ANNUAL 01. FINANCIAL REPORT AT DECEMBER 31, 2013 1
PIRELLI & C. Società per Azioni
Head office in Milan
Viale Piero e Alberto Pirelli, 25
Share Capital euro 1,345,380,534.66
Milan Companies Register No. 00860340157
Administrative Business Register (REA) No. 1055 2
PIRELLI & C. S.p.A. – MILAN Annual Financial Report at December 31, 2013
CONTENTS
General Information page 3 Directors' Report on Operations page 5 Macroeconomic and market situation page 5 Significant events in 2013 page 16 Group performance and results in 2013 page 25 Business outlook in 2014 page 40 Operating performance Tyre Business page 41 Consumer Business page 45 Industrial Business page 50 Research and development activities page 55 Highlights of other activities page 79 Parent highlights page 80 Risks and uncertainties page 83 Alternative performance indicators page 101 Significant events subsequent to the end of the year page 102 Sustainability Report page 104 Other information page 110
Resolutions page 114 Consolidated Financial Statements page 115 3
General Information
Board of Directors 1
Chairman and Chief Executive Officer Marco Tronchetti Provera Deputy Chairman Alberto Pirelli
Director Carlo Acutis Independent Director Anna Maria Artoni Director Gilberto Benetton Independent Director Alberto Bombassei Independent Director Franco Bruni Independent Director Luigi Campiglio Director Paolo Fiorentino Independent Director Jean Paul Fitoussi Independent Director Pietro Guindani Independent Director Elisabetta Magistretti Director Massimo Moratti Director Gaetano Micciché Director Renato Pagliaro Independent Director Luigi Roth Director Luca Rovati Lead Independent Director Carlo Secchi Independent Director Manuela Soffientini Director Claudio Sposito
Secretary to the Board Anna Chiara Svelto ------Board of Statutory Auditors 2 Chairman Francesco Fallacara Statutory Auditors Antonella Carù Enrico Laghi Alternate Auditors Umile Sebastiano Iacovino Andrea Lorenzatti
Internal Control, Risks and Corporate Governance Committee Chairman of the Committee – Lead Independent Director Carlo Secchi Independent Director Franco Bruni Independent Director Elisabetta Magistretti Independent Director Luigi Roth
------Remuneration Committee Chairman of the Committee – Independent Director Luigi Roth Independent Director Anna Maria Artoni Independent Director Luigi Campiglio Independent Director Pietro Guindani ------4
Nominations and Successions Committee Chairman of the Committee Marco Tronchetti Provera Independent Director Luigi Campiglio Independent Director Luigi Roth ------
Strategies Committee Chairman of the Committee Marco Tronchetti Provera Independent Director Alberto Bombassei Independent Director Franco Bruni Director Paolo Fiorentino Director Gaetano Micciché Director Renato Pagliaro Lead Independent Director Carlo Secchi Independent Director Manuela Soffientini Director Claudio Sposito ------
Independent Auditor 3 Reconta Ernst & Young S.p.A. ------
Corporate Financial Reporting Manager 4 Francesco Tanzi ------
General Manager Operations 5 Gregorio Borgo
------
Prof. Giuseppe Niccolini was appointed Joint Representative of the Savings Shareholders for the three-year period 2012-2014 by the general meeting of that body held on January 31, 2012.
1 Appointment: April 21, 2011. Expiry: Shareholders’ Meeting called to approve the Annual Financial Report at December 31, 2013. Manuela Soffientini, co-opted on March 1, 2012, was confirmed as Director by the Shareholders' Meeting on May 10, 2012. Jean Paul Fitoussi and Luca Rovati were appointed by the Shareholders' Meeting on May 10, 2012. Paolo Fiorentino and Claudio Sposito were co-opted on October 21, 2013. Gaetano Micciché was co-opted on November 5, 2013. 2 Appointment: May 10, 2012. Expiry: Shareholders’ Meeting called to approve the Annual Financial Report at December 31, 2014. 3 Post conferred by the Shareholders’ Meeting held on April 29, 2008, for the nine-year term 2008-2016. 4 Appointment: Board of Directors meeting held on April 21, 2011. Expiry: together with the current Board of Directors. 5 Appointment: Board of Directors meeting held on September 23, 2013.
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DIRECTOR’S REPORT ON OPERATIONS
MACROECONOMIC AND MARKET SITUATION
The international economy
The global GDP rose by 2.5% in 2013, at virtually the same rate as in 2012 (+2.6%) but with more volatility in emerging countries. Cyclical recovery in the eurozone seems to have gotten underway, although at a moderate pace. The latest macroeconomic figures released in the United States confirm the steady improvement in the U.S. economy that has led the Federal Reserve Bank to reduce its extraordinary measures to support growth. However, these measures negatively impacted emerging countries, with an outflow of investment money, softening of local currencies and higher inflation. The consequent increase in interest rates has caused economic growth to slow down in those countries.
World GDP Growth, Annual % Change
Source: IHS Global Insight, January 2014
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Advanced countries grew by 1.3% in 2013, marking a slowdown from 1.4% growth in 2012. European economic activity was conditioned by the austerity programmes adopted in the individual countries that have curbed domestic demand. Nevertheless, improved financial stability, greater consumer and business confidence, and rising foreign demand have sparked a recovery. This has been led by Germany with the steadily increasing contribution made by peripheral countries over the course of the year. However, the overall macroeconomic situation remains fragile, access to credit is still limited, and restructuring of the financial system has yet to be completed. Low inflation and the high rate of unemployment impacted private consumption and economic performance.
GDP growth in North American countries slowed down in 2013 from the previous year, largely due to higher taxes in the United States and, in particular, the automatic spending cuts that came into force on March 1 (the “sequester”). Prolongation of the political debate also caused numerous U.S. federal offices to shut down in October, sapping further resources from the economy. In this context, the United States Federal Reserve Bank maintained a loose monetary policy in support of the economy and employment. In spite of the uncertainty dominating the political arena, GDP growth was sustained in 2H 2013 by consumer spending and residential property investments. This improvement nudged the annual GDP growth rate up to 1.9% and the Federal Reserve Bank to taper off its expansionary monetary policies.
Growth on the Asian economies accelerated slightly in 2013 from the previous year, mainly due to the recovery in Japan, whose economy was stimulated by monetary and budget policies that bolstered consumer confidence and spending. China initiated a new reform phase, and seems to be performing as expected with the planned “soft landing” – development at high rates that are nonetheless lower than the peaks reached during the last several years, with growth of 7.7% in 2013.
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Economic activity in Brazil, the biggest economy in Latin America, expanded by 2.3% in 2013, with a slowdown in the second half of the year. Like other emerging country currencies, the real depreciated following the announcement that quantitative easing would be tapered off in the United States, and thus exacerbating inflation. The consequent monetary squeeze operated by Central Bank impacted investment spending in particular. In Argentina, strong economic growth in 1H 2013 was followed by softening in 4Q 2013 as domestic demand slowed down. An acceleration in the depreciation of the peso, and expectations of a further increase in inflation dented consumer confidence on fears of an additional reduction in their purchasing power.
Exchange rates
The tensions that arose on the international markets triggered volatile swings in exchange rates. Expectations that Federal Reserve Bank purchases of U.S. government bonds would be cut back (“tapering”) encourage a steady outflow of capital from emerging countries, exacerbating the depreciation of their currencies and simultaneously benefiting reserve currencies.
In 2013 the euro strengthened against the dollar, rising from an average level of USD 1.29 (in 2012) to USD 1.33. The euro rose particularly in 4Q 2013, reaching USD 1.36 notwithstanding the 25 basis point cut in the European Central Bank reference rate (to 0.25%) in November.
In Asia, the yen rate was influenced by the expansionary monetary policy undertaken by the Japanese central bank to stimulate sluggish growth and fight deflation. The average yen-U.S. dollar exchange rate rose from 79.8 in 2012 to 97.6 in 2013, which was equivalent to depreciation of the yen by 18%. With the exception of the brief period of uncertainty triggered by the U.S. Federal Reserve Bank announcement on May 22 that quantitative easing would be tapered off (coinciding with the period when all reserve currencies appreciated), the yen softened steadily over the course of the year.
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The appreciation of the Chinese renminbi remained under the prudent control of Chinese monetary authorities, levelling off at an average of 6.3 renminbi to the U.S. dollar in 2013, corresponding to an appreciation of 2.1%.
Latin American currencies depreciated steeply against the U.S. dollar in 2013. They were hit especially hard by the U.S. Federal Reserve Bank announcement that quantitative easing would be tapered off, which triggered a brusque contraction in foreign credit to emerging countries. The Brazilian real fluctuated in a range between 1.95 and over 2.40 BRL/USD in 2013, for an average of 2.16. This represented a depreciation of nearly 10% from 2012 in spite of the rise in the reference rate by the Brazilian central bank (from 7.25% in March 2013 to 10.50% in January 2014). The Argentine peso also fell sharply: the average rate for 2013 – 5.48 pesos to the U.S. dollar – reflects a 17% decrease from 2012, following a 9% fall in 2012. The Venezuelan bolivar was devalued in February 2013, until the official exchange rate rose from 4.3 to 6.3 bolivars per U.S. dollar.
EUR/USD Exchange Rates
Source: ECB 9
Automotive market
Car and Light Vehicle Sales
In 2013 global sales of new vehicles rose by 4%, compared with +5% in 2012 (Source: IHS). The market was boosted especially by sales in China, the United States and the United Kingdom. The contraction of the automotive market in Europe abated in 2013. It fell by a total of 2% from 2012, but did start growing again in 4Q 2013. Peripheral markets and core markets were both affected by weak demand. The significant growth in the United Kingdom and the lower growth in Spain and Portugal were unable to offset the fall in sales in Germany, France, Italy and The Netherlands. Although subsidies were introduced in Russia during 2H 2013 to ease access to credit, vehicle registrations fell by an average 6% for the year. This trend was driven mainly by the economic slowdown and termination of government incentives that had sustained registrations in 2012. NAFTA members benefited from a positive macroeconomic situation that supported vehicle registrations. The United States recovered volumes in 2013 that had been lost after the 2008- 2009 financial crisis, and sales of light vehicles rose by 8%, a rate that was only slightly lower than in 2012. Markets in Asia turned in a mixed performance. In China car registrations jumped by 15%, accelerating during the last several months of the year. The market benefited from robust increase in the number of dealers and greater use of financing by consumers. In Japan, car sales dipped slightly in 2013, being negatively impacted by the termination of government eco-incentives in 2012. However, purchases recovered at the end of 2013 in anticipation of higher consumption taxes scheduled to take effect in April 2014.
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In Latin America the car market expanded by 1%, being impacted by contraction on the Brazilian market. There the end of car purchase incentives, which had sustained demand for the last two years, coupled with the rising cost of consumer credit, negatively impacted registrations, which contracted by 1%. The car market expanded robustly instead in Argentina, with sales up by more than 10%. Consumers there purchased cars as a “safe haven” in the face of high inflation.
Commercial Vehicle Sales
The commercial vehicle market stabilised in 2013 after global demand fell by 7% in 2012. Sales rose on emerging markets, while mature markets returned to growth only in the closing months of the year. China and South America distinguished themselves as the most dynamic markets, posting double-digit growth in 2013. Commercial vehicle sales in Western Europe rose slightly (+1%), mainly due to improvement during 4Q 2013. New registrations of heavy trucks rose by +6% from 2012, with a fast acceleration during the last months of the year following introduction of the Euro VI regulations (in force from January 2014). Just as in the case of the car market, the United Kingdom and Spain contributed the most to growth, while the German and French markets contracted slightly. The Italian market remained the weakest of the leading markets, with sales of vehicles having a curb weight of over 3.5 tons falling 8%. In Russia the commercial vehicle market contracted in step with weakening industrial production, combined with the introduction of a tax for the recycling of imported vehicles (which was extended to cover locally made vehicles as well in January 2014). In the United States the moderate recovery in demand for heavy range vehicles that began in mid-2012 continued. Vehicle purchases in this market accelerated in 2H 2013 in response to expansion of the construction industry. The heavy vehicle segment grew by 1% from the previous year, and +10% in the light range vehicle segment.
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In Asia, China recovered its status as the locomotive for growth on the commercial vehicle market after contracting in 2012. The demand for commercial vehicles leapt at a double- digit rate in 2013, being driven by the implementation of emissions regulations at the beginning of 2014. On the contrary, the Japanese heavy vehicle market slowed down after posting a 16% increase in 2012, remaining stable at the levels reached the previous year. In Latin America commercial vehicle sales grew robustly in 2013. The market resumed expanding in Brazil after contracting sharply in 2012, the year when the introduction of emissions regulations had moved up many sales to 2011. Commercial vehicle sales rose by 15% in 2013, after falling by -20% in the previous year. Just as was the case for the car market, the Argentine market for commercial vehicles grew at a double-digit rate in 2013, as measured by both sales and production.
Tyre market
Consumer segment
The global consumer tyre market totalled 1.4 billion units in 2013, marking a 3.5% increase after the slight decrease reported a year earlier. Asia Pacific and Latam were the regions that contributed most to growth, while mature countries had more modest growth. The premium market grew at a sustained rate, amounting to 9% globally. The European tyre market ended 2013 with sales volumes at virtually the same level as the previous year. Both the original equipment segment and the replacement segment began growing in 3Q 2013, being driven by the steady improvement in consumer confidence. The premium market in Europe resumed growing at a rate higher than the market average after a slight downturn in 2012. The Russian consumer original equipment segmentrecorded negative rates as well as the summer replacement segment. This reflected the weak performance of the local economy, which was impacted by lower commodity prices. 12
In NAFTA countries, consumer sales in the original equipment segment tracked the positive performance of vehicle production, growing by +5% in 2013 (+17% in 2012). Net sales in the replacement segment, without imports, decreased instead by 1% during the year. The result including imports was an increase of +4%, with growth occurring during the last four months of 2013. The growth in vehicle output and registrations in China boosted original equipment tyre sales by 17% in 2013. In Japan, after the steep increase in 2012 connected with the increase in car production, original equipment sales decreased by 4%, while they increased by 4% in the replacement segment. Driven by the strong performance of Brazil and Argentina, the South American tyre market grew in both product segments during 2013.
Tyre sales, Consumer segment 2010 2011 2012 2013
Original equipment 13% 3% -9% 0% Europe* Replacement 8% 3% -12% 0% Original equipment 39% 10% 17% 5% NAFTA Replacement 4% -1% -5% -1% South Original equipment 13% 2% 0% 6% America** Replacement 11% 7% 1% 9% China Original equipment 31% 2% 7% 17% Original equipment 20% -13% 19% -4% Japan Replacement 9% 8% -1% 4% * including Turkey, excluding Russia. ** Argentina, Brazil and Venezuela. Note: the data exclude imports, excluding for South America, where the replacement segment includes imports to Brazil. Source: Pirelli estimates
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Industrial segment
The global radial truck tyre segment amounted to 140 million units in 2013, up 3% from 2012. This was mainly due to China (the biggest market with about 40% of the global market), Brazil and Europe. After sales contracted in 2012, the European industrial tyre market (including Turkey) resumed growing in 2013, increasing by 6% in the original equipment segment and 7% in the replacement segment (net of imports). After three years of expansion, original equipment sales in NAFTA countries fell by 4% in 2013 (net of imports), while those in the replacement market rose by +2% after contracting the previous year. In Asia, the recovery in commercial vehicle production and registrations in 2013 pushed original equipment sales in China up sharply by 17%. The replacement tyre segment turned in a positive performance, with a +3% increase. In Japan, sales to the original equipment segment remained substantially unchanged from the previous year, while the replacement channel, which showed a 6% increase, recovered from the downturn of the previous year. In South America, the development of commercial vehicles in Brazil and Argentina was reflected by original equipment tyre sales, which rebounded by 34% in 2013 after plunging - 29% in the previous year. Sales in the replacement channel also recovered by +10% after falling in 2012. Tyre sales, Industrial segment 2010 2011 2012 2013
Original equipment 57% 32% -8% 6% Europe* Replacement 18% -1% -17% 7% Original equipment 30% 55% 5% -4% NAFTA Replacement 18% 3% -11% 2% South Original equipment 47% 11% -29% 34% America** Replacement 23% 2% -4% 10% Original equipment 53% -15% -19% 17% China Replacement 10% 1% -4% 3% Original equipment 37% -2% 15% 1% Japan Replacement 14% 7% -4% 6% * including Turkey, excluding Russia. ** Argentina, Brazil and Venezuela. Note: the data exclude imports, excluding for South America, where the replacement segment includes imports to Brazil. Source: Pirelli estimates
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Commodities Modest global growth in 2013 translated into limited inflation and commodity price increases. The average USD 109/bbl price for Brent crude oil in 2013 was slightly lower from the average of USD 112/bbl the previous year. While geopolitical tensions in Syria drove up crude oil prices in the first part of 2013, higher oil and gas production in non- OPEC countries, especially the United States, reduced supplier price pressures, contributing to the relatively stable price for Brent crude during the year.
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The price of natural rubber (TSR20) was impacted instead by the weakening of demand in Europe and China and increased production. This last factor resulted from the growth in commodity prices between 2005 and 2008 and consequent investments in cultivated areas. The average purchase price of USD 2,518/ton in 2013 was 20% lower than the average price of USD 3,156/ton in 2012. Hit by weak demand and excess supply, prices for butadiene, which is the principal ingredient used in making synthetic rubber, fell in 2013. Prices fell below euro 1,000/ton (euro 750/ton in August) for the first time since March 2010, and the average purchase price in 2013 was euro 1,108/ton, 37.5% lower than in the previous year.
Commodity prices
Source: IHS Global Insight
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SIGNIFICANT EVENTS IN 2013
On January 15, 2013 Pirelli and the Ministry of Environment signed a new agreement to reduce the climate impact of activities related to tyre manufacturing and use. The agreement, signed by Minister Corrado Clini and Pirelli Chairman and CEO Marco Tronchetti Provera, defines the second phase of the agreement previously signed by the company with the Ministry in January 2012, as part of the international conference “Driving Sustainability: a Safe Road to the Future”. In this second phase, Pirelli and the Ministry of Environment will undertake technological experiments aimed at reducing the climate impact of activities related to the production and use of a representative car tyre, made by Pirelli in Brazil.
On January 15, 2013 the shareholders agreement of Pirelli & C. S.p.A. was renewed without any changes in its participants and the participating shares. All participants of this agreement affirmed their desire to renew it, which was set to expire on April 15, 2014.
On January 23, 2013 Pirelli initiated the Motorsport 2013 season by presenting the new versions of its Formula 1 tyres, the third such evolution in three years, and the original 17 inch tyre for Superbike championship competition, which marks a turning point in the most important motorcycle championship involving street model derivatives. Pirelli will participate in about 250 competitions, of which less than half as the sole tyre brand supplier, supplying tyres to more than 40 countries around the world, from the Americas to the Far East. 17
On January 30, 2013 Pirelli and Russian Technologies announced the start-up of a new production line at the Voronezh factory, in southwest Russia. Following the investments in new technology made there, this new production line now meets Pirelli standards and will make it possible to produce premium tyre compounds, especially in the winter segment. Investments will total euro 100 million in 2015.
On March 4, 2013 Mario Greco resigned as Director of the Company.
On March 26, 2013 Pirelli expanded its range of premium products with Winter Sottozero 3, an ultra-high performance tyre developed for medium-large engine cars in the premium segment that can enhance the sporty performance of such vehicles. The new Winter Sottozero 3 is the result of a joint development project with the most prestigious car companies and is designed to equip sports cars and powerful sedans. An innovative compound was developed in Pirelli laboratories to improve tyre performance, such as road hold, even in wet or icy conditions, while improving the driving performance characteristics of the tyre. 18
On March 27, 2013 Pirelli & C. S.p.A, in relation to the extraordinary operation of the re-launch of the Prelios group approved by the Board of Prelios S.p.A., involving restructuring of its financial position, announced – in its role of financier to Prelios S.p.A – that it expressed its participation in the operation along with the other parties involved. For Pirelli, this entailed the contribution of new financial resources with indirect subscription through Fenice S.r.l. of the capital increase for euro 23 million and restructuring of the entire credit during last August, totalling euro 173.5 million, claimed against Prelios at December 31, 2012, with conversion into shares and equity instruments (the “convertendo”) for euro 169.9 million and collection of the remaining euro 3.6 million. Pirelli’s participation in the operation of re-launching Prelios S.p.A. does not change in any way Pirelli’s strategic focus on the core tyre business, but has as its sole objective the strengthening of Prelios’ equity and finances with the aim of maximising the value of the credit Pirelli has with Prelios S.p.A.
On April 8, 2013 Pirelli presented the Angel GT tyre on board the ship Cavour at Taranto. This new motorcycle tyre is certified as number one for mileage in the Sport Touring segment. Angel GT is the pride and joy of the Pirelli Sport Touring range. It is the natural heir of the Angel ST, the tyre that has repeatedly come first in comparative tests held by prestigious motorcycle magazines and the holder of seven world duration records. Compared with its predecessor, the Angel GT increases mileage by 30% and reduces braking distance by about one metre (at a speed of 75 km/h), while also improving grip and maneuverability under wet conditions. 19
On April 15, 2013 a Memorandum of Understanding was signed by Pirelli and Rosneft for the first Pirelli premium flagship store in Russia. It will be located inside the new Rosneft service station in Sochi, on the Black Sea coast in the region of Krasnodar. The agreement represents a new important step towards development of the strategic commercial and marketing collaboration agreement initialled by the two partners on December 20, 2012. The agreement also calls for the opening of other similar sales outlets at Rosneft service stations located in areas offering access to premium customers.
On May 10, 2013 Vittorio Malacalza resigned as Deputy Chairman and member of the Pirelli & C. S.p.A. Board of Directors.
On May 13, 2013 the Shareholders' Meeting of Pirelli & C. S.p.A. approved the annual financial report 2012, which closed with consolidated net income of euro 398.2 million, and parent company net income of euro 234.4 million, resolving to pay a dividend of euro 0.32 euro per ordinary share and euro 0.39 per savings share. The Shareholders' Meeting appointed Jean Paul Fitoussi (independent), Luca Rovati and Carlo Salvatori, who had been previously co-opted by the Board of Directors in July 2012, as Directors until the term of the current Board of Directors expires upon approval of the annual report 2013. The Shareholders' Meeting also authorised the Board of Directors to buy back and dispose of treasury shares up to the limit of 10% of share capital and for a maximum period of 18 months, and also approved certain amendments to the bylaws. The Shareholders' Meeting approved the Company Remuneration Policy, with a 98.6% majority of the voting shares. 20
On June 5, 2013 the Pirelli & C. S.p.A. Block Voting Shareholders' Agreement announced that the parties to the Shareholders’ Agreement gave their consent on request: - to Allianz S.p.A. to release from the Shareholders' Agreement the entire Pirelli & C. S.p.A. shareholding that had been contributed, amounting to 20,977,270 Pirelli & C. ordinary shares (4.41% of the share capital); - to Fondiaria-Sai S.p.A. to release from the Shareholders' Agreement a total of 12,229,394 ordinary shares in Pirelli & C. S.p.A. (2.57% of the share capital); - to Camfin S.p.A. to release from the Shareholders' Agreement a total of 33,300,000 ordinary shares in Pirelli & C. S.p.A. (7% of the share capital); - to amend Article 2 of the Shareholders' Agreement by establishing that when it is renewed, the extension of the Shareholders' Agreement for the Participants that have not opted out shall be subject to the condition that the remaining financial instruments tied to the Shareholders' Agreement together represent at least 30% (rather than 33%, as previously envisaged) of the ordinary subscribed share capital of Pirelli & C. S.p.A.
As part of the rights issue by RCS Mediagroup S.p.A., on July 4, 2013 Pirelli exercised all of its options on the 5,757,493 shares restricted by the Block Voting Shareholders' Agreement of the company and sold on the market 105,696 options on the remaining shares of RCS that Pirelli owned but were not restricted by the Shareholders' Agreement, resulting in a net outlay of about euro 21.3 million. On October 30, 2013 the Block Voting Shareholders' Agreement of ordinary shareholders of RCS MediaGroup S.p.A, to which Pirelli belonged, was dissolved prematurely. Therefore, beginning on the date that the Block Voting Shareholders' Agreement was dissolved, the equity investment held in RCS Mediagroup will be reclassified on the Pirelli balance sheet as an available-for-sale financial asset.
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On July 24, 2013 Pirelli announced that it had received the resignation of Giulia Maria Ligresti as member of the Pirelli & C. S.p.A. Board of Directors.
On August 5, 2013 in relation to the joint venture between Pirelli, Russian Technologies (“RT”) and Fleming Family & Partners – now named GHP Asset Management Holdings Ltd. (“GHP”) – Pirelli, confirming the strategic importance of the Russian market, seized the opportunity to increase its own participation in the project, as agreed by its financial partner GHP and the shareholder RT. This raised the Pirelli shareholding from an initial 50% to 65% in the joint venture, following reduction in the GHP shareholding from 25% to 10% and maintenance of the RT shareholding at 25%. The agreements made by the parties envisage that Pirelli may further increase its shareholding in the joint venture in 2017, by exercising the put and call options on the entire 10% shareholding still owned by GHP, and on a 15% shareholding (out of the total 25% total holding) owned by RT.
On September 26, 2013 the Operations Management Department was formed, and Gregorio Borgo, previously in charge of the Asia-Pacific region, was named as General Manager Operations. The reorganisation aims to maximize oversight of the business and geographical coordination of all operational activities linked to product development and management. The organisational units linked to operations management (Industrial Operations, Supply Chain, Product and Original Equipment Aftermarket and Marketing), the Industrial and Moto Business Units, as well as the different Regions (Europa, Africa, Middle East and India, Asia-Pacific, Latam, NAFTA and Russia) report to the General Manager Operations.
On October 16, 2013 Carlo Salvatori resigned as member of the company Board of Directors, due to the recent concentration of his professional commitments. 22
On October 21, 2013 the Board of Directors of Pirelli & C. S.p.A. co-opted Claudio Sposito and Paolo Fiorentino. They were appointed after the resignation of Directors Vittorio Malacalza and Giulia Maria Ligresti, which were notified on May 10, 2013 and July 24, 2013, respectively.
On October 21, 2013 the Management of the Pirelli & C. S.p.A. Block Syndicate voted to appoint the lawyer Alessandro Pedersoli to open consultations between all aderents to the pact in view of its upcoming expire and to evaluate a possible early winding up of the agreement. Following the consultations sponsored by the Pirelli & C. S.p.A. Block Syndicate, the syndicate participants (Assicurazioni Generali S.p.A., Camfin S.p.A., Edizione S.r.l., Fondiaria-SAI S.p.A., Intesa Sanpaolo S.p.A., Mediobanca S.p.A, Massimo Moratti and Sinpar S.p.A) agreed to dissolve the shareholders' agreement in advance of its April 15, 2014 expiry. Therefore, since October 31, 2013 the participants have been definitively and irrevocably released from all the commitments and obligations resulting from the agreement.
On November 5, 2013 Gaetano Miccichè was co-opted by the Board of Directors following the resignation of Carlo Salvatori. At the same meeting, the Board of Directors appointed Gaetano Miccichè and Paolo Fiorentino as members of the Strategies Committee. 23
On November 5, 2013 the Board of Directors of Pirelli & C. S.p.A. gave the Chairman a mandate for further analysis of a possible partnership for the Steel Cord business unit. The decision, which was approved by the Strategies Committee, reflects the management's decision to examine possible opportunities to develop the business in partnerships that would guarantee it a significant international presence and adequate competitive standards.
The Business Plan 2013-2017 was presented in London on November 6, 2013. That plan forecasts growth in the business segments with higher added value, the extraction of value from selected medium segment products, further reduction of volumes and capacity in the standard segment, realisation of a new efficiency plan, selective investment in high-return projects, and continuous monitoring of working capital. These actions, supported by capital expenditure of euro 1.6 billion, should allow Pirelli to achieve EBIT (before restructuring charges) of over 15% in 2017 and ROI (excluding financial investments) of about 28%, as well as limit net debt to about euro 500 million at the end of the plan, through the forecast generation of solid cash flow.
On November 26, 2013 Pirelli, Rosneft and Rostec (Russian Technologies) signed a Memorandum of Understanding (MOU) to carry out joint research and development activities on materials to be used in tyre production. The tyre production materials include synthetic rubber, fillers such as carbon black and reinforcing materials, with all of them being developed at the high technological standards of Pirelli. 24
On December 27, 2013 Pirelli, Rosneft and Oil Techno signed a Memorandum of Understanding for joint research and development in the synthetic rubber field, and particularly Styrene-Butadiene Rubber (SBR), in Armenia. According to the terms of the preliminary agreement, Rosneft will be the principal investor in the activities related to SBR rubber in Armenia and Oil Techno will represent the local partner. For its part, Pirelli will collaborate with Rosneft in research and development activities related to SBR rubber, and is interested in defining a long-term supply agreement for purchase of the SBR rubber to be produced. 25
GROUP PERFORMANCE AND RESULTS IN 2013
In addition to the financial performance measures established by the International Financial Reporting Standards (IFRSs), this report presents alternative performance indicators that are derived from IFRSs. These performance indicators are used to facilitate understanding of Group operating performance. These indicators are: Gross Operating Profit, Non-current assets, Provisions, Operating working capital, Net working capital, and Net financial (liquidity)/debt position. Please refer to the section “Alternative performance indicators” for a more analytical description of these indicators.
Following the entry into force of the newly revised standard IAS 19 – Employee
Benefits on January 1, 2013, the 2012 figures have been restated. The following table summarises the impact of this change on the principal balance sheet and income statement items in each quarter and their totals for all of 2012. Please see the notes to the consolidated financial statements for additional details.
(in millions of euro) at 03.31.2012 at 06.30.2012 at 09.30.2012 at 12.31.2012 2012 2012 2012 2012 2012 2012 2012 2012 change change change change reported restated reported restated reported restated reported restated
Profit & Loss impact Operating income - quarter 209.4 212.7 3.3 191.3 192.6 1.3 192.1 195.5 3.4 188.0 191.7 3.7 Operating income - cumulative 400.7 405.3 4.6 592.8 600.8 8.0 780.8 792.5 11.7
Net income (loss) - quarter 125.3 123.6 (1.7) 96.4 94.9 (1.5) 86.6 84.8 (1.8) 89.9 88.2 (1.7) Net income (loss) - cumulative 221.7 218.5 (3.2) 308.3 303.3 (5.0) 398.2 391.5 (6.7)
Balance sheet impact Reserve 851.5 853.2 1.7 681.9 685.1 3.2 677.3 682.3 5.0 647.9 654.6 6.7 Net income (loss) - cumulative 125.3 123.6 (1.7) 221.7 218.5 (3.2) 308.3 303.3 (5.0) 398.2 391.5 (6.7) Equity 2,320.1 2,320.1 0.0 2,246.9 2,246.9 0.0 2,328.9 2,328.9 0.0 2,389.4 2,389.4 0.0
In this document, the comments on the changes from December 31, 2012 always refer to the restated amount, unless otherwise indicated.
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26
The macroeconomic situation was still difficult in 2013, with the European business cycle beginning to recover at a moderate pace and emerging country exchange rates growing increasingly volatile (Brazilian real, Argentine peso, Turkish lira and Egyptian pound). This situation is reflected in the performance of the markets where Pirelli operates. Europe reported volumes that were stable at their 2012 levels, while the soft market in Russia mainly affected the original equipment and summer segments. The premium segment, which is at the centre of Group strategy, continued growing and outperforming the market average, rising by about 9% (car tyres). Notwithstanding this general situation, exposure to the most dynamic markets and focus on value segments allowed Pirelli to expand its volumes in the consumer business by 4.6% and its premium segment volumes by 15.3%, higher than the 2013 target of more than 13%. Volumes also increased in the industrial business as compared with 2012, mainly due to the positive performance of sales on South American markets during the first part of the year.
Consolidated net sales in 2013 totalled euro 6,146.2 million, up 1.2% in spite of the large, negative translation effect (-7.2%). This was accomplished thanks to the increase in premium segment sales (49.3% of consumer business net sales, up 2.3 percentage points as compared with 2012) and the growing contribution made by emerging markets (55.7% of tyre sales, with its share increasing by about 1.6 percentage points on an annualised basis). Consolidated operating income totalled euro 791.0 million, with EBIT margin of 12.9%, virtually unchanged from 2012 (operating income of euro 792.5 million, EBIT margin 13.1%). Aside from the growth in volumes, this level of profitability benefits Pirelli, alone in its industry during 2013 to have improved its price/mix, due to its value strategy. 27
The improvement in operating variables, together with efficiency gains, offset higher industrial costs (start-up in Mexico and Russia, conversion of the Settimo Torinese plants) and commercial costs – as investments in future business growth – including higher amortisation and depreciation. Just like net sales, the net result was impacted by the unfavourable changes in exchange rates, which generated a negative change of nearly euro 63 million in consolidated net income. Net income for 2013 was euro 306.5 million, compared with euro 391.5 million in 2012. The net total was impacted by higher net financial expenses, up by about euro 45 million to euro 195.8 million. The change is attributable to the higher average level of debt, mainly during the first six months of 2013, the different mix of geographical areas of financing, the negative impact for euro 8.5 million resulting from devaluation of the Venezuelan currency on the accounts of the local subsidiary, and euro 13 million less financial income from the loan to Prelios S.p.A. Finally, the comparison with the previous year reflects the recognition in 2012 of non-recurring exchange gains amounting to euro 8.7 million, related to the start-up of activities in Russia. The aggregate impact resulting from long-term investments, which totalled a negative euro 78.3 million (negative euro 52.2 million in 2012) is tied to the investments in RCS MediaGroup S.p.A. and Mediobanca S.p.A. for about euro -20 million, fair value adjustment of the Prelios S.p.A. “convertendo” equity instrument by euro -44.3 million and the parent company share in the result of its associate Prelios S.p.A. for the last quarter of the year, as determined on the basis of available information (euro -12.8 million). 28
The consolidated net financial (liquidity)/debt position was a negative euro 1,322.4 million, compared with a negative euro 1,205.2 million at December 31, 2012. The planned conversion of the financial receivable from Prelios S.p.A. into shares and equity instruments (the “convertendo”) was carried out in 3Q 2013 following completion of the debt restructuring and capital increase process at the real estate company. The aggregate impact of these operations on the net financial (liquidity)/debt position of the Group was negative by about euro 193 million, including the cash payment of approximately euro 23 million for its share of the capital increase executed through Fenice S.r.l. The allocated euro 21.3 million contribution by Pirelli to the capital increase of RCS MediaGroup S.p.A. was made in 3Q 2013, while the parent company paid an approximately euro 157 million dividend to its shareholders in 2Q 2013. Net operating cash flow totalled a positive euro 720.1 million in 2013, up sharply from euro 281.1 million in 2012, due to better management of working capital. This figure received a big boost in the last quarter of the year, which is seasonally more favourable. Before payment of the parent company dividend to shareholders and the impact from conversion of the Prelios credit, the Group as a whole had net positive cash flow of about euro 232 million.
