FY 2003 ResultsFY 2003 Results
2
SAFE HARBOUR
This presentation contains statements that constitute forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995.
These statements appear in a number of places in this presentation and include statements regarding the intent, belief or current expectations of the customer base, estimates regarding future growth in the different business lines and the global business, market share, financial results and other aspects of the activities and situation relating to the Company.
Such forward looking statements are not guarantees of future performance and involverisks and uncertainties, and actual results may differ materially from those in the forwardlooking statements as a result of various factors.
Analysts are cautioned not to place undue reliance on those forward looking statements,which speak only as of the date of this presentation.
Pirelli & C SpA undertakes no obligation to release publicly the results of any revisions to these forward looking statements which may be made to reflect events and circumstances after the date of this presentation, including, without limitation, changes in Pirelli & C. SpA business or acquisition strategy or to reflect the occurrence of unanticipated events.
3
AGENDA
Group Overview & 2003 Results pp.4-10
Industrial Businesses 2003 Results pp.12-28
Pirelli Real Estate 2003 Insights pp. 30-33
Q & A
4
2003 ROAD MAP
Main Actions Results
• Pirelli & C capital increase and merger with Pirelli & C Luxembourgand Pirelli SpA
• Improved Corporate Governance
Simplified Control ChainStrengthened Financial and Economical Structure:
Group Organic Sales + 7% Y.o.YGroup EBIT +125%Y.o.Y
Industrial Businesses:
• Industrial Turnaround
Industrial Organic Sales +3% Y.o.Y Industrial EBIT increased from 162 m� to 264 m� (+63% Y.o.Y)Operating Free Cash Flow 1 bn � in 2 yearsSignificant reduction in break even point:-13%
Pirelli RE Group EBIT including income from equity participations +25%
Asset under Management reached 10.5 bn � at market value (Pirelli Stake28%)
Pirelli RE:• Consolidation of integrated
Business Model• New long-term approach: fund-
management • Launch of Franchising Network
••
••
••
•
•
•
•
5
SIMPLIFIED CONTROL CHAIN
Tyres
100%
27,5%
14,2%
61,2%
100%100% 100% 50,4%
• From three to one-layer structure
• Completed Group simplification started in 1999 with the incorporation of Société Internationale Pirelli and Pirelli Partecipazioni into Pirelli S.p.A.
100%100% 100% 50,4% 61,1%
Energy Cables
Former Structure As 11th March 2003
Current Structure effective from 4th Aug. 2003
Real EstatePirelli S.p.A.
Pirelli & C. S.p.a.
Camfin 24%Ass. Generali Group 4.6%RCS MediaGroup 4.4%Fondiaria � SAI 4.2%Edizione Holding 3.9%R.A.S. 3.9%Mediobanca 3.9%Pirelli & C.
Luxembourg
Pirelli & C. S.a.p.a.
Energy Cables
TelecomCables
OlimpiaTyres Real Estate
P Labs 100%
OlimpiaTelecomCables
P Labs100%
6
MAIN STEPS TOWARDS AN EFFECTIVE CORPORATE GOVERNANCE
2004:• Board of Directors has proposed to General Shareholder meeting:
• The modification of the By-laws with the introduction of the Cumulative Vote and the possibility for minorities to appoint one fifth of the members
2003: • Conversion into Società per Azioni (Public Limited Company) of Pirelli & C. Sapa• �Group Ethical Code�
2002: • �Code of Conduct in Insider Dealing�• Procedure for compliance with the requirements of article 150 It. L.D. (defining method,
frequency and content of information on the significant activities and transactions to be given to the Statutory Auditors) and Rules of Conduct for affecting transactions with related parties.
