Pirelli reports increased sales but flat profits in 2013

Pirelli & C. SpA today reported full-year 2013 consolidated revenues of 6,146.2 million euros on 31 December, an increase of 1.2 per cent from 6,071.5 million euros a year earlier. Tyre revenues, which account for almost all of the company’s sales totalled 6,115.8 million euros in 2013, an increase of 1.4 per cent from 6,031.3 million euros. Full year tyre-derived pre-tax profits (EBIT) were 822.0 million euros, an increase of 1.2 million euros (+0.1 per cent) compared with 820.8 million euros in the same period a year earlier, with a margin equal to 13.4 per cent (13.6 per cent in 2012). However, whether it will be enough to allay pre-release market fears that emerging market exchange rates and particular Russian market instability remains to be seen.

Much is attached to the continuing performance of Pirelli’s Premium tyre strategy. With regard to the Premium segment, revenues on December 31, 2013 amounted to 2,210.0 million euros, an increase of 6.5 per cent compared with 2,075.4 in the corresponding period of 2012.

Pirelli’s sales increase and the company’s ability to hold its EBIT position was said to have been thanks to strong price/mix improvement, the positive impact of the volume component (97.7 million euros). However, the fact that raw material costs were 136.2 million euros lower will have helped even more. And, as we all know, the prices of raw materials can go up as well as down. Nevertheless Pirelli reported that these improvements compensated for the increase in the cost of production (138.5 million euros), which was its reportedly down to: increased operating costs and amortizations of 168.4 million euros, mainly stemming from: 25.5 million for the transformation of the Settimo Torinese truck site into car tyre plant and of course the start-up costs for the plants in Mexico and Russia.

Referring to its annual tyre revenues of 6,115.8 million euros and excluding the exchange rate effect (negative 7.2 per cent), Pirelli reported sales revenue growth of 8.6 per cent. This performance reflects volume growth (+5.7 per cent), particularly relevant in emerging markets (+10.2 per cent) which represented 55.7 per cent of tyre sales during the year, and the component price/mix (+2.9 per cent). In the fourth quarter, revenues were 1,490.0 million euros, substantially unchanged (+0.1 per cent) compared with 1,488.4 million in the same period of 2012. Excluding the exchange rate effect, negative 9.1 per cent, revenues increased by 9.2 per cent.

In 2013 Pirelli invested a total of 199.2 million euros– equal to 3.2 per cent of sales – to research and development. Of this 163.3 million euros was for activities linked to Premium products – equal to 7.4 per cent of revenues in the segment.

Consumer tyre sales lead the way

Pirelli’s Consumer business (car/light truck and two-wheel tyre) sales totalled 4,478.9 million euros, an increase of 1.3 per cent compared with 4,419.8 million euros in the corresponding period of 2012. In total, volumes rose 4.6 per cent, with the fourth quarter registering an increase of 6.9 per cent. Premium product sales were described as the driver of growth, with an increase in volumes (+15.3 per cent in 2013) more than three times more that of the entire Consumer segment and characterized by diverse regional dynamics.

Growth was evident in emerging markets (volumes +33 per cent; revenues +22 per cent), particularly in Asia (revenues +29 per cent) and South America (revenues +25 per cent), while in Russia and the Nafta saw revenue growth “more contained” with 2 per cent and 3 per cent respectively.

Europe saw revenue growth of 1.7 per cent and volumes up 10.9 per cent, thanks to the improvement clocked in the last quarter of 2013. The overall performance in Europe discounted the consumer crisis linked to the macro-economic performance, a partial adjustment of prices to the actual raw material scenario and a diverse mix of sales’ channels, with greater weight in original equipment which is an investment for the future development of the replacement channel.

Outlook for 2014

Despite outside suggestions to the contrary, in light of the performance in the last quarter of 2013 and in the first months of 2014, Pirelli confirmed the 2014 targets the company indicated last November, namely: EBIT of 900 million euros before restructuring costs of 50 million euros; investments below 400 million euros; cash generation before dividends above 250 million euros; net financial position negative at around 1.2 billion euro. At the same time Pirelli raised some profitability target: margin before restructuring costs was raised from the prior 13.5 per cent to roughly 14.5 per cent in light of an improvement in the price/mix contribution to +4 per cent/+5 per cent (previously +3 per cent/+4 per cent) with a positive impact on the operating result of about 15 million euros.

Emerging market performance better than expected

According to the company, the positive performance of emerging markets more than offset the weakness of mature markets, with an increase in revenues of 4.3 per cent compared with a reduction of sales in Europe (-2.2 per cent) and in the Nafta area (-1.5 per cent). A particularly positive performance was posted in South America (+5.2 per cent) and Apac (+14.5 per cent), while Russia remained substantially in line with the previous year and the Middle East Africa area saw a decline of 5 per cent compared with the prior year, impacted by elevated exchange rate volatility.

Notwithstanding the unfavourable exchange rate impact, linked in particular to the devaluation of Latin American currencies, revenues saw growth of 1.2 per cent to over 6.1 billion euros, which adjusted for the exchange rate effect is 8.4 per cent, while EBIT was in line with 2012 levels and 2013 targets. In the fourth quarter alone, in particular, profitability improved markedly compared with both the same period a year earlier and the preceding quarter thanks to a better product mix, as can be seen in the strong growth of Premium volumes.

Analysts: Foreign exchange outlook the only bad news in Pirelli results March 28, 2014
[…] Chris Anthony Financial analysts have responded positively to Pirelli’s full-year 2013 financial results, with some reiterating their “outperform” guidance. The upbeat response was markedly different […]
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