Net sales by the Tyre Business, which generates 99.5% of Company net sales, totalled euro 6,115.8 million at December 31, 2013, for an increase of 1.4% (+8.6% net of the translation effect), being sustained by higher volumes (+5.7%) and improvement in the price/mix component (+2.9%). Both businesses reported higher volumes: +4.6% in the consumer business, driven by sales to the South America and good performance of the premium segment in China, NAFTA and Europe, and +8.7% in the industrial business, where growth was focused on South America. 29
In geographical terms, the growth in revenue on emerging markets (+4.3%) more than offset the decrease in net sales in Europe and NAFTA (-2.2% and -1.5%, respectively). In particular, net sales in South America increased by 5.2% (including the translation effect), and +14.5% in Asia-Pacific, while net sales in Russia were substantially stable from 2012, and down by 5% in Middle East Africa, impacted by highly volatile exchange rates. Net sales in the premium segment totalled euro 2,210.0 million, up 6.5% from 2012, and grew over the course of 2013 after a negative first quarter. Growth was greater in emerging countries, where premium segment net sales rose by +21.9% from 2012. In NAFTA, premium segment net sales grew by 3.1% and Europe, although impacted by recession, reported a 1.7% increase in premium segment net sales. This was the result of performance during the last two quarters of the year (+7.2% in 3Q 2013 and +17.2% in 4Q 2013). Operating income was euro 822.0 million in 2013, with an EBIT margin of 13.4% (euro 820.8 million in the previous year, equal to 13.6% of net sales). Focusing on the different business segments, the consumer business was more impacted by the performance of the European and Russian markets, which were stable and down slightly, respectively. Net sales in 2013 totalled euro 4,478.9 million, +1.3% from 2012 (including the 6.5% negative translation effect). Operating income was euro 596.4 million, with an EBIT margin of 13.3%, down by 1.2 percentage points from 2012, mainly due to the negative translation effect, the costs of converting the Settimo Torinese truck plants to premium car tyre production, the start-up costs of activities in Mexico and Russia, and higher commercial costs for development of the premium segment. The industrial business, focused mainly in South America and the Middle East Africa and India area, had net sales of euro 1,636.9 million, up 1.6% from 2012 (net of a negative 9.2% translation effect). Operating income improved by 26% to euro 225.6 million, with the EBIT margin growing from 11.1% to 13.8%, partly due to production capacity being located entirely in countries having low industrial costs. 30
The consolidated financial highlights for the Group are summarised as follows:
(in millions of euro) 12/31/2013 12/31/2012 12/31/2012 restated reported Net sales 6,146.2 6,071.5 6,071.5 Gross operating profit before restructuring expenses 1,105.4 1,102.9 1,091.2 % of net sales 18.0% 18.2% 18.0% Operating income before restructuring expenses 816.5 831.6 819.9 % of net sales 13.3% 13.7% 13.5% Restructuring expenses (25.5) (39.1) (39.1) Operating income 791.0 792.5 780.8 % of net sales 12.9% 13.1% 12.9% Net income (loss) from equity investments (78.3) (52.2) (52.2) Financial income/(expenses) (195.8) (150.5) (129.5) Pre-tax income (loss) 516.9 589.8 599.1 Income tax (210.4) (198.3) (200.9) Tax rate % 40.7% 33.6% 33.5% Total net income (loss) 306.5 391.5 398.2 Net income attributable to owners of Pirelli & C. S.p.A. 303.6 387.1 393.8 Total net earnings per share attributable to owners of Pirelli & C. S.p.A. (in euro) 0.622 0.793 0.807 Non-current assets 4,043.0 3,877.2 3,877.2 Inventories 987.3 1,102.6 1,102.6 Trade receivables 666.4 704.6 704.6 Trade payables (1,244.5) (1,268.7) (1,268.7) Operating Net working capital 409.2 538.5 538.5 % of net sales (°) 6.7% 8.9% 8.9% Other receivables/other payables 3.0 11.0 11.0 Total net working capital 412.2 549.5 549.5 % of net sales (°) 6.7% 9.1% 9.1% Net invested capital 4,455.2 4,426.7 4,426.7 Equity 2,436.6 2,389.4 2,389.4 Provisions 696.2 832.1 832.1 Net financial (liquidity)/debt position 1,322.4 1,205.2 1,205.2
Equity attributable to the owners of Pirelli & C. S.p.A. 2,376.1 2,337.4 2,337.4 Equity per share attributable to the owners of Pirelli & C. S.p.A. (in euro) 4.869 4.790 4.790 Total Tyre - net sales 6,115.8 6,031.3 6,031.3 % of net sales total 99.5% 99.3% 99.3% Total Tyre - operating income 822.0 820.8 809.1 % on total tyre - net sales 13.4% 13.6% 13.4% Total Tyre - net sales Consumer 4,478.9 4,419.8 4,419.8 % on total tyre - net sales 73.2% 73.3% 73.3% Total Tyre - net sales Industrial 1,636.9 1,611.5 1,611.5 % on total tyre - net sales 26.8% 26.7% 26.7% Total Tyre - net sales Premium 2,210.0 2,075.9 2,075.9 % on net sales Consumer 49.3% 47.0% 47.0%
Capital expenditure 413.1 470.9 470.9 Research and development expenses 199.2 178.9 178.9 % of net sales 3.2% 2.9% 2.9% Research and development expenses - Premium 163.3 141.9 141.9 % on sales Premium 7.4% 6.8% 6.8%
Headcount (number at end of period) 37,979 37,338 37,338 Industrial sites (number) 23 23 23 31
To facilitate understanding of Group performance, the table below sets forth the income statement broken down by business segment.
(in millions of euro) Total Tyre Other business Total 2013 2012 2013 2012 2013 2012 restated restated restated
Net sales 6,115.8 6,031.3 30.4 40.2 6,146.2 6,071.5 Gross operating profit before restructuring expenses 1,130.3 1,126.5 (24.9) (23.6) 1,105.4 1,102.9 Operating income before restructuring expenses 845.4 859.9 (28.9) (28.3) 816.5 831.6 Restructuring expenses (23.4) (39.1) (2.1) - (25.5) (39.1) Operating income 822.0 820.8 (31.0) (28.3) 791.0 792.5 % of net sales 13.4% 13.6% 12.9% 13.1% Net income (loss) from equity investments (78.3) (52.2) Financial income/(expenses) (195.8) (150.5) Pre-tax income (loss) 516.9 589.8 Income tax (210.4) (198.3) Tax rate % 40.7% 33.6% Total net income (loss) 306.5 391.5 Net financial (liquidity)/debt position 1,322.4 1,205.2
Group performance broken down on a quarterly basis is shown next:
(in millions of euro) 1° Q 2° Q 3° Q 4° Q TOTAL 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012
Net sales 1,536.3 1,556.5 1,594.8 1,465.3 1,518.8 1,552.3 1,496.3 1,497.4 6,146.2 6,071.5 yoy -1.3% 11.1% 8.8% 5.5% -2.2% 5.3% -0.1% 5.3% 1.2% 7.5% Gross operating profit before restructuring expenses 255.3 279.1 278.2 271.2 279.9 267.6 292.0 285.0 1,105.4 1,102.9 % of net sales 16.6% 17.9% 17.4% 18.5% 18.4% 17.2% 19.5% 19.0% 18.0% 18.2% Operating income before restructuring expenses 183.0 214.7 205.1 205.1 208.8 199.2 219.6 212.6 816.5 831.6 % of net sales 11.9% 13.8% 12.9% 14.0% 13.7% 12.8% 14.7% 14.2% 13.3% 13.7%
Operating income 179.8 212.7 200.9 192.6 201.0 195.5 209.3 191.7 791.0 792.5 % of net sales 11.7% 13.7% 12.6% 13.1% 13.2% 12.6% 14.0% 12.8% 12.9% 13.1%
Pre-tax income (loss) 114.6 188.9 137.1 155.9 158.5 126.3 106.7 118.7 516.9 589.8
Total net income (loss) 72.1 123.6 78.0 94.9 108.0 84.8 48.4 88.2 306.5 391.5
Net sales
In 2013 net sales totalled euro 6,146.2 million, up 1.2% from the previous year (euro 6,071.5 million), with 99.5% of net sales being generated by the Tyre Business, which is the core business of the Group. Excluding the negative translation effect (- 7.2%), net sales grew by 8.4% in 2013. 32
Operating income
Operating income in 2013 totalled euro 791.0 million, with an EBIT margin of 12.9%, substantially the same as in 2012 (euro 792.5 million). This result benefited from the positive contribution made by volumes (euro +98 million), the improved price/mix component (euro +47 million), the lower cost of raw materials (euro +136 million), and gross efficiency gains (euro +74 million), which offset the negative impact of the change in consolidation translation rates (euro -62.7 million), higher production costs, including amortisation and depreciation, the previously mentioned plant conversion costs at Settimo Torinese, start-up costs in Mexico and Russia, and higher commercial costs for development of the premium segment. This result was also impacted by euro 25.5 million in restructuring charges resulting from ongoing organisational streamlining measures. At December 31, 2012 restructuring charges totalled euro 39.1 million.
Net income (loss) from equity investments
The net loss from equity investments was euro 78.3 million, and is mainly composed of: - euro 44.3 million for the fair value adjustment of the “convertendo” equity instruments issued by Prelios S.p.A.; - euro 12.8 million from consolidation, on the basis of available information, of the associate Prelios S.p.A. according to the equity method; - euro 4.9 million as the net balance of consolidation according to the equity method and adjustment to market value of the investment in RCS Mediagroup S.p.A. (which, once the premise of significant influence ceased to exist due to dissolution of the Shareholders' Agreement, was reclassified from being an associated company to an available-for-sale financial asset); 33
- euro 11.7 million for adjustment of the value of the equity investment held in Mediobanca (euro -10.4 million) and Fin.Priv. (euro -1.3 million), recognised in the interim financial statements at June 30, 2013, consistently with the policy that governs overshooting the significance threshold and duration of the decrease in value; - euro 4.9 million for adjustment of the value of Alitalia to net equity before the subscribed capital increase.
Net income
Net income at December 31, 2013 totalled a positive euro 306.5 million (euro 391.5 million in 2012). The lower net income was impacted by net financial expenses, totalling euro 195.8 million and reflecting an increase of euro 45.3 million from 2012 (which benefited from euro 8.7 million in non-recurring exchange gains related to the start-up of activities in Russia). This largely occurred in 1H 2013, and resulted from: - the higher average indebtedness during the period and greater exposure to currencies in countries where interest rates are higher than in the eurozone; - the negative euro 8.5 million impact of devaluation of the Venezuelan currency that occurred at the beginning of 2013: - the euro 13.3 million in lower financial income from the loan to Prelios S.p.A. The average cost of debt during the period was 6.23%. Tax liabilities totalled euro 210.4 million, with a tax rate of 40.7%. Excluding the amount resulting from consolidation of associates according to the equity method (negative euro 25.8 million), the effective tax rate was 38.8%. Impairment of the Prelios S.p.A. “convertendo” equity instruments impacted that result by about 3 percentage points. The total net income attributable to owners of Pirelli & C. S.p.A. at December 31, 2013 was a positive euro 303.6 million (euro 0.62 per share), compared with euro 387.1 million for the same period of 2012 (euro 0.79 per share). 34
Equity
Consolidated equity rose from euro 2,389.4 million at December 31, 2012 to euro 2,436.6 million at December 31, 2013. Equity attributable to owners of Pirelli & C. S.p.A. at December 31, 2013 totalled euro 2,376.1 million (euro 4.87 per share), compared with euro 2,337.4 million at December 31, 2012 (euro 4.79 per share). The change, whose details are illustrated in the following table, largely reflects the net income, euro 306.5 million, payment of the euro 156.7 million parent company dividend, the negative change resulting from changes in the translation rate of foreign equity investments (principally due to depreciation of the Brazilian, Venezuelan, Turkish, Egyptian and Argentine currencies), and the positive net effect of inflation/devaluation on the equity held in the Venezuelan subsidiary.
(in millions of euro) Group Non-controlling Total
interests Equity at 12/31/2012 2,337.4 52.0 2,389.4 Translation differences (226.7) (4.1) (230.8) Net income (loss) 303.6 2.9 306.5 Adjustement to fair value of other financial assets/derivative instruments 57.4 - 57.4 Actuarial gains/(losses) on employee benefits 22.8 - 22.8 Dividend resolved (156.7) (2.9) (159.6) Venezuela inflation effect 49.5 1.9 51.4 Other changes (11.1) - 10.6 - (0.5) - Total changes 38.7 - 8.5 - 47.2 - Equity at 12/31/2013 2,376.1 60.5 2,436.6 35
The following statement illustrates the reconciliation between the equity of the parent company and the consolidated equity attributable to owners of Pirelli & C. S.p.A. pursuant to the Consob Notice of July 28, 2006.
(in millions of euro) Share Treasury Net income TOTAL Capital reserves
Equity of Pirelli & C. S.p.A. at 12/31/2013 1,343.3 404.8 191.9 1,940.0
Net income for the year of consolidated companies (before consolidation adjustments) - - 398.2 398.2
Share capital and reserves of consolidated companies (before consolidation adjustments) - 1,218.5 - 1,218.5
Consolidation adjustments:
- carrying value of equity investments in consolidated companies - (1,169.7) - (1,169.7)
- intercompany dividends - 322.6 (322.6) -
- others - (47.0) 36.1 (10.9) Consolidated equity of Group at 12/31/2013 1,343.3 729.2 303.6 2,376.1
36
Cash flow – change in net financial (liquidity)/debt position
The following table summarises the changes in cash flow during the period:
(in millions of euro) Q1 Q2 Q3 Q4 TOTAL 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Operating income (EBIT) before restructuring expenses 183.0 214.7 205.1 205.1 208.8 199.2 219.6 212.5 816.5 831.6 Amortisation and depreciation 72.3 64.4 73.1 66.1 71.1 68.4 72.4 72.4 288.9 271.3 Capital expenditures of property, plant and equipment and intangible assets (79.7) (80.1) (84.3) (114.8) (74.3) (132.5) (174.8) (143.5) (413.1) (470.9) Change in working capital/other (492.4) (511.1) (5.6) (237.3) (160.3) (197.2) 686.1 594.7 27.8 (350.9) Operating cash flow (316.8) (312.1) 188.3 (80.9) 45.3 (62.1) 803.3 736.2 720.1 281.1 Ordinary financial income/(expenses) (58.6) (24.3) (46.1) (33.5) (43.9) (45.5) (47.2) (47.2) (195.8) (150.5) Ordinary tax charges (42.5) (65.3) (59.1) (61.0) (50.5) (41.5) (58.3) (30.5) (210.4) (198.3) Net operating cash flow (417.9) (401.7) 83.1 (175.4) (49.1) (149.1) 697.8 658.4 313.9 (67.7) Financial investments/disinvestments - 3.2 - - (31.6) 2.3 (7.5) - (39.1) 5.5 Real estate disposals - - - - 26.5 - - 20.5 26.5 20.5 Russia Investment - (154.5) - - - (16.4) - - - (170.9) Impact of consolidating of Sino Italiana Wire - - - - (39.5) - (39.5) - Retail Investment - - - (106.2) (4.1) - (7.9) (0.0) (12.0) (106.2) Other dividends paid - (2.2) (3.1) (0.7) - - - - (3.1) (2.9) Cash Out for restructuring operations (7.5) (4.2) (5.2) (3.3) (4.2) (3.6) (5.7) (12.4) (22.6) (23.5) Foreign exchange differences/other (49.6) (8.5) 29.5 20.2 17.1 0.7 11.3 (3.0) 8.3 9.4 Net cash flow before divid. paid/Prelios (475.0) (567.9) 104.3 (265.4) (45.4) (166.1) 648.5 663.5 232.4 (335.8) Dividend paid by Parent - - (156.7) (132.3) - - - - (156.7) (132.3) Receivable conversion/Prelios share capital increase - - - - (192.9) - - - (192.9) - Net cash flow (475.0) (567.9) (52.4) (397.7) (238.3) (166.1) 648.5 663.5 (117.2) (468.1) Operating cash flow was generally positive in 2013, totalling euro 720.1 million, up from euro 281.1 million in 2012, due to better management of working capital, especially in 2Q and 4Q 2013. At December 31, 2013 capital expenditure on property, plant and equipment and intangible assets totalled euro 413.1 million (1.4 times depreciation and amortisation). Capital expenditure was mainly related to development of the premium segment (capacity and improved mix and quality) in Russia, Mexico, Romania and China. The financial restructuring of Prelios S.p.A. was completed in 3Q 2013. This involved conversion of the financial receivable held by Pirelli into shares and equity instruments (the “convertendo”) issued by the company for euro 169.9 million, and indirect subscription of the capital increase, for euro 23 million paid through Fenice s.r.l., with an aggregate negative impact on net financial (liquidity)/debt position amounting to euro 192.9 million. Net cash flow before the effects resulting from completion of the reorganisation of Prelios S.p.A. and payment of the parent company dividend was positive for euro 232.4 million. Net cash flow was a negative euro 117.2 million, with a consequent increase in the negative net financial (liquidity)/debt position. 37
Net financial (liquidity)/debt position
At December 31, 2013 the Group's net borrowings totalled euro 1,322.4 million. in millions of euro 12/31/2013 12/31/2012 Current borrowings from banks and other financial institutions 316.7 440.5 Current derivative financial instruments 3.2 19.2 Non-Current borrowings from banks and other financial institutions 2,014.3 1,995.8 Total gross debt 2,334.2 2,455.5
Cash and cash equivalents (879.9) (679.8) Securities held for trading (48.1) (224.7) Current financial receivables (17.7) (66.3) Current derivative financial instruments (6.7) (18.1) Non-current financial receivables (59.4) (261.4) of which Prelios - (173.5) Total financial receivables, cash and cash equivalents (1,011.8) (1,250.3)
Net financial (liquidity)/debt position 1,322.4 1,205.2
Totale gross debt fell by a total of euro 121.3 million from December 31, 2012, falling from euro 2,455.5 million to euro 2,334.2 million. Following conclusion of the capital transaction resolved by Prelios S.p.A. at the end of March 2013, aimed at relaunching the business development prospects and strengthening the financial position of the group owned by Prelios S.p.A., as well as rebalancing its overall financial structure, and as accepted by Pirelli, the financial receivable of euro 173.5 million outstanding at December 31, 2012 was converted into Prelios S.p.A. ordinary shares for euro 21.5 million, into equity instruments (the “convertendo”) for euro 148.4 million, while the remaining euro 3.6 million was repaid by Prelios and thus collected. The reduction in non-current financial receivables reflected recognition in Brazil of the release and consequent receipt of about euro 19 million in amounts posted as a bond in tax litigation and lawsuits. 38
In regard to current financial receivables, the reduction from December 2012, about euro 33 million resulted from the effects of line-by-line consolidation of the Chinese subsidiary operating in the steel cord business at December 31, 2013 (previously classified as an associate and by which a financial receivable was owed at December 31, 2012).
The structure of total gross debt, which totals euro 2,334.2 million and of which about 85% matures beginning in 2015, is summarised as follows:
(in millions of euro) Financial Maturity date Statements 12/31/2013 2014 2015 2016 2017 2018 and beyond Use of committed credit facilities 575.0 - 575.0 - - - Bond 5,125% - 2011/2016 500.0 - - 500.0 - - EIB loans 250.0 - 100.0 100.0 20.0 30.0 USD private placement 108.8 - - - 10.9 97.9 Schuldschein 155.0 - - 114.0 31.0 10.0 Other financing 745.4 312.1 101.8 116.9 174.5 40.1 Total gross debt 2,334.2 312.1 776.8 830.9 236.4 178.0 13.4% 33.3% 35.6% 10.1% 7.6%
At December 31, 2013 the Group disposed of euro 625 million as the unused portion of the euro 1.2 billion committed credit facility (euro 625 million at December 31, 2012). When combined with the euro 928 million in cash or cash equivalents, this provides the Group with a liquidity margin amounting to euro 1,553 million. 39
Headcount
Group headcount was 37,979 at December 31, 2013, compared with 37,338 employees at December 31, 2012.
The following tables show the breakdown of headcount by geographical area and type:
GEOGRAPHICAL AREA 12/31/2013 12/31/2012
Europe:
- Italy 3,611 9.5% 3,667 9.8% - Rest of Europe 12,063 31.8% 12,102 32.5% of which Russia 3,394 3,758
Nafta 1,152 3.0% 994 2.7%
Central and South America 14,244 37.5% 13,860 37.1%
Middle Est/Africa 3,311 8.7% 3,301 8.8%
Asia/Pacific 3,5980 9.5% 3,4140 9.1% 37,979 100.0% 37,338 100.0%
TYPE 12/31/2013 12/31/2012
Executives 322 0.8%- 354 0.9%- White collar staff 7,135 18.8%- 7,026 18.8%- Blue collar staff 27,902 73.5%- 27,244 73.0%- Temps 2,620 6.9% 2,714 7.3% 37,979 100.0% 37,338 100.0%
For more details, the reader is referred to the Social Dimension chapter in the Sustainability Report 2013, which is an integral part of this annual report. 40
BUSINESS OUTLOOK IN 2014
In light of the performance in the last quarter of 2013 and in the first months of 2014, Pirelli confirms the 2014 targets indicated last November in terms of: Ebit at 850 million euro after restructuring costs of 50 million euro investments below 400 million euro cash generation before dividends above 250 million euro net financial position negative at around 1.2 billion euro. Consolidated sales are expected to be around 6.2 billion euro (compared with the previous target of around 6.6 billion euro) essentially because of a more cautious exchange rate scenario, expected at -9%/-10% compared with the prior target of - 2%/-3%. In organic terms, that is excluding exchange rate effects, growth is expected at >+9%/+10% compared with the previous estimate of >+8%/+9% in the following context: volumes above +5% (in line with previous targets) but with a greater contribution from Premium component (growth above +14% compared with prior target of about +12%). The volume growth estimates in Consumer and Industrial remain unchanged, respectively >+6 and between +4% and +4.5%); price/mix improving to +4%/+5% (previous targets +3%/+4%). The target for the operating result (Ebit) excluding restructuring charges is confirmed at 850 million euro, as a consequence of: an improvement in the price/mix contribution to +4%/+5% (previously +3%/+4%), as already noted, with a positive impact on the operating result of about 15 million euro. lower raw material costs compared with previous estimates (-75 million euro compared with -120 million euro previously); already mentioned greater exchange rate volatility, with a total negative impact on the operating result of -110 million euro compared with the previous -50 million euro. 41
OPERATING PERFORMANCE
TYRE BUSINESS
The table below sets forth the consolidated results for 2013 as compared with 2012:
(in millions of euro) 2013 2012 2012 restated reported Net sales 6,115.8 6,031.3 6,031.3
yoy 1.4% 7.7% 7.7%
Gross operating profit before restructuring expenses 1,130.3 1,126.5 1,114.8 % of net sales 18.5% 18.7% 18.5% Operating income before restructuring expenses 845.4 859.9 848.2 % of net sales 13.8% 14.3% 14.1%
Restructuring expenses (23.4) (39.1) (39.1) Operating income 822.0 820.8 809.1 % of net sales 13.4% 13.6% 13.4%
The following table illustrates the quarterly results:
1° Q 2° Q 3° Q 4° Q TOTAL 2012 2012 2012 2012 2012 (in millions of euro) 2013 restated 2013 restated 2013 restated 2013 restated 2013 restated Net sales 1,526.7 1,542.6 1,587.3 1,457.7 1,511.8 1,542.6 1,490.0 1,488.4 6,115.8 6,031.3 yoy -1.0% 11.4% 8.9% 5.9% -2.0% 5.3% 0.1% 8.2% 1.4% 7.7% Gross operating profit before restructuring 260.1 283.6 282.7 277.2 284.7 272.9 302.8 292.7 1,130.3 1,126.5 expenses
% of net sales 17.0% 18.4% 17.8% 19.0% 18.8% 17.7% 20.3% 19.7% 18.5% 18.7% Operating income before restructuring expenses 188.8 220.5 210.6 212.2 214.6 205.8 231.4 221.4 845.4 859.9 % of net sales 12.4% 14.3% 13.3% 14.6% 14.2% 13.3% 15.5% 14.9% 13.8% 14.3% Operating income 185.6 218.5 207.2 199.7 207.0 202.1 222.2 200.5 822.0 820.8 % of net sales 12.2% 14.2% 13.1% 13.7% 13.7% 13.1% 14.9% 13.5% 13.4% 13.6%
Net sales Net sales totalled euro 6,115.8 million, up 1.4% compared with euro 6,031.3 million at December 31, 2012. Excluding the translation effect (negative 7.2%), net sales rose by 8.6% due to the improvement in volumes (+5.7%) – especially in the emerging markets (+10.2%) that accounted for 55.7% of net sales in 9M 2013 – and the price/mix component ( +2.9%). 42
The overall change in net sales from the same period in the previous year is summarised as follows:
1° Q 2° Q 3° Q 4° Q at 12/31 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Volume 3.9% -7.4% 8.8% -7.6% 5.4% -6.2% 4.9% -1.8% 5.7% -5.6%
of which Premium volume 4.0% 15.8% 12.9% 12.3% 19.1% 12.5% 27.5% 11.1% 15.3% 12.6% Price/mix 0.0% 16.5% 5.1% 11.1% 2.5% 8.6% 4.3% 5.4% 2.9% 10.2% Change in scope of Russia - 2.2% - 3.5% - 4.1% - 6.6% - 4.1% Change on a like-for-like basis 3.9% 11.3% 13.9% 7.0% 7.9% 6.5% 9.2% 10.2% 8.6% 8.7% Translation effect -4.9% 0.1% -5.0% -1.1% -9.9% -1.2% -9.1% -2.0% -7.2% -1.0% Total change -1.0% 11.4% 8.9% 5.9% -2.0% 5.3% 0.1% 8.2% 1.4% 7.7%
The following tables show the breakdown of net sales by geographic area and product category:
(in millions of euro) GEOGRAPHICAL AREA 12/31/2013 12/31/2012
Euro\mln yoy
Italy 349.1 -9.4% 5.7% 6.4% Rest of Europe 1,679.4 -0.5% 27.3% 28.0% Russia 254.1 -0.4% 4.2% 4.0% Nafta 682.1 -1.5% 11.2% 11.5% Central and South America 2,174.2 5.2% 35.6% 34.3% Asia\Pacific 481.5 14.5% 7.9% 7.0% Middle East\Africa|India 495.4 -5.1% 8.1% 8.8%
TOTAL 6,115.8 1.4% 100.0% 100.0%
PRODUCT 12/31/2013 12/31/2012 Euro\mln yoy
Car tyres 4,092.1 1.7% 66.9% 66.7% Motorcycle tyres 386.8 -2.5% 6.3% 6.6% Consumer 4,478.9 1.3% 73.2% 73.3%
Industrial vehicle tyres 1,551.7 2.5% 25.4% 25.1% Steelcord 85.2 -12.7% 1.4% 1.6% Industrial 1,636.9 1.6% 26.8% 26.7% 43
Operating income Operating income in 2013 totalled euro 822.0 million (euro 820.8 million in 2012), with an EBIT margin of 13.4% (13.6% in 2012). This result reflected the negative 62.7 million euro consolidation translation effect. In 2013, the change in volume was a positive euro 97.7 million, while the contribution made by the change in the price/mix component to the result was a positive euro 47.3 million. Taken together with efficiency gains (positive euro 74.0 million before the impact of the slowdown in production, amounting to a negative euro 34.0 million) and lower commodity costs (euro 136.2 million), these operating results nearly offset both the growth in production input costs (euro 138.5 million) and the increase in all other operating costs and depreciation and amortisation (euro 134.4 million). This last quantity mainly refers to: - higher industrial costs (about euro 25.5 million), mainly related to transformation of the Settimo Torinese truck plant into a new plant making premium car tyres and to the start-up costs for the plants in Mexico and Russia; - higher depreciation and amortisation (euro 34.2 million) as the result of intense investment activity during previous financial years; - higher commercial costs (euro 30.3 million) related to development of the premium segment.
In 2013 non-recurring events occurred related to disposals of real estate and receivables under litigation from the 1990's, and expenses related to settlement of a lawsuit in Brazil for a net positive balance of about euro 22 million. In 2012, the non- recurring events had a positive balance of about euro 30 million (disposal of real estate in Brazil and elimination of liabilities for the earn-out on the Russia acquisition). 44
The changes as compared with December 2012 can be summarised as follows in the following table:
(in millions of euro) 1° Q 2° Q 3° Q 4° Q TOTAL
2012 Operating income restated 218.5 199.7 202.1 200.5 820.8
Foreign exchange effect (9.6) (9.2) (18.8) (25.1) (62.7) Prices/mix (19.6) 20.2 15.1 31.6 47.3 Volumes 17.9 28.0 25.7 26.1 97.7 Cost of prodution factors (raw materials) 37.0 31.2 42.2 25.8 136.2 Cost of prodution factors (labour/energy/others) (24.2) (37.2) (39.3) (37.8) (138.5) Efficiency * 7.6 5.3 18.5 8.6 40.0 Ammortisation, depreciation and other (40.8) (39.9) (34.6) (19.1) (134.4) Restructuring expenses (1.2) 0.09.1 (3.9)0.0 11.60.0 15.6 Change (32.9) 7.5 4.9 21.7 1.2 2013 Operating income 185.6 207.2 207.0 222.2 822.0
* of which slowdown impact (5.5) (7.5) (11.1) (9.9) (34.0)
45
CONSUMER BUSINESS
The following table illustrates the 2013 results compared with 2012:
(in millions of euro) 1° Q 2° Q 3° Q 4° Q TOTAL 2012 2012 2012 2012 2012 2013 restated 2013 restated 2013 restated 2013 restated 2013 restated
Net sales 1,116.7 1,151.8 1,138.7 1,078.3 1,123.2 1,116.8 1,100.3 1,072.9 4,478.9 4,419.8 yoy -3.0% 17.1% 5.6% 12.5% 0.6% 9.0% 2.6% 11.9% 1.3% 12.6% Gross operating profit before restructuring expenses 194.8 235.4 203.5 214.7 211.9 210.1 229.4 210.8 839.6 871.0 % of net sales 17.4% 20.4% 17.9% 19.9% 18.9% 18.8% 20.8% 19.6% 18.7% 19.7% Operating income before restructuring expenses 138.0 187.3 146.7 164.4 155.3 157.8 172.2 154.7 612.2 664.2 % of net sales 12.4% 16.3% 12.9% 15.2% 13.8% 14.1% 15.7% 14.4% 13.7% 15.0% Operating income 136.0 185.4 144.2 154.5 151.2 154.8 165.0 148.0 596.4 642.7 % of net sales 12.2% 16.1% 12.7% 14.3% 13.5% 13.9% 15.0% 13.8% 13.3% 14.5%
The next table shows the detailed breakdown of market performance:
at Total year 1° Q 2° Q 1° half 2013 3° Q 4° Q 09/30/2013 EUROPE (*) Original Equipment -9% +3% -3% +5% -1% +2% +0% Replacement -11% +3% -5% +5% -1% +2% +0% NAFTA Original Equipment +1% +6% +4% +5% +4% +5% +5% Replacement -7% -3% -4% +0% -3% +3% -1% SOUTH AMERICA Original Equipment +8% +22% +15% +4% +11% -10% +6% Replacement +6% +17% +11% +11% +11% +4% +9% CINA Original Equipment +16% +14% +15% +14% +14% +24% +17%
(*) including Turkey; excluding Russia
Net sales at December 31, 2013 totalled euro 4,478.9 million, up 1.3% (+7.8% excluding the translation effect) as compared with 2012. Sales made a positive contribution, up by 4.6% (+1.2% in 1Q 2013, +4.6% in 2Q, +6.0% in 3Q and +6.9% in 4Q), driven by the performance of emerging markets (volumes +9.7%, particularly APAC, South America and Russia), which offset the slight downturn in Europe. 46
The premium segment grew at a rate three times that of the market average, with volumes increasing by 15.3% in 2013. The performance in South America, APAC and the Middle East Africa and India was particularly positive, confirming the robust development of higher added value product segments on these markets. As measured by net sales, the premium segment expanded strongly on emerging markets (+21.8%), particularly in Asia (+28.6%) and South America (+25.4%), while expanding more modestly in Russia (+4%), NAFTA (+3.1%) and Europe (+1.7%), where the improvements occurred over the last two quarters of the year (+7% in 3Q and +17% in 4Q). It must be emphasised that overall performance in Europe was impacted by the crisis in consumer spending due to macroeconomic trends, partial adjustment of prices to current trends on the commodity markets, and a different mix of sales segments, with original equipment assuming greater weight as an investment in the future development of the replacement segment.
The following table sets forth the breakdown of net sales:
1° Q 2° Q 3° Q 4° Q at 12/31 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Volume 1.2% -5.1% 4.6% -5.3% 6.0% -6.1% 6.9% -4.0% 4.6% -5.2%
of which Premium volume 4.0% 15.8% 12.9% 12.3% 19.1% 12.5% 27.5% 11.1% 15.3% 12.6% Price/mix -0.5% 18.8% 5.7% 13.6% 3.1% 9.6% 5.1% 6.4% 3.2% 12.0% Change in scope of Russia JV - 2.7% - 4.4% - 5.9% - 9.5% - 5.8% Change on a like-for-like basis 0.7% 16.4% 10.3% 12.7% 9.1% 9.4% 12.0% 11.9% 7.8% 12.6% Translation effect -3.7% 0.7% -4.7% -0.2% -8.5% -0.4% -9.4% 0.0% -6.5% 0.0% Total change -3.0% 17.1% 5.6% 12.5% 0.6% 9.0% 2.6% 11.9% 1.3% 12.6%
Operating income totalled euro 596.4 million in 2013, with an EBIT margin of 13.3%, as compared with euro 642.7 million in the same period of 2012 (14.5% of net sales). The strong performance of operating variables, with the price/mix up 3.2% in the premium segment and volumes up 4.6%, was contrasted by: the higher industrial costs resulting from the start-up of activities in Mexico and Russia and conversion of the Settimo Torinese truck plant to premium car tyre production (euro 23 million); higher commercial costs for development of the premium segment (euro 30 million); 47
rising inflation for factors of production, mainly related to the cost of labour in emerging countries; the costs related to new activities that have not yet reached operating capacity, particularly in Russia and Sweden, where the seasonal nature of the business is focused more on the winter segment; the impact related to consolidation translation rates (negative euro 34.3 million) and higher depreciation (negative euro 29.3 million).
Car Business
The car business accounts for 91.4% of net sales in the consumer segment. In 2013 net sales were divided 70% in the replacement channel and 30% in the original equipment segment (71% in the replacement segment and 29% in the original equipment segment in 2012). The greater weight of the original equipment segment in 2013 reflects rising original equipment sales in South America (where the market was dynamic in 2013, contrasting with a downturn in 1H 2012, before the reintroduction of car purchase incentives), in Asia (due to continuous growth of the premium segment) and full operating activity in Russia as compared with the previous year. Net sales in the replacement segment fell in Europe and Russia, were substantially stable in the Middle East, Africa and India, while growing significantly in APAC, Latam and NAFTA. The results of the car business reflect the growth in volumes, which rose especially in APAC, Russia and South America, together with improvement of the price/mix due to development of the premium segment. These positive elements offset the soft market and greater competition in Europe and Russia, the previously mentioned increase in industrial and start-up costs and higher commercial costs for development of the premium segment, aside from the unfavourable consolidation translation rate. 48
In 2013 Pirelli reinforced its market presence by rolling out products offering constantly improving performance and responsiveness to environmental concerns, both for winter and summer tyres: the Cinturato P7 Blue, the first summer tyre to come in efficiency class A sizes for rolling resistance and wet braking in compliance with new European labelling requirements; the Winter Sottozero 3, developed to guarantee safety and performance for new sedans and sports cars in the winter season; the Winter Ice Zero, a studded tyre designed for harsh winter climates, dedicated to Nordic markets and Russia. Over the past year, Pirelli has consolidated its role as a key partner in the sports car and prestige car segment by obtaining numerous product approvals, including those for the new Audi RS6 and RS7, BMW X5, Range Rover, Maserati Quattroporte and Ghibli, and Porsche Panamera, just to mention a few, demonstrating the technological reliability of its products in the P ZERO, Cinturato and Scorpion lines. Continuous dedication to innovation has led to introduction of the PNCS (Pirelli Noise Cancelling System) technology: Pirelli was the first tyre maker to integrate a tyre noise abatement solution in original equipment. The new system, initially developed for the new Audi RS6 and RS7 in the PZero tread, makes it possible to improve driving comfort without compromising the classic performance characteristics of this tyre. 49
Motorcycle Business
The target markets of the Motorcycle Business were heavily impacted by the continuing crisis, especially in Europe, with vehicle registrations down sharply and volumes down even in the replacement segment. In 2013 certain market criticalities also arose in specific segments, including the South American original equipment market, due to lower financing of motorcycle purchases, and in the NAFTA area, while the market was up in Asia. Net sales in 2013 totalled euro 386.8 million, down 2.5% from 2012, due to the aforementioned external conditions, with markets contracting in the various reference regions. This trend reversed in 4Q 2013, with net sales rising by 15% year-over-year. The breakdown of net sales by segment was as follows: 81.1% in the replacement segment and 18.9% in the original equipment segment (in the previous year, the replacement segment accounted for 79.6% and the original equipment segment accounted for 20.4%). New Metzeler 888 products were launched in 2013 for the custom segment, the Tourance Next and the Angel GT products. The new products won all comparative tests conducted by leading European motorcycle magazines. 50
INDUSTRIAL BUSINESS
The following table illustrates the 2013 results compared with 2012:
(in millions of euro) 1° Q 2° Q 3° Q 4° Q TOTAL 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012
Net sales 410.0 390.8 448.6 379.4 388.6 425.8 389.7 415.5 1,636.9 1,611.5 yoy 4.9% -2.6% 18.2% -9.1% -8.7% -3.3% -6.2% -0.3% 1.6% -3.9% Gross operating profit before restructuring expenses 65.3 48.2 79.2 62.5 72.8 62.8 73.4 82.0 290.7 255.5 % of net sales 15.9% 12.3% 17.7% 16.5% 18.7% 14.7% 18.8% 19.7% 17.8% 15.9% Operating income before restructuring expenses 50.8 33.2 63.9 47.8 59.3 48.0 59.2 66.7 233.2 195.7 % of net sales 12.4% 8.5% 14.2% 12.6% 15.3% 11.3% 15.2% 16.1% 14.2% 12.1% Operating income 49.6 33.1 63.0 45.2 55.8 47.3 57.2 52.5 225.6 178.1 % of net sales 12.1% 8.5% 14.0% 11.9% 14.4% 11.1% 14.7% 12.6% 13.8% 11.1%
The next table shows the detailed breakdown of market performance:
1° half 2013 at 1° Q 2° Q 3° Q 4° Q Total year 09/30/2013 EUROPE (*) Original Equipment -6% +2% -2% +7% +1% +24% +6% Replacement +1% +12% +7% +9% +8% +6% +7% NAFTA Original Equipment -11% -10% -10% +0% -7% +7% -4% Replacement -8% +6% +0% +5% +2% +1% +2% SOUTH AMERICA Original Equipment +44% +51% +48% +33% +42% +11% +34% Replacement +12% +16% +14% +8% +12% +6% +10% CINA Original Equipment -6% +40% +14% +24% +17% +18% +17%
(*) excluding Russia
Net sales totalled euro 1,636.9 million, up 1.6% compared with euro 1,611.5 million at December 31, 2012. Net of the negative translation effect (-9.2%), net sales grew by 10.8%, driven by higher sales volumes (+8.7%, mainly due to good performance in South America in the first part of the year), and improvement in the price/mix (+2.1%). 51
The following table sets forth the breakdown of net sales:
1° Q 2° Q 3° Q 4° Q at 12/31 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Volume 11.7% -12.3% 20.6% -11.3% 4.0% -6.2% -0.3% 3.1% 8.7% -6.5% Price/mix 1.4% 11.2% 3.6% 5.3% 0.9% 6.0% 2.5% 2.9% 2.1% 6.2% Change on a like-for-like basis 13.1% -1.1% 24.2% -6.0% 4.9% -0.2% 2.2% 6.0% 10.8% -0.3% Translation effect -8.2% -1.5% -6.0% -3.1% -13.6% -3.1% -8.4% -6.3% -9.2% -3.6% Total change 4.9% -2.6% 18.2% -9.1% -8.7% -3.3% -6.2% -0.3% 1.6% -3.9%
Operating income totalled euro 225.6 million, with EBIT margin of 13.8%, up sharply from euro 178.1 million reported at December 31, 2012 (11.1% of net sales). The operating result positively impacted the development of activities in the Group's principal markets, especially in South America, where Pirelli increased its market share, and in Middle East, Africa and India. The complete localisation of truck production capacity in emerging markets, which was completed by conversion of production activities in Italy to make premium car tyres, had a positive impact on profitability. Most of the start-up costs for this conversion (euro 10.4 million), instead impacted the consumer business. 52
Truck Business
In 2013 the truck tyre market was characterised by contrasting trends in the various geographical areas and different segments. The original equipment channel recovered strongly in South America, rising +34%, after having been impacted in 2012 by the conversion of production capacity from Euro3 to Euro5 vehicles, especially in 1H 2013. Growth rates fell to 11% in 4Q 2013 after hitting +42% in the first nine months of the year. The NAFTA truck market was down, ending the year down by 4%, in spite of rising 7% in 4Q 2013. The market in Europe grew by 6% overall, recovering after initially shrinking by 2% in 1H 2013. In the replacement segment, the South American market closed up by 10%, with a slowdown in the last quarter, partly in consequence of a different basis of comparison. In Europe it expanded by 7% from the previous year, with a substantially continuous trend. The NAFTA replacement market grew by 2% from 2012, due to improvements in 2H 2013. Against this backdrop, the profitability of this business segment improved significantly from the previous year, notwithstanding the negative translation effect. It was driven by growing net sales volumes, especially in South America, improvement in prices and mix, supported by the successful introduction of new products, and lower commodity prices. Special emphasis should also be given to the growing contribution made by the new industrial organisation over the course of the year, with 100% of production capacity being located on emerging markets and gradual introduction of new products. 53
The Driving Innovation event was held in Munich in the first half of March, being attended by over 300 participants, including journalists, fleets, dealers and business partners, coming from Europe, Turkey, Australia, China and Egypt. The content of this event, reported in the specialised press and online, was focused on the innovative, complete and integrated package of products and services designed for fleets. After Munich, a Driving Innovation event was repeated at the beginning of October, with broad participation by dealers, fleets and local press. This event highlighted both the products in the series 01, particularly the new tyre for tow trucks (ST-01), marked M+S, and also used under wintry conditions, and in the CyberFleet. At the end of October, Pirelli introduced the complete range of 01 Series radial tyres, the innovative Cyber Fleet technology and the Novateck range for reconstruction at Fenatran (the principal transport and logistic sector in South America), held in Sao Paulo, Brazil. The new products, developed at the Group's Research and Development Centre in Brazil, also using the technology developed at the Italian establishment, represent the entire line of tyres dedicated to various applications. With products for all types of freight transport vehicles, passenger vehicles, and mixed and city use, the new range was developed considering the peculiarity of South American roads. The exceptional results of certification by the principal makers of heavy vehicles in Latin America and evaluations of the tyres (whose pressure and mileage were monitored by CyberFleet sensors), under all driving conditions during three years of tests for a total of 1.5 million kilometres in certain fleets in Argentina, Brazil, Chile and Colombia, confirm the excellent performance of the product line. This event also offered Pirelli another opportunity to confirm its goal of providing transport operators with a package of products and services allowing them to operate with maximum economic efficiency, safety and respect for the environment. 54
The product range was extended in the Series 01 lines, with the most recent ST:01 NeverendingTM and ST:01 Base. They went on sale on the European market at the end of the second quarter, at the same time sales of the new associated Formula brand began. Finally, after the official launch of the Pirelli Fleet Solutions project in Munich, the gradual start-up of sales also got under way in Europe (beginning in Italy, Germany and Spain) of CyberFleetTM. The agreement with the partner Marangoni was renewed for the tyre rebuilding activity (Novateck) following the excellent results achieved in South America.