1999: • �Corporate Governance Code� recommended by Borsa Italiana
• In 2004, Financial Times has included Pirelli among �2003 European Best Practised Corporate Governance Companies�
• Pirelli is included for 2004 in the FTSE4Good and the DJSI
7
FY 2003 ECONOMIC and FINANCIAL RESULTS (m€)
(^) Figure does not represent business volumes; Aggregate Production Value 1525 m� 18% YoY)(^^) Include Settlement Ciena +10m�(^^^) Of which 83 m� real estate activities and 43 m� other components (sales of ex UNIM securities)
EBITEBIT margin
Net Sales (as reported)Net Sales (Organic)
NFP
EBITDAEBITDA margin
Results from Equity Part.Olimpia
Financial Expenses
PBEIT
Extraordinary Items
Income Taxes
Net Income (loss)
Op. Result incl. Equity Part.
Industrial Businesses
2003 2002
Pirelli Real Estate
2003 2002
Total
2003 2002
Others
2003 2002
Attributable
∆
1296973
(305)112
(61)(62)
(253)(2)
9176
(118)(86)
127262
(35)(2)2.6%4.4%
1622647.9%9.4%
5015675,8616,3466,034
(12)9
126(^^^)102
(24)(21)
50(6)
100129
(2)1
102128
6067
4261
5279424424645(^)
(150)(100)
766763
(226)(210)
(2)13
120(1)
(344)(222)
(58)(49)
(286)(173)
(50)(16)
(86)(57)
(30)(18)(^^)
(52)(52)(8)
∆ - 15 %
∆ + 125 %
∆ + 20 %∆ + 7.0 %∆ - 0.7 %
(150)(100)
20501745
(58)(39)(405)4
(87)(70)
(83)(9)
(235)83
(178)(134)
(57)217
(25)491.8%4.0%
1182687.8%9.4%
5236286,2336,7186,671
8
FINANCIAL STRUCTURE: NET FINANCIAL POSITION TREND – FY 2003
Debt Reduction from Operating Activities
2.050 (239)
1811
(649)
64
388
61
1.745
NFP YE 2002
Net Cas
h Flowfro
m
operatin
g activ
ities
NFP bef. Extr
aord
inary
Items an
d Div.
Net Cap
ital In
creas
e
Dividen
ds
Olimpia
Capita
l Incre
ase
PUT CISCO
Others
NFP YE 2003
48
Net Bala
nceAcq
./
Sale Part
icipati
onsPUT B
Z
43 2.006
NFP before
Capita
l Incre
ase
(21)
9
OLIMPIA BALANCE SHEET (m€)
TI Shares & Bonds
20% Holinvest
Other
Total
8,426
Olimpia current stake in Telecom Italia: 1,752 m ordinary Shares (17% of ord. capital)
TI Book Value in Olimpia:5.2 � per share
TI Book Value in Pirelli:4.5 � per share
Assets
173
8,599
Equity
NFP
Total
4,923
Liabilities
3,676
8,599
Following the dividend proposed by the TI Board (0.1041 � / share) Olimpia in Break Even in 2004
Improved financial structure: Gearing reduced from 0.75x to 0.52x
9,135
314
153
9,602
6,324
3,278
9,602
2002 2003
2002 2003
10
0.0310 €
Dividend Proposed
0.0414 €
Pirelli & C. S.p.A. Net Profit 138 m €
Ordinary Shares
Saving Shares
STATUTORY ACCOUNTSAs proposed by the Board to shareholders
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AGENDA
Group Overview & 2003 Results pp. 4-10
Industrial Businesses 2003 Results pp.12-28
Pirelli Real Estate 2003 Insights pp.30-33
Q & A
12
INDUSTRIAL CORE BUSINESSES
- Utilities- HV/Submarine- General Market- Special Cables
Pirelli EnergyCables & Systems
- Cables & Fibers- Submarine Systems
- BBA Systems- Photonic Products
Pirelli TelecomCables & Systems
- Car- Moto- Truck- Steel Cord
Pirelli Tyre
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33,401 EmployeesEnergy 32%Telecom 7%Tyre 61%
77 Factories in 22 Countries
Energy 48Telecom 11Tyre 22
(Energy/TLC 4 shared)
INDUSTRIAL WORLDWIDE PRESENCE AT A GLANCE
Italy
18%
Rest of Europe
47%
Africa, Asia & Pacific
14%
North America
11%
South America
13%
Sales Geographical Breakdown
