Italian tyre maker Pirelli says it has taken stock of the deterioration of the global economic growth outlook because of the Covid-19 health emergency and therefore decided to:
. reformulate the 2020 targets, while reserving the recalculation of the 2022 ones in the fourth quarter, on the basis of the evolution of the external scenario;
. cancel the distribution of dividends for 2019, modifying the decision approved on March 2, 2020, while reserving at the same time the distribution of reserves to shareholders in the second half of 2020, should cash generation exceed the new 2020 target and/or the economic scenario permit greater visibility on the total impacts of the Covid-19 emergency.
. revise 2020 remuneration policy taking into account, in particular, the cancellation of the short-term incentive system for 2020.
Pirelli now expects a fall of 2020 GDP at the global level of about -2.8% (+2.7% the outlook foreseen in the Industrial Plan presented on February 19). In this scenario, the expectations for the overall car tyre market are for a decline of approximately -19% with:
. -21% in the Original Equipment channel (prior estimate -2.4%) as a result of the global fall in the production of new vehicles;
. -18% in the Replacement channel (prior estimate +0.5%), taking also into account the measures restricting circulation adopted by various countries.
The expectations for the new premium car segment (Car tyres ?18’’) are for a decline of -14% (prior indication +6%), more contained than the expected fall of -20% (prior indication around -2%) for the Standard segment (Car tyres ?17’’).
To deal with this new scenario, Pirelli says it has implemented a series of actions aimed at protecting profitability and cash generation. In particular:
. temporary reduction of production levels: factory activity, which was slowed from the beginning of the emergency, has been temporarily suspended, beginning from March 20, in all production facilities (with the exception of China) with the adoption of social safety nets. In China, following the suspension of activities for about a month in two factories, activity is gradually returning to normal;
. launch of additional cost containment actions (reduction of discretionary costs, revision of marketing and communication activities, renegotiation of contracts with suppliers, prioritising investments in R&D and efficiencies in the distribution channel). These actions are in addition to the competitiveness program already called for in the context of the industrial plan;
. revised investment plans for the current year in line with the new market outlook;
. launched actions for the optimal management of working capital (e.g. reducing of inventory levels);
. reduced compensation of top management and cancelled short-term incentive plan for 2020;
. cancelled 2019 dividend payment;
. reinforcement of the financial structure through refinancing actions already implemented in the first quarter of the year.
Based on the new economic context and taking into account the actions implemented, Pirelli estimates for 2020:
· Revenues of between EUR4.3 and 4.4 billion (prior indication around EUR5.4 billion), with total volumes falling by between -18% and -20% (prior indication between 0% and +1%). In the high value segment the expected decline is -14% (prior indication + 8%) with a performance of new premium of about -11.5% (-14% fall expected for New Premium market) and a fall of around -26% in the Standard segment (previous indication -6%);
· Adjusted Ebit Margin of between 14% and 15% (around 17% margin implicit in the targets presented on February 19) thanks to above mentioned cost containment actions and a more favourable scenario for raw materials and energy costs;
· Investments of around EUR130 million (prior indication about EUR300 million) mainly for plant management and improvement of mix and quality;
· Net Financial Position confirmed at around -EUR3.3 billion with net cash generation of approximately EUR230-260 million (the corresponding implicit level in the previous guidance about EUR220 million), assuming the cancelled distribution of dividends.
In the fourth quarter of the year, in light of the situation’s evolution, there will be a revision of the 2022 outlook formulated in the context of the 2020-2022 Industrial Plan.
In the context of measures to contain costs, the Executive Vice Chairman and CEO, Marco Tronchetti Provera, members of the board of directors and managers of the leadership team have renounced part of their compensation for the next three months. In particular:
. 50% of the gross fixed annual compensation of the Executive Vice Chairman and CEO, Marco Tronchetti Provera, also for the positions of Vice Chairman, Executive Director and CEO, as well as for the positions of board member and Chairman of the board committees;
. 50% of the remuneration of board members;
. 20% of the gross fixed annual compensation of managers of the leadership team.
The Pirelli board also decided to cancel the short-term monetary incentive plan (STI, Short Term Incentive), destined to all group Managers including the Executive Vice Chairman and CEO and the leadership team.
The actions described above will allow savings of approximately EUR31 million.
The group’s financial solidity has been further reinforced, thanks in part to refinancing actions already taken in the first quarter with the subscription to a new sustainable bank line of EUR800 million (5-year) and the extension of the maturity of a EUR200 million credit line to September 2021, compared with the original maturity of June 2020. These actions will allow the company, through liquidity and bank lines, to meet its debt maturities for the next 3 years, says Pirelli.