Agricultural Business
Net sales in 2013 totalled euro 192.9 million, up a total 5.1% year-on-year. Volumes rose by 15%, accompanied by a negative translation effect (-13%) related to South American currencies. Almost 90% of net sales are concentrated in South America, where the agricultural business grew sharply. Pirelli has confirmed its leadership in this context, especially in the original equipment segment, focusing on growth in the rear and radial segment.
Steel Cord Business
Aggregate net sales of steel cord in 2013 were 13% lower than in 2012. The hose wire business, which is connected with the production of high pressure pipes for new vehicles, remained substantially stable with the results for the previous year. Manufacturing activity at the German plant in Merzig ended at the end of June 2013. 55
RESEARCH AND DEVELOPMENT ACTIVITY
The core of Pirelli’s growth strategy is its consolidated capacity to innovate products and processes and consider new opportunities that might arise from ongoing research activities. The exchange of know-how amongst the different business units, partnership with the best suppliers and continuous collaboration with major university research centres and leading car makers, ensure that the Group has technologies capable of developing cutting-edge products, successfully tested at major sports competitions, certified as original equipment by the most prestigious car makers and transferred to highway use to satisfy specific customer requirements. Traditionally focused on the development of new high-end premium products (UHP, winter, runflat, SUV and motorcycle tyres), R&D activity has been complemented by increasing strategic attention to the reduction of environmental impact. This relies on a "Green Performance" strategy that calls for comprehensive eco-innovation, exploiting technological components and the most advanced know-how, the result of intensive research on materials, model prototypes, profiles, tread designs and production processes. Research and development costs totalled euro 199.2 million, corresponding to 3.2% of net sales. The R&D costs related to the premium segment totalled euro 163.3 million, equal to 7.4% of premium product net sales. They were concentrated on high-end products, making it possible to achieve major results: - in 2013, ten out of the twenty new car product lines planned for the 2011-2015 period were introduced, as previously announced; - in the truck business, the evolution of Winter, Regional and Offroad products in the 01 series was successfully completed; - in the motorcycle business, the new Enduro and Sport Touring products received top scores in 2013 tests; - the first generation of the Cyber Tyre was introduced on the market beginning in 2012, and the second generation will be introduced in 2015. 56
To achieve the targets set out in the business plan 2014-2017, Pirelli intends to further redouble its commitment to research and development in all business segments. The R&D unit has its headquarters in Milan and ten regional centres, and relies on the collaboration of about 1,400 engineers. It will develop 14 new product lines in the car business (including six winter tyres): six will be initially dedicated to the original equipment segment and eight immediately to the replacement segment. A portion of the new products will be sold on all markets, and a portion will instead be reserved for specific, individual local markets. Six lines will also include niche products like Runflat and Seal Inside tyres. Aside from significantly expanding its product line, Pirelli will introduce other technological innovations. These will include the PNCS (Pirelli Noise Cancelling System), to reduce noise, and new materials and geometries intended to reduce the rolling resistance of certain products by up to 20% by 2017. In the Moto business, Pirelli aims at consolidating its technological leadership with even better performing products. Plans call for the introduction of ten new Pirelli products and eleven new Metzeler products. In particular, a new line of radial tyres will be developed for 250-350 cc motorcycles on the Latin American market, while the Metzeler Custom Touring line will be launched in North America. Pirelli will introduce 11 new tyres between 2014 and 2017 in the Truck business. These will include the new Regional tyre, which offers greater mileage and tyre tread reconstruction technology, the Highway and City tyres, whose rolling resistance is comparable to what is offered by its principal competitors, and rounding out the line of severe winter condition tyres. Finally, Pirelli will focus on development of the technology for reconstruction and customer service through the Cyber Fleet. In the Agricultural business, Pirelli will transfer the radial tyre fabrication process to the replacement segment, invest in local production capacity and renewal of the product line, while establishing original equipment partnerships with top brands – John Deer, CNH and AGCO – in view of developing products that target specific local needs.
57
Innovative Materials Compounds are key to tyre performance. Research on polymers, fillers and chemical additives offers Pirelli new future possibilities to develop ever more stable compounds, ever lighter structures and ever more impermeable liners. Collaboration by Pirelli with the academic world involves the University of Milan Bicocca, offering scholarships for doctoral candidates in the School of Sciences through the Corimav (Consorzio ricerca materiali avanzati – Consortium for Research on Advanced Materials). The relationship between Milan Polytechnic and Pirelli has led to establishment of the chair in “Chemical Foundations of Rubber and Compound Technology” for the study of innovative materials for development of new generation tyres. In November 2013 Pirelli, Rosneft and Rostec (Russian Technologies) signed a Memorandum of Understanding (MOU) to carry out joint research and development activities on materials to be used in tyre production. The tyre production materials include synthetic rubber, fillers such as carbon black and reinforcing materials, with all of them being developed at the high technological standards of Pirelli. Pirelli, Rosneft and Oil Techno signed a Memorandum of Understanding for joint research and development in the synthetic rubber field, and particularly Styrene-Butadiene Rubber (SBR), in Armenia. According to the terms of the preliminary agreement, Rosneft will be the principal investor in the activities related to SBR rubber in Armenia and Oil Techno will represent the local partner. For its part, Pirelli will collaborate with Rosneft in research and development activities related to SBR rubber, and is interested in defining a long-term supply agreement for purchase of the SBR rubber to be produced. An eco-sustainable material, SBR rubber is used to product low environmental impact tyres, and contributes to improving its performance as measured by fuel consumption and grip under both dry and wet conditions.
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Nanotechnology The introduction of a new family of materials – “nano-fillers” – in tyre compounds aims to obtain mechanical reinforcement and air impermeability properties that could not otherwise be achieved. These new material properties will translate into improved performance, environmental impact, safety and tyre durability. At the product level, the possibility of using stiffer compounds makes it possible to develop tyres with improved driving characteristics, particularly in terms of stability and precision. By using compounds that are significantly stiffer than those currently used, it will also be possible to develop tyres with a different structure, where several elements may have smaller dimensions, thus resulting in a lighter tyre that consequently has a reduced environmental impact in terms of raw material use and lower mass to be managed during waste disposal. The barrier characteristic of compounds with lamellar nanocompounds may significantly improve the impermeability of tyres to air, fundamentally impacting product characteristics. Between 2008 and 2011, Pirelli led the “Nanofiller and New High-Performance Materials for Tyres” pre-competitive programme, financed by the Ministry of Economic Development and carried out in collaboration with the Milan Polytechnic, University of Salerno, the German institute DIK, CNR-ISMAC – Genoa unit and INSTM-University of Brescia. Its activities, aimed at developing the mechanical reinforcement obtainable with nanofillers or improving its impermeability were particularly successful. Four materials, including three lamellar materials and one having a fibrous geometry, were developed in eight different applications to the prototype tyre stage. This resulted in five patent applications being filed. Four of these applications were introduced into industrial production immediately after the end of the development programme. The activities carried out in collaboration with the universities and research institutes mentioned above have led to significant progress in basic comprehension of the systems comprised by nanometric fillers in elastomers, testifying – together with technical reports, publications and presentations at conferences – to the scientific excellence of the work performed. 59
Green Materials Leadership in green materials is achieved through research on biomaterials (silica from rice husks, natural rubber from alternative sources to the rubber tree) and recycling. Research into alternative sources is increasingly necessary, both for cost- savings and for sustainability. The guayule (Parthenium argentatum) is a non-edible shrub that needs little water and no pesticides, and represents an alternative source to natural rubber thanks to its hypo-allergenic properties, unlike the more common Hevea rubber. In March 2013 Versalis (Eni) and Pirelli signed an important Memorandum of Understanding to undertake a joint research project on the use of natural rubber from guayule in tyre production. This study will engage the two firms for a period of three years. During that time, and operating on an exclusive basis between the parties, Versalis will provide innovative types of natural rubber extracted from guayule that will be tested by Pirelli for use in tyre production. On the basis of this new collaboration and, upon industrial scale production of rubber from guayule, Versalis may provide Pirelli with new products that will consolidate and round out the commercial range of synthetic rubber made by Versalis and already used by Pirelli for quite some time in tyre production. The agreement with Versalis will complement and expand the commitment made by Pirelli to research on innovative materials from renewable sources, and particularly from biomasses. Pirelli, which already makes tyres using raw materials derived from rice husks (the non-edible part of the rice grain and normally used for combustion), aims at steadily reducing petroleum-derived components by replacing them with new raw materials that simultaneously guarantee constant improvement in the performance and environmental sustainability of processes and products. 60
The three-year (2012-2014) JOINT LABS agreement made between Pirelli and the Milan Polytechnic for research and training in the tyre industry also focuses research on the de-vulcanization of materials derived from used tyre compounds and biopolymers.
Modelling New simulation models (developed in-house, capitalising directly on the experience acquired from supplying Formula 1 tyres), supported by extremely high-powered calculating capacity, will allow further reductions in the time-to-market and improvement of project quality, by improving their performance in accordance with higher demands: tyre model: prediction of wear and tear, integrity, rolling resistance, vulcanization; models of the entire vehicle and tyre as a single system: braking, stability, aquaplaning, high-speed deformation, F1 simulator.
Processes The development of innovative production processes (like the new generation of MIRS – Modular Integrated Robotized System – a robotized process owned exclusively by Pirelli, or extension of the PTSM – Pirelli Twin Screw Mixing – process, which represents the evolution of the CCM – Continuous Compound Mixing System) is one of the Group’s key tools for achieving a competitive advantage.
Cyber Tyre Tyre electronics (like the microchip contained in the Cyber Tyre, which makes it possible to monitor changing road surface conditions by sending the vehicle key information for stability and safe driving), represent a path for Pirelli’s premium innovation strategy. 61
The Tyre System project certainly represents one of the most technologically advanced and innovative programmes at Pirelli, but in all likelihood for the entire tyre industry and beyond (wireless sensor field). Industrial research activity relies on the contribution of specialised knowledge from both the academic and industrial communities during the development phase. In collaboration with the Turin Polytechnic, Pirelli has set up a Tyre System research laboratory. Initially located in an area provided by the Turin Polytechnic and now the permanent home of the Pirelli Technological Centre in Settimo Torinese, this joint effort aims to maximise the development of know-how and effectiveness of development activities. The Centre is staffed by individuals from Pirelli, the Turing Polytechnic and other resources (suppliers, visiting scientists and students) who have different but extremely interdependent expertise and offer synergies. Finally, the JOINT LABS agreement between Pirelli and the Milan Polytechnic also focuses on the intelligent tyre (Cyber Tyre), with the development of mathematical models which allow the chip contained in the Cyber Tyre to “interpret” different road surface conditions. CYBER FLEET is the innovative monitoring system perfected by Pirelli for road haulers. After a total of 28 trucks equipped with 176 sensors travelled a total of approximately 7 million kilometres during different phases of testing, from Germany to Sweden and from Italy to Brazil, it was shown that the reduction in operating costs in consequence of lower fuel consumption and longer tyre life amounts to about euro 1,000/year for the vehicles operating in Europe and a comparable figure for the vehicles operating in Brazil. Using a telematic box and special sensors applied on the inner surfaces of the tyres, the system transmits data about tyre condition to a central infrastructure. This permits monitoring of the principal operating parameters, such as pressure and temperature, through real-time reporting of the situation to the fleet operator, while also warning the operator of punctures or other hazardous events. Pirelli offers vehicle management advice to fleets. The sensor is not damaged and the data are not lost even if the tyre is rebuilt. 62
Products
Car Business Product performance requirements are significantly different today from what they were 10-15 years ago. Now the performance threshold has been raised yet again for premium products. Pirelli wishes to achieve better market segmentation for premium products, and specifically in the category of winter products, including the different studded tyres made for the Nordic and Russian markets. It intends to continue obtaining certification of its premium tyres for the most prestigious car models. Even the top product line, the P Zero, will contribute to further developing the position of premium tyres through product certifications, which in turn make the firm a partner of top car makers like Bentley, Aston Martin, Porsche and BMW. This will be achieved by exploiting the priceless know-how developed in the Formula 1 programme, which will be continuously transferred to highway products. SUV vehicles, representing a segment that did not even exist until about 20 years ago, will benefit from lighter products, with improved mileage and at least 30% less rolling resistance than today. These green characteristics will also be found in the principal ecological line, the Cinturato product family, which will offer comprehensively improved green performance. The challenge today and in future is to make simultaneous progress in terms of rolling resistance, grip and stopping distance under wet conditions, and also run flat and self-sealing technologies. The Pirelli Noise Cancelling System is the new technology developed by Pirelli that can reduce noise by 2 to 3 decibels inside the vehicle passenger compartment, equivalent to halving total noise, and doing so without interfering with the other tyre characteristics in any way. 63
The system absorbs the vibrations released by compression of the air during the compression phase and reduces its transmission inside the passenger compartment, with a significant improvement in driving comfort. Developed by Pirelli for the Audi Group, it responds to increasing demand in the automotive world, in step with the latest European noise abatement regulations. The Pirelli Noise Cancelling System is currently available as original equipment on the Audi RS6 and RS7, which are equipped with P Zero tyre sizes 285/30ZR21 and 275/30ZR21, respectively. The tyres featuring this system will have the letters “PNCS” stamped on their sidewall, representing an additional confirmation of the historic partnership between the two companies.
New Products In 2013 Pirelli car tyre research and development activity created new green products. The Pirelli Winter Sottozero 3 tyres were presented in a preview offered to over 400 European dealers last March in Austria, between Seefeld and the Kühtai pass at over 2,000 metres. The third generation of ultra-high performance tyres for the winter season, conceived to equip sports cars and powerful sedans and offer grip on water, ice and snow. Here are the principal characteristics of this new product line: An innovative compound made of functional polymers (that improve the mechanical, thermal and dynamic properties of the compounds), improving tyre performance. An improved profile to guarantee greater mileage through uniform contact with the ground. A more rounded shoulder to shed much more water. The deep grooves that help water to drain away.
The new line guarantees control, mileage and grip under wintry conditions. The Winter Sottozero 3 tyres are offered in bore sizes ranging from 16 to 21 inches and in 11 runflat versions. 64
Original Equipment As has been previously illustrated, Pirelli enjoys close relationships with the world's leading car makers, which are cultivated to provide original equipment tyres and essential to the development of new products and implementation of new technologies. In February, at the Parco Naturale delle Dolomiti e della Val Fiscalina nature preserve, the new Jaguar XF Sportbrake station wagon was tested for its performance under all hazardous winter driving conditions, including steep climbs, being equipped with the Pirelli Winter Sottozero™ in the 18, 19 and 20 inch sizes. Three days of tests on snowy, wet, slippery or simply icy roads, including a spin around the Auronzo di Cadore circuit, revealed the strengths of the winter product that reproduce the UHP characteristics of the P Zero family: compounds for high performance under wet and icy conditions, with side grip on snow and dry roads, but also traction and braking on snow and handling on dry roads. The Pirelli Winter Sottozero tyres also feature a mark – “J” or “JRS” – which indicate that these tyres were developed specifically for this car, through a joint fine-tuning effort between Pirelli and Jaguar. The number of types of Pirelli tyres certified on Jaguar Land Rover vehicles has now climbed to 69. A new achievement in the historic collaboration between Pirelli and Maserati is represented by the ad hoc development of tyres specifically for the new Ghibli, presented in Milan in May. Pirelli researchers developed a dedicated version of P Zero tyres to satisfy the high-performance demands of the latest Maserati model. The summer tyres of the top-performing family of tyres in the Pirelli product line were custom-made for the new Ghibli. They are marked with the letters “MGT”, dedicated tyres offered in the 18, 19 and 20 inch sizes.
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Once again flanking great car designers, Pirelli has equipped the latest car designed by Studiotorino: the customised Moncenisio model, derived from the Porsche Cayman S. The name of this new car is borrowed from one of the most beautiful Alpine passes in Piedmont. This new “Fine Sports Car” made by the Piedmont firm is equipped with P Zero tyres in the following sizes: 235/35R20 front and 265/35R20 rear. Lamborghini celebrated 50 years of history at the “Fondazione Pirelli” foundation in Milan, where the car maker based in Sant’Agata Bolognese opened the festivities with a press conference, including the participation of Maurizio Boiocchi, CTO Pirelli, and Stephan Wilkelmann, Chairman and Chief Executive Officer of Lamborghini. The partnership began in 1963, the year when Ferruccio Lamborghini asked Pirelli to supply the tyres for the first car made by his newly formed company. This was the 350 GTV, presented as a prototype at the Turin Car Show that same year. This relationship is based on shared values: technological innovation, passion, a taste for beauty, challenge, speed and racing. It is also based on an “ethical approach to doing business”, as the Chairman of Lamborghini mentioned. For its fiftieth birthday, Lamborghini organised a special tour that began in Milan – with over 700 Lamborghini that had arrived from around the world at Piazza Castello – and, after stopping at Forte dei Marmi and Rome, ended at Sant’Agata Bolognese, location of the company headquarters, for the grand finale of the celebrations. The fact that Lamborghini chose the Pirelli location to celebrate its own fiftieth anniversary confirms that, together with the extraordinary technological quality offered by its respective products, the relations between corporate functions – R&D, Production, Quality, Procurement and even Top Management – has also gone beyond the simple customer-supplier relationship and transformed over the years into a solid personal as well as professional relationship. For years Pirelli has been the exclusive supplier of all models, from the historic Miura and Countach, to the current Gallardo and Aventador, and will continue to be so for the next models that are currently being designed. 66
Moreover, it is common knowledge that Lamborghini belongs to the VW Group, of which Pirelli is proud to be the principal supplier for its prestige and premium brands such as Bentley, Porsche and Audi and the second biggest supplier at the VW Group level. This status has been achieved through the quality and innovative content of its products and its capacity to serve customers in areas such as China, Russia, and the Americas. For its “commitment, competitiveness and capacity to innovate, with development of the Self Sealing technology that exhibits technological know-how and corporate capacity to meet future challenges”, Pirelli was given the “Global Champion” award as part of the Volkswagen Group Award, the prize that the car maker awards every year to its best suppliers. This award recognises excellence in global partnership, product quality, competitiveness, project management and flexibility. That recognition is testified by the many models equipped with Pirelli tyres – from the Porsche Carrera, Boxster, Cayenne and Panamera and Bentley Continental GT and Flying Spur to the Audi A3, A4, A5, A6, A7, A8, Q3, Q7, RS5, RS6 and TT, the Volkswagen Tiguan, Touareg, Phaeton and Golf. An annual supply of six million Ultra High Performance (UHP) tyres for over 200 automotive approvals, in sizes ranging from 15 to 21 inches, plus another 250 approved versions under development and ready to be produced over the coming years. A long list of prestige and premium models equipped with Pirelli tyres, and a global partnership extending far beyond Europe over the years, has grown in Latin America, Mexico, China, and now also Russia and the United States.
Car Shows Pirelli equipped all the supercars at the 83rd Geneva Car Show held in March: Ferrari, Lamborghini, Maserati, McLaren, Audi, AMG, BMW, Jaguar and Porsche. Drawing on the precious experience gained from supplying Formula 1, Pirelli is transferring more and more race car tyre technology to highway models with its premium tyres. Two examples are the limited edition Ferrari Kers, a special version of the PZero Corsa Asimmetrico, and the PZero with the new fitment+1 for the new Aventador made by Lamborghini. 67
Competitions Pirelli research and development efforts earned it major recognition in competition during 2013. Races offer the testing ground for new technological solutions under extreme vehicle use conditions. Pirelli was the sole supplier to Formula 1 for the third year in a row, with an evolution of its compounds from the previous year. Its aim was to increase thermal degrade and guarantee more pit stops, and thus greater spectacle for fans. Pirelli also returned to stock car racing in Brazil in 2013, after a five-year hiatus. For Pirelli, Motorsport means: GT, Rally (including historic rallies), prestigious single-brand events like the Ferrari Challenge, Lamborghini Super Trofeo, Maserati Trofeo and many others. Motorsport competitions feature different categories, both on the racetrack and off-road events. Over 250 championship events held in more than 40 countries around the world were equipped by Pirelli, for a total of 720,000 tyres supplied to the most famous car and motorcycle makers. This activity makes Pirelli the single biggest supplier of tyres to Motorsport both domestically and internationally.
Formula 1 Pirelli was confirmed as the sole supplier to the FIA Formula 1 World Championship. World Motor Sport Council confirmed Pirelli as the sole supplier of tyres to the FIA Formula 1 World Championship by renewing the contract that engaged Pirelli between 2011 and 2013, with the renewal period covering the 2014 through 2016 seasons. In collaboration with the racing teams, the Federation and Pirelli worked together on further improvements to the safety and performance of the F1 Championship. Major changes in tyre test rules were also made to the FIA Sporting Regulations.
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The principal changes are summarised as follows: 1) one of the 12 pre-season group test days governed by the 2014 Sporting Regulations will be dedicated to wet condition tyres. 2) each team dedicates one of the eight in-season test days already envisaged by the 2014 Sporting Regulations exclusively to tyre tests; this means that during each of the eight test days, at least one team, and up to a maximum of two, will concentrate on the tyre tests together with Pirelli technicians. 3) Pirelli will continue to define the tyre specifications and manage all aspects of their development, in close collaboration with FIA and the teams, and within the parameters established by the FIA Formula One Sporting and Technical Regulations. Moreover, Pirelli and the Federation have agreed to discuss the procedures for establishing a partnership to address road safety as part of the “FIA Action for Road Safety” programme. Conclusion of the third Formula 1 season supplied with Pirelli tyres offers an opportunity to sum up the Pirelli commitment to Formula 1 in numbers. The numbers for these first three years are important: more than 110 thousand tyres supplied, 3,000 pit stops, and an average of 56 overtakes per race. These three years were characterised by the continuous commitment of Pirelli staff both at the racetrack and at R&D centres, to respond to the needs of teams and race car drivers with ever- more sophisticated and challenging technologies and solutions, as repeatedly recognised by very people involved. Over the three-year period, the specifications changed completely every year, and evolved each year over the course of the season. This effort has no equal in the history of exclusive supplier relationships with Formula 1. The relationship between Pirelli and the GP2 and GP3 series is also continuing. An agreement has been announced for a multiyear renewal that will continue the partnership that began in 2010 and engaged Pirelli as a key player in this series, which allows young race car drivers to prepare for the next step, Formula 1.
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Rally Pirelli has been participating in this class of competition since 1907, with the Peking- Paris raid, and was the exclusive supplier to the Rally world championship from 2008 to 2010, developing unique know-how in the field. In addition to its commitments in numerous national and single-brand championships, Pirelli is supplier to the FIA WRC Academy, the rally series created to train young rally stars. Beginning in 2014, Pirelli will return to the Rally WRC World Championship, a series with which Pirelli has collaborated since way back in 1973. Pirelli is returning to this field after a brief interruption, operating under open competition conditions. This means that it will supply tyres together with three other tyre makers chosen by FIA to supply the Rally World Championship from 2014. Pirelli is confident in the quality of its products, which have been further developed from the experience acquired in the meantime, especially from Formula 1. It believes that the most recent evolutions will allow its tyres to be even more competitive in future together with the latest generation of the World Rally Car races. The rally is a fantastic challenge for a tyre maker, because the tyres are tested on all road surfaces and under a great variety of climate conditions. The rally is an extreme sport, where the tyres can make a huge difference. Pirelli intends to become a true partner in a championship that will assume growing importance, thanks to greater promotion and a high level of interest by new car makers. This year, Pirelli is going to continue developing and testing its own rally tyres, refining the latest P Zero products for asphalt and the renamed Scorpion for dirt roads. They represent an excellent match of performance and durability and have been adapted to the most recent rules issued by the WRC, while always respecting the environment. 70
Motorcycle Business Pirelli and Metzeler tyres are offering incredible levels of performance and safety as compared with the past. Pirelli will continue concentrating on its unique competitive advantages that already make it the best world motorcycle tyre maker. It will use the technology coming from the Superbike experience to produce supersport applications. Enduro and SportTouring tyres, which will be increasingly used under all weather conditions, will significantly benefit from our dedicated product range to offer the best performance under wet conditions. Metzeler celebrated its 150th anniversary in 2013. The celebrations began with a ceremony in Stuttgart organised by the German magazine Motorrad to elect Metzeler as the “the best brand of 2013 in the tyre category” for the fourth straight year.
New Products A spectacular wet road braking test was held at the new Taranto naval base in April 2013. The flight deck of the aircraft carrier Cavour was doused with water pumps operating at a pressure of 17 atmospheres, creating the unprecedented track for launching the Angel GT. Max Biaggi accelerated to 100 km/h and then braked hard at the previously marked braking point. He first accelerated his motorcycle to full throttle, and then he stopped immediately on the wet asphalt. Thus, the six-time World Superbike Champion christened the Angel GT, the new sport touring tyre for naked small motorcycles, supersport motorcycles and touring motorcycles. This unprecedented test was held by Pirelli thanks to the precious collaboration of Difesa Servizi S.p.A. and, in particular, the Italian Navy, which provided the flight deck of the aircraft carrier Cavour, moored at the Taranto naval base.
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The Metzeler Legendary Knight was held in November 2013. During this event, the new SPORTEC M7 RR supersport tyres and the ME 888 MARATHON Ultra custom touring tyres in the Whitewall version and 23 inch front wheel size were introduced to the world for the very first time.
Original Equipment Mv Agusta, the prestigious Italian motorcycle maker, chose the Pirelli Diablo Supercorsa™ SP as original equipment for the base versions of the R and RR models in the F4 2013 line. The Diablo Supercorsa was chosen by motorcycle makers for their own supersports models because it has the characteristic of embodying everything that can learned from racing experience, and particularly from the Superbike, to which Pirelli is sole supplier. The Diablo is a highway tyre that can nonetheless offer the typical performance of racing products, thereby offering an ultra-performance tyre that can be used equally on the road or on the racetrack. One interesting detail of this tyre is that its compounds have been reinforced even more with a tread design that is repeated six times on the surface of the tyre. These solutions now guarantee increased grip and traction, allowing the motorcycle to maintain higher speed at every leaning angle. The partnership between Pirelli and Agusta has been renewed and offers the world a match synonymous with performance and technology. It is still possible to customise the tyre by applying special labels on its sidewalls, a characteristic that has made the Diablo a unique product much-loved by motorcyclists. The press preview was held at the Autodromo Enzo e Dino Ferrari racetrack in Imola, where the new Ducati 899 Panigale was presented. This offered Pirelli the opportunity to confirm its leadership in the top of the line segment and the strong technological partnership between the Borgo Panigale based motorcycle maker. It has adopted the Pirelli Diablo Rosso Corsa as original equipment for its new motorcycle, in the 120/70 ZR17 size for the front wheel and the 180/60 ZR17 size for the rear wheel. The Pirelli Diablo Rosso Corsa tyres are the most versatile supersport tyres for highway and track use designed for flared and naked motorcycles. 72
Press Test After being certified by the authoritative independent entity Motorrad Testcenter as the best sport touring tyre for mileage and having won the comparative test of sport touring tyres conducted by the prestigious German magazine Motorrad, the new Angel GT has also won top place in the comparative tyre tests held by the French magazines Moto Journal and Moto Magazine and the German magazine PS Das Sport-Motorrad Magazin. The comparative tests conducted by the three magazines compared the new Pirelli Angel GT with the Metzeler Roadtec Z/8 Interact M/O, Bridgestone Battlax T30, Continental Road Attack 2, Dunlop Sportmax RoadSmart II and Michelin Pilot Road 3. In all three cases, the testing entities gave the top score to the new Pirelli sport touring tyre, which won all four of the comparative sport touring tyre tests in 2013. The new Metzeler TouranceTM Next moved up to the highest position on the winner's stand in the comparative street enduro tyre test organised by the authoritative German magazine Motorrad, which compared it with the Michelin Anakee 3, Bridgestone Battle Wing 501/502, Continental TrailAttack 2, Dunlop Trailmax TR91 and Pirelli Scorpion Trail. All of these tyres were tested in the 110/80 R19 and 150/70 R17 sizes, mounted on six Triumph Tiger Explorer motorcycle. The Metzeler tyre won because it offered the most balanced performance under all test conditions, performing outstandingly under dry conditions, while exhibiting excellent handling under wet conditions, combined with its high mileage. Issue number 11/2013 of the German magazine shows that the six tyre models were tested at two different times – the first time when the tyre was brand new and then, the second time, after being used for 4000 km to determine the wear and tear and mileage of both the front and rear tyres. A fast road test was also performed (on the Autobahn and on a super highway) and, above all, under wet conditions. 73
In particular, the dry condition test measured performance in terms of maneuverability, steering precision, stability on curves, grip while leaning over, traction under acceleration, stability on a straight-away under full throttle, behaviour when carrying a passenger, behaviour under extreme conditions, travelling on a straight line and braking on curves.
The wet test was held on a track that had been soaked in water. In addition to the parameters listed above, Motorrad also considered the braking distance at a speed of 100 km/h, average travelling speed and time on the circuit, with the new Metzeler TouranceTM Next beating the competition.
Competitions Pirelli has accumulated an impressive series of motorcycle race wins. Since 2004 Pirelli has been the sole supplier of tyres for the SBK World Championship, but also for the Supersport, Superstock 1000 and Superstock 600 classes. The commitment of Pirelli has marked a major change from the use of past prototypes. Technically, this has translated into a significant increase in the quality and performance of its products, with constant technical development that has been made possible in part by the involvement of technicians and drivers on the various teams. Its technical partnership has been confirmed for the four competition classes of the World Championship until the end of the 2015 season. The eni FIM Superbike World Championship has seen lots of technical firsts, starting with the new line of 17 inch Diablo Superbike tyres for dry conditions, Diablo Wet for mixed conditions and Diablo Rain for very wet conditions. The new 17 inch tyres, used beginning this year, performed very well even in the Superbike class, confirming the expectations of both Pirelli and the race drivers, who steadily improved their times on the circuit and also toppled historic records. 74
In particular, at their season debut in Monza, with the Pirelli Diablo Superbike and Diablo Supercorsa rear tyres using the SC0 compound, the Englishman Tom Sykes broke the fast lap record on the circuit, and the Italian Marco Melandri broke the record for highest average race speed in the entire history of the Superbike World Championship, and the drivers covered a lap 1 second faster on average than in 2011. Once again in 2013, the world championship was fought out to the very end by four race drivers from three different teams. In the end, Tom Sykes celebrated his first world championship title on his Kawasaki, by beating the Aprilia team, which got the consolation prize of best motorcycle maker, its 52ndprize in little over twenty years, counting both speed and off-road competition. Sykes succeeded Max Biaggi, who had won the top prize the previous year by half a point. In 2013, for the first time Pirelli also sponsored a new prize, the “Tattooed tyre of the Champion”, a tattooed slick tyre given to the winner of the eni FIM Superbike World Championship.
The image shows the World Champion driver sitting on his own motorcycle, framed by laurel leaves and the phrase “2013 FIM Superbike World Champion”. Pirelli appeared as a top player in this championship, with over 57 thousand tyres supplied for the 28 races in the Superbike World Championship, European Junior Cup and Cup of Nations classes (excluding tests). Once again, Pirelli demonstrated its excellent work in 2013 in the Superbike World Championship. It achieved all this by using Diablo Superbike tyre models that are available on the market and that any motorcyclist can purchase.
The Team HRC Rally, the official Honda team, chose Metzeler as supplier of tyres and technical partner to confront the toughest raids and rally competitions in the world, including the 2014 edition of the prestigious Dakar race. 75
The product to be used in the competitions at which the Team HRC Rally will participate, the Metzeler KAROO Extreme, is a prototype tyre that is not available for sale, because it was specifically developed for sports activities in collaboration with the Team HRC Rally. This name was used to emphasise two important aspects for development of this product, which tend to combine the know-how and experience acquired with the KAROO in the enduro on/off application and the “extreme” experience of Metzeler in the enduro competition world with the MCE 6 Days Extreme, a tyre that has won the Enduro World Championship 22 times. Pirelli won its 59th championship title in the FIM Motocross World Championship thanks to the performance of the Dutch 18-year-old Jeffrey Herlings, who decided the outcome of the MX2 championship a good three races before the end of the series.. For the KTM driver, who was competing with the SXF 250 official equipped with Pirelli Scorpion MX MidSoft 32F tyres in the front and Scorpion MX MidSoft 32 in the back, this was the second straight world championship title that he won, putting in an extraordinary superior performance by winning all 14 of the grand prizes in competition. They were also world champions in MX1. Tony Cairoli, a 27 year old from Messina, competed with the KTM SX 350 equipped with the Pirelli Scorpion MX MidSoft 32F in the front and Scorpion MX MidSoft 32 in the back, won the world championship one race before the end of the series. Having won his seventh world championship, Cairoli became the second-top winner in the history of motocross, after the Belgian Stefan Everts.
