No 2019 dividend, updated 2020 guidance: Pirelli strives to mitigate COVID-19 impact
The Board of Directors of Pirelli met last Friday to take stock of the COVID-19 crisis and its detrimental effect upon global economic outlook. During the meeting, they decided the scenario that forms the basis of the 2020-2022 Industrial Plan, which Pirelli presented on 19 February, no longer applies. The Board has therefore decided to reformulate Pirelli’s targets for 2020 “in light of the elements available today” and has also cancelled the distribution of dividends for 2019 for the time being and revised its 2020 renumeration policy.
While Pirelli is reformulating its 2020 targets, it will recalculate its 2022 targets in the fourth quarter of the year based upon how the “external scenario” evolves.
The cancellation of dividends for 2019 reverses the decision approved on 2 March. 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, Pirelli may distribute reserves to shareholders in the second half of 2020.
A key feature of the revisions being made to Pirelli’s remuneration policy is the cancellation of the short-term incentive system for 2020.
Measures taken to deal with the COVID-19 emergency
In response to the coronavirus health emergency, Pirelli immediately implemented all preventative actions to safeguard the health of its employees and the wider community. Pirelli created a task force that is in constant contact with the various institutional crisis units in all the countries where the company is present. The HSE function is coordinating the implementation of actions at the global level and, in addition, has created an emergency hotline for employees that is staffed 24/7 by doctors, security specialists and HSE. Pirelli has also promoted a number of initiatives to support the wider community: in Italy with donations together with the Lombardy Regional Government for Milan’s Sacco Hospital to provide medical devices; in China from a donation to the ‘Coronavirus Relief Efforts’ to the sending of healthcare equipment. There was a contribution to research against the coronavirus drawn from the Pirelli Calendar project, following the cancellation of the 2021 edition. Pirelli is constantly in contact with all its stakeholders (including suppliers, clients and the distribution network) with the aim of limiting the impact of the crisis and to better plan the recovery.
New 2020 market scenario and actions taken
The Covid emergency will impact the global economy, with a general fall in production and consumption expected. In light of the elements available today and based on a “prudent scenario”, Pirelli now expects a fall of 2020 GDP at the global level of about -2.8 per cent (+2.7% the outlook foreseen in the Industrial Plan presented on 19 February). In this scenario, the expectations for the overall car tyre market are for a decline of approximately -19 per cent, with:
-21 per cent in the Original Equipment channel (prior estimate -2.4%) as a result of the global fall in the production of new vehicles;
-18 per cent in the Replacement channel (prior estimate +0.5%), taking also into account the measures restricting circulation adopted by various countries.
The expectations for the Car New Premium segment (Car tyres ≥18’’) are for a decline of -14 per cent (prior indication +6%), more contained than the expected fall of -20 per cent (prior indication around -2%) for the Standard segment (Car tyres ≤17’’).
To deal with this new scenario, Pirelli has implemented a series of actions aimed at protecting profitability and cash generation
Temporary reduction of production levels: factory activity, which was slowed from the beginning of the emergency, has been temporarily suspended, beginning from 20 March, in all production facilities outside 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.
Updated 2020 guidance
Based on the new economic context and taking into account the actions implemented, Pirelli estimates for 2020:
· Revenues of between 4.3 and 4.4 billion euro (prior indication around 5.4 billion), with total volumes falling by between -18 per cent and -20 per cent (prior indication between 0% and +1%). In the High Value segment the expected decline is -14 per cent (prior indication + 8%) with a performance of Car New Premium of about -11.5 per cent (-14% fall expected for New Premium market) and a fall of around -26 per cent in the Standard segment (previous indication -6%);
· Adjusted Ebit Margin of between 14 and 15 per cent (around 17% margin implicit in the targets presented on 19 February) thanks to above mentioned cost containment actions and a more favourable scenario for raw materials and energy costs;
· Investments of around 130 million euro (prior indication about 300 million euro) mainly for plant management and improvement of mix and quality;
· Net Financial Position confirmed at around -3.3 billion euro with net cash generation of approximately 230-260 million euro (the corresponding implicit level in the previous guidance about 220 million euro), 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.
Cancellation of dividend for 2019
In light of the COVID-19 emergency, Pirelli’s board decided to cancel payment of the dividend for 2019, modifying therefore the proposed distribution of the 2019 profit already approved on 2 March, which called for a dividend of 0.183 euro per share for a total of 183 million euro.
Therefore, at the next Pirelli & C. shareholders’ meeting, scheduled for 18 June, there will be a proposal to bring back the entire 2019 profit, about 273.2 million euro. The board will evaluate the possible calling of a shareholders’ meeting, to be held in the second half of the year, to propose the eventual distribution of reserves, 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.
Management compensation 2020 and remuneration policy
Chief executive officer, 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 per cent of the gross fixed annual compensation of Marco Tronchetti Provera for each office he holds, as well as for the positions of board member and Chairman of the board committees;
50 per cent of the remuneration of board members;
20 per cent 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 chief executive officer and the leadership team.
The actions described above will allow savings of approximately 31 million euros.
Group’s financial solidity confirmed
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 800 million euro (5-year) and the extension of the maturity of a 200 million euro 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 approximately the next three years.