Energy44%
Telecom7%
Tyre49%
6 Bn� Total Sales
Italy
15%
14
• 80% of total Senior Executives (150) grown through an international experience
• Exploiting business and technological synergies among sectors all over the world
• Cross fertilization among different managerial skills, experiences, organisations and methods (400 managers missioning abroad)
• Common culture and ethical behaviour as guarantee for stakeholders
……. DRIVEN by a HIGHLY SKILLED & TALENTED MANAGEMENT TEAM
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SPARKLE ON INDUSTRIAL ROAD MAP 2002 - 2003
Actions Results
• Resizing of Capacity
• Efficiency Recovery
• Process/Product Innovation
• Significant Renewal of management team
• Total efficiency in FY2003 up to 170 m� (370 m� in 2 years)
• Break Even Point reduced by 13% from 2001
• MIRS fully implemented in US, UK and Germany
• BBA sales from 9 m� to 29 m�
• Continuous ROS improvement QoQ
• 50 % of executives (215) have had new and unlarged responsibilities within the group in the last two years
� with unchanged R&D commitment (3.4% of sales)
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2003 INDUSTRIAL BUSINESSES RESULTS (m€)
EBITEBIT margin
Net Sales (as reported)
Net Sales (Organic)
Operating Free Cash Flow
EBITDAEBITDA margin
6,034 6,346 - 4.9 %
6,034 5,861 3.0%
567 501 13.2%
264 162 63.0%4.4% 2.6%
464 538
Volume: 3.9 %Price/Mix: -0.9%
Organic Variation: 3.0%
∆Exchange Rates: -6.0%
Metal Price: -0.3%
Perimeter: -1.6%
Total Variation: - 4.9%
2003 2002 Var(%)
9.4% 7.9%
Net Result 112 (305) n.m.
17
POSITIVE INDUSTRIAL EBIT TREND (m€)
ROS
∆ + 9
∆ + 9
∆ + 49 ∆ + 35
0
20
40
60
80
1 Q 2Q 3Q 4Q
1Q 2Q 3Q 4Q
2002
2003
3,1%
4,3% 4,6%
3,8%
4,0%
0,7%
4,7%
2,3%
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Energy
Telecom
Tyre
Industrial Businesses
Efficiencies
2002 2003
107 98
67 55
25 19
199 172
∆ %Vs 2001
Break EvenPoint
-27%
-35%
14%
-13%
F.C.F
2002/2003
409
6
587
1002
ROI %
2002
4.3 %
-11.1%
10.5 %
3.9 %
FOCUS on COST CONTROL AND PROFITABILITY
2003
8.5%
-9.1%
13.2%
8.6%
19
ENERGY SECTOR RESULTS (m€)
EBITDAEBITDA margin
Net Sales (as reported) 2,637 3,021 - 12.7%
169 158 +7.0%6.4% 5.2%
Volume: -1.7%Price/Mix: -2.7%
Organic Variation: - 4.4 %
∆Exchange Rates: -4.6%
Metal Price: -0.4%
Perimeter: -3.3%
Total Variation: -12.7%
2003 2002 Var (%)
Gross efficiencies (98m�) more than offset decrease in prices/mix (-35m�) and volumes (-12m�)
Net Sales (Organic) 2,637 2,759 - 4.4%
EBITEBIT margin
83 55 + 50.9%3.1% 1.8%
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ENERGY SECTOR
Italy 10%
Rest ofEurope 56%
NorthAmerica
12%
SouthAmerica
8%
Africa Asia & Pacific
14%
Positive trend in High Voltage, Special Cables and Submarine
Slight recovery in volumes in Western Europe in General Market and Power Distribution
North America: volumes recovery driven by utilities investments
Stable market environment in South America
Continuous positive trend in Asia and Pacific area
Raw materials still under pressure
•
•
•
•
•
•
Sales Breakdown by BU � FY2003
Sales Geograph. Breakdown � FY2003
MARKET OUTLOOK 2004
Utilities46%
General Market35%
Industrials & Specials
19%
21
PIRELLI TELECOM SECTOR (m€)
EBITDAEBITDA margin
Net Sales (as reported) 427 468 - 8.8%
(1) (22) n.m.n.m. n.m.