Truck Business Industrial customers use different parameters to assess and choose tyres. Pirelli will concentrate its efforts on their actual needs. It will significantly increase mileage and fuel consumption efficiency through improved rolling resistance in all segments, and 30% better rebuildability for all products will guarantee excellent value for money. 76
The Company also aims to focus on the winter segment, which is undergoing major growth on the industrial market, with the goal of increasing traction on snow by about 20% and guaranteeing top winter performance. The European General Safety Regulation 661/2009 entered into force November 1 last year. This has led to the issuance of a series of new noise, wet grip and rolling resistance requirements. These requirements were established by Regulation UNECE 117.02 (issued by the United Nations in Geneva), which divided the snow tyre into two families: Snow and Snow tyre for use in severe snow conditions. The first family is identified by the mark “M+S”, while the second is identified by the mark “3PMSF” (Three Peak Mountain Snow Flake). In order to affix this mark, the manufacturer has to subject its tyres to a performance test on a snowy surface. Pirelli has already started selling these truck tyres. Beginning with products made in 2013, all Pirelli Winter tyres bear the 3PMSF mark on their sidewall. Compared with the M+S, they perform better in terms of traction, grip, braking on show at temperatures below 4°C. They consequently guarantee better control of the vehicle.
New Products Many innovations were rolled out in 2013. The roll-out of the innovative “Formula” associated brand line of Pirelli Tyre was completed in a few months, marking an important change in corporate policy. There is a strong demand on the market for lower-cost products, but at the same time buyers do not want to give up quality and performance, which are themselves a source of savings, such as low fuel consumption or rolling resistance, and a guarantee of safety, such as wet braking. Pirelli has chosen to design a specific new product line, privileging the concept of value for money. This is how it has rounded out its product line without making compromises that would have contradicted the corporate philosophy. In fact, the decision was taken to create a lighter product of limited size that uses the latest generation of materials: compounds with a high silica content and high mileage performance. 77
The engineers who have developed the new line were able to rely on the most recent Pirelli technologies, such as double layer technology, and especially the Bigiro Slim belting structure, covered by a Pirelli patent. The zero degree protection of the last belt is key to preserving the structure of the tyre, both at the beginning of its life and during reconstruction. The use of these Pirelli technologies combined with the use of better performing tread compounds has made it possible to make a lighter, more efficient tyre with an extremely high quality/price ratio, offering high performance guarantees and thus safety. In fact, every tyre in this line satisfies the same Green Label rules of the premium class, and for some parameters reaching the same levels of other product lines. The new Formula product line has passed all the severe in- house tests, which guarantee a product designed and certified by Pirelli. Formula is a line developed for medium and long-distance travel, combining the characteristics of versatile use, performance, durability and economy. It is available in various versions: for the steer axles, drive axles and trailer axles. This product line is offered in six sizes and two bores (17.5 and 22.5 inches). The Formula Steer tyre has four, straight longitudinal grooves to guarantee precise driving, control and safety even under critical conditions. The dense lamellar structure on the edges of the tyre beads serve to prevent irregular wear and tear. The tyre preserves all these characteristics unchanged over its entire lifetime. Optimisation of the lamellar structure and the geometry of the design then guarantee reduced braking distances and better lateral grip. The Formula Drive tyres have been designed to offer guaranteed performance under all conditions (they also bear the M+S mark for winter use). The deep web structure offers high traction. The tread design also improves wet grip, reduces noise and optimises grip. Designed for trailers, the Formula Trailer tyres feature zigzag longitudinal grooves that assist transverse grip and braking performance, even under wet conditions. The reinforced beads assure greater resistance against lateral stresses. 78
The product line dedicated to the medium and long-distance transport segment has also been rounded out by a new tyre that enhances safety and minimises operating costs, by means of energy efficiency, high mileage, possibility of reconstruction, reduced noise and use of innovative materials. With the new ST:01 Base – characterised by innovative materials, optimal reduction of wear and tear and use of a Pirelli patent – all different types of transport operator requirements are covered. ST:01 Base improves the Pirelli range of products offered for industrial vehicles with a new tyre that flanks the other two products for trailers and semi-tractor trailers already available in the catalogue: ST:01 Neverending and Formula Trailer. In particular, ST:01 Neverending is the first Pirelli line to have been awarded the double class “A” of the European Label for rolling resistance and wet grip, and represents the best equipment for trailers and semi-tractor trailers even for reconstruction. 79
HIGHLIGHTS OF OTHER ACTIVITIES
The other activities refer to Pirelli Ambiente (which also include the activities related to particulate filter figures) and PZero and are broken down as follows:
(in millions of euro) Pirelli Ambiente Pzero Total other business 2013 2012 2013 2012 2013 2012
Net sales 22.3 29.2 8.1 11.0 30.4 40.2
Gross operating profit before restructuring expenses (11.8) (6.9) (13.1) (16.7) (24.9) (23.6)
Operating income before restructuring expenses (14.9) (10.7) (14.0) (17.6) (28.9) (28.3)
Restructuring expenses (1.0) - (1.1) - (2.1) -
Operating income (15.9) (10.7) (15.1) (17.6) (31.0) (28.3)
At December 31, 2013 net sales totalled euro 30.4 million, compared with euro 40.2 million at December 31, 2012, while the operating loss was euro 31.0 million (due to euro 2.1 million in restructuring charges), compared with the euro 28.3 million operating loss in 2012. The reduction in filter activities, which partly reflected the strategy of focusing on the Tyre business, specifically led to impairment of assets and inventories by about euro 7 million. 80
PARENT HIGHLIGHTS
The following table illustrates highlights of the parent’s operating results, earnings and financial position:
(in millions of euro) 12/31/2013 12/31/2012 Operating income 24.3 17.5 Net financial income and net income from equity investments 195.8 211.2 Net income (loss) 191.8 234.4
Non current-financial assets 1,536.1 1,363.7 Equity 1,940.0 1,866.2 Net financial (liquidity)/debt position (227.1) (288.6)
At December 31, 2013 the company had net income of euro 191.9 million, including euro 310 million in dividends received from the subsidiary Pirelli Tyre S.p.A. adjustment of the value of certain financial assets with a negative impact of euro 126.7 million, of which euro 20.1 million for the subsidiary Pirelli Ambiente S.p.A., euro 15.2 million for the subsidiary Pzero S.r.l., euro 23.7 million for RCS Mediagroup S.p.A., euro 10.4 million for Mediobanca S.p.A. (adjustment made on the half-yearly financial statements at June 30, 2013 consistently with the policy that governs overshooting the significance threshold and duration of the decrease in value), euro 4.9 million for Alitalia S.p.A., euro 44.3 million for fair value adjustment of the “convertendo” equity instrument of the subsidiary Prelios S.p.A., and euro 4.8 million for the associate Fenice S.r.l.. 81
The following table summarises the carrying values of the principal non-current financial assets at December 31, 2013:
(in millions of euro) 12/31/2013 EQUITY INVESTMENTS IN SUBSIDIARIES - Pirelli Tyre S.p.A. 1,085.8 - Pirelli Finance (Luxembourg) S.A. - Lussemburgo 10.4 - Pirelli Ltda - Brasile 9.7 - Pirelli Ambiente S.r.l. 13.5 - Pirelli Labs S.p.A. 4.1 - Pirelli UK Ltd 21.8 - Pirelli Group Reinsurance Company S.A. 6.3 - Pzero Srl 4.0 - Pirelli Servizi Amministrazione e Tesoreria S.p.a. 3.2 - Altro 3.3 Total equity investments in subsidiaries 1,162.1 EQUITY INVESTMENTS IN ASSOCIATES and OTHER FINANCIAL ASSETS
-Eurostazioni S.p.A. 52.9 -Prelios S.p.A. 21.8 -Convertendo Prelios S.p.A. 104.0 -Fenice S.r.l. 18.2 - Mediobanca S.p.A. 100.1 - RCS Mediagroup S.p.A. 30.5
-Fin. Priv. S.r.l. 13.7 - Fondo Comune di Investimento Immobiliare - Anastasia 15.0 -Alitalia S.p.A. 7.5 -Istituto Europeo di Oncologia S.r.l. 5.0 - Altro 5.3 Total equity investments in associates and other financial assets 374.0
TOTAL NON-CURRENT FINANCIAL ASSETS 1,536.1
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Equity rose from euro 1,866.2 million at December 31, 2012 to euro 1,940.0 million at December 31, 2013. The change is illustrated as follows:
(in millions of euro) Equity at 12/31/2012 1,866.2 Net income 191.9 Dividends paid (156.7) Gains/(losses) recognised directly in Equity 38.6 Equity at 12/31/2013 1,940.0
The following table illustrates the breakdown of equity at December 31, 2013 and comparative figures for the year at December 31, 2012:
(in millions of euro) 12/31/2013 12/31/2012 Share capital 1,343.2 1,343.2 Legal reserve 129.6 118.0 Business combination reserve 12.4 12.4 IAS operating reserve 42.6 3.9 Retained earnings 220.2 154.3 Net icome 191.8 234.4 1,940.0 1,866.2
The net financial (liquidity)/debt position, which was a positive euro 227.1 million at December 31, 2013 as compared with euro 288.6 million at December 31, 2012, was mainly impacted by the receipt of dividends from the subsidiaries and other equity investments totalling euro 325.2 million (including euro 310.0 million from Pirelli Tyre S.p.A.), offset by payment of the dividend of euro 156.7 million and capital increases executed by RCS Mediagroup S.p.A. (euro 21.3 million) and Fenice S.r.l. (euro 23 million), plus reclassification of the euro 169.9 million credit from Prelios S.p.A. as shares and equity instruments following the extraordinary capital transactions completed in 3Q 2013 that involved financial restructuring of Prelios S.p.A. 83
RISKS AND UNCERTAINTIES The current macroeconomic situation, financial market instability, complex management processes and continuous legislative and regulatory evolution force successful businesses to protect and maximise tangible and intangible sources of value that characterise the corporate business model. Pirelli adopts a pro-active risk management system. It uses a systematic process of identifying, analysing and assessing risk-prone areas to provide the Board of Directors and management with decision-making tools so that they can anticipate and manage the effects of these risks, guided by the awareness that the assumption of risk is a fundamental part of business management. Reference is made to the Corporate Governance Report for details on the risk management system. The Pirelli Risk Model systematically assesses three categories of risks: external risks, strategic risks and operating risks.
1. External risks The occurrence of these risks is beyond the Company's control. This category includes the risks related to macroeconomic trends, changes in demand, the strategy of competitors, technological innovation, new regulations, and country risk (and specifically economic, security, political and environmental risks).
2. Strategic risks These are typical risks in the Group's specific business sector. Proper management of these risks is a source of competitive advantage or, on the contrary, a cause for failure to achieve plan targets (three-year and annual targets). This category includes market risk, product innovation and process risk, human resource risk, raw material price risk, production process risk, financial risk, and M&A risk. 84
3. Operating risks These are risks generated by the organisational structure and processes of the Group, and the assumption of which does not determine any competitive advantage. The principal areas of risk in this category are information technology, business interruption, legal and compliance, health, safety and environment and security risk.
1. EXTERNAL RISKS
Risks connected with general economic conditions and the medium-term evolution of demand
After a year, 2013, dominated by a high degree of uncertainty, Pirelli expects – consistently with forecasts by leading analysts – that the global economy will gradually accelerate in 2014. In mature economies, a partial relaxation of austerity measures in the public sector and lower level of indebtedness in the private sector (especially in the United States) should sustain growth on both sides of the Atlantic. Improvement in the economic fundamentals of the United States and, to a lesser extent, in Europe, should also permeate emerging economies in terms of greater exports and further improvement in financial market confidence. Elements of uncertainty will remain and might derive, inter alia, from the tapering of quantitative easing in the United States, possible political tensions in the more economically fragile emerging countries and, last but not least, geopolitical tensions in the Middle East. 85
• EUROPE: TIMID RECOVERY IN 2014 Although signs of cyclical weakness are still perfectly evident (especially in the labour market), the recent economic recovery could accelerate during 2014, through an easy monetary policy and increased purchasing power (resulting from lower inflationary pressure). Notwithstanding these encouraging signs, 2014 will continue to be a transition year for the eurozone periphery, especially on account of the labour market remaining depressed and austerity measures that will continue to curtail internal demand. However, the recovery will be stronger elsewhere in the European Union, especially in Germany.
• UNITED STATES: ROBUST IMPROVEMENT IN OUTLOOK After slowing down in 2013, the American economy should undergo a robust acceleration in 2014. With significant improvement in economic fundamentals (especially the real estate market), growing importance of unconventional energy sources (shale gas/fracking oil) combined with a more relaxed political climate in regard to the debt ceiling represent the principal bases for the American recovery.
• CHINA: SUBSTANTIALLY STABLE GROWTH The recent trend data and forecasts issued by leading economic analysts seem to converge on a 2014 GDP forecast that is substantially consistent with the last two years or, in the worst case, in slight deceleration. The structural reforms decided during the third plenum of the Central Committee of the Chinese Communist Party will continue to drive the country towards an economic model based more on consumption and a slow, but steady deregulation of the financial system. While no particular risks are perceived at the cyclical level – partly on account of the ever- increasing attention dedicated by the government to achieving a minimum growth rate – over the medium-long term the country must find a permanent solution to certain endemic problems such as the excessive debt of local governmental entities, a 86
possible bubble on the real estate market and, in regard to society, an ageing population, urbanisation and pollution.
• SOUTH AMERICA: STABLE OUTLOOK, NOT WITHOUT RISKS The Brazilian economy should stabilise at its present growth levels. Over the short term, the principal growth driver will continue to be the stimulus generated by the upcoming World Cup soccer championships. The principal risk factors include the impact of changing United States monetary policy on the Brazilian currency and, indirectly, consumer price pressures. The risk of possible devaluations is growing in both Argentina and Venezuela.
• RUSSIA: ACCELERATION IN 2014, BUT PRE-CRISIS RATES ARE STILL FAR OFF After 2013, which was most likely the year with the lowest growth rate in the last five years (around 1.6%), the economy of the Russian Federation should accelerate during 2014 thanks to an increase in internal demand (especially government consumption and families). This acceleration, combined with a substantially stable outlook for energy commodities, might negatively impact its trade balance, and consequently slowing down marginal improvements in GDP during 2014. A return to pre-crisis growth rates is not expected over the short-medium term. The automotive market will continue to be influenced by exogenous factors, such as persistent macroeconomic uncertainty, regulatory obligations, volatile currency markets, and the evolution in demand according to consumer habits and lifestyles. The number of vehicles on the road is forecast to increase at an average annual rate of 3.7% until 2017, with a steady increase in the impact of the premium segment. In particular, it is forecast that nearly 10% of the total number of vehicles on the road in 2017 will be premium segment vehicles, up from the 9.1% share estimated in 2013. The premium segment will remain concentrated in Europe and the NAFTA area, which account for 60% of the total, as compared with 65% in 2013, and in the APAC area, whose weight is expected to grow by 30% from the present 27% level. 87
Even during economic crisis, the performance of the tyre market confirms the wisdom of the choice made by Pirelli to focus its activities on the premium segment. Even in the face of a situation caused by the difficult international business cycle, the premium segment will continue to grow at a rate three times faster than the non- premium segment, with a forecast annual average global increase of 7.3% between 2013 and 2017, as compared with a 2.4% rate in the non-premium segment (+3.6% overall growth). In mature economies (Europe and NAFTA), the annual growth of the premium segment is forecast to be 5.7%, compared with 0.3% growth in the non-premium segment (+2.2% overall growth). Finally, in rapidly developing economies, the annual growth of the premium segment is forecast to be 11.6%, compared with 3.8% growth in the non-premium segment (+4.8% overall growth). For 2017, it is forecast that the premium segment will account for 26% of the total global tyre market (38% in mature markets and 15% in rapidly developing economies), up 4 percentage points from the 22% estimated in 2013. In this context, it may be forecast that: - the profitability of the premium products made by the automotive and tyre industry will remain structurally higher than the average stability of the respective sectors, partly in consideration of the fact that premium segment tyres are increasingly perceived as products associated with sustainability and safety. These areas are systematically cultivated by Pirelli, using its know- how and cutting-edge technology; - mature economies will continue to play a preponderant role in the premium segment; - the tyre segment will continue to be driven by the positive developments of emerging economies, beginning in the APAC area.
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In light of these elements, the Group's strategic objectives will aim at balancing the impact of various geographical areas on profitability. In particular: - the contribution to EBIT made by mature countries, currently 35%, will increase in 2016 (with an average annual growth rate of 12%, tied to the dynamics of the premium segment and greater efficiency, especially in Europe); - the contribution to EBIT made by rapidly developing economies (excluding Latam), now 20%, is forecast to grow to nearly 30% in 2016 (with an average annual growth rate of 22%, driven by the expected development of the premium segment); - the contribution to EBIT made by Latam, now 45%, will sink to around 35% (with an average annual growth rate of 3% and a stable “mid-teen” EBIT margin over the three-year period.
Risks connected with the evolution of long-term demand Social and technological trends have emerged over the last several years that might have a material impact over the medium-long term on the automotive sector and indirectly on the tyre market. On the one hand, these are represented by growing urbanisation (according to United Nations estimates, about 70% of the global population will live in urban areas in 2050) and, on the other hand, by changes in the values and behaviour of younger generations (increase in the average age when a driver's license is obtained, loss of importance of owning a car, increased recourse to various types of car sharing). These factors will be complemented by the spread of information technologies, with a concurrent expansion of e-commerce and/or telecommuting, and frequent regulatory changes in both mature and emerging economies to limit the presence of polluting vehicles within and near metropolitan areas. These dynamics might be followed by an evolution in automotive sector demand (from changes to vehicle dimensions or type of propulsion system to possible resizing of cars to satisfy the transportation preferences of citizens), with contingent impact on tyre sector dynamics. 89
Pirelli constantly monitors the evolutionary changes in automotive sector demand by actively participating in international working groups, such as the one engaged in the Sustainable Mobility 2.0 (SMP 2.0) project sponsored by the World Business Council for Sustainable Development (WBCSD). The principal aim of SMP 2.0 is to study the possible long-term evolution in urban mobility and promote solutions that might improve the social, environmental and economic well-being of the urban population.
Country Risk Pirelli implements a “local for local” strategy by setting up production sites in rapidly developing countries to serve local demand at competitive industrial and logistic costs. This strategy improves Group competitiveness in the face of resurgent trading blocs and growing protectionist measures (customs barriers or other measures such as technical prerequisites, product certification, and administrative costs connected with import procedures, etc.). The Pirelli Group adopts this strategy for its operations in countries (Argentina, Brazil, Mexico, Russia, China, Egypt, Turkey, Venezuela and Indonesia) where the general political and economic context and tax systems might prove unstable in future. In fact, structural risk factors persist in the Latam area, particularly those involving the political and economic situation in Venezuela and Argentina, and in Egypt, where political and social instability remains dominant and which has altered normal market dynamics over the last three years and, more generally, business operating conditions. In order to adopt prompt (or even preventive, when possible) measures to mitigate the possible impact stemming from changes in the local context, the Group constantly monitors the evolution of political, earnings, financial and safety risks associated with the countries where it operates. Moreover, in situations where the production capacity of certain factories is underutilised, production can be reassigned to other Group plants. 90
Competitive risks associated with the markets where the Group operates Over the last several years, competition has grown in the markets where the Group operates, especially in Latin America, due to the entry of low-cost products from Asian countries and major investments by competitors attracted by the dimensions of the internal market and growth of the middle class (+10 million persons over the next few years). Pirelli generated about 45% of its EBIT in Central and South America. Consistently with its strategy, it intends to seize the opportunities for value creation deriving from the forecast growth rates in the premium segment of the automotive market by exploiting and preserving its market leadership, both in the replacement and original equipment segments, the broad and consolidated network of single brand retail outlets, both in Brazil and Argentina, and the consolidation of its brand, due partly to its participation in Formula 1 competition.
2. STRATEGIC RISKS
Risks associated with price trends and availability of raw materials In 2014 natural rubber, synthetic rubber and petroleum based raw materials (especially chemicals and carbon black) will remain an uncertain factor in the Group’s cost structure, due to the sharp volatility witnessed over the past several years and their impact on the cost of finished products (about 37% of cost of sales). In 2013, commodity prices – especially natural rubber – were negatively impacted by the capacity of mature economies to recover and lower than expected economic growth in the People's Republic of China. Pirelli expects that commodity prices in 2014 will remain substantially steady at their 2013 levels. Uncertainty will clearly persist, mainly due to the impact on commodity markets of the tapering off of quantitative easing in the United States and/or possible conflicts or geopolitical tensions.
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Contingent price scenarios for the principal commodities purchased by the Group are simulated on the basis of their historic volatility and/or the best information available on the market (e.g. forward prices). On the basis of various scenarios, sales price increases and/or other internal cost efficiency recovery actions have been identified (e.g. use of alternative raw materials, reduction of product weight, improvement of process quality, and reduction of discarded material) as necessary to guarantee the forecast profitability levels.
Financial risk The Group is exposed to financial risks. These are principally associated with foreign exchange rates, raising funds on the market, fluctuations in interest rates, the ability of customers to honour their obligations to the Group, and the price of financial assets held as investments. Financial risk management is an integral part of Group business management and is handled directly by headquarters in accordance with guidelines issued by the Finance Department on the basis of general risk management strategies defined by the Managerial Risk Committee.
Exchange rate risk The varied geographical distribution of Pirelli production and commercial activities entails exposure to transaction and translation exchange rate risk. Transaction exchange rate risk is generated by the commercial and financial transactions executed in currencies other than the functional currency due to exchange rate fluctuations between the time when the commercial or financial relationship is established and when the transaction is completed (collection or payment). 92
The aim of Group policy is to minimise the impact of transaction exchange rate risk related to volatility. For this reason, Group procedures envisage that the Operating Units be responsible for collecting all information related to assets and liabilities exposed to transaction exchange rate risk. Forward contracts are made to hedge this risk, with the Group Treasury whenever possible.
The items subject to exchange rate risk are mainly represented by receivables and payables denominated in foreign currency.
The Group Treasury is responsible for hedging the net position for each currency. In accordance with established guidelines and restrictions, it closes all risk positions by trading derivative hedging contracts on the market, which typically take the form of forward contracts.
Furthermore, as part of the annual and three-year planning process, the Group makes exchange rate forecasts by using the best information available on the market. The fluctuation in exchange rates between the time when the forecast is made and the time when the commercial or financial transaction is established represents the transaction exchange rate risk on future transactions with respect to the targets announced to the market. The Group periodically monitors the opportunity to enter into hedges on future transactions. In these cases, it typically uses forward purchases and risk reversal options (i.e. zero cost collars).
Currency translation risk: Pirelli owns controlling interests in companies that prepare their financial statements in currencies other than the euro, which is used to prepare the consolidated financial statements. This exposes the Group to currency translation risk, which is generated by the conversion into euro of the assets and liabilities of subsidiaries whose functional currency is not the euro. The principal exposures to currency translation risk are constantly monitored, but it is not currently deemed necessary to adopt specific policies to hedge this exposure. 93
In 2013 the principal currencies of emerging countries where Pirelli operates depreciated against the United States dollar (USD), and particularly the Venezuelan bolivar, Argentine peso, Egyptian pound and, to a lesser extent, the Brazilian real and Turkish pound. This generalised trend of depreciation in emerging country currencies, partly due to exogenous factors – such as U.S. Federal Reserve Bank monetary policy – and specific internal macroeconomic conditions, combined with appreciation of the euro against the U.S. dollar has had a comprehensively negative impact on the Group. In 2014, Pirelli expects – consistently with leading market operators – continuation of the present trend of depreciation tracked by leading emerging country currencies, attributable once again to the impact of changes in U.S. Federal Reserve Bank monetary policy and specific country risk factors (particularly in regard to the Venezuelan bolivar and Argentine peso). Finally, Pirelli expects that the current euro/dollar exchange rate trend to reverse, with the euro weakening from its levels at the end of 2013. Once again, significant uncertainty persists, such as the monetary policy decisions that will be taken by central banks on both sides of the Atlantic.
Liquidity risk The principal instruments used by the Group to manage the risk of not having sufficient financial resources to meet its financial and commercial obligations at the agreed terms and conditions consist of annual and three-year plans and cash-pooling plans, which give a full and fair view and measurement of positive and negative cash flows. The differences between plans and actual data are constantly analysed. The Group has implemented a centralised cash pooling system for the management of collection and payment flows in compliance with various local currency and tax laws. Banking relationships are negotiated and managed centrally, in order to ensure coverage of short and medium-term financial needs at the lowest possible cost. The procurement of medium and long-term resources on the capital market is also streamlined through centralised management. 94
Prudent management of the risk described above requires maintaining an adequate level of cash equivalents and/or highly liquid short-term financial instruments, and the availability of funds through an adequate amount of committed credit facilities and/or recourse to the capital market. In addition to the available portion of the euro 1.2 billion revolving credit facility due on November 30, 2014, of which euro 575 million had been used at December 31, 2013, the Pirelli Group draws on the capital market by diversifying the products and maturities used to seize the best opportunities available from time to time. For example, in December 2012 a private placement was executed in several tranches on the United States market for a total of USD 150 million, and a Schuldschein (German law loan) was obtained, again in several tranches, for a total amount of euro 155 million. The generation of cash flow and profile of debt maturities did not entail particularly significant transactions in 2013. The EMTN (Euro Medium Term Note) programme was finalised in July 2013. This is a document platform for the issuance of bonds on the Euromarket – whose maximum amount was set at euro 2 billion. The Board of Directors periodically resolves on the maximum amount of bonds that may be issued and their time horizon under this programme. The program aims at promptly seizing the best financing opportunities to provide continuous support for business growth in the face of volatile financial markets and possible restrictions on access to credit. The bonds may be placed only with professional investors.
Interest rate risk Fluctuations in interest rates impact the market value of Group financial assets and liabilities and net financial expenses. Group policy tends to keep the ratio of exposure to fixed rates and variable rates at around 70% fixed rate and 30% variable rate. To maintain this general ratio, the Group enters into derivative financial instrument contracts, typically interest rate swaps.
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Price risk associated with financial assets Group exposure to price risk is limited to the volatility of financial assets, such as listed and unlisted stocks and bonds, which represent 4.6% of total Group assets. Derivatives contracts that would limit the volatility of these assets are not normally made.
Credit risk Credit risk represents Group exposure to contingent losses resulting from default by commercial and financial counterparties. To limit commercial counterparty default risk, the Group has implemented procedures to evaluate its customers’ potential and financial solidity, monitor expected incoming cash flows and take credit recovery action if necessary. The aim of these procedures is to define customer credit limits. Further sales are suspended when those limits are exceeded. In certain cases customers are asked to provide guarantees. These mainly consist of standby letters of credit issued by parties with excellent credit or personal standing. Less frequently, mortgage guarantees may be requested. Another tool used to manage commercial credit risk is the execution of insurance policies: beginning in January 2012, a two-year master agreement was made with a leading insurance company for worldwide coverage (the policy excludes Egypt, Venezuela and China) of the credit risk related mainly to sales in the replacement segment (with the acceptance rate in December 2013 running at about 79%). The foregoing master agreement was also renewed in 2014. In 2013 the general situation of trade receivables was substantially the same as at December 31, 2011. The Group transacts only with financial counterparties having high credit ratings for the management of its temporary cash surpluses or trading of derivative instruments. Pirelli does not hold government bonds issued by any European country, and constantly monitors its net credit exposures to the banking system. Pirelli does not exhibit significant concentrations of credit risk.
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Restructuring of the financial receivable from Prelios S.p.A.
Following restructuring of the financial receivable from Prelios S.p.A. completed in August 2013, the company now owns three types of financial assets: Prelios shares (listed on the stock market); shares in the special purpose vehicle Fenice, which owns Prelios class B shares; the “convertendo” equity instrument. In addition to the price risk limited to the volatility of financial assets, such as listed shares, the company is also subject to the risk of economic and financial performance and execution capacity of the Prelios S.p.A. business plan. 97
3. OPERATING RISKS
Environmental risks The activities and products of the Pirelli Group are subject to numerous environmental laws that vary from country to country. These are related by the tendency to evolve towards increasingly restrictive measures, partly in consequence of the growing commitment by the international community to environmental sustainability. Pirelli expects that stricter laws will be gradually introduced, regulating the various types of environmental impact that businesses might have (air pollution, waste output, soil contamination, water use, etc.). Consequently, the Pirelli Group expects that it will have to continue to invest and/or incur costs for what might become significant amounts. Reference is made to the Sustainability Report chapter “Environmental Dimension” for details on the process of managing and controlling environmental risks described above.
Employee health and safety risks As part of operating its business, the Pirelli Group bears liabilities and costs for the measures necessary to guarantee full compliance with its obligations under workplace health and safety protection laws. Specifically in Italy, the occupational health and safety law (Legislative Decree 81/08), as amended (Legislative Decree 106/09) introduced new obligations that have impacted the management of activities at Pirelli sites and the models used to allocate liability. Failure to comply with applicable laws and regulations results in the imposition of criminal and/or civil penalties on the persons responsible and, in certain cases where health and safety laws are violated, on the firms themselves, in accordance with a European standard of objective business liability that has also been received in Italian law (Legislative Decree 231/01). Reference is made to the Sustainability Report for details on the process of managing and controlling these risks. 98
Product defect risk Like all other producers of goods for sale to the public, Pirelli might be affected by product liability suits or by product recalls due to presumed defects in sold materials. Although no major events of this sort have occurred in recent years and notwithstanding insurance coverage against these risks, the Pirelli brand might be negatively impacted should they ever occur. For this reason, the tyres made by Pirelli are subjected to intensive quality tests before being released for sale, and the entire production process is subject to specific quality assurance procedures with constantly rising thresholds for safety and performance.
Litigation risks In the course of operating its business, Pirelli might be involved in legal actions, tax litigation, commercial lawsuits or labour lawsuits. The Group adopts the measures necessary to prevent and attenuate any penalties that might result from these proceedings.
Risks associated with human resources The Group is exposed to the loss of human resources holding key positions or possessing critical know-how. To face this risk, Pirelli has adopted compensation policies that are periodically revised according to changes in general macroeconomic conditions as well as on the basis of pay benchmarks. Moreover, long-term incentive plans and specific not-to-compete clauses (also aimed at retention) are also envisaged. Finally, specific management policies are adopted to motivate and keep talented employees. 99
Business interruption risks The global scale of Group operations exposes it to a plethora of risks that might cause an interruption in business activities for an indefinite period of time, consequently impacting its operating capacity and financial results. Risks associated with natural or accidental events (fire, flood, earthquake, etc.), malicious acts (vandalism, sabotage, etc.), malfunctions in auxiliary plants or interruption of utilities may cause serious property damage and production losses, with a particular impact on production sites that have high volumes or specific (high-end) products. During 2013 the vulnerability of all Group facilities to catastrophic natural events (particularly flooding, hurricane and earthquakes) was analysed, with an estimate of the contingent damage (give the probability of occurrence). The analyses that were performed confirmed that business interruption risks are adequately covered, through a detailed series of safety measures, damage prevention systems and mitigation of possible impact on business, inter alia on the basis of current business continuation plans and existing insurance policies covering property damage and business interruption. In regard to earthquake risk, and specifically at the plant located in Turkey, particularly large seismic events might cause losses exceeding the insurance coverage limits, with a consequent negative impact on operating results. In 2012 the scope of analysis of business interruption risks was extended to the Pirelli supply chain, particularly in regard to Tier-1 suppliers. The analysis led the Group to undertake a series of mitigation actions to reduce the vulnerability of the supply chain. In particular, this involved extending the portfolio of approved plants by individual supplier, approval of alternative materials/suppliers, increase in the levels of safety stocks of critical materials, supplier audits, etc.
A joint effort was launched in 2013 with certain of the Group's principal suppliers to agree on areas for improvement of the principal business interruption risks at their production sites, including the sharing of Pirelli best practices applicable to loss prevention.
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Risks associated with information systems and network infrastructure Group operating activities rely increasingly on the proper, uninterrupted functioning of information systems and network infrastructure in support of business processes. Human error, access by unauthorised persons, vulnerable security systems, and/or system and network infrastructure breakdowns or malfunctions might negatively impact the performance of operating activities, cause the disclosure of critical, confidential corporate information, with consequent repercussions on the Group’s corporate image and/or the risk of statutory and regulatory violations. The Group has finished mapping the principal risks connected with the 10 most important information systems supporting core processes (production, purchasing, sales, and logistics). The risk was analysed on the basis of its impact on the Group if confidentiality were breached and according to the likelihood that the event occur in connection with the vulnerabilities existing in the system. Specific measures for the principal vulnerabilities were implemented for additional reinforcement of safety measures (physical, logic and infrastructure). 101
ALTERNATIVE PERFORMANCE INDICATORS
In addition to the financial performance measures established by the International Financial Reporting Standards (IFRSs), this report presents certain measures that are based on IFRSs figures (“Non-GAAP Measures”). These performance measures are presented to facilitate understanding of Group operating performance and should not be considered as substitutes for the information required under the IFRSs. Specifically, the Non-GAAP Measures used are the following: - Gross Operating Profit (EBITDA): gross operating profit is an intermediate economic measure deriving from operating income, but excluding depreciation of property, plant and equipment and amortisation of intangible assets; - Non-current assets: this measure is the sum of “property, plant and equipment,” “intangible assets,” “investments in associates and joint ventures” and “other financial assets”; - Provisions: this measure is the sum of “provisions for liabilities and charges (current and non-current),” “provisions for employee benefits” and “provisions for deferred tax liabilities”;
- Operating working capital: this measure consists of the sum of "inventories," "trade receivables" and "trade payables"; - Net working capital: this measure consists of operating working capital and the other receivables and payables not included in "net financial (liquidity)/debt position"; - Net financial (liquidity)/debt position: this performance measure is represented by gross financial debt less cash and cash equivalents and other financial receivables. The section “Explanatory notes to the consolidated financial statements” presents a table showing the items of the balance sheet used to calculate this measure. 102
SIGNIFICANT EVENTS SUBSEQUENT TO THE END OF THE YEAR
On January 16, 2014, following up on the decision by the World Motor Sport Council that confirmed Pirelli as sole supplier of tyres to the FIA Formula One World Championship, Pirelli announced that it had renewed that agreement with FIA. The duration of the agreement is three years, beginning with the 2014 season. Pirelli will continue to define the tyre specifications and manage all aspects of their development, in close collaboration with FIA and the teams, and within the parameters established by the FIA Formula One Sporting and Technical Regulations.
On data February 28, 2014 Pirelli & C. S.p.A. and Bekaert announced that they had signed an agreement for sale of 100% of the Pirelli steel cord activities to Bekaert for an enterprise value of about euro 255 million. The sale of the steel cord business enables Pirelli to withdraw from a business which is too small to be competitive, and to focus on the premium tyre segment, which has higher profit margins. As part of the sale and purchase agreement, a long-term agreement was also made for long-term supply and joint development of products to boost R&D activities and guarantee that the transition to the new agreement be consistent with the companies' respective growth and development plans. The closing of the deal, which is subject to regulatory approval, is expected to take place in the second half of the year and affects all five of the Pirelli steel cord plants located in Italy, Turkey, Romania, China and Brazil. 103
On February 28, 2014 Pirelli & C. S.p.A. announced that effective December 31,
2013, it had closed the medium-long term management cash incentive plan – Long Term Incentive (LTI) – adopted in 2012 in support of the 2012-2014 three-year objectives without any pay-out, either full or pro-rated, of the three-year incentive. The Company announced that it had adopted a new plan – also applicable to all of management (about 330 participants) – related to the targets for the period 2014-2016 contained in the business plan presented on November 6, 2013. Consistently with the variable compensation mechanisms adopted internationally, the three-year LTI plan is also based on the performance of Pirelli stock (“TSR”) and makes it possible to align the interests of management with those of shareholders. Just like previous plans, the 2014-2016 plan is entirely self-funded, insofar as the related expenses are included in the financial figures of the business plan. Participants in the LTI Plan 2014-2016 include, inter alia, the Chairman and Chief Executive Officer of Pirelli & C., Marco Tronchetti Provera, the Deputy Chairman, Alberto Pirelli (as senior manager), the General Manager Operations, Gregorio Borgo, the key managers Maurizio Boiocchi (Chief Technical Officer), Maurizio Sala (Chief Planning and Controlling Officer), Francesco Tanzi (Chief Financial Officer and Financial Reporting Manager) and Christian Vasino (Chief Human Resources Officer).
