of sales, versus 228 million euros for first quarter 2001 (-40%).
The Group's operating income for first quarter 2002 amounted to 42 million euros (equal to 2.5% of sales) in comparison with 134 million euros for the same period 2001 (6.9% of sales). In brief, the main variations are due to the smaller contribution from the Telecom Cables and Systems Sector (equal to 83 million euros, 26 million of which was connected with termination of the supply agreement with Cisco Systems) and to intense Research and Development activities, the cost of which have risen by 4 million euros.
The Group's financial income and expenses at 31 March 2002 show a negative balance of 62 million euros compared to a positive balance of 20 million euros for the same period last year. This change is due to the net equity method for evaluating the participation in Olimpia SpA (equal to 27 million euros) and to a higher average debt.
The extraordinary income and charges item, of minimum importance in this first quarter of the year, included in the same period previous year the gain before tax resulting from the sale of Pirelli S.p.A. treasury shares on the market (30 million euros) and 36 million euros received from Cisco Systems within the framework of the sale of Terrestrial Optical Systems in the year 2000.
Net income at 31 March 2002 was negative to an extent of 12 million euros before taking the Olimpia effect into account, and of 39 million euros, after this effect, versus 148 million euros for the first three months of 2001 (after financial income of 20 million euros, extraordinary items of 65 million euros and tax of 71 million).
Net equity has risen from 5.660 million euro at 31 December 2001 to 5.629 million euros at 31 March 2002, primarily on account of the result for the first quarter.
The net financial position is negative to an extent of 1.406 million euros compared to 1.089 million euros at 31 December 2001. This variation is mainly attributable to seasonal factors, which resulted in an increase in working capital, and to expenses in respect of re-organization plans provided for in previous years.
Despite adverse economic conditions, the priority commitment to research and technological innovation is confirmed also in first quarter 2002 with an increase in the research and development costs borne by the Group; these have risen from 55 million euros (2.8 % of sales) to 59 million euros, equal to 3.5% of sales.
The Group's headcount was equal to 38,260 versus 39,127 at 31 December 2001; a reduction of 867 people compared to the end of last year but 3,070 less versus 31 March 2001.
Energy Cables and Systems Sector
Sales amounted to 796 milion euros (- 2.3% compared to first quarter 2001). This variation is due to the negative trend of prices (-3.4%) and volumes (-2.1%) as well as to the exchange rate effect (-0,9%), offset by an improvement in the mix and other items (+4.1%).
In greater detail, the negative sales trend in the Power Distribution, Installations, Special Cables and Enamelled Wire businesses was partly neutralised by the positive trend in the General Market and Accessories businesses. Europe and South America saw falling sales, while Australia and the Far East recorded increases. Worthy of note is the new agreement between Pirelli Cavi e Sistemi Energia Spa and American Superconductor Corporation granting AMSC the right to sell High Temperature Superconductors worldwide.
The Sector's operating income is still affected by certain manufacturing inefficiencies related to unutilized production capacity and amounted to 1 million euros (0.1% of sales), in comparison with 12 million first quarter previous year (1.5% of sales). The restructuring process under way will contribute to improving the Sector's profitability for the year, as early as the second quarter.
Telecom Cables and Systems Sector
Sales, at 164 million euros, recorded a sharp drop compared to same period previous year (-58.9%) primarily due to the contraction in volumes (-39.5%) and prices (-4.9%) as well as to a worsened mix and other items (-14.1%). Lower sales volumes were recorded in all geographical areas, due to the reduction of investments on the part of telecom operators. The market trend is not showing significant signs of recovery yet, but the first signs of an upturn are expected towards the end of the year.
The fall in volumes, accompanied by a poorer product mix (fewer sales of premium optical fiber cables), impacted profitability, producing a negative operating income of 2 million euros, versus 81 million euros in the first quarter previous year, which benefitted by 26 million euros from the Cisco Systems supply agreement.
After the closure of plants in the second half of 2001, the decision was made to rationalise the industrial base in the United Kingdom further, while in all the other factories actions directed at recovering efficiency continued, the effects of which should be felt in the second half of the year. The strengthening of new business activities (Fiber to the home - Access Networks), which are growing compared to the same period in the previous year even if the profitability is still not entirely satisfactory, continues.
As regards the submarine cables and systems business in particular, the Palma-Algeri installation has been completed and production of a submarine cable for the island of Sumatra is in progress. The awarding of new contracts is expected as of the second quarter 2002.
Tyre Sector
Sales, showing a growth of 4% compared to first quarter 2001, amounted to 758 million euros. Increases in volumes (+2.6%) and prices/mix (+5%) contributed to this positive performance, offsetting the negative exchange rate effect (-3.6%). Shares are growing in all market segments in Europe and Latin America; " high performance" car tyre volumes were particularly positive, showing an increase of 12% over last year. Truck tyre volumes grew 2% compared to 2001, thanks to higher Replacement sales which made up for the lower Original Equipment volumes, with a significant rise in market share. Motorcycle tyre sales were also positive, with an increase of over 2%.
The first quarter ended with an operating income of 54 million euros (7.1% of sales), in line with the 57 million euros recorded same period 2001 (7.8%).
Highlights
In February Pirelli Finance (Luxembourg) S.A. with JP Morgan subscribed to an equity swap in respect of n. 100 million Olivetti S.p.A. shares with expiry in December 2006. Settlement envisages either the physical transfer of securities or payment of market price differentials. The reference price is equal to 1.4213 euros per share plus a quarterly interest rate equal to three-month Euribor increased by a spread of 143 bps.
The placing of a 500 million euros bond loan issued by Pirelli Finance (Luxembourg) S.A., with expiry on 4 April 2007 and a fixed interest rate of 6.5%, was completed in March. The issue is in line with the objective of re-financing short term debt, optimizing the Group's financial structure in terms of both interest rates and expiry dates. The funds were collected at the beginning of April.
After the end of the first quarter, it should be pointed out that on 22 April 2002 an agreement was signed rearding the sale of 25.3% of Epiclink SpA., a company specializing in Information and Communication Technology outsourcing, to Telecom Italia SpA. The sale, subject to approval on the part of the Antitrust Authority, will take place before 31July 2002.
Outlook for the rest of the year
Despite the continuing difficulties in the telecom market, where the first signs of an upturn are expected towards the end of the year, the maintenance of a satisfactory level of activity in the Tyre Sector, combined with the effect of reorganization and restructuring actions initiated primarily in the Telecom and Energy Cables and Systems Sectors, lead the Group to expect a further improvement in operating income in the second quarter and to envisage for the year as a whole a performance, net of non recurring items, at least in line with the previous year.
Appendix 1 - Highlights of Pirelli SpA Group consolidated financial statements at 31 March 2002