Volume: 18.3 %Price/Mix: -21.5%
Organic Variation: -3.2%
∆Exchange Rates: -5.6%
Total Variation: -8.8%
2003 2002 Var(%)
Net Sales (Organic) 427 441 - 3.2%
Continuous efficiencies (55m�) in a still negativemarket scenario
EBITEBIT margin
(39) (84) n.m.n.m. n.m.
22
TELECOM SECTOR: 2003 ACHIEVEMENTS
• New business MODEL:Cable - Fiber - Access systems - Photonic Components
• Diversify business towards ACCESS Market (Age, ADSL gateway) leveraging on Pirelli LABS
• Support / repositioning FIBER PRICE
• EBIT strongly improved but still negative with a clear improvement forecast
23
Traditional
NEW TELECOMS DEVELOPMENT…
Radio Over Fiber
Sewer Systems
OPGW Cable(Optical Ground Wire)
FiberOptic
FiberOptic
ROF Module
Radio signal
CentralBase Stations
Fiber or Copper
RNC/Radio Network
Controller
ROF Module
ROF Modules
Blown Fiber
Broadband Access Systems
� Leading traditional and high tech businesses
Innovative
24
TELECOM SECTOR
Continuous operating result improvement thanks to cost control and new products deployment
BBA business expected to grow strongly reaching 15% of total sales
Optical cables volumes to offset prices still under pressure
First signs of recovery from Europe, North America (FTTP) and Latam(Copper)
•
•
•
•
Sales Breakdown by BU � FY 2003
Sales Geograph. Breakdown � FY 2003
Italy 9%
Rest ofEurope
41%North
America 18%
South America
10%
Africa Asia & Pacific
22%
MARKET OUTLOOK 2004
Optical Cables and
Fiber53%
BBA 7%Submarine
Connectivity & Other 16%
Copper Cables 24%
25
PIRELLI TYRES SECTOR (m€)
EBITDAEBITDA margin
Net Sales (as reported) 2,970 2,857 4.0%
399 365 +9.3%13.4% 12.8%
Volume: 7.5%Price/Mix: 4.1%
Organic Variation: 11.6%
∆Exchange Rates: -7.6%
Total Variation: 4.0%
2003 2002 Var (%)
Net Sales (Organic) 2,970 2,661 11.6%
Growth sustained by both Price/Mix and Volumes, more than compensating increase in raw materials
EBITEBIT margin
220 191 +15.2%7.4% 6.7%
26
PIRELLI TYRES BRAND POSITIONINGSales Mix Enrichment
2001 2002 2003 2004
MIX INDEX+24%
+15%
100
+10%
+10%
CAGR UHP
MOTO
SUV
LOW SECTION
(High Mix Truck)
OEM Portfolio
27
THE AMERICAN CHALLENGE
Replacement Coverage
New Factories
RETAIL WHOLESALERS
GEO
RG
IA, U
SB
AH
IA, B
RA
ZIL
OE Penetration
2002 2003 2004
J.D. POWER
J.D. POWER
100
630
1400
Index
28
TYRE SECTOR
Breakdown by BU � FY 2003
Geograph. Breakdown � FY 2003
Italy 14%
Rest of Europe45%North America
7%
South America 20%
Africa Asia & Pacific 14%
Consumer 71%
Industrial29%
MARKET OUTLOOK 2004
• Sustained volumes in Car and SUV Tyres
• Price/Mix improvements driven by two digit growth of Performance, SUV and Winter segments
• Double digit growth in Motorcycle Tyre, supported by new products and racing activities
• Sales in Industrial Tyres and Steelcordincreasing in Europe, Middle East and Latam with positive price/mix development
• Raw materials price (natural rubber and steel) still on upward trend
29
AGENDA
Group Overview & 2003 Results pp.4-10
Industrial Businesses 2003 Results pp.12-28
Pirelli Real Estate 2003 Insights pp.30-33