104
SUSTAINABILITY REPORT
The Pirelli Group Sustainability Report is the expression of a corporate culture based on the integration of economic, environmental and social choices, in accordance with the triple bottom line approach. For this reason, instead of being published separately, the description of Pirelli sustainable performance is included as an integral part of the Pirelli Annual Financial Report at December 31, 2013, of which it is Volume 3. The Sustainability Report is prepared in accordance with the reporting guidelines published by the Global Reporting Initiative (GRI) – in the new version GRI-G4 and application of the most advanced option for sustainability reporting, defined comprehensive reporting. The contents of the Sustainability Report are also based on the principles of inclusiveness, materiality and compliance with Standard AA1000, a tool for measuring the capacity of the company to integrate sustainable management in its corporate strategy, identification of “material” themes that are consequently significant to the business and its stakeholders, related management and transparent reporting.
More specifically, the analysis of sustainable performance is based on a set of Key Performance Indicators (KPIs), developed in accordance with the GRI–G4 indicators, the ten principles of the Global Compact (which Pirelli has adhered to since 2004) and what is periodically monitored by the leading sustainable finance rating agencies.
The management systems used to consolidate the data are the CSR-DM (Corporate Social Responsibility Data Management), HSE-DM (Health, Safety and Environment Data Management), SAP-HR (SAP Human Resources) and HFM (Hyperion Financial Management). 105
The Sustainability Report is approved by the Board of Directors of the parent company Pirelli & C. S.p.A. on a voluntary basis, since it is not prescribed as a mandatory statutory or regulatory obligation. The Board of Directors of the parent company also approves the sustainability strategies and plans that are presented to the market together with the Group business plan.
The Sustainability Report has been submitted for External Assurance certification by SGS Italia SpA.
Following below is a summary of the highlights of the Sustainability Report 2013 – Volume 3 of the Annual Financial Report, to which reference is made for detailed and complete discussion.
Chapter 1 is dedicated to the “Sustainable Value Creation Model” and describes the Sustainability governance approach adopted by Pirelli, its guiding principles, the policies drafted in support of the model, the organisational structure, and the long- term governance tools directly related to the capacity of the Company to generate and distribute value, with this including corporate governance, risk governance, reputation governance, compliance and the system for management of whistleblowing reports by stakeholders.
The materiality mapping of strategic sustainable growth issues for Pirelli is also presented. The mapping is the result of a sophisticated stakeholder engagement that allowed the expectations of the principal classes of Group stakeholders in relation to the cited issues to be compared with the criticalities attributed to them for success of the business according to the corporate vision. The result of the comparison is the strategic significance matrix, which reveals inter alia that stakeholder expectations are substantially aligned with the corporate vision.
Space is also dedicated to the Business Plan 2013-2017 presented by the top management of the Group to the financial community in London on November 6, 2013. That Business Plan includes the Sustainability Plan containing specific economic, environmental and social targets, some of which reach as far as 2020. 106
These include a reduction in tyre rolling resistance, which will reach 40% of the 2007 figure in the car segment, a 58% reduction in the specific uptake of water with an expected saving of 2,700,000 cubic metres in the period 2014-2017, a 90% reduction in the injury incidence rate from 2009 levels, a 15% reduction in CO2 levels and an 18% reduction in Company energy consumption from 2009 levels, for an expected saving of about euro 25 million and 400,000 tons of CO2 in the period 2014-2017, a 95% waste recovery rate by 2020, with an expected savings of about euro 60 million by 2017 through the reuse of industrial discards.
The sustainable performance assessments of the Company by leading global indices of sustainable finance and received recognition complete the report given in Chapter 1.
Chapter 2, which has a strongly economic focus, is dedicated to the added value created and distributed by the Company in 2013 (euro 2,218 million, up 0.3% from 2012), as well as a description of the sustainable performance reported in management of relations with shareholders, investors and the financial community, customers and suppliers.
A section is dedicated to each of the mentioned stakeholders, which provides a complete description of the adopted management and dialogue model, the activities performed in 2013 and the objectives and projects for 2014. Quantitative performance indicators are provided in support and illustrate the performance, for example in terms of increases of the share price on the stock market, the positive results of customer satisfaction surveys, the number of suppliers whose sustainability performance was audited by third parties, and the related outcome. 107
Chapter 3 is dedicated to the process and environmental performance achieved in 2013, as compared with the previous two years and in view of pursuing the targets that the Company has committed itself to meet by 2020.
The “materiality” approach that characterises environmental impact governance is highlighted. This was made possible by having calculated – and reported – both the carbon footprint and the water footprint of the Group. The environmental impact of the tyre, considering the phases of its life cycle, is substantially determined by the usage phase. According to the considered environmental indicator (atmospheric emissions, energy consumption, impact on water resources), it varies from 75% to 95% of the total impact.
In regard to the process – which has a weight of less than 5% in terms of the environmental impact on the tyre life cycle – information is provided about the performance of Pirelli to reduce use of environmental resources. Specific examples of this are the 10% reduction in specific uptake of water from 2012, the 1% reduction in specific emissions of CO2 and energy consumption, the 4% increase in waste recovery during 2013 from the previous year, raising the recovery rate to 80%, which is thus on track to achieving a recovery rate in excess of 95% that the Company intends to achieve by 2020.
Again in terms of materiality – the Model for Environmentally Friendly Management that characterises the entire product life cycle, from research and development of new raw materials to end-of-life is described. 108
The description dwells on the green performance characteristics of Pirelli tyres, i.e. tyres that can maximise respect for the environment and performance, whose total impact on net sales of tyres at December 31, 2013 was about 42.4%, up from 39.6% in 2012. This figure is on track to achieving the impact target of 48% of total tyre sales by 2017. The chapter then highlights the green performance characteristics that the Company expects to achieve between 2015 and 2020, both for car tyres and truck and motorcycle tyres. In the car product, for example, tyre rolling resistance will decrease by 20% from 2013. The figure for 2013 was already 20% less than the 2007 benchmark figure. Chapter 4 is dedicated to management performance in relation to the Internal Community and External Community. The report on the Internal Community, which is comprised of Group employees, gives a detailed illustration of the composition and evolution of Pirelli employees during the three-year period 2013-2012-2011. The focus is in job category, geographical area of assignment, gender, average age, average job seniority, type of employment contract, new hires and separations from the Group. It shows, inter alia, that there was a net increase of 641 new employees at December 31, 2013 from a year earlier, and 1,533 new employees from December 31, 2011. Proceeding to discussion of the adopted Responsible Management Model and related qualitative and quantitative performance, the report focuses on hiring, development, training, diversity, compensation, international mobility, internal communication, welfare, industrial relations, health and occupational safety.
Among the numerous indicators of quantitative performance in 2013, the following merit mention here: - the workplace accident frequency rate fell by 20% from the 2012 figure; - the average number of pro-capita training days grew, reaching an average of 7.2 days in 2013, compared with 5.1 in 2012. 109
In both of these cases, Pirelli met its 2015 target two whole years in advance, as previously communicated to the market with the Plan 2012-2104 and Vision to 2015.
The report on the External Community opens by describing the internationally significant activities for sustainable development in which Pirelli participated actively in 2013, including Global Compact Lead (where Pirelli belongs to the Steering Committee), CSR Europe (where Pirelli is part of the Board), World Business Council for Sustainable Development (where Pirelli is part of the Tyre Industry Project Group and the “Mobility 2.0” Project), the activity performed by the International Rubber Study Group (where Pirelli belongs to the Industry Advisory Panel) for drafting a standard on sustainability in the context of producing and transforming natural rubber, participation in the Campaigns of the European Occupational Safety and Health Agency (EU-OSHA).
A section is then dedicated to relations with institutions and public administrations, before presenting a detailed report on the philanthropic activities supported by Pirelli around the world to assist youths, training, health, the environment and culture. 110
OTHER INFORMATION
Information on ownership structure The information pursuant to Article 123 bis of Legislative Decree 58 of February 24, 1998 can be found in the Report on Corporate Governance and the Structure of Share Ownership, included in this Annual Financial Report and published in the Governance section of the Company website (www.pirelli.com).
Security Policy Document Although Decree Law 5 of February 9, 2013 (entitled “Urgent Measures for Simplification and Development”) converted, with amendments, by Law 35 of April 4, 2012, abrogated the obligation to draft/update the Security Policy Document, Pirelli & C. S.p.A has nonetheless updated this document for 2013, for the purpose of effectively monitoring its adoption of and compliance with security measures.
Foreign subsidiaries not in the European Union (Non-EU Companies) Pirelli & C. S.p.A. directly or indirectly controls a number of companies with registered offices in countries that are not members of the European Union (Non-EU Companies) and which are of significant importance under the terms of Art. 36 of Consob Regulation 16191/2007 on market regulation (“Market Regulation”). At December 31, 2012, the Non-EU Companies that were directly or indirectly controlled by Pirelli & C. S.p.A. and of material interest pursuant to Article 36 of the Market Regulation were Pirelli Pneus Ltda (Brazil); Pirelli Tire LLC (USA); Pirelli Tyre Co. Ltd (China); Turk Pirelli Lastikleri A.S. (Turkey); Pirelli de Venezuela C.A. (Venezuela); Pirelli Neumaticos S.A.I.C. (Argentina); Pirelli Neumaticos S.A. de C.V. (Mexico). 111
Also under the terms of the same regulations, the Company has in place specific and appropriate “Group Operating Rules” which ensure immediate, constant and full compliance with the provisions contained in the said Consob Regulations. Under the terms of the said Operating Rules, the delegated corporate functions of the parent precisely and periodically identify and disclose all Non-EU Companies of material interest under the Market Regulations, and – with the necessary and timely collaboration of the companies involved – guarantee collection of the data and information and verification of the circumstances as required by Article 36 of the Market Regulations, ensuring that the information and figures provided by the subsidiaries are available in the event of a request by Consob. Furthermore, a regular flow of information is provided in order to ensure that the Board of Statutory Auditors of the Company can carry out the required and appropriate audits. Finally, in keeping with the regulatory provisions, the above “Operating Rules” prescribe how the financial statements (the balance sheet and income statement) of material Non-EU Companies prepared for use in the consolidated financial statements are to be made available to the public. Therefore, it is certified that the Company has fully complied with the provisions of Article 36 of Consob Regulation 16197/2007 and that its conditions have been satisfied.
112
Related party transactions Pursuant to Article 5(8) of Consob Regulation no. 17221 of March 12, 2010, concerning related party transactions, and the subsequent Consob Resolution no. 17389 of June 23, 2010, between January 1, 2013 and December 31, 2013 the Pirelli Board of Directors approved a most significant transaction, as defined in Article 3(1)(a) of the aforementioned regulation, after receiving the favourable opinion of the Related-Party Transactions Committee. This transaction involved the financial restructuring and relaunching of the business prospects of Prelios S.p.A., to be implemented by means of recapitalising it and restructuring its financial debt. In particular, Pirelli participated in that transaction through (i) conversion into Prelios ordinary shares of a portion of the financial receivable claimed against Prelios totalling about euro 21.5 million, compared with an authorised maximum amount of euro 26.3 million and (ii) restructuring of an additional portion of the financial receivable claimed against Prelios into a “convertendo” equity instrument, having a total value of about euro 148.4 million – of which about euro 67.5 million into Prelios class B shares – compared with an authorised maximum amount of euro 157.9 million, while (iii) Pirelli was not asked to make any payment against the guarantee – for a maximum of euro 2.3 million – envisaged in the connection with the aforementioned capital increase. For more information about the description of the transaction, reference is made to the Information Document published pursuant to the cited Consob Regulation and available – complete with the changes thereto – on the Company website. There were no other related party transactions that had a material impact on the Group's financial position or earnings. Furthermore, there were no material, non-recurring, unusual and/or atypical related transactions, including intercompany transactions. The information on related party transactions required pursuant to Consob Notice no. DEM/6064293 of July 28, 2006 is presented in the financial statements and in the Explanatory Note “Related party transactions” of the Annual Financial Report at December 31, 2012. 113
In the 2010 financial year, the Board of Directors approved the Procedure for Related Party Transactions in view of, inter alia, implementing the aforementioned Consob regulation. In implementation of, inter alia, a specific recommendation by Consob on this matter, and since three years had passed since its adoption, the Board of Directors, after receiving the favourable opinion of the Internal Control, Risks and Corporate Governance Committee and the Related-Party Transactions Committee, found at its November 5, 2013 meeting that the overall Procedure for Related Party Transactions was valid and effective, limiting itself to introducing the definition of “transaction” and eliminating the previous clause 22.2, a transitory rule which was no longer applicable. For more details on the Procedure for Related Party Transactions, please see the section Interests of Directors and Related Party Transactions in the Annual Report on Governance and Share Ownership and the procedure published on the Group websitewww.pirelli.com.
Waiver to publish disclosure documents In light of the simplifications to regulatory measures introduced by Consob in the Issuers Regulation no. 11971/99, the Board of Directors has resolved to exercise the waiver, granted in Art. 70(8) and Art. 71(1-bis) of that regulation, of the obligation to publish the disclosure documents that are prescribed in the event of significant mergers, demergers, capital increases through contribution in kind, acquisitions and disposals.
The Board of Directors Milan, March 27, 2014 114
Motion for Approval of the Annual Financial Report and Allocation of Net Income
Shareholders, The financial year at December 31, 2011 closed with net income of euro 272,474,107.
The Board of Directors proposes to distribute a dividend, net of the required allocation to the legal reserve and gross of the required withholding taxes, of: euro 0.27 for each ordinary share; euro 0.34 for each savings share.
If you agree with our proposals, we ask you to pass the following
RESOLUTIONS “The Shareholders’ Meeting: having examined the Annual Financial Report at December 31, 2011; having taken note of the report of the Board of Statutory Auditors; having taken note of the report of the independent auditors;
RESOLVES a) to approve the financial statements of the Company for the year ended December 31, 2011, as presented by the Board of Directors, in their entirety and their individual captions, with the provisions proposed, which show a net income of euro 272,474,107; b) to allocate the 2011 net income of euro 272,474,107 as follows: 5% to the legal reserve euro 13,623,705 to the shareholders: euro 0.27 (*) to each of the 475,388,592 (**) ordinary shares, for a total euro of 128,354,920 euro 0.34 (*) to each of the 11,842,969 (**) savings shares, for a total euro of 4,026,610 the remainder to retained earnings euro 126,468,872
(*) Before the required withholding taxes. (**) Net of the 351,590 ordinary shares currently held by the Company. (***) Net of the 408,342 savings shares currently held by the Company. c) to authorise the directors, if the dividends specified at sub-indent b) above are paid prior to the sale of the treasury shares, to draw the amount of the dividend related to those shares from retained earnings and to allocate to that item the balance of the rounding that may result from the dividend payment operation;
The dividend for 2011 will be collectible from May 24, 2012, with coupon detachment date on May 21, 2012.”
115
PIRELLI & C. S.p.A.
CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2013
116
CONSOLIDATED BALANCE SHEET (in thousands of euro) 12/31/2013 12/31/2012 *
of which related of which related parties parties
9 Property, plant and equipment 2,608,448 - 2,623,444 - 10 Intangible assets 1,013,979 - 1,022,484 - 11 Investments in associates 131,466 - 113,171 - 12 Other financial assets 289,096 104,087 118,125 - 13 Deferred tax assets 210,181 - 207,110 - 15 Other receivables 169,463 - 370,210 173,968 16 Tax receivables 7,890 - 9,297 - Non-current assets 4,430,523 - 4,463,841 - 17 Inventories 987,318 - 1,102,560 - 14 Trade receivables 666,427 1,367 704,558 6,377 15 Other receivables 267,535 8,485 341,404 40,536 18 Securities held for trading 48,090 - 224,717 - 19 Cash and cash equivalents 879,897 - 679,794 - 16 Tax receivables 55,604 - 28,246 - 27 Derivative financial instruments 24,818 - 47,703 - Current assets 2,929,689 - 3,128,982 - Total Assets 7,360,212 - 7,592,823 -
20.1 Equity attributable to owners of the Parent: 2,376,066 - 2,337,403 - - Share capital 1,343,285 - 1,343,285 - - Reserves 729,207 - 607,009 * - Net income (loss) 303,574 - 387,109 * 20.2 Equity attributable to non-controlling interests: 60,523 - 52,026 - - Reserves 57,605 - 47,575 - - Net income (loss) 2,918 - 4,451 -
20 Equity 2,436,589 - 2,389,429 - 23 Borrowing from bank and other financial institutions 2,014,406 1,674 1,995,775 2,565 25 Other payables 76,853 - 70,643 - 21 Provisions for liabilities and charges 116,745 - 142,230 - 13 Provisions for deferred tax liabilities 49,956 - 56,056 - 22 Employee benefit obligations 439,450 - 522,957 - 26 Tax payable 3,537 - 4,172 - Non-current liabilities 2,700,947 - 2,791,833 - 23 Borrowing from bank and other financial institutions 316,653 - 440,526 877 24 Trade payables 1,244,466 41,075 1,268,683 5,305 25 Other payables 434,158 69 417,556 105 21 Provisions for liabilities and charges 90,089 - 110,839 - 26 Tax payables 80,272 600 77,609 - 27 Derivative financial instruments 57,038 - 96,348 - Current liabilities 2,222,676 - 2,411,561 - Total liabilities and equity 7,360,212 - 7,592,823 - * The figures of 2012 have been restated due to the new standard IAS 19 revised "employee benefits" being effective from 1/1/2013
For a description of the items reflecting related party transactions, please refer to note 41 of the Explanatory Notes.
117
CONSOLIDATED INCOME STATEMENT (in thousands of euro) 1/1 - 12/31/2013 1/1 - 12/31/2012 *
of which related of which related parties parties
29 Revenues from sales and services 6,146,160 1,872 6,071,535 3,813 30 Other income 252,309 3,126 241,630 849 - of which non-recurring events 44,344 - 29,646 - Change in inventories of work in progress, semi-finished and finished products 7,804 - 73,119 - Raw materials and consumables (net of change in inventories) (2,282,963) - (2,330,139) -
31 Personal expenses (1,211,761) (3,362) (1,193,927) (9,365) - of which non-recurring events (45,435) - (28,827) -
32 Amortisation,depreciation and impairment (296,492) - (282,246) - - of which non-recurring events - - (10,261) -
33 Other costs (1,827,550) (70,058) (1,791,671) (40,331) - of which non-recurring events (2,716) - - -
Additions to property plant and equipment for internal work 3,507 - 4,171 - Operating income 791,014 792,472 34 Net income (loss) from equity investments (78,298) (52,247) - share of net income (loss) of asscoiates and jv (25,835) (25,835) (21,293) (21,293) - gains on equity investments 9,551 - 513 - - losses on equity investments (63,304) - (33,359) - - dividends 1,290 - 1,892 - 35 Financial income 64,787 1,531 43,012 14,372 36 Financial expenses (260,619) - (193,452) - Net income (loss) before income tax 516,884 589,786 37 Income tax (210,392) (600) (198,225) - Net income (loss) 306,492 391,560
Attributable to: Owners of the parent 303,574 387,109 Non-controlling interests 2,918 4,451
38 Earnings (losses) per share (euro per shares) 0.623 0.794
* The figures of 2012 have been restated due to the new standard IAS 19 revised "employee benefits" being effective from 1/1/2013
For a description of the items reflecting related party transactions, please refer to note 41 of the Explanatory Notes.
118
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in thousands of euro) 2013 2012 *
A Net income (loss) 306,492 391,560 Components of other comprehensive income: B - Items that will not be reclassified to income statement: - Net actuarial gains (losses) on employee benefits 22,823 (52,713) - Tax effect 12,225 4,326 Total B 35,048 (48,387)
C - Items reclassified / that may be reclassified to income statement: Exchange differences from translation of foreign financial statements (230,773) (66,934)
Fair value adjustment of other financial assets: - Gains / (losses) for the period 37,499 2,912 - (Gains) / losses reclassified to income statement 933 20,846
Fair value adjustment of derivatives designated as cash flow hedges: - Gains / (losses) for the period (4,431) (16,822) - (Gains) / losses reclassified to income statement 16,277 28,856 - Tax effect (2,946) (825) Total C (183,441) (31,967)
Share of other comprehensive income related to associates and joint ventures (1,701) (2,175) Total D (2,175) (1,701)
E Total components of other comprehensive income (B+C+D) (150,568) (82,056)
A+E Total comprehensive income (loss) 155,924 309,505
Attributable to: - Owners of the Parent 157,084 305,951 - Non-controlling interests (1,160) 3,554
* The figures of 2012 have been restated due to the new standard IAS 19 revised "employee benefits" being effective from 1/1/2013
119
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY at 12/31/2013 (in thousands of euro) Attributable to owners of the Parent Share Capital Translation Total IAS Other Total Non TOTAL reserve Reserves * reserves/retained attributable to controlling earnings owners of the interests Parent
Total at 12/31/2012 (:) 1,343,285 (1,606) (531,446) 1,527,171 2,337,403 52,026 2,389,429 Other comprehensive income - (226,695) 80,205 - (146,490) (4,078) (150,568) Net income (loss) - - - 303,574 303,574 2,918 306,492 Total comprehensive income - (226,695) 80,205 303,574 157,084 (1,160) 155,924 Dividends paid - - - (156,743) (156,743) (2,921) (159,664) Venezuela inflation effect - - - 49,470 49,470 1,944 51,414 Other - - (1,303) (9,844) (11,147) 10,634 (514) Total at 12/31/2013 1,343,285 (228,301) (452,545) 1,713,628 2,376,066 60,523 2,436,589 (:) The figures of 2012 have been restated due to the new standard IAS 19 revised "employee benefits" being effective from 1/1/2013
(in thousands of euro) Breakdown of IAS reserves *
Reserve for Reserve for Reserve for Reserve for Total IAS fair value cash flow actuarial deferred reserve adjustment of hedge gains/losses taxes avaible-for- sale financial assets Balance at 12/31/2012 (:) 2,001 (44,971) (539,559) 51,082 (531,446) Other comprehensive income 33,631 14,472 22,823 9,279 80,205 Other changes - - (1,303) - (1,303) Balance at 12/31/2013 35,632 (30,499) (518,039) 60,361 (452,545) (:) The figures of 2012 have been restated due to the new standard IAS 19 revised "employee benefits" being effective from 1/1/2013
120
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY at 12/31/2012 (in thousands of euro) Attributable to owners of the Parent Share Capital Translation Total IAS Other Total Non TOTAL reserve Reserves * reserves/retained attributable to controlling earnings owners of the interests Parent
Total at 12/31/2011 1,343,285 64,446 (513,494) 1,251,862 2,146,099 45,479 2,191,578 Other comprehensive income - (66,052) (15,106) - (81,158) (882) (82,040) Net income (loss) - - - 387,109 387,109 4,451 391,560 Total comprehensive income - (66,052) (15,106) 387,109 305,951 3,569 309,520 Capital increases (decreases) - - - - - 5,487 5,487 Dividends paid - - - (132,382) (132,382) (3,006) (135,388) Venezuela inflation effect - - - 21,245 21,245 835 22,080 Other - - (2,846) (664) (3,510) (338) (3,848) Total at 12/31/2012 (:) 1,343,285 (1,606) (531,446) 1,527,170 2,337,403 52,026 2,389,429 (:) The figures of 2012 have been restated due to the new standard IAS 19 revised "employee benefits" being effective from 1/1/2013
(in thousands of euro) Breakdown of IAS reserves *
Reserve for Reserve for Reserve for Reserve for Total IAS fair value cash flow actuarial deferred reserve adjustment of hedge gains/losses taxes avaible-for- sale financial assets Balance at 12/31/2011 (19,216) (55,304) (486,562) 47,588 (513,494) Other comprehensive income 23,758 10,333 (52,691) 3,494 (15,106) Other changes (2,541) - (305) - (2,846) Balance at 12/31/2012 (:) 2,001 (44,971) (539,558) 51,082 (531,446) (:) The figures of 2012 have been restated due to the new standard IAS 19 revised "employee benefits" being effective from 1/1/2013
121
CONSOLIDATED STATEMENT OF CASH FLOW (in thousands of euro) 2013 2012 *
of which of which related parties related parties
Net income (loss) from continuing operations before taxes 516,884 589,786 Amortisation, depreciation, impairment losses and reversals of impaired property, plant and equipment and intangible assets 296,492 282,246 Reversal of financial expenses 260,619 193,452 Reversal of financial income (64,787) (43,012) Reversal of dividends (1,290) (1,892) Reversal of gains/(losses) on equity investments 53,753 32,846 Reversal of share of net income from associates and joint ventures 25,835 21,293 Income taxes (210,392) (198,225) Change in inventories 3,910 (73,967) Change in trade receivables (31,140) 29,885 Change in trade payables 98,904 (97,887) Change in other receivables/payables (50) (168,319) Change in provisions for employee benefits and other provisions (58,407) (14,440) Other changes (22,055) (16,865) A Net cash flows provided by (used in) operating activities 868,276 534,900 Purchase of property, plant and equipment (402,281) (455,548) Disposal of property, plant and equipment 23,084 19,917 Purchase of intangible assets (10,818) (15,414)
Disposal of intangible assets - 149 Acquisitions of subsidiaries - Russia - (168,887) Acquisitions of retail investments (11,173) (93,039)
Disposals (Acquisition) of associates and joint ventures (55,360) (55,360) - Disposals (Acquisition) of other financial assets (9,931) (558) 3,584 (818) Dividends received 1,290 1,892 B Net cash flows provided by (used in) investing activities (465,189) (707,346) Increase (reduction) in equity - 5,487 Change in financial payables (36,440) 705,293 - Change in financial receivables/Securities held for trading 169,118 (107,196) Financial income (expenses) (195,832) (150,440) Dividends paid (159,789) (135,286) C Net cash flows provided by (used in) financing activities (222,943) 317,858 D Total cash flows provided (used) during the period (A+B+C) 180,144 145,412
E Cash and cash equivalents at beginning of year 679,150 542,443
F Exchange differences on translation of cash and cash equivalents (52,439) (8,705) G Cash and cash equivalents at end of the period (D+E+F) (°) 806,856 679,150
(°) of which: cash and cash equivalents 879,897 679,794 bank overdrafts (73,041) (14,790)
* The figures of 2012 have been restated due to the new standard IAS 19 revised "employee benefits" being effective from 1/1/2013
The Statement of Cash Flows shows transactions with related parties only if they cannot be directly derived from the other statements. Please refer to note 41 of the Explanatory Notes for detailed information about these items.
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EXPLANATORY NOTES
1. GENERAL INFORMATION
Pirelli & C. S.p.A. is a corporation organised under the laws of the Republic of Italy. Founded in 1872 and listed on the Italian Stock Exchange, Pirelli & C. S.p.A. is a holding company that manages, coordinates and finances the operations of its subsidiaries, which are mainly active in the tyre sector. The other activities are represented by emissions control technologies, renewable energy sources and fashion.
The head office of the company is located in Milan, Italy.
Pursuant to Article 5(2) of Italian Legislative Decree 38 of February 28, 2005, these financial statements have been prepared using the euro as the functional currency, and all amounts have been rounded to the nearest thousand euro unless indicated otherwise.
The consolidated financial statements are audited by Reconta Ernst & Young S.p.A., pursuant to Article 159 of Italian Legislative Decree 58 of February 24, 1998, the Consob recommendation of February 20, 1997, and the shareholders’ meeting resolution of April 29, 2008, which engaged this accounting firm for the period 2008-2016.
On March 27, 2014 the Board of Directors authorised publication of these consolidated financial statements.
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2 . BASIS OF PRESENTATION
Financial statement formats
The Company has applied the provisions of Consob Resolution no. 15519 of July 27, 2006 in regard to the formats of financial statements and Consob Notice no. 6064293 of July 28, 2006 in regard to corporate disclosure.
The consolidated financial statements at December 31, 2013 consist of the Balance Sheet, the Income Statement, the Statement of Comprehensive Income, the Statement of Changes in Equity, the Statement of Cash Flows and the Explanatory Notes, and are accompanied by the Directors’ Report on Operations.
The format adopted for the Balance Sheet classifies assets and liabilities as current and non- current. The Group has opted to present the components of profit or loss for the year in a separate Income Statement, rather than include these components directly in the Statement of Comprehensive Income. The Income Statement classifies costs by nature.
The Statement of Comprehensive Income includes the result for the period and, for homogeneous categories, the revenues and costs which, in accordance with IFRSs, are recognised directly in equity.
The Group has decided to present both the tax effects and reclassifications to the Income Statement of gains/losses recognised directly in equity in previous periods directly in the Statement of Comprehensive Income and not in the Explanatory Notes.
The Statement of Changes in Equity includes the amounts of transactions with the equity holders and the movements that occurred during the period in retained earnings.
In the Statement of Cash Flows, the cash flows deriving from operating activities are presented using the indirect method, according to which the profit or loss for the period is adjusted by the effects of non-monetary transactions, by any deferment or accrual of past or future operating receipts or payments, and by any revenue or cost items connected with the cash flows arising from investing activities or financing activities.
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Scope of Consolidation
The scope of consolidation includes the subsidiaries, associates and investments in joint ventures.
All companies and entities whose financial and operating policies are subject to control by the Group are considered subsidiaries. This condition is normally satisfied when the Group owns more than half of the voting rights, unless it is clearly demonstrated that such ownership does not confer control. Subsidiaries are also considered to be those companies in which the Group has the power to control their financial and operating policies through agreements with other shareholders, even if it owns less than or up to one-half of the voting rights.
The financial statements of subsidiaries are included in the consolidated financial statements beginning on the date when control is acquired until the time when control is lost. Non- controlling interests in equity and net income (loss) are separately indicated on the consolidated Balance Sheet and Income Statement.
All companies over which the Group can exercise significant influence (as defined by IAS 28 – Investments in Associates) are considered associates. This influence is normally assumed to exist if the Group holds between 20% and 50% of the voting power of the investee or – even with a smaller proportion of voting rights – it has the power to participate in determining the financial and operating policies of the investee on the basis of particular legal relationships. Such relationships may take the form of shareholders’ agreements together with other forms of significant exercise of governance rights.
Companies in which two or more parties operate a business under joint control on the basis of a contractual or statutory agreement are considered joint ventures.
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The principal changes in the scope of consolidation during 2013 relate to: the line-by-line consolidation of Sino Italian Wire Tech. Co. Ltd, domiciled in China, previously classified under “equity investments in associates”, as described at note 7 “Business combinations”; reclassification of the investment in RCS Mediagroup S.p.A. from “equity investments in associates” to “available-for-sale financial assets” as described in notes 11 “Investments in associates and joint ventures” and 12 “Other financial assets”; reclassification of the equity investment in PT Evoluzione Tyres, a joint venture operating in Indonesia, from subsidiary to joint venture.
Consolidation Policies
The financial statements used for consolidation purposes are those of the companies included in the scope of consolidation, prepared at the reporting date of the parent and adjusted, as necessary, in accordance with the IAS/IFRSs applied by the Group.
The financial statements expressed in foreign currencies have been translated into euro at the period-end rates for the Balance Sheet and at the average exchange rates of the period for the Income Statement, with the exception of financial statements of companies operating in high-inflation countries, whose income statements are translated at the period-end exchange rates.
The differences arising from the translation of opening equity at period-end exchange rates have been recognised in the reserve for translation differences, together with the difference between the result for the period translated at the period-end rate and at the average rate for the period. The reserve for translation differences is recognised in the Income Statement upon disposal of the company that generated the reserve.
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The consolidation policies may be summarised as follows:
subsidiaries are consolidated on a line-by-line basis, according to which:
the assets, liabilities, revenue, and costs on the financial statements of subsidiaries are recognised in their full amounts, regardless of the percentage of ownership;
the carrying amount of investments is eliminated against the underlying share of equity;
the financial and operating transactions between companies consolidated on a line- by-line basis, including dividends distributed within the Group, are eliminated;
the non-controlling interest in equity and in income (loss) is presented separately on the Balance Sheet and Income Statement;
upon disposal of the equity investment with consequent loss of control, the gain or loss from that disposal reflects the corresponding residual value of goodwill;
in the case of equity interests acquired after acquisition of a controlling interest, any difference between the purchase cost and the corresponding fraction of acquired equity is recognised in equity. Likewise, the effects of disposing non-controlling interests without loss of control are also recognised in equity;
investments in associates and joint ventures are accounted for by the equity method, on the basis of which the carrying amount of the investments is adjusted by:
the investor’s share of the post-acquisition results of the associate or joint venture;
the allocable amount of profits and losses recognised directly in the equity of the associate or joint venture, in accordance with the reference accounting standards;
dividends paid by the associate or joint venture;
when the Group’s share in the losses of the associate/ joint venture exceeds the carrying amount of the investment in the financial statements, the carrying amount of the investment is eliminated and the share of any further losses is recognised in the “Provisions for liabilities and charges,” to the extent that the Group has a contractual or implicit obligation to cover the losses;
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the profits resulting from sales made by subsidiaries to joint ventures or associates are eliminated in proportion to the percentage equity interest in the acquiring entity.
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3. ACCOUNTING POLICIES
3.1 Adopted accounting standards
Pursuant to Regulation 1606 issued by the European Parliament and the European Council in July 2002, the consolidated financial statements of the Pirelli & C. Group have been prepared in accordance with the current International Financial Reporting Standards (“IRFSs”) issued by the International Accounting Standards Board (“IASB”) and endorsed by the European Union at December 31, 2012, as well as the measures issued in implementation of Article 9 of Legislative Decree 38/2005. The term “IFRSs” also refers to all revised International Accounting Standards (“IAS”) and all interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”), formerly known as the Standing Interpretations Committee (“SIC”). The consolidated financial statements have been prepared in accordance with the historic cost method, with the exception of: derivative financial instruments, financial instruments held for trading, available-for-sale financial assets, and financial assets at fair value through profit or loss, which are carried at their fair value; financial statements of companies operating in hyperinflationary economies, which are prepared according to the current cost method.
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Business combinations
Corporate acquisitions are accounted for by using the acquisition method.
When a controlling interest in a company is acquired, goodwill is initially recognised at cost and calculated as the difference between:
- the price paid plus any non-controlling interests in the acquired entity. These latter interests are measured at fair value (if this option is chosen for the acquisition in question) or in proportion to the share of the non-controlling interest in the net assets of the acquired entity;
- the fair value of the acquired assets and liabilities.
If this difference is negative, that difference is immediately recognised as income in the Income Statement.
In the case of acquisition of control of an entity in which a non-controlling interest is already held (step acquisition), the investment held previously must be recognised at fair value through profit or loss. The costs for the business combination are recognised in the Income Statement. Contingent consideration, i.e. the obligations of the buyer to transfer additional assets or shares to the seller if certain future events occur or specific conditions are fulfilled, should be recognised and measured at fair value at the acquisition date as a portion of the consideration transferred in exchange for the acquisition itself. Subsequent changes in the fair value of these agreements are normally recognised in the Income Statement.
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Intangible assets Intangible assets having finite useful lives are measured at cost less accumulated amortisation and accumulated impairment losses. Amortisation is charged on a straight-line basis and begins when the asset is available for use or operable in the opinion of management and ceases on the date when the asset is classified as held for sale or is derecognised. Gains and losses resulting from the sale or disposal of an intangible asset are determined as the difference between the net sale proceeds and the carrying amount of the asset. In addition to goodwill, the Group has identified other intangible assets with an indefinite useful life.
Goodwill
Since this is an intangible asset with an indefinite useful life, goodwill is not amortised. Goodwill is tested for impairment in order to identify any impairment losses at least annually or whenever there are indications of an impairment loss, and is allocated to cash generating units for this purpose.
Trademarks and licenses Trademarks and licenses are measured at cost less accumulated amortisation and accumulated impairment losses. The cost is amortised over the contract period or the useful lives of the assets, whichever is shorter.
Software Software license costs, including direct incidental costs, are capitalised and recognised net of accumulated amortisation and accumulated impairment losses. Software is amortised over its useful life on a straight-line basis.
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Customer relationships Customer relationships are intangible assets acquired in a business combination and are recognised on the balance sheet at their fair value as at the purchase date. They are depreciated according to their useful life.
Research and development costs Research costs for new products and/or processes are expensed when incurred. There are no development costs that satisfy the conditions for capitalisation under IAS 38.
Property, plant and equipment Property, plant and equipment are recognised at their purchase or production cost, including directly attributable incidental expenses. Subsequent expenditure and the cost of replacing certain parts of property, plant and equipment are capitalised only if they increase the future economic benefits inherent in the affected asset. All other costs are expensed as incurred. When the cost of replacing certain parts is capitalised, the carrying amount of the replaced part is recognised in the Income Statement. Property, plant and equipment are recognised at cost less accumulated depreciation and accumulated impairment losses, except for land, which is not depreciated and is recognised at cost less accumulated impairment losses. Depreciation is recognised starting from the month in which the asset is available for use, or is potentially capable of providing the economic benefits associated with it. Depreciation is charged monthly on a straight-line basis at rates that allow depreciating the assets until the end of their useful life or, in the case of disposal, until the last month of use.