Q & A
30
Actual December 03
Actual December
02
Growth % Actual 03 vs
Actual 02
Aggregate Production Value net of acquisitions 1,525.5 1,297.3 18%
Consolidated Production Value 649.0 491.5
EBIT incl. Income from Equity Participations 128.1 102.2 25%
Profit before Extraordinary Items 128.9 99.9
Net Attributable Income from RE Activities 102.1 82.6 24%Other Components (*) 0.0 42.7
(*) deriving almost entirely from the sale of securities portfolio Ex-Unim
Pirelli RE - Consolidated P&L (m€)
31
ACTUAL ACTUALDecember 2003 December 2002
Fixed Assets 313.4 218.8of which investments in participated companies 149.7 109.1
Net Working Capital 162.3 190.5of which inventories 325.0 383.7
475.7 409.3
424.8 368.83.2 0.9
Funds and Provisions 41.7 52.8
Shareholders' Loans 214.5 179.0
Total Investment in Equity Participations 364.2 288.1
"Adjusted" Net Financial Position (not including Shareholders' Loans)
223.7 166.7
"Adjusted" Net Financial Position(not including SL)/Equity
0.53 0.45
Net Capital Invested
Shareholders' Equityof which minority interests
Net Financial Position 9.2 (12.3)
Total 475.7 409.3
Pirelli RE – CONSOLIDATED BALANCE SHEET (m€)
32
Book Value 100%
Book Value Pro- quota
Market Value 100%
Market Value Pro- quota
NAV Dicember
2003
RESIDENTIAL 1,490.0 541.7 2,271.3 832.3 290.7
COMMERCIAL 5,050.1 1,099.7 6,828.7 1,485.9 386.2
LAND 361.4 151.7 448.5 188.8 37.1
NPL 925.2* 414.6 925.2 414.6 -
TOT. ASSET UNDER MGT. 7,826.7 2,207.7 2,921.6 713.910.473.7
Total NAV Pirelli & C. Real Estate Not including NPL, Service Provider, Fund Management Investments
Attr. Shareholders' Equity Dec. 2003 421.6
1135.5
* Gross Book Value (200.6 m€ of Net Book Value)
Pirelli RE - NET ASSET VALUE (m€)
33
• ASSET MANAGEMENTResidential– Acquisition for around Euro 600m (Book Value) , negotiation under way for around Euro 350m and sale for
around Euro 800m-1bn (Market value)Commercial– Acquisition for around Euro 1bn (Book Value), negotiation under way for around Euro 400m and sale for
around Euro 600m-700m (Market value)– Launch of three funds during 2004 for a contribution value of around Euro 2.2b (including Tecla successfully
placed in March 2004)NPL�s
– Acquisition for around Euro 3.5bn (Gross Book Value), negotiation under way for around Euro 2.5bn (Gross Book Value) and securitization for around Euro 500m (Gross Book Value)
• LAND– Short listed for Fiera di Milano Project
• SERVICES– Value of production: double digit growth and stabilize revenues over a longer period thanks to the fund
management (7-10 years) ;ROS improvement• FRANCHISING NETWORK
– 500 contracts by year-end (258 in 2003) and widening the offer with real estate and financial related products
YEAR END TARGET: EBIT incl. income from equity investment + 20-25%in line with the 2003-2005 plan
Pirelli RE 2004 OUTLOOK
34
AGENDA
Group Overview & 2003 Results pp.4-10
Industrial Businesses 2003 Results pp.19-28
Pirelli Real Estate 2003 Insights pp. 30-33
Q & A
FY 2003 ResultsFY 2003 Results