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The applied depreciation rates are illustrated as follows:
Buildings 3% - 10% Plant 7% - 20% Machinery 5% - 20% Equipment 10% - 33% Furniture 10% - 33% Motor veichles 10% - 25%
Government grants related to assets referring to property, plant and equipment are recognised as deferred income and credited to the income statement over the period of depreciation of the relevant assets. Borrowing costs directly attributable to the purchase, construction or production of a qualifying asset are capitalised as part of the cost of the asset. A qualifying asset is one that requires substantial time in order to be prepared for use. The capitalisation of borrowing costs ceases when substantially all the activities necessary to render the qualifying asset available for use have been completed. Leasehold improvements are classified as property, plant and equipment, consistently with the nature of the cost incurred. The depreciation period corresponds to the remaining useful life of the asset or the residual period of the lease agreement, whichever is shorter. Spare parts of significant value are capitalised and depreciated over the estimated useful life of the assets to which they refer. Any dismantling costs are estimated and added to the cost of property, plant and equipment with a corresponding accrual to provisions for liabilities and charges if the prerequisites for establishing such provisions are satisfied. They are then depreciated over the remaining useful life of the assets to which they refer. Assets acquired under finance lease agreements, in which substantially all the risks and rewards of ownership are transferred to the Group, are recognised as property, plant and equipment at their fair value or, if lower, at the present value of the minimum lease payments, with a corresponding entry for the relevant financial payable. The lease instalment payments are allocated between interest expense, which is recognised in the Income Statement, and principal repayment, which is recorded as a reduction of the financial payable.
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Leases in which the lessor maintains substantially all the risks and rewards associated with ownership are classified as operating leases. The costs referring to an operating lease are recognised as an expense in the Income Statement over the lease term on a straight-line basis. Property, plant and equipment are derecognised at the time of disposal or retirement from use and, consequently, when no future economic benefits are expected to derive from their sale or use. Gains and losses resulting from the sale or disposal of property, plant and equipment are determined as the difference between the recoverable amount and the carrying amount of the asset.
Impairment of assets Property, plant and equipment and intangible assets Whenever there are specific indicators of impairment, and at least annually for intangible assets with indefinite life, including goodwill, the property, plant and equipment and intangible assets are tested for impairment. The test consists of an estimate of the recoverable amount of the asset and a comparison with its carrying amount. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use, where the latter is the present value of the expected future cash flows arising from the use of the asset and those deriving from its disposal at the end of its useful life, excluding income taxes and applying a discount rate, which should be the pre-tax rate which reflects the current market assessments of the time value of the money and the risks specific to the asset. There is no need to estimate both amounts because it is sufficient to verify that one of the two amounts is higher than the carrying amount in order to establish that no impairment has occurred. If the recoverable amount is lower than the asset carrying amount, the latter is reduced to the recoverable amount. This reduction constitutes an impairment loss, which is recognised in the Income Statement.
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In order to assess impairment, assets are allocated to the lowest level at which independent cash flows are separately identifiable (cash generating units). Specifically, goodwill must be allocated to the cash generating unit or group of cash generating units, complying with the maximum level of aggregation allowed, which must never be greater than the operating segment. When there is evidence that an impairment loss recognised in previous years and relating to property, plant and equipment or intangible assets other than goodwill may no longer exist or can be reduced, the recoverable amount is estimated again. If it is higher than the net carrying amount, then the net carrying amount should be increased to the revised estimate of its recoverable amount. The reversal of an impairment loss may not exceed the carrying amount that would have been recognised (net of impairment and depreciation or amortisation) had no impairment loss been recognised in previous years. The reversal of an impairment loss other than goodwill is recognised in the Income Statement. An impairment loss recognised for goodwill may not be reversed in subsequent years. An impairment loss recognised for goodwill on the interim financial statements may not be reversed in the subsequent annual period.
Investments in associates and joint ventures When there are indicators of impairment, the value of investments in associates and joint ventures accounted for using the equity method must be compared with the recoverable amount (impairment test). The recoverable amount corresponds to the higher of the fair value, less selling costs, and the value in use. For the purposes of impairment testing, the fair value of an investment in an associate or joint venture with shares listed on an active market is always equal to its market value, irrespective of the percentage of ownership. The fair value of equity investments in unlisted financial instruments was determined by making estimates on the basis of the best information available.
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To determine the value in use of an associate or joint venture, the entity's own share of the discounted value of future cash flows that are expected to be generated by the associate or joint venture is estimated, including cash flows deriving from the operating activities of the associate or joint venture and the consideration that will be received upon final disposal of the investment (known as the discounted cash flow – asset side method). If there is evidence that an impairment loss recognised in previous years may no longer exist or can be reduced, the recoverable amount of the investment is estimated again, and if it is higher than the amount of the investment, then the latter amount should be increased up to the recoverable amount. The reversal of an impairment loss may not exceed the amount of the investment that would have been recognised (net of impairment) had no impairment loss been recognised in previous years. The reversal of an impairment loss on investments in associates and joint ventures is recognised in the Income Statement.
Available-for-sale financial assets The category of available-for-sale financial assets includes investments in entities other than subsidiaries, associates and joint ventures and other financial instruments not held for trading. They are recognised on the Balance Sheet at the item “Other financial assets.” They are measured at fair value, if this can be reliably determined. Gains and losses deriving from changes in fair value are recognised in a specific equity reserve. When a reduction in fair value has been recognised directly in equity and there is objective evidence that the asset was impaired, the losses recognised up to that time in equity are recognised in the Income Statement. A prolonged (meaning more than 12 months) or significant (meaning more than 50% for instruments issued by the bank entities and more than one-third for instruments issued by entities in other sectors) reduction in the fair value of equities and as compared with their cost is considered an indicator of impairment. Beginning with the half-year financial statements at June 30, 2012, the quantitative limit was raised from one-third to 50% for banking sector financial instruments due to the exceptional increase in volatility of that sector.
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This threshold revision was determined on the basis of the updated historic analysis carried out in 2008 and only reflects the adjustments in new context conditions. The exacerbation of volatility on the financial markets and particularly in the banking sector has caused a series of exceptional circumstances to arise. Therefore, it was decided to revise the quantitative threshold for defining impairment losses in regard to the securities belonging to this sector. Instead, there has been no change in the definition of the threshold duration of impairment losses (12 months). The accounting impact of this change is illustrated below at note 12 ("Other financial assets"). In the event of disposal, the gains and losses recognised up to that time in equity are recognised in the Income Statement. Any impairment losses of an available-for-sale financial asset recognised in the Income Statement may be reversed through the Income Statement, with the exception of those recognised for stocks classified as available for sale, which may not be reversed through the Income Statement. Available-for-sale financial assets, whether debt or equity instruments for which fair value is not available, are accounted for at cost, reduced by any impairment losses based on the best market information available at the Balance Sheet date. Purchases and sales of available-for-sale financial assets are accounted for at the settlement date.
Inventories Inventories are measured at the lower of cost, determined according to the FIFO method, and their estimated realisable value. The measurement of inventories includes direct costs of materials and labour and indirect costs. Provisions are calculated for obsolete and slow-moving inventories, taking into account their expected future use and estimated realisable value. The realisable value is the estimated selling price, net of all costs estimated to complete the asset and selling and distribution costs that will be incurred. Cost includes incremental expenses and borrowing costs qualifying for capitalisation, similarly to what has been described for property, plant and equipment.
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Construction contracts
A construction contract is a contract specifically negotiated for the construction of an asset, based on the instructions of a principal who, as a preliminary step, designs the plans and the technical characteristics. Contract revenues include the consideration initially agreed with the customer, as well as changes in the construction work and price variations envisaged by the contract that can be determined reliably. When the outcome of a contract can be estimated reliably, the contract revenues and costs are measured using the percentage of completion method. The stage of completion is determined with reference to the costs incurred up to the Balance Sheet date as a percentage of the total estimated costs for each contract. Costs incurred in connection with future activities on the contract are excluded from contract costs when determining the stage of completion and are recognised as inventories. When total contract costs are expected to exceed total contract revenues, the expected loss is immediately recognised as an expense. The gross amount due from customers for contract work for all the contracts in progress and for which the costs incurred plus recognised profit (or net of recognised losses) exceed progress billings is recognised as a receivable, under the item “trade receivables.” The gross amount due to customers for contract work for all the contracts in progress and for which the progress billings exceed the costs incurred plus recognised profit (or net of recognised losses) is recognised as a payable, under the item “trade payables.”
Receivables
Receivables are initially recognised at their fair value, which normally corresponds to the consideration agreed or to the present value of the amount that will be collected. They are subsequently measured at amortised cost, less provisions for impairment losses. Amortised cost is calculated by using the effective interest rate method, which is equivalent to the discount rate that, when applied to future cash flows, renders the present value of such flows equal to the initial fair value. Impairment losses on receivables are calculated according to counterparty default risk, which is determined by considering available information on the solvency of the counterparty and historic data. The carrying amount of receivables is reduced indirectly by accruing provisions. Individual material positions that are objectively found to be partially or entirely uncollectable are impaired individually.
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The amount of the impairment loss reflects the estimate of future recoverable flows and the applicable date of collection, recovery costs and expenses, and the fair value of guarantees, if any. The positions that are not written down individually are included in groups with similar characteristics in terms of credit risk, and they are impaired as a group on an increasing percentage basis as the period during which they are overdue increases. The Group impairment procedure also applies to receivables not yet due. The impairment percentages are determined on the basis of historic experience and statistical data. When the conditions that led to impairment of the receivables no longer exist, the impairment losses recognised in previous periods are reversed by crediting the Income Statement up to the amortised cost that would have been recognised had no impairment loss been recognised. Receivables in currencies other than the functional currency of the individual companies are adjusted to the year-end exchange rates, with a balancing entry in the Income Statement. Receivables are derecognised when the right to receive cash flows is extinguished, when substantially all the risks and rewards connected with holding the receivable have been transferred, or when the receivable is considered definitely irrecoverable after all necessary credit recovery procedures have been completed. When the receivable is derecognised, the relative provision is also derecognised, if the receivable had previously been impaired.
Payables
Payables are initially recognised at their fair value, which normally corresponds to the consideration agreed or to the present value of the amount that will be paid. They are subsequently measured at amortised cost. Amortised cost is calculated by using the effective interest rate method, which is equivalent to the discount rate that, when applied to future cash flows, renders the present value of such flows equal to the initial fair value. Payables in currencies other than the functional currency of the individual companies are adjusted to the year-end exchange rates, with a balancing entry in the Income Statement. Payables are derecognised when the specific contractual obligation is extinguished.
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Financial assets carried at fair value through profit or loss This category includes financial instruments that are purchased mainly for resale in the short term and classified under current assets as “securities held for trading,” financial assets that are initially recognised at fair value through profit or loss, classified as “other financial assets,” and derivatives (except those designated as effective hedging instruments), classified as “derivative financial instruments.” They are measured at fair value with a balancing entry in the Income Statement. Transaction costs are expensed to the Income Statement. Purchases and sales of these financial assets are accounted for at the settlement date.
Cash and cash equivalents Cash and cash equivalents include bank deposits, postal deposits, cash and cash equivalents on hand, and the other forms of short-term investment whose original maturity is three months or less. Current account overdrafts are recognised as current liabilities under financial payables. The amounts included in cash and cash equivalents are recognised at their fair value and any changes are recognised in the Income Statement.
Provisions for other liabilities and charges Provisions for other liabilities and charges include accruals for current obligations (legal or constructive) deriving from a past event, for the fulfilment of which an outflow of resources will probably be necessary and whose amount can be reliably estimated. Changes in estimates are recognised in the Income Statement of the period when the change occurs. If the effect of discounting is material, provisions are presented at their present value.
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Employee benefit obligations Employee benefits paid after termination of the employment relationship under defined benefit plans and other long-term benefits are subject to actuarial measurements. The liability recognised in the financial statements is the present value of the Group’s obligation, net of the fair value of any plan assets. For defined benefit plans, actuarial gains and losses deriving from adjustments based on past experience and changes in actuarial assumptions are fully recognised in equity for the year in which they occur. For other long-term benefits, actuarial gains and losses are recognised immediately in the Income Statement. The provision for employees' leaving indemnities (TFR) of Italian companies with at least 50 employees is a considered a defined benefit plan only for the portion accrued prior to January 1, 2007 (and not yet paid at the Balance Sheet date), whereas subsequent to that date, it is considered a defined contribution plan. The net interest calculated on net liabilities is classified under financial expenses. The costs relating to defined contribution plans are recognised in the Income Statement when incurred.
Derivative financial instruments designated as hedging instruments In accordance with IAS 39, hedging instruments are subject to hedge accounting only when: - formal designation and documentation of the hedging relationship between the hedging derivative and the hedged item exist at the beginning of the hedge; - it is expected that the hedge be highly effective; - its effectiveness can be measured reliably; - the hedge is highly effective during the various accounting periods for which it is designated. These derivative instruments are recognised at fair value.
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The following accounting treatment is applied according to the type of hedge: - Fair value hedge – if a derivative financial instrument is designated as a hedge against exposure to changes in the fair value of an asset or liability attributable to a specific risk, the gain or loss resulting from subsequent changes in fair value of the hedging instrument is recognised in the Income Statement. For the portion attributable to the hedged risk, the gain or loss on the hedged item modifies the carrying value of that item (basis adjustment), and it too is recognised in the income statement; - Cash flow hedge – if a derivative instrument is designated as a hedge against exposure to the variable cash flow of an asset or liability carried on the balance sheet or a highly likely future transaction, the effective portion of the change in fair value of the hedging instrument is recognised directly in equity, while the ineffective portion is immediately recognised in the Income Statement. The amounts recognised directly in equity are reversed to the Income Statement in the year when the hedged item produces an effect in the Income Statement. When a hedging instrument expires or is sold, terminated, exercised or no longer meets the criteria to be designated as a hedge, or whenever the Group voluntarily revokes the designation, hedge accounting is interrupted. The fair value adjustments accumulated in equity remain in equity until the hedged item produces an effect in the Income Statement. Subsequently they are reclassified to the Income Statement over the periods in which the acquired financial asset or assumed financial liability impact the Income Statement. When the hedged item is no longer expected to impact the Income Statement, the fair value adjustments accumulated in equity are immediately recognised in the Income Statement.
For the derivative instruments that do not satisfy the prerequisites established by IAS for adoption of hedge accounting, please see the section “Financial assets carried at fair value in the Income Statement.”
Purchases and sales of these derivative financial instruments are accounted for at the settlement date.
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Determination of the fair value of financial instruments The fair value of financial instruments traded on an active market is based on listed market prices at the reporting date. The listed market price used for financial assets is the bid price, while for financial liabilities it is the ask price. The fair value of instruments that are not traded on an active market is determined by using measurement techniques with a variety of methods and assumptions that are based on market conditions at the balance sheet date. The fair value of interest rate swaps is calculated as the present value of expected future cash flows. The fair value of forward exchange contracts is determined by using the forward rate at the reporting date.
Income taxes Current taxes are determined on the basis of a realistic forecast of the taxes payable under the current tax law of the country. Deferred taxes are calculated according to the temporary differences existing between the asset and the liability amounts in the balance sheet and their tax basis (full liability method), and are classified under non-current assets and liabilities. Deferred tax assets on tax loss carry-forwards, as well as on temporary differences, are only recognised when there is a likelihood of future recovery. Current and deferred tax assets and liabilities are offset when the income taxes are levied by the same tax authority and when there is a legally enforceable right to offset. Deferred tax assets and liabilities are determined according to enacted tax rates that are expected to be applicable to taxable income in the years when those temporary differences are expected to be recovered or settled, with reference to the jurisdictions where the Group operates.
The deferred tax liabilities related to equity investments in subsidiaries, associates and joint ventures are not recognised if the participating entity can control the turnover of temporary differences and they are unlikely to arise in the foreseeable future. Deferred taxes are not discounted. Deferred tax assets and liabilities are credited or debited to equity if they refer to items that have been credited or debited directly in equity during the period or during previous periods.
Equity Treasury shares Treasury shares are recognised as a reduction in equity. If they are sold, reissued or cancelled, the resulting gains or losses are recognised in equity.
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Costs of equity transactions Costs that are directly attributable to equity transactions of the parent are recognised as a reduction in equity.
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Recognition of revenue Revenue is measured at the fair value of the consideration received for the sale of products or provision of services.
Sales of products Revenue from the sale of products is recognised when all the following conditions are met: the material risks and rewards of ownership of the goods are transferred to the buyer; effective control over the goods and the normal continuing level of activities associated with ownership have ceased; the amount of revenue is reliably determined; it is likely that the economic benefits deriving from the sale will be enjoyed by the enterprise; the costs incurred or to be incurred are determined reliably.
If the nature and extent of involvement of the seller are such that the risks and rewards of ownership are not in fact transferred, then the recognition date of the revenues is deferred until the date on which this transfer can be considered to have taken place.
Provision of services
Revenue from the provision of services is recognised only when the results of the transaction can be measured reliably, by reference to the state of completion of the transaction at the balance sheet date. The results of a transaction can be measured reliably only when all the following conditions are met: the amount of revenue can be determined reliably; it is likely that the company will enjoy the economic benefits of the transaction; the stage of completion of the transaction at the reporting date can be reliably measured; the costs incurred for the transaction and the costs to be incurred to complete it can be determined reliably.
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Interest income Interest income is recognised on a time proportion basis that considers the effective return of the asset.
Royalty income Royalty income is recognised on an accrual basis, according to the substance of the relevant agreement.
Dividend income Dividend income is recognised when the right to receive payment is established, which normally corresponds to the resolution passed by the Shareholders’ Meeting for the distribution of dividends.
Earnings (losses) per share Earnings (losses) per share are calculated by dividing the income (loss) attributable to the equity holders of the company by the weighted average number of outstanding shares during the year. To calculate diluted earnings per share, the weighted average number of outstanding shares is adjusted by assuming the conversion of all shares having a potentially dilutive effect.
Operating segments The operating segment is a part of the Group that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by top management in view of making decisions about resources to be allocated to the segment and assessing its performance, and for which discrete financial information is available.
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Accounting policies for hyperinflationary countries Group companies operating in high-inflation countries recalculate the amounts of their non- monetary assets and liabilities in their individual financial statements to eliminate the distorting effects caused by the loss of purchasing power of the currency. The inflation rate used for implementation of inflation accounting corresponds to the consumer price index. Companies operating in countries where the cumulative inflation rate over a three-year period approximates or exceeds 100% adopt inflation accounting and discontinue it in the event that the cumulative inflation rate over a three-year period falls below 100%. Gains or losses on the net monetary position are recognised in the Income Statement.
Non-current assets held for sale and disposal groups Non-current assets and disposal groups are classified as held for sale if their carrying value is recovered mainly through sale rather than through continuous use. This occurs if the non- current asset or disposal group are available for sale under current conditions and the sale is highly likely, or if a binding program for sale has already begun, activities to find a buyer have already commenced and it is expected that the sale will be completed within one year after the classification date. On the consolidated Balance Sheet, the non-current assets held for sale and the current and non-current assets/liabilities of the disposal group are presented as a separate item from other assets and liabilities, and their totals are reflected in current assets and liabilities, respectively. Non-current assets classified as held for sale and disposal groups are measured at the lesser of their respective carrying value and fair value net of the costs of sale. The property, plant and equipment and intangible assets classified as held for sale are not depreciated or amortised.
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Discontinued operations A discontinued operation is a component that has been disposed of or classified as held for sale and that represents an important business unit or geographical area of activity, and pertains to a single, coordinated disposal programme. On the consolidated income statement for the period, the net result of the discontinued operations, as well as the gain or loss resulting from fair value measurement net of the costs of sale or from disposal of the assets or disposal groups constituting the discontinued operation are combined in a single item at the end of the Income Statement separately from the result for continuing operations. The cash flows for discontinued operations are shown separately in the statement of cash flows. The foregoing information is also presented for the comparative period.
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3.2 Accounting standards and interpretations endorsed and in force from January 1, 2013
Amendments to IAS 1 – Presentation of Financial Statements – presentation of other components recognised in equity The principal changes to IAS 1 concern the new way to present the components of the comprehensive income statement: the other components recognised in equity will have to be grouped between those that may be recycled in future on the income statement and those for which this possibility is not envisaged. The following are examples of reclassification on the Income Statement: translation differences, fair value adjustment of cash flow hedge derivatives, fair value adjustment of available-for-sale equity investments. The actuarial gains/losses for defined benefit pension plans are an example of items not subject to reclassification in the Income Statement. These changes are reflected in the statement of comprehensive income at December 31, 2013 and in the comparative statement of comprehensive income at December 31, 2012.
Changes to IAS 19 – Employee Benefits The amendment of IAS 19 is focused on the procedures used to account for defined benefit plans, other long-term benefit plans and termination benefits. The principal changes from the current standard concern: defined benefit plans. Actuarial gains/losses (renamed "remeasurements") must be immediately and fully recognised in the comprehensive statement of income. The option that allowed not recognising actuarial gains/losses if they fell within a certain “corridor” (“corridor approach”) has been eliminated; elimination of the “expected return on plan assets” and “interest expense,” which will be replaced by a new quantity called “net interest,” calculated by applying the discount rate now used only for the gross liability to the net liability (i.e. the gross liability net of the assets servicing the plan); request for supplemental information to be included in the explanatory notes to the financial statements for improved illustration of the risks stemming from defined benefit plans;
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termination benefits: the benefits for termination of the employment relationship (“termination benefits”) are recognised at the earliest date between when the Group may no longer withdraw the offer of such benefits and when the Group recognises restructuring costs.
The transition to the new accounting standard has not had any impact on equity at January 1, 2012. The elimination of “expected yield on plan assets” and the “interest expense”, replaced by a new quantity named “net interest”, has caused a restatement of 2012 figures. Moreover, beginning January 1, 2013, net interest is classified under financial expenses, and no longer as a component of the operating result.
The effects on the Income Statement and equity at December 31, 2012 are summarised in the following table:
(in thousands of euro) 12/31/2012
2012 reported 2012 restated change
Operating income 780,791 792,472 11,681 Net income (loss) 398,236 391,560 (6,676)
Reserve 647,908 654,584 6,676 Equity 2,389,429 2,389,429 0
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Amendments to IAS 12 – Income Taxes – Deferred Taxes: recovery of underlying assets IAS 12 requires measurement of deferred taxes related to an asset or liability according to whether the book value of the asset is recovered through use or through sale. In the case of assets carried at fair value pursuant to IAS 40 – Investment Property, determining whether recovery is realised through use or sale might be difficult and subjective. These changes offer a practical solution to the problem, by allowing one to assume that investment property will be recovered entirely through sale. Consequently, SIC 21 – Income Taxes – Recovery of Revalued Non-Depreciable Assets is no longer applicable to investment property carried at fair value. The guidelines of SIC 21 that are still applicable have been incorporated in the amended version of IAS 12, and SIC 21 was consequently abrogated. These changes are not applicable to the Group.
Amendments to IFRS 1 – First-time Adoption of International Financial Reporting Standards – Hyperinflation and elimination of fixed dates on first-time adoption The amendments that have been introduced concern: - guidelines for preparing the financial statements in accordance with IFRSs after a period when application of IFRSs was suspended due to hyperinflation; - elimination of fixed dates upon first-time adoption of IFRSs. The entities that adopt IFRSs apply the requirements applicable to prospective derecognition of financial assets and liabilities, i.e. they are no longer obligated to reconstruct transactions that occurred before first-time adoption of IFRSs and that led to derecognition of financial assets and liabilities. These changes are not applicable to the Group.
IFRS 13 – Fair Value Measurement IFRS 13 introduces unique guidelines for determining fair value and required disclosures. The standard does not extend the use of fair value, but it provides rules for its determination and application when other principles allow or require it to be used. IFRS 13 also requires specific disclosure on the fair value, a portion of which substitutes the disclosure requirements previously envisaged by other standards, including IFRS 7 – Financial Instruments: Supplemental Information. The application of IFRS 13 has not had a material impact on the Group financial statements.
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Amendments to IFRS 7 – Financial Instruments: Supplemental Information – Offsetting of Financial Assets and Liabilities These amendments introduce the obligation of providing full disclosure in the notes of financial assets and liabilities offset on the basis of a statutory right to offsetting (e.g. net and gross amounts, guarantees granted and held).
Amendments to IFRS 1 – Government Loans These amendments concern government loans received at below-market rates and during transition allow adoption of the same accounting treatment applicable to financial statements that already use IFRSs, rather than apply IAS 20, "Recognition of public subsidies and disclosure of public assistance" on a fully retrospective basis. These changes are not applicable to the Group.
“Improvements” to IFRSs between 2009 and 2011 (issued by the IASB in May 2012) As part of the project begun in 2009, the IASB has issued a series of amendments to five current standards. The following table summarises the standards and issues addressed by these amendments:
IFRS Subject of the amendment IFRS 1 – First-time Adoption of An entity may apply IFRS 1 more than International Financial Reporting Standards once in specific circumstances, for example when IFRSs are actually adopted for the first time and after a period of suspended application of IFRSs; an entity may choose to adopt IAS 23 "financial expenses" during transition to IFRSs or beginning from a prior date.
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IAS 1 – Presentation of Financial Statements Clarifications in regard to the comparative data that must be presented when an entity publishes three balance sheets on a voluntary basis or if required by IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors. IAS 16 – Property, Plant and Equipment Clarification of spare parts and servicing equipment as plant and machinery, and not as inventory, when they satisfy the definition given in IAS 16. IAS 32 – Financial Instruments: Presentation Recognition of the tax effect of dividends paid to shareholders (on the Income Statement) and transaction costs (in equity) IAS 34 – Interim Financial Reporting Disclosure of all assets and liabilities of operating segments in interim financial statements
These changes have not had a significant impact on the Group consolidated financial statements.
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3.3 International Accounting Standards and/or interpretations that have been issued but not yet in force and/or endorsed
Pursuant to IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors, the new standards and/or interpretations that have been issued but were not yet in force or not yet endorsed by the European Union at December 31, 2013, and which are therefore not applicable, are mentioned and described briefly as follows. None of these standards and interpretations has been adopted early by the Group.
Amendments to IFRS 32 – Financial Instruments: Presentation – offsetting of financial assets and liabilities These amendments better clarify the requirements for offsetting financial assets and liabilities, already present in this standard, i.e. - the significance of currently enjoying the statutory right to offsetting financial assets and liabilities; - the fact that in certain cases, realisation of the asset at the same time as extinguishment of the liability may be considered de facto extinguishment of a net amount. These amendments were endorsed by the European Union in December 2012 (EC Regulation no. 1256/2012) and are applicable from January 1, 2014. Application of these amendments has no impact on the Group financial statements.
IFRS 10 – Consolidated Financial Statements The new standard replaces IAS 27 – Consolidated and Separate Financial Statements – for the portion relating to the consolidated financial statements – and SIC 12 – Consolidation – Special Purpose Entities. Following issuance of the new standard, IAS 27 – renamed “Separate Financial Statements” – contains the principles and guidelines to be used in preparing the separate financial statements. The new version of IFRS 10 defines just one control model that applies to all associates and joint ventures and represents the key factor in determining whether an associate or joint venture have to be consolidated. Instead, the accounting treatment and consolidation procedures have not changed from what is currently envisaged in IAS 27.
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The new control model introduces a greater degree of subjectivity and demands that management exercise a higher standard of judgement to determine whether an entity is controlled and thus has to be consolidated. This new standard also explicitly envisages the possibility of controlling an entity even in the absence of a majority of votes (de facto control), a concept that was not explicitly stated in IAS 27. This standard was endorsed by the European Union in December 2012 (EC Regulation no. 1254/2012) and will come into force on January 1, 2014. No impact on the consolidated financial statements is expected.
IFRS 11 – Joint Arrangements IFRS 11 replaces IAS 31 – Interests in Joint Ventures, and SIC 13 – Jointly Controlled Entities – Non-Monetary Contributions by Venturers and defines the benchmark principles for representation of the joint arrangements. The new standard distinguishes two categories of joint arrangements that are associated with different accounting treatment: joint operations: these are agreements that give the parties of the agreement, which have joint control of the initiative, rights to the individual activity and obligations for the individual liabilities related to the agreement. In the case of joint operations, the assets, liabilities, costs and revenue of the agreement must be recognised on the basis of the applicable accounting standards; joint ventures: a joint venture exists when the parties, which have joint control of the venture, do not have rights or obligations in relation to the individual assets or liabilities covered by the agreement, but only in relation to the net assets or net income (loss) of the venture. Joint ventures must be consolidated with the equity method, while IAS 31 allowed the option of choosing between proportional consolidation and consolidation according to the equity method. To determine what category a joint arrangement falls in, the substance of the agreement must be considered on the basis of the rights and obligations defined therein. This standard was endorsed by the European Union in December 2012 (EC Regulation no. 1254/2012) and will come into force on January 1, 2014. No impact on the consolidated financial statements is expected.
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IFRS 12 – Disclosure of Interests in Other Entities IFRS 12 includes – and expands on – all the requirements governing the supplemental information that must be given in regard to subsidiaries, associates, joint arrangements and other equity investments (“structured entities”). Many of the disclosures required under IFRS 12 were previously included in IAS 27 – Consolidated and Separate Financial Statements, IAS 28 – Investments in Associates, and IAS 31 – Interests in Joint Ventures, while others are new. This standard was endorsed by the European Union in December 2012 (EC Regulation no. 1254/2012) and will come into force on January 1, 2014. Application of this standard will have an impact on consolidated financial statement disclosures, and particularly in regard to the supplemental information on subsidiaries.
IAS 28 – Investments in Associates and Joint Ventures Following the introduction of the new IFRS 10 and 12, IAS 28 has been renamed “Investments in Associates and Joint Ventures” and describes application of the equity method for equity investments in joint ventures, in addition to associates. These amendments were endorsed by the European Union in December 2012 (EC Regulation no. 1254/2012) and came into force on January 1, 2014. Application of these amendments will not have any impact on the consolidated financial statements.
Amendments to IFRS 10 – Consolidated Financial Statements, IFRS 11 – Joint Arrangements and IFRS 12 – Disclosure of Interests in Other Entities – Transition Guide These amendments clarify the transitory rules for application of IFRS 10, which have been found too burdensome. They also limit the obligation to provide restated comparative data to only the comparative period preceding first-time application of IFRS 10, 11 and 12. These amendments were endorsed by the European Union in April 2013 (EC Regulation no. 313/2013) and are applicable from January 1, 2014. The application of these amendments will impact the disclosures made in the consolidated financial statements.
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Amendments to IFRS 10, IFRS 12 and IAS 27 – Investment Entities These amendments apply to a specific class of assets defined as "investment entities," whose corporate purpose consists of investing funds in order to realise unearned income or appreciation of the invested capital, or both. Examples of such entities include private equity and venture capital firms, pension funds, and other types of investment funds. In consequence of these amendments, the companies controlled by investment entities must not be consolidated on a straight-line basis but instead recognised at fair value in profit or loss. These amendments were endorsed by the European Union in November 2013 (EC Regulation no. 1174/2013) and are applicable from January 1, 2014. These changes are not applicable to the Group.
Amendments to IAS 36 – Impairment of Assets – supplemental information about the recoverable value of non-financial assets IFRS 13 – Fair Value Measurement requires that supplemental information about the recoverable value of non-financial assets be published. The amendments to IAS 36 – Impairment of Assets stipulate that these disclosures must be published only if the recoverable value is based on the fair value net of disposal expenses. These amendments were endorsed by the European Union in December 2013 (EC Regulation no. 1374/2013) and are applicable from January 1, 2014. No impact is expected on the disclosures made in the notes to the consolidated financial statements.
Amendments to IAS 39 – Financial Instruments: Recognition and Measurement – novation of derivatives and continuation of hedge accounting These amendments, made in response to legislative changes which it is believed will lead to numerous novations of derivatives, allow the continuation of hedge accounting if derivative financial instruments designated as hedging instruments are modified to execute clearing with a central counterparty in response to legal obligations, provided that they have satisfied several conditions. In this situation, the novation indicates that the parties to a contract agree to replace the original counterparty with a new one. This amendment will also result in amendment of IFRS 9.
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These amendments were endorsed by the European Union in December 2013 (EC Regulation no. 1375/2013) and are applicable from January 1, 2014. No impact on the consolidated financial statements is expected.
IFRIC 21 – Levies This interpretation clarifies the accounting treatment of tax liabilities and government levies other than income taxes. In particular, it defines the time when an entity may recognise these liabilities. Pursuant to IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, one of the prerequisites for recognition of a liability is the presence of a present liability resulting from a past event. The interpretation clarifies that this liability is represented by the asset described in legislation and that is at the basis of payment of levies or taxes. This interpretation, which was expected to come into force effective January 1, 2014, has not yet been endorsed by the European Union. It is not expected that future application of this interpretation will have any impact.
Amendments to IAS 19 – Employee Benefits – defined benefit plans: contributions by employees or third parties Certain retirement funds require that employees or third parties make contributions to the fund itself. These contributions reduce the cost of the benefit to the employer and were previously deducted from the cost of benefits accrued during the year when the contributions were paid. These amendments introduce the distinction between the following types of contributions: contributions related to the service provided only in the period when they occur and which do not change according to the duration of the service. They must be deducted from the coast of benefits accrued during the period when the service is provided; contributions related to the service provided over several periods and which vary according to the duration of the service: they must be recognised in profit or loss on a straight-line basis according to the duration of the service itself; contributions unrelated to the service provided: they must be included in the measurement of the liability and recognised in equity.
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These amendments, which are expected to come into force effective July 1, 2014, have not yet been endorsed by the European Union. It is not expected that future application of these amendments will have any impact.
“Improvements” to IFRSs between 2010 and 2012 (issued by the IASB in December 2013) The IASB has issued a series of amendments to seven standards that are currently in force. The following table summarises the standards and issues addressed by these amendments: IFRS Subject of the amendment IFRS 2 – Share-based Payment The definitions of “vesting conditions”, “service conditions” and “performance conditions” are clarified. IFRS 3 – Business Combinations (Reasons Recognition of the “contingent consideration” in for conclusions) a business combination: the contingent consideration may not be recognised with a balancing entry in equity. IFRS 8 – Operating Segments Description of the operating segments covered by the business combination and the logic applied in combining them Reconciliation of the total amount of assets in the segments being reported with the total assets of the entity must be provided only if this reconciliation is periodically provided to the highest operating decision-making level. IFRS 13 – Fair Value Measurement The short-term payables and receivables not subject to a pre-set interest rate may continue to be measured at their original value if discounting has a negligible effect. IAS 16 – Property, Plant and Equipment Method for recalculation of value – IAS 38 – Intangible Assets proportionate recalculation of accumulated amortisation
IAS 24 – Related Party Disclosures It is clarified that if an entity provides key management services to another entity without the individuals being employees of the latter, the two entities must be considered related parties.
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These amendments, which are expected to come into force beginning July 1, 2014, with the exception of the amendments to IFRS 13, which have been applicable since December 31, 2013, have not yet been endorsed by the European Union. The amendments to IFRS 2, IAS 16 and IAS 38 are not applicable to the Group. It is not expected that the amendments to the other IAS / IFRS will have a material impact on the Group financial statements or disclosures.
“Improvements” to IFRSs between 2011 and 2013 (issued by the IASB in December 2013) The IASB has issued a series of amendments to four standards that are currently in force. The following table summarises the standards and issues addressed by these amendments: IFRS Subject of the amendment IFRS 1 – First-time Adoption of Meaning of “IFRS in force”: on first-time International Financial Reporting Standards adoption of IFRSs, an entity may choose (Reasons for conclusions) whether to apply the IFRSs in force or those that are not yet in force, but for which premature adoption is allowed. IFRS 3 – Business Combinations It is clarified that IFRS 3 does not apply to the joint arrangements introduced by IFRS 11. This exception applies only for recognition of the joint arrangement itself in the financial statements. IFRS 13 – Fair Value Measurement The allowed exception to the standard for fair value measurement of net positions exposed to market risks or credit risks (“portfolio exception”) may be applied to financial assets, financial liabilities and other contracts covered by the scope of IAS 39 / IAS 9 (including non- financial arrangements). IAS 40 – Investment Property Clarification of the interrelationships between IFRS 3 and IAS 40. IAS 40 provides guidelines for classifying an investment as investment property or as a property used by the owner. IFRS 3 provides guidelines for determining whether the acquisition of investment property represents a business combination.
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These amendments, which are expected to come into force effective July 1, 2014, have not yet been endorsed by the European Union. No impact on the Group financial statements is expected.
IFRS 9 – Financial Instruments (issued in November 2009 and October 2010) and subsequent amendments (issued in December 2011 and November 2013) IFRS 9 will ultimately supplant IAS 39 – Financial Instruments: Recognition and Measurement, and has the principal aim of reducing its complexity. IFRS 9 was planned to be released in three distinct phases: 1. Phase 1: Classification and measurement of financial assets and liabilities. In the version issued by the IASB in November 2009, the scope of IFRS 9 was restricted to financial assets only. In October 2010 the IASB amended IFRS 9 by adding the requirements for classification and measurement of financial liabilities, thereby completing the first phase of the project. A new Exposure draft was issued in November 2012, which proposes limited amendments to the model for recognition and measurement of the financial instruments defined in IFRS 9, in order to clarify certain aspects of application and account for the interaction with other projects, including convergence with U.S. GAAP. The Exposure Draft also proposes the introduction of a measurement category for fair value debt instruments recognised in equity on the basis of the entity's business model. The principal changes introduced by IFRS 9 in regard to financial assets can be summarised as follows: - financial assets may be classified in only two categories – at fair value or at amortised cost. The categories of loans and receivables, available-for-sale financial assets and financial assets held to maturity are therefore eliminated. Classification within the two categories is made on the basis of the entity’s business model and on the basis of the features of the cash flows generated by the assets themselves. Financial assets are measured at amortised cost if both the following requisites are met: the entity’s business model envisages that financial assets are held to collect their cash flows (thus, substantially, not to make trading profits) and the characteristics of the cash flows of the assets correspond only to payment of principal and interest. Otherwise, financial assets must be measured at fair value; - the accounting rules for embedded derivatives have been simplified: separate accounting for the embedded derivative and the “host” financial asset is no longer required;
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- all equity instruments – both listed and unlisted – must be measured at fair value. IAS 39 stated instead that if fair value could not be determined reliably, unlisted equity instruments had to be measured at cost; - the entity has the option of presenting in equity any change in the fair value of equity instruments not held for trading, while this option is forbidden for those held for trading. This designation is permitted at the time of initial recognition, may be adopted for a single financial instrument and is irrevocable. If this option is taken, the fair value changes of such instruments can never be reclassified from equity to the Income Statement (either in the event of impairment or in the event of sale). Dividends instead continue to be recognised in the Income Statement; - reclassifications between the two categories of financial assets are not allowed, except in rare cases where there is a change in the entity's business model. In this case, the effects of the reclassification are applied prospectively; - the disclosure required in the notes has been adapted to the classification and measurement rules introduced by IFRS 9; - exemption from retrospective application of the standard to the comparative period at the date of first-time application of IFRS 9 is allowed, provided that a series of specific additional information is provided to clarify the transition to IFRS 9. In regard to financial liabilities, the IASB has substantially confirmed the provisions of IAS 39, except for the requirements applicable to the fair value option. When the fair value option is adopted for financial liabilities, the change in fair value attributable to the change in the issuer’s credit risk must be recognised in the Statement of Comprehensive Income and not in the Income Statement.
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2. Phase 2: impairment of financial instruments. The IASB issued an initial Exposure Draft in November 2009 and an amendment in November 2011. In March 2013 it issued a final Exposure Draft, which contains new proposals for the impairment of financial instruments that are based on a forecasting model where the expected losses on receivables are recognised more punctually. 3. Phase 3: hedge accounting The IASB amended IFRS 9 in November 2013 by introducing a new model for hedge accounting and related disclosure, with the principal aim of allowing entities to improve reflection of their management of financial risks in their financial statements.
The November 2013 amendments to IFRS 9 also eliminate the mandatory application date of IFRS, previously scheduled for January 1, 2015, insofar as Phase 2 of the project has not yet been completed. A new date will be decided with the project is near completion. However, the possibility of premature application has been left unchanged. IFRS 9 and all related amendments have not yet been endorsed. It is currently impossible to quantify the impact resulting from future application of this standard to the classification and measurement of financial assets and the new hedge accounting rules. The changes affecting financial liabilities are not applicable to the Group.
Amendments to IFRS 7 – Financial Instruments: Supplemental Information – First-time Application of IFRS 9 These amendments introduce the obligation of providing additional quantitative information upon transition to IFRS 9 to clarify the effects of first-time adoption of IFRS 9 on the classification and measurement of financial instruments. These amendments have not yet been endorsed by the European Union. The impact of future application of these amendments cannot be quantified at this time.
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4. FINANCIAL RISK MANAGEMENT POLICIES
The Group is exposed to financial risks. These are principally associated with foreign exchange rates, fluctuations in interest rates, the price of financial assets held as investments, the ability of customers to honour their obligations to the Group (credit risk), and raising funds on the market (liquidity risk). Financial risk management is an integral part of Group business management and is handled directly by headquarters in accordance with guidelines issued by the Finance Department on the basis of general risk management strategies defined by the Managerial Risk Committee.
4.1 Types of financial risks
Exchange rate risk
The varied geographical distribution of Group production and commercial activities entails exposure to transaction and translation exchange rate risk. a) transaction exchange rate risk
This risk is generated by the commercial and financial transactions of the individual companies that are executed in currencies other than the functional currency. Exchange rate fluctuations between the time when the commercial or financial relationship is established and when the transaction is completed (collection or payment) may generate foreign exchange gains or losses.
The Group aims to minimise the impact of transaction exchange rate risk related to volatility. To do so, Group procedures make the operating units responsible for collecting complete information about the assets and liabilities that are subject to transaction exchange rate risk. This risk is hedged with forward contracts made with the Group Treasury. The items subject to exchange rate risk are mainly represented by receivables and payables denominated in foreign currency.
The Group Treasury is responsible for hedging the net position for each currency. In accordance with established guidelines and restrictions, it closes all risk positions by trading
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derivative hedging contracts on the market, which typically take the form of forward contracts. The Group has decided not to opt for hedge accounting pursuant to IAS 39, insofar as representation of the effects of the transaction exchange risk hedging strategy in the income statement and equity is substantially guaranteed even without adopting hedge accounting. Furthermore, as part of the annual and three-year planning process, the Group makes exchange rate forecasts by using the best information available on the market. The fluctuation in exchange rates between the time when the forecast is made and the time when the commercial or financial transaction is established represents the transaction exchange rate risk on future transactions. In accordance with established policy, the Group monitors the opportunity to hedge future transactions, with each hedge being authorised by the Finance Department on a case-by-case basis. Hedge accounting in accordance with IAS 39 is used when the conditions for doing so are satisfied. b) currency translation risk The Group owns controlling interests in companies that prepare their financial statements in currencies other than the euro, which is used to prepare the consolidated financial statements. This exposes the Group to currency translation risk, which is generated by the conversion into euro of the assets and liabilities of these subsidiaries. The principal exposures to currency translation risk are constantly monitored, but it is not currently deemed necessary to adopt specific policies to hedge this exposure. About 25% of total consolidated net equity at December 31, 2013 was expressed in euro (compared with about 32% at December 31, 2012). The most important currencies for the Group other than the euro are the Brazilian Real (16%; 17% at December 31, 2012), the Turkish Lira (7%; 8% at December 31, 2012), the Chinese Renminbi (11%; 9% at December 31, 2012), the Romanian Leu (13%; 11% at December 31, 2012), the Venezuelan Bolivar (6%; 6% at December 31, 2012), the Egyptian Pound (3%; 3% at December 31, 2012), the British Pound (4%; 3% at December 31, 2012), the Argentine Peso (2%; 3% at December 31, 2012) and the U.S. Dollar (3%; 3% at December 31, 2012).
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The tables below shows the effects on consolidated equity deriving from a hypothetical appreciation/ depreciation of the above currencies against the euro, with all other conditions being equal:
(in thousands of euro) Appreciation of 10% Depreciation of 10% 12/31/2013 12/31/2012 12/31/2013 12/31/2012
Brazilian real 42,233 45,393 (34,555) (37,140) Turkish lira 18,744 20,771 (15,336) (16,994)
Chinese renminbi 28,978 23,891 (23,709) - (19,547) Romanian leu 34,2110 27,946 (27,991) - (22,865) Venezuelan Bolivar 16,4560 15,354 (13,464) - (12,562) Egyptian pound 7,8780 8,966 (6,445) - (7,336) British pound 10,8220 8,238 (8,855) - (6,740) Argentinian pesos 6,1440 7,949 (5,027) - (6,503) US Dollar 8,933 7,418 (7,309) (6,070)
Total out of consolidated equity 174,400 165,927 (142,691) (135,757)
Interest rate risk Interest rate risk is the risk that the fair value or the future cash flows of a financial asset or liability will change due to fluctuations in market interest rates. Group policy is to attempt to maintain the following ratio between fixed rate and variable rate exposures: 70% fixed and 30% variable. The Group makes derivative contracts, typically interest rate swaps with hedging objective in order to maintain this target ratio. For such derivatives hedge accounting is adopted when the conditions set by IAS 39 are met.
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The table below shows the effects on net income (loss) and direct effects on equity deriving from an increase or decrease of 0.50% in the level of interest rates of all currencies to which the Group is exposed – all other conditions being equal:
(in thousands of euro) +0,50% -0,50%
12/31/2013 12/31/2012 12/31/2013 12/31/2012
Impact on net income (loss) (4,488) (5,183) 4,953 6,208 Total (4,488) (5,183) 4,953 6,208
Direct impact on equity: 3,830 7,233 (5,404) (12,314) Total 3,830 7,233 (5,404) (12,314)
Price risk associated with financial assets The Group’s exposure to price risk is limited to the volatility of financial assets such as listed and unlisted equities and bonds, for approximately 4.6% of total consolidated assets at December 31, 2013 (4.5% at December 31, 2012). Such assets are classified as available-for-sale financial assets, financial assets at fair value through profit or loss, or financial assets held for trading. No derivatives contracts are made to limit the volatility of these assets. The available-for-sale financial assets represented by listed equity instruments total euro 130,864 thousand (euro 73,602 thousand at December 31, 2012) and those represented by securities that are indirectly related to listed financial instruments (Fin. Priv. S.r.l. and Emittenti Titoli) total euro 16,365 thousand (euro 11,939 thousand at December 31, 2012). These financial assets represent 43.7% of all financial assets subject to price risk (24.5% at December 31, 2012). A 5% change in the aforementioned listed securities, all else being equal, would entail a change of euro 7,325 thousand (euro 4,233 thousand at December 31, 2012) in the Group's equity.
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Restructuring of the financial receivable from Prelios S.p.A. Following restructuring of the financial receivable from Prelios S.p.A. completed in August 2013, the Company now owns three types of financial assets related to Prelios: Equity investment in the associate Prelios S.p.A. (listed on the Stock Exchange); shares in the special purpose vehicle Fenice S.r.l., an associate which owns Prelios class B shares; the “convertendo” equity instrument. In addition to the price risk limited to the volatility of financial assets, such as listed shares, the company is also subject to the risk of economic and financial performance and execution capacity of the Prelios S.p.A. business plan. Specifically in regard to the “convertendo” equity-for-debt financial instrument, the Group is exposed to the risk of fair value measurement of that instrument which may occur in consequence of variation in the market price of Prelios S.p.A. stock due to market conditions or in consequence of the earnings results of the associate.
Credit risk Credit risk represents Group exposure to contingent losses resulting from default by commercial and financial counterparties. The Group is exposed to credit risk as part of its operating activities and financing activities. To limit commercial counterparty default risk, the Group has implemented procedures to evaluate its customers’ potential and financial solidity, monitor expected incoming cash flows and take credit recovery action if necessary. The aim of these procedures is to define customer credit limits. Further sales are suspended when those limits are exceeded. In certain cases customers are asked to provide guarantees. These mainly consist of bank guarantees issued by parties with the highest credit standing, or personal guarantees. Less frequently, mortgage guarantees may be requested.
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Insurance policies are another instrument used to manage commercial credit risk. These policies aim to prevent the risk of non-payment through careful selection of covered customers in collaboration with the insurance company, which undertakes to indemnify the Group in the event of customer insolvency. The Group transacts only with highly rated financial counterparties for the management of its temporary cash surpluses or trading in derivative instruments, and constantly monitors its exposure to individual counterparties. The Group does not hold public debt instruments of any European country, and constantly monitors its net credit exposure to the banking system. The Group does not have significant concentrations of credit risk. The disclosure related to the maximum credit exposure, which is represented by the gross receivables, is included in note 14 “Trade receivables” and note 15 “Other receivables.”
Liquidity risk Liquidity risk represents the risk that the Company’s available financial resources be insufficient to meet its financial and commercial obligations pursuant to the contractual terms and conditions. The principal instruments used by the Group to manage liquidity risk are comprised by its annual and three-year financial and cash-pooling plans. These allow complete and fair detection and measurement of incoming and outgoing cash flows. The differences between plans and actual data are constantly analysed. The Group has implemented a centralised cash pooling system for the management of collection and payment flows in compliance with various local currency and tax laws. Banking relationships are negotiated and managed centrally, in order to ensure coverage of short and medium-term financial needs at the lowest possible cost. The procurement of medium and long-term resources on the capital market is also streamlined through centralised management.
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Prudent management of the risk described above requires maintaining an adequate level of cash or cash equivalents and/or highly liquid short-term financial instruments, and the availability of funds through an adequate amount of committed credit facilities and/or recourse to the capital market, while diversifying the products and their maturities to seize the best available opportunities. The EMTN (Euro Medium Term Note) programme was finalised in July 2013. This is a document platform for the issuance of bonds on the Euromarket – whose maximum amount was set at euro 2 billion. The Board of Directors periodically resolves on the maximum amount of bonds that may be issued and their time horizon under this programme. The program aims at promptly seizing the best financing opportunities to provide continuous support for business growth in the face of volatile financial markets and possible restrictions on access to credit. The bonds may be placed only with professional investors. At December 31, 2013 the Group had, aside from cash and financial assets held for sale of euro 927,987 thousand, unused committed credit facilities of euro 625,000 thousand (euro 625,000 thousand at December 31, 2012) maturing on November 30, 2015.
The maturities of financial liabilities at December 31, 2013 may be broken down as follows:
(in thousands of euro) within 1 year 1 to 2 years 2 to 5 years over 5 years Total
Trade payables 1,244,466 - - - 1,244,466
Other payables 434,158 14,225 34,817 27,811 511,011
Derivative financial instruments 57,038 - - - 57,038
Borrowings from banks and other financial 316,653 773,844 1,107,072 133,490 institutions 2,331,059
2,052,315 788,069 1,141,889 161,301 4,143,574
The use of the syndicated credit facility (granted to Pirelli & C. S.p.A., Pirelli Tyre S.p.A. and Pirelli International Limited) of euro 575,000 thousand at December 31, 2013 has been classified under non-current borrowings from banks and other financial institutions due in 2015 (from 2 to 5 years). Reference is made to note 23.
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The maturities of financial liabilities at December 31, 2012 may be broken down as follows:
(in thousands of euro) within 1 year 1 to 2 years 2 to 5 years over 5 years Total
Trade payables 1,268,683 - - - 1,268,683
Other payables 417,556 9,933 31,101 29,609 488,199
Derivative financial instruments 96,348 - - - 96,348
Borrowings from banks and other financial 440,526 190,549 1,640,117 165,109 2,436,301 institutions
2,223,113 200,482 1,671,218 194,718 4,289,531
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4.2 Fair value measurement
The classification of financial instruments carried at fair value on the basis of a hierarchy of levels pursuant to IFRS 13 is illustrated as follows. This hierarchy reflects the significance of the inputs used to determine fair value. The following levels are distinguished: Level 1 – unadjusted quotations recorded on an active market for the assets or liabilities to be measured; Level 2 – inputs different from the quoted prices referred to at the preceding sub-indent, and that are observable on the market either directly (as in the case of prices) or indirectly (because they are derived from prices); Level 3 – inputs that are not based on observable market data.
The following table shows assets and liabilities carried at fair value at December 31, 2013, divided into the three levels defined above:
(in thousands of euro) Note Carrying Level 1 Level 2 Level 3 amount at 12/31/2013
FINANCIAL ASSETS Financial assets carried at fair value through profit and loss: Securities held for trading 18 48,090 1,130 46,960 - Current derivative financial instruments 27 22,268 - 22,268 - Other financial assets 12 104,087 - - 104,087 Hedging financial instruments: Current derivative financial instruments 27 2,550 - 2,550 - Available-for-sale financial assets: Other financial assets Equities 169,925 130,864 16,365 22,696 Investment funds 15,084 - 15,084 - 12 185,009 130,864 31,449 22,696 TOTAL ASSETS 362,004 131,994 103,227 126,783
FINANCIAL LIABILITIES Financial liabilities carried at fair value through profit and loss: Current derivative financial instruments 27 (16,718) - (16,718) - Hedging financial instruments: Current derivative financial instruments 27 (40,320) - (40,320) - TOTAL LIABILITIES (57,038) - (57,038) -
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The situation at December 31, 2012 was as follows:
(in thousands of euro) Note Carrying Level 1 Level 2 Level 3 amount at 12/31/2012
FINANCIAL ASSETS Financial assets carried at fair value through profit and loss: Securities held for trading 18 224,717 755 223,962 - Current derivative financial instruments 27 42,208 - 42,208 - Hedging financial instruments: Current derivative financial instruments 27 5,495 - 5,495 - Available-for-sale financial assets: Other financial assets Equities 105,782 73,602 11,939 20,241 Investment funds 12,343 - 12,343 - 12 118,125 73,602 24,282 20,241 TOTAL ASSETS 390,546 74,357 295,948 20,241
FINANCIAL LIABILITIES Financial liabilities carried at fair value through profit and loss: Current derivative financial instruments 27 (44,756) - (44,756) - Hedging financial instruments: Current derivative financial instruments 27 (51,592) - (51,592) - TOTAL LIABILITIES (96,348) - (96,349) -
During 2013, there were no transfers from level 1 to level 2 or vice-versa.
The following table shows the changes that occurred in level 3 during 2013:
(in thousands of euro) 12/31/2013 12/31/2012
Opening balance 20,241 32,492 Increases / Subscription of capital 113,940 1,981 Disposals - (136) Impairment (6,185) (12,055) Fair value adjustments through Equity (1,250) (2,029) Other changes 37 (12) Closing balance 126,783 20,241
These financial assets are mainly represented by the Prelios S.p.A. “convertendo” (euro 104,087 thousand) and equity investments in Alitalia S.p.A. (euro 7,534 thousand), Istituto Europeo di Oncologia (euro 5,038 thousand), Equinox Two S.C.A. (euro 5,421 thousand) and Tlcom I LP (euro 700 thousand).
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The additions mainly refer to the Prelios S.p.A. “convertendo” (euro 104,087 thousand) and the rights offering affecting the equity investment in Alitalia S.p.A (euro 7,534 thousand) and Equinox Two S.C.A. (euro 1,179 thousand).
The impairments mainly refer to the equity investments in Equinox Two S.C.A. (euro 1,232 thousand) and Alitalia S.p.A. (euro 4,925 thousand).
The fair value adjustment through equity refers mainly to the investment in the Istituto Europeo di Oncologia (negative euro 494 thousand), Euroqube (negative euro 178 thousand), and S.In.T. S.p.A (negative euro 527 thousand).
During the year, there were no transfers from level 3 to other levels or vice-versa.
The fair value of financial instruments traded on active markets is based on the price quotations published at the reporting date. These instruments, included in level 1, mainly consist of equity investments classified as available-for-sale financial assets.
The fair value of financial instruments not traded on active markets (e.g. derivatives) is measured by means of techniques that maximise the use of observable and available market data, using widely applied financial measurement techniques: - market prices for similar instruments; - the fair value of interest rate swaps is calculated by discounting estimated future cash flows based on observable yield curves; - the fair value of foreign exchange derivatives (forward contracts) is determined by using the forward exchange rate at the reporting date.
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The fair value of the “convertendo”, a level 3 financial instrument, was determined on the basis of an appraisal prepared by an independent professional. For measurement purposes, the instrument is essentially composed of: a value assigned to a long position on Prelios shares; net of the value of a sold call option, which Prelios implicitly holds since it may exercise the right of conversion at a fixed countervalue.
The principal non-observable input used in the measurement is represented by the expected volatility of Prelios S.p.A, stock, in the amount of 32.16%. It was not possible to refer to the implicit volatility of the options when estimating the expected volatility, since there are no listed options on Prelios S.p.A. Therefore, the forecast volatility was estimated beginning with the historic volatility of the Prelios S.p.A. stock measured over a one-year time horizon, in the amount of 32.85%. The relation between the implicit volatility of the options and the historic volatility of a panel of comparable entities was subsequently analysed. The expected volatility of Prelios S.p.A. turned out to be less than its historic volatility. A +/- 5% change in expected volatility (compared with the 32.16% used to determine the fair value of the convertendo) would result in a euro 6,800 thousand decrease or increase, respectively, in the fair value of the instrument. Reference is made to note 12.
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4.3 Categories of financial assets and liabilities
The table below shows the carrying amounts for each class of financial asset and liability identified by IAS 39:
(in thousands of euro) Note Carrying Carrying amount atl amount atl 12/31/2013 12/31/2012 Financial Assets Financial assets carried at fair value through profit and loss Securities held for trading 18 48,090 224,717 Current derivative financial instruments 27 22,268 42,208 Non-current other financial assets 12 104,087 - 174,445 266,925 Loans and receivables Non-current other receivables 15 169,463 370,210 Current trade receivables 14 666,427 704,558 Current other receivables 15 267,535 341,404 Cash and cash equivalents 19 879,897 679,794 1,983,322 2,095,966 Available-for-sale financial assets Non-current other financial assets 12 185,009 118,125 Hedging financial instruments Current derivative financial instruments 27 2,550 5,495 2,345,325 2,486,511
Financial liabilities Financial liabilities carried at fair value through profit and loss Current derivative financial instruments 27 16,718 44,756 Financial liabilities carried at amortised cost Non-current borrowings from banks and other financial institutions 23 2,014,406 1,995,775 Non-current other payables 25 76,853 70,643 Current borrowings from banks and other financial institutions 23 316,653 440,526 Current trade payables 24 1,244,466 1,268,683 Current other payables 25 434,158 417,556 4,086,536 4,193,183 Hedging financial instruments Current derivative financial instruments 27 40,320 51,592 4,143,575 4,289,531
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5. CAPITAL MANAGEMENT POLICIES
The Group’s objective is to maximise the return on net invested capital while maintaining the ability to operate over time, ensuring adequate returns for its shareholders and benefits for the other stakeholders, with a sustainable financial structure. In order to achieve these objectives, as well as pursue satisfactory earnings results and generate cash flows, the Group may adjust its dividend policy and the configuration of the Company’s capital.
The main indicators used by the Group to manage its capital are: 1) R.O.I. (Return on Investments) – Ratio between operating income and average net invested capital: the indicator represents the capacity of business results to remunerate net invested capital, construed as the sum of non-current assets and net working capital. The Group’s objective is for this ratio to be greater than the weighted average cost of capital (WACC); 2) Gearing: this is calculated as the ratio between net financial position and equity. It is an indicator of the sustainability of the ratio between debt and equity, which takes into account the market situation and trend in the cost of capital and debt at different times; 3) R.O.E (Return on equity): this is calculated as the ratio between net income and average book value of equity. It is an indicator representing the Group’s ability to remunerate its shareholders. The objective is for the indicator to be higher than the rate of return on a risk-free investment, correlated to the nature of the operated businesses.
The figures for 2013 and 2012 are shown below:
2013 2012
1 R.O.I. (operating income / average net invested capital) 17.81% 19.44% 2 Gearing ( net financial position/equity) 0.54 0.50 3 R.O.E. (Return on Equity) 12.70% 17.39%
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6. ESTIMATES AND ASSUMPTIONS
The preparation of the consolidated financial statements entails that management make estimates and assumptions which, under certain circumstances, are based on difficult and subjective assessments and estimates that are based on historical experience, and assumptions that are periodically considered reasonable and realistic in light of the circumstances. The results that actually emerge could therefore differ from such estimates. Estimates and assumptions are reviewed regularly and the effects of each change made to them are recognised in income for the year when the estimate is revised if the revision itself only affects that year, or also in subsequent periods if the revision affects both the current period and future ones.
In this context it is important to note that the situation caused by the economic and financial crisis entailed making extremely uncertain assumptions about future performance. Therefore, it cannot be ruled out that next year’s results will be different from those estimated and that adjustments to the carrying value of the relevant items might be necessary, including significant adjustments, which obviously cannot be estimated or foreseen at this time. Such estimates affect the carrying amounts of certain assets and liabilities, costs and revenues, and also disclosures relating to contingent assets/liabilities at the reporting date.
The estimates and assumptions relate mainly to assessments of the recoverability of intangible assets, to the definition of the useful lives of property, plant and equipment, to the recoverability of receivables and to the recognition/measurement of provisions for liabilities and charges, pension schemes and other post-employment benefits and are based on data that reflect the current state of available knowledge.
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Estimates entailing greater subjectivity and having a particularly material impact
What follows is a brief description of the accounting policies that, more than others, require management to exercise greater subjectivity in the calculation of estimates, and for which a change in the conditions underlying the assumptions used could have a material impact on the Consolidated Financial Statements, or for which there is a risk that material adjustments to the carrying amount of assets and liabilities may emerge in the year subsequent to the reference period.
Goodwill
In accordance with the accounting standards adopted for preparation of the financial statements, goodwill is tested annually in order to ascertain the existence of any impairment losses to be recognised in income. In particular, the test in question entails allocation of goodwill to cash generating units and subsequent determination of their recoverable value, understood as the greater of fair value and value in use.
If the recoverable amount proves to be less than the carrying amount of the cash generating units, the goodwill allocated to them must be impaired. Determination of the recoverable value of the cash generating units entails using estimates that depend on subjective assessments and on factors that can change over time, with consequent and possibly material effects on the measurements made by management.
Impairment of property, plant and equipment and intangible assets
In accordance with the reference accounting standards, non-current assets are tested to ascertain whether there has been an impairment loss, which must be recognised through impairment, when there are signs that difficulties are to be expected for recovery of their net carrying amount through use. Testing whether these symptoms exist requires that the directors use subjective assessments based on information available from both internal and external sources, and on historical experience.
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Moreover, if it is determined that a potential impairment loss may be generated, this loss is calculated using appropriate measurement techniques. The proper identification of elements indicating the existence of a potential impairment loss, and the estimates for calculating the amount of such losses, depend on subjective assessments and factors that may vary over time, affecting the assessments and estimates made by management.
Pension plans and other post-employment benefits
Group companies have set up pension plans, healthcare plans and other defined benefit plans in different countries for their employees, mainly in the United States, the United Kingdom and Italy. Management uses different actuarial assumptions to calculate the liabilities and the future returns on assets serving these employee benefit plans. Actuarial assumptions of a financial nature regard the discount rate, the rates of future salary increases and trends in healthcare costs. Demographic actuarial assumptions of a demographic nature essentially regard the rates of mortality, disability and resignations. The Group has identified discounting rates deemed to be balanced, considering the context.
Deferred tax assets
Deferred tax assets are accounted for on the basis of expected future taxable earnings prospects. The measurement of prospective income to account for deferred taxes depends on factors that may change over time and materially impact the measurement of deferred tax assets.
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The determination of adjustment items reflects budget figures and plans consistent with those used for the impairment tests and described in the previous paragraph in relation to the recoverable amount of non-current assets. Moreover, it is believed that the accrued adjustments adequately cover the risk of further worsening in the plan assumptions, considering that the accrued net deferred tax assets refer to temporary differences or tax losses for which a significant amount may be recovered over an extremely long period of time, and thus consistently with a context where emergence from the crisis and economic recovery should last beyond the time horizon implicit in the aforementioned plans.
Provisions for liabilities and charges
Provisions are set aside against contingent legal and fiscal liabilities, representing the risk of losing lawsuits. The amount of provisions recognised in relation to these liabilities represents the best estimate at the reporting date made by management for lawsuits and tax claims regarding a vast range of issues which are subject to the jurisdiction of various countries. Such an estimate entails making assumptions that depend on factors that may change over time and which could therefore have a material impact with respect to the current estimates made by management for preparation of the Consolidated Financial Statements.
Measurement of the Prelios “convertendo” debt-for-equity instrument As part of the arrangements to restructure the financial receivable from Prelios S.p.A. that were finalised in August 2013, Pirelli subscribed to the “convertendo” bond that was designated as a financial asset at fair value through profit or loss when it was first recognised. Estimates were used to measure the fair value of the financial instrument at December 31, 2013. The reader is referred to the note on the Financial Risk Management Policy – Supplemental Information: hierarchical levels for measurement of fair value in regard to the analytical description of the measurement criteria that are used.
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7. BUSINESS COMBINATIONS
Wagner (Germany) acquisition Between July and October 2013 Pneumobil Gmbh, a German company controlled by Pirelli Tyre S.p.A through Deutsche Pirelli Reifen Holing GmbH, acquired 25 retail outlets in Bavaria, of which 15 belong to Reifen Wagner I.S. Autoservice GmbH & Co and 10 to Tire Wagner GmbH, for a value of euro 20,138 thousand. With this transaction, Pirelli wishes to reinforce its commercial presence in Bavaria, and especially in the Munich area.
The fair value of the acquired assets is illustrated as follows:
(in thousands of euro) Fair value recognised on acquisition
Property, plant and equipment 1,540
- Customer relationship 331 - Trademarkes 9,439 Intangible assets 9,770 Inventories 5,948
Fair value of total net identifiable assets acquired 17,258
Goodwill 2,880
Totale consideration 20,138
The process of allocating the price paid to the fair value of the assets and liabilities acquired in the business combination (purchase price allocation – PPA) has been completed, in accordance with IFRS 3 – Business Combinations. Therefore, the consequent calculation of goodwill resulting from the acquisition must be considered final.
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The difference between the total consideration (euro 20,138 thousand) and the value of net acquired assets (euro 7,488 thousand) has been allocated as a euro 9,770 thousand addition to intangible assets (including trademarks for euro 9,439 thousand and customer relationships for euro 331 thousand). The residual goodwill consequently totals euro 2,880 thousand, entirely allocated to the consumer cash generating unit. The incurred costs related to the transaction in 2013 total euro 22 thousand. These costs have been recognised in the Income Statement under “other costs” and mainly refer to various advisory services provided in support of the acquisition process.
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Line-by-line consolidation of the China JV The equity investment in Sino Italian Wire Tech. Co. Ltd, amounting to 49%, was classified as a subsidiary at December 31, 2013, since the call option held by Pirelli became exercisable in 2013. If exercised, it would boost the Pirelli shareholding to 75%. In accordance with IAS 27, if call options can be exercised, they constitute potential voting rights that must be added to the voting shares counted to determine whether or not there is control. The equity investment was classified as an associate at December 31, 2012. Line-by-line consolidation of this investment is subject to IFRS 3, since it involves a step acquisition or a business combination achieved in stages, i.e. acquisition of control over an investee in which a non-controlling equity interest was already held.
The table shows the fair value of the equity investment and the assets and liabilities at the consolidation date:
(in thousand of euro) Fair value recognised on 12/31/2013
Property, plant and equipment 46,867
Inventories 4,458 Trade receivables 7,977 Other receivables 4,901 Cash and cash equivalents 842 65,045
Trade payables (4,100) Other payables (2,015) Borrowings from bank and other financial institutions (40,315) (46,430)
Total net identifiable assets consolidated 18,615
Minorities 51% (9,494)
Fair value 49% shareholding * 9,121 * equivalent to the consideration for the acquisition of control
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8. OPERATING SEGMENTS
In view of reconciling the organisation of the operating segments with the organisation of the internal reporting of the Group, the operating segments subject to separate reporting at December 31, 2013 have been changed since December 31, 2012. In particular, the only operating segment present in 2012, the Total Tyre Business, has been broken down into: the Consumer Business: this includes car and motorcycle tyres made for both the original equipment and replacement markets; the Industrial Business: this includes truck tyres, tyres for agricultural equipment, made both for the original equipment and replacement markets, and the steel cord business.
The data of the holding companies and service companies (including the parent company) have been allocated to the operating segments by using reasonable and consistent principles. The “Other business” consist of the Pirelli Ambiente Group and the PZero Group. The comparative data for 2012 have thus been restated.
The segment results for 2013 are as follows:
(in thousands of euro) CONSUMER INDUSTRIAL OTHER BUSINESS TOTAL 12/31/2013
Total net sales 4,478,886 1,636,900 30,374 6,146,160 Gross operating profit 823,896 283,100 (27,049) 1,079,947 Depreciation and amortisation (227,532) (57,500) (3,901) (288,933) Operating income (loss) 596,364 225,600 (30,950) 791,014
Net income (loss) from equity investments (78,298) Financial income (expenses) (195,832)
Net income (loss) before income taxes 516,884
Income taxes (210,392) Net income (loss) 306,492
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The segment results for 2012 are as follows:
(in thousands of euro) CONSUMER INDUSTRIAL OTHER BUSINESS TOTAL 12/31/2012
Total net sales 4,419,835 1,611,500 40,200 6,071,535 Gross operating profit 849,472 237,900 (23,493) 1,063,879 Depreciation and amortisation (206,800) (59,800) (4,807) (271,407) Operating income (loss) 642,672 178,100 (28,300) 792,472 Net income (loss) from equity investments (52,247) Financial income (expenses) (150,440) Net income (loss) before income taxes 589,786 Income taxes (198,225) Net income (loss) 391,560
The assets, liabilities and capital expenditure broken down by segment at December 31, 2013 are illustrated as follows:
(in thousands of euro) CONSUMER INDUSTRIAL OTHER BUSINESS OTHER TOTAL 12/31/2013
Goodwill 587,233 325,784 - - 913,017 Allocated assets 3,727,388 1,060,961 61,680 - 4,850,029 Unallocated assets - - - 1,597,166 1,597,166 TOTAL ASSETS 4,314,621 1,386,745 61,680 1,597,166 7,360,212
Allocated liabilities 1,527,130 466,688 14,881 - 2,008,342 Unallocated liabilities - - - 2,915,281 2,915,281 TOTAL LIABILITIES 1,527,130 466,688 14,881 2,915,281 4,923,623 Capital expenditure: - property, plant and equipment 318,400 83,100 781 - 402,281 - intangible assets 7,700 3,100 18 - 10,818
The assets, liabilities and capital expenditure broken down by segment at December 31, 2012 are illustrated as follows:
(in thousands of euro) CONSUMER INDUSTRIAL OTHER BUSINESS OTHER TOTAL 12/31/2012
Goodwill 590,488 328,201 - - 918,689 Allocated assets 3,756,537 1,176,374 85,800 - 5,018,711 Unallocated assets - - - 1,655,423 1,655,423 TOTAL ASSETS 4,347,025 1,504,575 85,800 1,655,423 7,592,823
Allocated liabilities 1,511,300 520,600 21,100 - 2,053,000 Unallocated liabilities - - - 3,150,394 3,150,394 TOTAL LIABILITIES 1,511,300 520,600 21,100 3,150,394 5,203,394 Capital expenditure: - property, plant and equipment 376,800 75,900 2,848 - 455,548 - intangible assets 11,100 4,000 314 - 15,414
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Segment assets consist mainly of property, plant and equipment and intangible assets, leased assets, inventories, trade receivables and other receivables. Financial receivables, cash equivalents, other financial assets, securities held for trading and both current and deferred tax assets are excluded. Segment liabilities mainly comprise trade payables and other payables, advances from customers and provisions for liabilities and charges and employee benefits. Financial payables and both current and deferred tax liabilities are excluded.
Capital expenditure on tangible assets was focused on expanding the availability of premium products in Italy, Mexico, Romania and China. Work is also proceeding in Russia to align the production sites with Group processes and quality standards.
The capital expenditure on intangible assets include IT costs for improvement and development of business support platforms (GeoMarketing phase I, eCRM-CRM, O.E. System Evolution, B2B Platform Evolution), for business intelligence implementations (OE Aftermarket, Sell In and Out Optimisation Programme) and new, evolved functions for Forecast and Purchasing profitability – SAP SRM Enhancements.
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Net sales by geographical area are shown below. They are allocated on the basis of the country in which the customer is resident.
(in thousands of euro) 2013 2012
Europe: - Italy 379,451 6.18% 425,260 7.00% - Rest of Europe 1,679,367 27.32% 1,688,549 27.81% - Russia & CSI 254,122 4.13% 255,160 4.20% Nafta 682,053 11.10% 692,618 11.41% Central and South America 2,174,235 35.38% 2,067,525 34.05% Asia/Pacific 481,493 7.83% 420,400 6.92% Middle Est/Africa/India 495,439 8.06% 522,023 8.60% 6,146,160 100.00% 6,071,535 100.00%
Non-current assets by geographical area are shown below. They are allocated on the basis of the country where these assets are located.
(in thousands of euro) 12/31/2013 12/31/2012
Europe: - Italy 463,064 12.78% 403,152 11.06% - Rest of Europe 695,374 19.20% 648,527 17.79% - Russia & CSI 255,637 7.06% 286,139 7.85% Nafta 207,927 5.74% 195,422 5.36% Central and South America 560,349 15.47% 633,746 17.38% Asia/Pacific 334,789 9.24% 342,042 9.38% Middle Est/Africa/India 192,270 5.31% 218,211 5.99% Non-current assets not allocated 913,017 - 25.20%0.00% 918,689 - 25.20%0.00% 3,622,427 100.00% 3,645,928 100.00%
The allocated non-current assets shown in the table above consist of property, plant and equipment and intangible assets, excluding goodwill. The unallocated non-current assets pertain to goodwill (see note 10).
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9. PROPERTY, PLANT AND EQUIPMENT
At December 31, 2013 the breakdown and changes are as follows:
(in thousands of euro) 12/31/2013 12/31/2012
Gross Amount Accumulated Net Amount Gross Amount Accumulated Net Amount Depreciation Depreciation
Land 106,896 - 106,896 108,399 - 108,399 Buildings 1,099,434 (429,450) 669,984 1,101,203 (416,187) 685,016 Plant and machinery 3,480,584 (1,909,024) 1,571,560 3,521,488 (1,971,572) 1,549,916 Industrial and commercial equipment 691,235 (507,690) 183,545 715,488 (524,765) 190,723 Other assets 230,162 (153,699) 76,463 260,803 (171,413) 89,390 5,608,311 (2,999,863) 2,608,448 5,707,381 (3,083,937) 2,623,444
GROSS AMOUNT (in thousands of euro) 12/31/2012 Hyperinflation Business Translation Increases Decreases Reclassif. Other 12/31/2013 effect combination differ. effect Land 108,399 1,581 5,025 (6,338) 18 (687) 1,703 (2,805) 106,896 Buildings 1,101,203 17,347 14,024 (80,097) 41,638 (12,143) 18,298 (836) 1,099,434 Plant and machinery 3,521,488 28,402 32,285 (296,000) 276,116 (89,061) 3,213 4,141 3,480,584 Industrial and commercial equipment 715,488 6,222 - (66,510) 37,978 (26,108) 20,980 3,185 691,235 Other assets 260,803 17,152 2,948 (32,699) 46,531 (19,490) (44,194) (889) 230,162 5,707,381 70,705 54,282 (481,644) 402,281 (147,489) - 2,795 5,608,311
ACCUMULATED DEPRECIATION (in thousands of euro) 12/31/2012 Hyperinflation Business Translation Reclassif. Decreases Deprec. Other 12/31/2013 effect combination differ. effect Buildings (416,187) (15,550) (754) 38,040 (4,142) 3,114 (35,084) 1,115 (429,450) Plant and machinery (1,971,572) (16,371) (4,431) 167,880 688 80,908 (165,202) (924) (1,909,024) Industrial and commercial equipment (524,765) (5,279) - 49,595 1,792 23,554 (54,634) 2,047 (507,690) Other assets (171,413) (3,268) (690) 12,662 1,662 16,829 (14,996) 5,515 (153,699) (3,083,937) (40,468) (5,875) 268,177 - 124,405 (269,916) 7,752 (2,999,863)
NET AMOUNT (in thousands of euro) 12/31/2012 Hyperinflation Business Translation Increases Decreases Reclassif. Depreciation Other 12/31/2013 effect combination differ. effect Land 108,399 1,581 5,025 (6,338) 18 (687) 1,703 - (2,805) 106,896 Buildings 685,016 1,797 13,270 (42,057) 41,638 (9,029) 14,156 (35,084) 278 669,984 Plant and machinery 1,549,916 12,032 27,854 (128,120) 276,116 (8,153) 3,901 (165,202) 3,216 1,571,560 Industrial and commercial equipment 190,723 943 - (16,915) 37,978 (2,554) 22,772 (54,634) 5,232 183,545 Other assets 89,390 13,884 2,258 (20,037) 46,531 (2,661) (42,532) (14,997) 4,627 76,463 2,623,444 30,237 48,407 (213,467) 402,281 (23,084) - (269,917) 10,548 2,608,448
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The changes at December 31, 2012 were as follows:
GROSS AMOUNT (in thousands of euro) 12/31/2011 Restatement * 12/31/2011 Hyperinflation Business Translation Increases Decreases Reclassif. Other 12/31/2012 restated effect combination differ. effect Land 93,647 (700) 92,947 721 - (1,406) 5,037 (1,159) 867 11,392 108,399 Buildings 970,824 37,608 1,008,432 7,909 29,459 (20,512) 59,625 (4,390) 25,255 (4,575) 1,101,203 Plant and machinery 3,322,727 14,800 3,337,527 9,380 46,542 (102,764) 286,664 (42,512) (17,420) 4,071 3,521,488 Industrial and commercial equipment 650,694 - 650,694 2,554 18,501 (21,393) 43,218 (18,329) 37,889 2,354 715,488 Other assets 272,422 (7,597) 264,825 11,201 2,748 (4,870) 61,004 (30,218) (46,591) 2,704 260,803 5,310,314 44,111 5,354,425 31,765 97,250 (150,945) 455,548 (96,608) - 15,946 5,707,381
ACCUMULATED DEPRECIATION (in thousands of euro) 12/31/2011 Restatement * 12/31/2011 Hyperinflation Business Translation Reclassif. Decreases Deprec. Other 12/31/2012 restated effect combination differ. effect Buildings (391,114) - (391,114) (6,960) (234) 10,897 781 3,150 (32,940) 234 (416,187) Plant and machinery (1,891,612) - (1,891,612) (6,945) (929) 54,029 7,842 28,869 (163,823) 997 (1,971,572) Industrial and commercial equipment (499,602) - (499,602) (2,301) (8,185) 16,589 2,943 15,887 (49,920) (176) (524,765) Other assets (171,370) - (171,370) (1,466) (1,405) 2,690 (11,566) 28,785 (13,382) (3,699) (171,413) (2,953,698) - (2,953,698) (17,673) (10,752) 84,205 - 76,691 (260,065) (2,644) (3,083,937)
NET AMOUNT (in thousands of euro) 12/31/2011 Restatement * 12/31/2011 Hyperinflation Business Translation Increases Decreases Reclassif. Depreciation Other 12/31/2012 restated effect combination differ. effect Land 93,647 (700) 92,947 721 - (1,406) 5,037 (1,159) 867 - 11,392 108,399 Buildings 579,710 37,608 617,318 948 29,226 (9,615) 59,625 (1,240) 26,036 (32,940) (4,342) 685,016 Plant and machinery 1,431,115 14,800 1,445,915 2,435 45,613 (48,735) 286,664 (13,643) (9,578) (163,823) 5,068 1,549,916 Industrial and commercial equipment 151,092 - 151,092 253 10,316 (4,804) 43,218 (2,442) 40,832 (49,920) 2,178 190,723 Other assets 101,052 (7,597) 93,455 9,734 1,344 (2,180) 61,004 (1,433) (58,157) (13,382) (995) 89,390 2,356,616 44,111 2,400,727 14,092 86,498 (66,740) 455,548 (19,917) - (260,065) 13,301 2,623,444 * The amounts at 12/31/2011 have been restated to include retrospectively the effects of the final purchase price allocation related to the acquisition in Russia
The additions in 2013 mainly refer to capital expenditure to expand the availability of premium products in Italy, Mexico, Romania and China. Work is also proceeding in Russia to align the production sites with Group processes and quality standards. The ratio of additions to property, plant and equipment to depreciation in 2013 was 1.49 (1.75 at December 31, 2012).
The effect from business combinations refers to the acquisition of 25 retail outlets in Germany that belonged to Reifen Wagner I.S. Autoservice GmbH & Co and Tire Wagner GmbH (euro 1,540 thousand) and line-by-line consolidation of the Chinese company Sino Italian Wire Tech. Co. Ltd (euro 46,867 thousand). For more details, see note 7 “Business combinations”.
Construction in progress at December 31, 2013, included in the individual categories of property, plant and equipment, totalled euro 274,703 thousand (euro 241,107 thousand at December 31, 2012).
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Impairment during 2013, included in the column “gross value – decreases” of the table illustrated above, totalled euro 7,559 thousand (euro 10,839 thousand in 2012) and are associated with the reduction of the activity in anti-particulate filters (in China and Romania), in response to the strategy of focusing on the tyre business.
In regard to restrictions on the ownership of assets, note that: - the subsidiary Pirelli Tyres Alexandria Co. (Egypt) pledged its plant and machinery for a total of euro 3,561 thousand (euro 5,230 thousand at December 31, 2012) as collateral for loans granted by the National Bank of Egypt; - the subsidiary Pirelli Pneus Ltda. (Brazil) pledged its machinery and land as collateral for a total of euro 42,452 thousand (euro 50,573 thousand at December 31, 2012) against bank loans granted by BNDES (Banco Nacional de Desenvolvimento) and litigation with the national social security institution INSS (Instituto nacional de seguridade social); - the subsidiary Pirelli Neumaticos SAIC (Argentina) pledged its own land and buildings for a total of euro 12,248 thousand as collateral for a loan granted by Banco de la Nacion Argentina (euro 11,019 thousand at December 31, 2012); - the subsidiary Pirelli Neumaticos S.A. de C.V. (Mexico) pledged its own land, factories and plants as collateral worth euro 67,668 thousand for a loan granted by Bancomext.
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9.1 FINANCE LEASES
The value of buildings and other assets for which the Group has entered into a finance leasing agreement is included in the respective categories of property, plant, and equipment. The item is broken down as follows:
(in thousands of euro) 12/31/2013 12/31/2012
Cost Accumulated Net Cost Accumulated Net Depreciation amount Depreciation amount
Leased land - - - 10,348 - 10,348 Leased buldings 2,860 (1,292) 1,568 52,537 (12,605) 39,932 Other leased assets 2,635 (2,091) 544 2,955 (2,158) 797 Leased plant and machinery 94 (94) - 96 (96) - 5,589 (3,477) 2,112 65,936 (14,859) 51,077
The decrease in land and buildings held under finance leases from 2012 is mainly due to the redemption in July 2013 of the land and factory building held under finance lease, where the structures and Tyre R&D activities in Italy and the headquarter of Prelios S.p.A.are located (euro 12,562 thousand).
The payables for finance leases are included in financial payables (note 23).
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10. INTANGIBLE ASSETS
The breakdown and changes in this item are as follows:
(in thousands of euro) 12/31/2012 Translation Effect of Increase Decrease Amortisation Reclassif. Other 12/31/2013 differences business combination
Patents and intellectual property rights 19 (2) - - - (31) 63 - 49 Concessions/licenses/trademarks 52,349 (2,518) 9,770 367 - (6,914) (370) - 52,683 Goodwill 918,689 (8,552) 2,880 - - - - - 913,017 Application software 18,570 (70) - 7,583 (52) (8,168) 307 31 18,201 Other intangible asstes 32,857 (2,289) - 2,868 - (3,904) - 496 30,028 1,022,484 (13,432) 12,650 10,818 (52) (19,016) - 527 1,013,979
The changes in 2012 were as follows:
(in thousands of euro) 12/31/2011 Effect of 12/31/2011 Translation Effect of Increase Decrease Amortisation Other 12/31/2012 business restated * differences business combination combination
* Patents and intellectual property rights 31 - 31 - - - - (12) (0) 19 Concessions/licenses/trademarks 7,898 13,000 20,898 (593) 41,417 1,158 (19) (4,496) (6,017) 52,349 Goodwill 915,321 (50,985) 864,336 334 54,019 - - - (0) 918,689 Application software 8,376 - 8,376 21 843 12,968 - (3,912) 275 18,570 Other intangible asstes 2,673 12,200 14,873 1,670 15,750 1,288 (130) (2,922) 2,329 32,858 934,299 (25,785) 908,514 1,433 112,029 15,414 (149) (11,342) (3,414) 1,022,484 * The amounts at 12/31/2011 have been restated to include retrospectively the effects of the final purchase price allocation related to the acquisition in Russia
The addition to software application mainly refers to IT costs for improvement and development of business support platforms (GeoMarketing phase I, eCRM-CRM, O.E. System Evolution, B2B Platform Evolution), for business intelligence implementations (OE Aftermarket, Sell In and Out Optimisation Programme) and new, evolved functions for Forecast and Purchasing profitability – SAP SRM Enhancements.
The “business combination effect” includes euro 2,880 thousand for the goodwill resulting from the acquisition of 25 retail outlets belonging to Reifen Wagner I.S. Autoservice GmbH & Co and Tire Wagner GmbH, plus euro 9,770 thousand for the allocation to trademarks and customer relationships (see the previous note 7 Business Combinations).
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The allocation of goodwill by operating segment, the cash generating units (CGU) to which it was allocated for impairment testing, and the method used to measure the recoverable amount are shown in the following table:
(in thousands of euro) Operating segment Cash generating unit 12/31/2013 12/31/2012 Recoverable amount
Consumer Consumer 587,233 590,488 Value in use Industrial Industrial 325,784 328,201 Value in use 913,017 918,689
Goodwill was tested for impairment at December 31, 2013, relying on independent appraisals. This involved estimating the recoverable value of the CGU and comparing it with the net carrying amount of the relevant assets, including goodwill. Value in use corresponds to the discounted value of the future cash flows that are expected to be associated with the CGU, using a rate that reflects the specific risks of the single CGU at the measurement date. The key assumptions used by management are estimates of future sales increases, operating cash flows, the rate of growth of terminal values and the weighted average cost of capital (discount rate). The forecast income flows cover a three-year period (2014-2016), and refer to the “Industrial Plan 2014-2017”, announced to the financial community on November 6, 2013. If the consensus estimates are lower, the EBIT flows of each CGU were reduced by the negative difference between the consensus flows and the Business Plan flows. The calculation also factored in the hypothetical flow deriving from the disposal of CGUs at the end of the explicit period (assumed to be the discounted value of the perpetual return of the flow generated in the last year of the projection).
The discount rates, defined as the average cost of capital net of taxes, applied to prospective cash flows, and the used growth factors are shown in the following table:
Operating segment Cash Generating Unit 2013 2012 discount rate growth rate WACC - g discount rate growth rate WACC - g (WACC) ( g ) (WACC) ( g )
Consumer Consumer 8.56% - 8.56% 9.28% - 9.28% Industrial Industrial 8.56% - 8.56% 9.28% - 9.28%
On the basis of these tests, no impairment loss was exposed.
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A sensitivity analysis of the results for the examined CGUs was also carried out. In all cases the values in use remain higher than the carrying amounts even assuming a change in key parameters such as: - a change in discount rates by 100 basis points; - a change in the growth rate by 100 basis points.
“Concessions, licenses and trademarks” mainly include the brands deriving from acquisition in 2013 of 25 retail outlets belonging to Wagner in Germany for euro 9,770 thousand, and from the acquisitions made during 2012 in Russia (euro 7,542 thousand), the retail chains Däckia in Sweden (euro 24,206 thousand) and Campneus in Brazil (euro 9,443 thousand).
The “other intangible assets” are mainly composed of the fair value measurement of customer relationships and commercial partnerships resulting from the acquisitions made in 2012 in Russia and Sweden (Däckia) .
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11. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
The changes in investments in associates and joint ventures during the period are illustrated as follows:
(in thousands of euro) 12/31/2013 12/31/2012
Opening balance 113,171 140,114 Increases 76,780 - Distribution of dividends (1,947) (3,928) Impairment - (29) Share of net income (loss) (25,835) (21,293) Share of other components recognised in other comprehensive income (3,932) (1,701) Reclassifications and other (26,771) 8 Closing balance 131,466 113,171
The breakdown by individual investment is as follows:
(in thousands of euro) 12/31/2012 Increases Distrub. Share of Share of components Reclass. 12/31/2013 of dividends net income recognised in other and (loss) comprehensive income other Eurostazioni S.p.A. 59,912 - (1,947) - - - 57,965 Prelios - 21,523 - (12,838) - 313 8,998 Fenice S.r.l. - 22,986 - - (4,801) - 18,185 RCS MediaGroup S.p.A. 19,327 21,331 - (13,573) - (27,085) - Sino Italian Wire Tech. Co Ltd 8,491 - - 350 - (8,841) - GWM Renewable Energy II S.p.A. 23,823 - - (191) 869 - 24,501 PT Evoluzione Tyres - 10,338 - 637 8,966 19,941 Idea Granda Società Consortile r.l. 633 - - - - 633 Other companies 985 602 - (220) - (124) 1,243 Total 113,171 76,780 (1,947) (25,835) (3,932) (26,771) 131,466
The investments in GWM Renewable Energy II S.p.A. (16.87%) and in Prelios S.p.A. (13.06% of voting shares, and 9.17% of total share capital), are classified as associates (although the percentage of participation in the share capital is less than 20%), since the Group has a significant influence through the membership of its own managers on their Board of Directors and, in regard to Prelios, while accounting for the other interests associated with Prelios, such as the equity investment in Fenice S.r.l. and the “convertendo” financial instrument (see also next note 12 “Other financial assets”).
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The fair value of the equity investment in Prelios S.p.A., listed on the Milan Stock Exchange, was calculated by using the quotation at December 31, 2013 (euro 0.5775 per share), and totals euro 20,912 thousand. The additions during the year refer to: - euro 21,523 thousand from the conversion into Prelios S.p.A. ordinary stock of a portion of the financial receivable from Prelios S.p.A. (which amounted to euro 173,506 thousand at December 31, 2012) and euro 22,986 thousand from the formation and subsequent subscription of the share capital increase of Fenice S.r.l., a special purpose vehicle that owns 117,597,496 Class B non-voting shares of Prelios S.p.A., as part of the restructuring of the financial receivable from Prelios S.p.A.; - the share capital increase of RCS Mediagroup S.p.A. (euro 21,331 thousand) and PT Evoluzione Tyres (euro 10,338 thousand), a joint venture operating in Indonesia.
In regard to the share of net income (loss), see the comments made below at note 34.1 “share of net income (loss) of associates and joint ventures.” In particular, it must be noted that: - the equity investment in Prelios S.p.A. was acquired at the end of August 2013. When this document was prepared, Prelios S.p.A. had not yet approved its draft annual report at December 31, 2013. Therefore, as provided by IAS 28, the value of the associate, measured by applying the equity method, includes the Group's share (9.17%) in the only public and available figure related to the associate for 4Q 2013, i.e. the loss announced in a press release on February 12, 2014, related to disposal of the German platform (with a consolidated impact on earnings of between euro 135 and 145 million). The Group's share in the loss (euro 12,838 thousand) is thus 9.17% of the estimated loss (euro 140 million); - the share in the loss related to RCS Mediagroup S.p.A. was recognised for the period up to September 30, 2013 (negative euro 13,573 thousand), insofar as the equity investment was reclassified in 4Q 2013 as an available-for-sale financial asset (see the comment below on “Reclassifications”).
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The share of other components recognised in other comprehensive income (negative euro 3,652 thousand) mainly refers to the Group's share in the losses recognised directly in equity by Fenice S.r.l. in 4Q 2013 (euro 4,801 thousand), resulting from fair value adjustment of the Prelios S.p.A. Class B shares held by it. These shares are qualified by Fenice S.r.l. as available-for-sale financial assets, and the fair value of these shares was determined by applying an approximately 18% non-liquidity discount rate on the value of Prelios S.p.A. ordinary shares (euro 0.5775 per share at December 31, 2013). This discount was necessary because the nature of the Prelios S.p.A. Class B shares is such that they will be automatically converted into ordinary shares when a sales procedure is initiated and coinciding with their transfer to third parties. The distinctive element between Class B shares and ordinary shares is thus constituted by the lock-up restriction implied by holding them.
The “reclassifications” mainly refer to: - the equity investment in RCS Mediagroup S.p.A. from “associate” to “available-for- sale financial asset”. The following indicators that Pirelli has significant influence were considered: its participation in the block voting shareholders' syndicate, intended to guarantee a stable ownership structure and unified corporate management of the RCS Group, the intensification of other forms of exercising governance rights, such as membership on the Board of Directors and other bodies. On October 31, 2013, the participants of the shareholders' block voting syndicate of RCS Mediagroup (including Pirelli) agreed not to renew the shareholders' agreement and to dissolve it prematurely, before its originally scheduled expiry date of March 14, 2014. Following this decision, it is believed that the assumptions justifying the existence of significant influence by Pirelli on RCS no longer exist. As provided by IAS 28, once Pirelli ceased to have significant influence, the equity investment was measured at its fair value (in the amount of the Stock Market quotation of RCS Mediagroup S.p.A. at October 31, 2013 – euro 1.62 per share), and the difference between the fair value and the carrying value of the shareholding (euro 27,085 thousand) was recognised in the Income Statement (with a positive effect of euro 10,395 thousand). The losses recognised directly in the equity of the associate were also reclassified to the Income Statement (euro 1,757 thousand). Therefore, the net impact of the reclassification on profit or loss was a positive euro 8,638 thousand;
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- line-by-line consolidation of Sino Italian Wire Tech. Co. Ltd, domiciled in China, as described above at note 7 – Business Combinations; - reclassification of the equity investment in PT Evoluzione Tyres, a joint venture operating in Indonesia, from subsidiary to joint venture.
The highlights for the principal associates and joint ventures are shown in full and not on a pro-rated basis, as follows: (in thousands of euro) 12/31/2013 12/31/2012
Non-current assets 693,818 2,081,320 Current assets 105,449 862,926 Non-current liabilities 273,866 1,319,206 Current liabilities 100,981 969,038
Revenues from sales and services 73,838 1,260,453 Production costs (54,968) (1,643,793) Net income (loss) (87) (396,581)
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12. OTHER FINANCIAL ASSETS
These totalled euro 289,096 thousand, compared with euro 118,125 thousand at December 31, 2012. These are broken down as follows:
(in thousands of euro) 12/31/2013 12/31/2012
Financial assets available for sale 185,009 118,125 Financial assets at fair value through profit and loss 104,087 - 289,096 118,125
The financial assets at fair value through profit or loss refer to the “convertendo” loan, a debt-for-equity financial instrument subscribed as part of the restructuring of the financial receivable from Prelios S.p.A. that was finalised in August 2013. The financial instrument was designated as a financial asset at fair value through profit or loss (“FVTPL”) in the Income Statement when it was first recognised, and is composed of 80,880 “convertendo” debt- for-equity tranche A bonds valued at euro 1,000 each, and initially recognised on the balance sheet at a value of euro 80,880 thousand, convertible into ordinary Prelios S.p.A. shares (Class A shares), and 67,492 “convertendo” tranche B bonds valued at euro 1,000 each, initially recognised in the balance sheet at euro 67,492 thousand, convertible into Prelios S.p.A. Class B non-voting shares. The number of Prelios S.p.A. shares that Pirelli will obtain at maturity (December 31, 2019) will be equal to the par value of the “convertendo” (euro 148,372 thousand) divided by the greater of the market price on conversion and the price of the capital increase (euro 0.5953 per share). The financial instrument accrues interest at a rate of 1% (PIK interest rate), which is payable in shares on maturity.
201
Pirelli used the assistance of an independent professional to make the appraisal at December 31, 2013. For measurement purposes, the instrument is essentially composed of: a value assigned to a long position on Prelios shares; net of the value of a sold call option, which Prelios implicitly holds since it may exercise the right of conversion at a fixed countervalue. The combination of the two effects resulted in a negative fair value adjustment, compared with the nominal carrying value, of euro 44,285 thousand, recognised in the Income Statement. The carrying value of the financial instrument at December 31, 2013 is thus equal to euro 104,087 thousand. The reader is also referred to the note on the Financial Risk Management Policy – Supplemental Information: hierarchical values for measurement of fair value.
The changes during the year in available-for-sale financial assets are the following:
(in thousands of euro) 12/31/2013 12/31/2012 Opening balance 118,125 127,037 Exchange difference 67 - Increases 9,931 1,981 Decreases (29) (1,727) Impairment (17,970) (12,066) Fair value adjustments through Equity 37,499 2,912 Transfer from investments in associated companies 37,480 - Other (94) (12) Closing balance 185,009 118,125
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The breakdown of this item by individual investment is as follows:
(in thousands of euro) 12/31/2013 12/31/2012
Cumulated FV Historical cost adjustments FV adjustments through P&L Fair Value Fair value through equity
Previous 2013 periods Listed stock A B C D A+B+C+D Mediobanca S.p.A. 90,247 37,178 (16,805) (10,429) 100,191 73,442 Prelios S.p.A. 211 - (201) (10) - 45 RCS Mediagroup S.p.A. 37,480 (6,941) - - 30,539 - Other companies 134 11 (11) - 134 115 128,072 30,248 (17,017) (10,439) 130,864 73,602 Unlisted stock Alitalia S.p.A. 27,534 - (15,075) (4,925) 7,534 4,925 Fin. Priv. S.r.l. 14,458 4,836 (4,217) (1,345) 13,732 10,241 Fondo Anastasia 13,250 1,834 - - 15,084 12,343 Istituto Europeo di Oncologia S.r.l. 4,039 999 - - 5,038 5,532 F.C. Internazionale Milano S.p.A. 7,213 - (6,655) - 558 - Euroqube 373 - - - 373 550 Tlcom I LP 1,319 - (591) (28) 700 728 Emittenti Titoli 117 2,516 - - 2,633 1,698 Equinox Two SCA 6,653 - - (1,232) 5,421 5,346 Other companies 4,154 - (34) (1,048) 3,072 3,160 79,110 10,185 (26,572) (8,578) 54,145 44,523 207,182 40,433 (43,589) (19,017) 185,009 118,125
The increases relate mainly to the capital increase related to the equity investments in F.C. Internazionale S.p.A. (euro 558 thousand), in Alitalia S.p.A. (euro 7,534 thousand, subscribed on November 27, 2013), and in Equinox Two S.C.A. (euro 1,179 thousand).
The impairment mainly refers to the equity investments in Mediobanca S.p.A for euro 10,429 thousand, Alitalia S.p.A. for euro 4,925 thousand, Fin. Priv. S.r.l. for euro 1,345 thousand and Equinox Two S.C.A. for euro 1,232 thousand. In this regard, also see note 34.3 - Losses from investments. It is also noted that the impairments of the investments in Mediobanca S.p.A. and Fin. Priv. S.r.l. were made in the condensed half-yearly financial statements at June 30, 2013, since the limits on duration of the impairment loss were exceeded. Because the IFRSs prohibit reversal of the impairment losses recognised in interim financial statements, the positive fair value adjustment at December 31, 2013 has been recognised as an increase to equity.
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The fair value adjustment through equity, equal to a net positive value of euro 37,499 thousand, mainly refers to the equity investments in Mediobanca S.p.A (positive euro 37,178 thousand), RCS Mediagroup S.p.A. (negative euro 6,941 thousand and referring to the period beginning on the reclassification date of the associate as an available-for-sale financial asset and ending December 31, 2013), Fin. Priv. S.r.l. (positive euro 4,836 thousand), Emittenti Titoli (positive euro 935 thousand), Istituto Europeo di Oncologia (negative euro 494 thousand), and Fondo Comune di Investimento Immobiliare – Anastasia (positive euro 2,741 thousand).
The “transfer from investments in associated companies” (euro 37,480 thousand) refers to the equity investment in RCS MediaGroup S.p.A., reclassified from “Investments in associates” to “Other financial assets” following dissolution of the shareholders' agreement, as described in the note commenting on the account “investments in associates and joint ventures” – see note 11.
The fair value of listed financial instruments corresponds to their stock market price at December 31, 2013.
The fair value of unlisted financial instruments was determined by making estimates on the basis of the best information available.
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13. DEFERRED TAX ASSETS AND PROVISION FOR DEFERRED TAX LIABILITIES
This item is broken down as follows:
(in thousands of euro) 12/31/2013 12/31/2012
Deferred tax assets 210,181 207,110
Provision for deferred tax liabilities (49,956) (56,056)
160,225 151,054
Deferred tax assets and deferred tax liabilities are offset when a legal right exists to offset current tax receivables and current tax payables, and the deferred taxes refer to the same legal entity and the same tax authority. Their composition gross of the offsets made is as follows:
(in thousands of euro) 12/31/2013 12/31/2012
Deferred tax assets 303,911 294,026 - of which recoverable in 12 months 72,483 67,286 - of which recoverable after 12 months 231,428 226,740
Provision for deferred tax liabilities (143,686) (142,972) - of which recoverable in 12 months (27,247) (3,947) - of which recoverable after 12 months (116,439) (139,025)
160,225 151,054
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The tax effect of temporary differences and of tax losses carried forward which make up the item at December 31, 2013 and at December 31, 2012 is shown in the following table:
(in thousands of euro) 12/31/2013 12/31/2012 Deferred tax assets: Provisions for future liabilities and charges 17,044 23,187 Provision for employee benefits 74,694 49,090 Stocks 19,161 14,402 Tax losses carried forward 123,254 151,661 Amortisation and depreciation 4,854 677 Trade receivables and other receivables 10,093 8,537 Trade payables and other payables 37,227 32,629 Derivatives 6,003 11,718 Other 11,582 2,125 Total 303,911 294,026 Provision for deferred tax liabilities: Amortisation and depreciation (92,047) (132,007) Other (51,639) (10,965) Total (143,686) (142,972)
At December 31, 2013 unrecognised deferred tax assets relating to temporary differences amounted to euro 53,132 thousand (euro 113,740 thousand at December 31, 2012), and those relating to tax losses amounted to euro 199,563 thousand (euro 167,087 thousand at December 31, 2012). These amounts refer to situations where recovery is not deemed likely at this time.
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The value of tax losses broken down by maturities, against which no deferred tax assets were recognised, are shown below:
(in thousands of euro) Year of expiry 12/31/2013 12/31/2012
2014 285 285 2015 1,414 1,424 2016 7,881 7,943 2017 5,389 5,418 2018 3,981 3,997 2019 3,148 3,159 2020 6,609 3,254 2021 6,870 6,993 2022 15,674 15,273 2027 503 503 2028 12,690 12,690 2029 878 878 2030 156 156 with no expiry 655,383 538,553
720,861 600,527
Of the total tax losses without maturity, euro 462,995 thousand refer to losses recognised in the past by the subsidiary Pirelli Finance (Luxembourg) S.A., in relation to which no taxable income sufficient to recover those losses is expected.
The tax effect of gains and losses recognised directly in equity was a positive euro 9,279 thousand (a positive euro 3,501 thousand at December 31, 2012), and is shown in the Statement of Comprehensive Income. These changes were mainly due to the tax effects associated with actuarial gains/losses on employee benefits and to the adjustment of derivatives in cash flow hedges to their fair value.
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14. TRADE RECEIVABLES
Trade receivables may be broken down as follows:
(in thousands of euro) 12/31/2013 12/31/2012 Total Non-current Current Total Non-current Current
Trade receivable 708,000 - 708,000 755,641 - 755,641 Provision for bad debts (41,573) - (41,573) (51,083) - (51,083) 666,427 - 666,427 704,558 - 704,558
Out of the total of trade receivables amounting to euro 708,000 thousand (euro 755,641 thousand at December 31, 2012), shown net of invoices or credit notes to be issued, but gross of the provision for bad debts, euro 89,276 thousand are overdue (euro 105,763 thousand at December 31, 2012). Receivables past due and not yet due were measured in accordance with the Group accounting policies described in the section on adopted accounting standards. Impaired receivables include both significant single positions subject to individual impairment and positions sharing similar credit risk characteristics that have been grouped together and impaired on a collective basis.
The change in the provision for bad debts is shown below:
(in thousands of euro) 12/31/2013 12/31/2012
Opening balance at 12/31/2012 51,083 68,142 Translation differences (2,017) (1,400) Accruals 6,250 8,129 Decreases (12,646) (24,440) Other (1,097) 652 Closing balance at 12/31/2013 41,573 51,083
Accruals to the provision for bad debts are recognised in the Income Statement at the item “Other costs” (note 33). For trade receivables, the carrying amount is considered approximate to the fair value.
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15. OTHER RECEIVABLES
Other receivables may be broken down as follows:
(in thousands of euro) 12/31/2013 12/31/2012
Total Non-current Current Total Non-current Current
Financial receivables 77,198 59,460 17,738 327,617 261,327 66,290 Accrued income and prepaid expenses 17,166 573 16,593 25,878 526 25,352 Receivables from employees 11,722 2,265 9,457 11,978 1,889 10,089 Receivables from social security and welfare institutions 11,910 - 11,910 5,015 - 5,015 Receivables from tax authorities non related to 135,209 7,857 127,352 171,819 7,158 164,661 income taxes Other receivables 184,415 99,308 85,107 169,595 99,310 70,285 437,620 169,463 268,157 711,902 370,210 341,692 Provision for bad debts (622) - (622) (288) - (288) 436,998 169,463 267,535 711,614 370,210 341,404
Non-current financial receivables (euro 59,460 thousand) principally refer to euro 47,317 thousand (euro 77,434 thousand at December 31, 2012) deposited as a bond for tax and legal disputes in relation to the subsidiary Pirelli Pneus Ltda (Brazil), remunerated at market rates. The reduction is related to the release and subsequent collection of about euro 19 million in court bonds that had been posted by the Brazilian subsidiary Pirelli Pneus Ltda.
In 2012 this account included the loan to Prelios S.p.A. for euro 173,506 thousand. In 3Q 2013 euro 21,523 thousand of this receivable was converted into Prelios ordinary shares, and euro 148,372 thousand was converted into equity instruments (the “convertendo”), while the remaining euro 3,611 thousand was repaid by Prelios S.p.A. and thus collected.
The current financial receivables (euro 17,738 thousand) mainly refer to the euro 8,225 thousand in loans to the associate company GWM Renewable Energy II S.p.A., to the euro 2,657 thousand Alitalia S.p.A. subordinated convertible bond loan issued on February 26, 2013 at a gross annual rate of 8%, and to euro 4,223 thousand for the accrued coupon of the interest rate swap on the unrated bond loan placed by Pirelli & C. S.p.A. eurobond market in February 2011 for a total face value of euro 500 million, with a fixed coupon of 5.125% and maturity in February 2016.
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The decrease from December 31, 2012 (euro 48,552 thousand) is mainly due to the effects of line-by-line consolidation of the Chinese subsidiary Sino Italian Wire Technology Co Ltd, operating in the steel cord business. It was consolidated at the end of 2013, after previously being classified as an associate, and towards which a financial receivable for euro 32,538 thousand was recognised at December 31, 2012.
The other non-current receivables (euro 99,308 thousand) mainly refer to amounts posted as bonds in lawsuits and tax litigation involving the Brazilian units (euro 72,200 thousand), euro 8,213 thousand in receivables for guarantees to Pirelli that may be exercised if contingent liabilities materialise in relation to the acquired company Campneus Lider de Pneumaticos Ltda (Brazil), and euro 8,250 thousand in receivables relating to a cash grant paid in connection with the execution of an equity partnership agreement.
The other current receivables (euro 85,107 thousand) mainly include euro 33,997 thousand in advances paid to suppliers, a receivable of euro 12,688 thousand for settlement of the Eletrobras lawsuit in Brazil, euro 3,099 thousand in receivables for disposal of property not used for the industrial operations in Brazil, and contributions of euro 4,437 thousand for research and development to be received from the Region of Piedmont.
It is believed that the carrying value of other current and non-current receivables approximates their fair value.
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16. TAX RECEIVABLES
The tax receivables relate to income taxes and total euro 63,494 thousand (of which euro 7,890 thousand in non-current assets, mainly related to bonds posted for tax litigation by the Brazilian subsidiary), compared with euro 37,543 thousand at December 31, 2012 (of which euro 9,297 thousand in non-current assets). This amount mainly refers to receivables for tax prepayments made during the year, euro 15,551 thousand in receivables for tax withholding paid to foreign entities and IRES (corporate income tax) receivables from previous years recognised in favour of Pirelli & C. S.p.A. for about euro 5,000 thousand.
17. INVENTORIES
Inventories may be broken down as follows:
(in thousands of euro) 12/31/2013 12/31/2012
Raw and auxiliary materials and consumables 205,033 255,517 Sundry materials 7,029 6,448 Work in progress and semi-finished products 77,473 81,756 Finished products 691,781 747,724 Goods for resale 2,827 6,769 Advances to suppliers 3,175 4,346 987,318 1,102,560
All components of inventories at December 31, 2013 were lower than at December 31, 2012.
The impairment of inventories recognised at December 31, 2013 was euro 5,337 thousand (euro 12,518 thousand at December 31, 2012).
Inventories were not subject to any collateral pledges.
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18. SECURITIES HELD FOR TRADING
The securities held for trading amounted to euro 48,090 thousand, compared with euro 224,717 thousand at December 31, 2012, reflecting a decrease of euro 176,627 thousand that was essentially due to the reclassification of securities having a maturity of less than three months to the account “cash and cash equivalents”. They were comprised of: - unlisted floating-rate bonds for euro 25,309 thousand (euro 134,808 thousand at December 31, 2012); - unlisted fixed-rate bonds for euro 21,613 thousand (euro 80,413 thousand at December 31, 2012); - equities for euro 1,166 thousand (euro 8,347 thousand at December 31, 2012), including euro 1,130 thousand in listed stock (euro 755 thousand at December 31, 2012); - other securities for euro 2 thousand (euro 1,149 thousand at December 31, 2012).
The fair value of listed financial instruments corresponds to their stock market price at December 31, 2013. The fair value of unlisted financial instruments was determined by making estimates on the basis of the best information available. The changes in fair value are recognised in the Income Statement at “financial expenses”.
19. CASH AND CASH EQUIVALENTS
Cash and cash equivalents rose from euro 679,794 thousand at December 31, 2012 to euro 879,897 thousand at December 31, 2013, for an increase of euro 200,103 thousand. This was mainly due to the reclassification of financial instruments having a maturity of less than three months from “securities held for trading” and to collection by the Brazilian subsidiary Pirelli Pneus Ltda of court bonds totalling about euro 19,000 thousand. Cash and cash equivalents are concentrated in the Group’s holding companies and at companies that generate cash and invest it locally. They are used essentially on the market for short-term maturity deposits with major banking counterparties at interest rates in line with the prevailing market terms.
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In the statement of cash flows, the balance of cash and cash equivalents was indicated net of bank overdrafts of euro 73,041 thousand at December 31, 2013 (euro 14,790 thousand at December 31, 2012).
20. EQUITY
20.1 Equity attributable to owners of the Parent
The equity attributable to owners of the Parent rose from euro 2,337,403 thousand at December 31, 2012 to euro 2,376,066 thousand at December 31, 2013. The change from December 31, 2012 (positive euro 38,663 thousand) is substantially due to net income (positive euro 303,574 thousand), the combined effect of inflation/devaluation upon application of inflation accounting in Venezuela (positive euro 49,470 thousand), fair value adjustment of derivative financial instruments in cash flow hedges net of its tax effect (positive euro 14,472 thousand), fair value adjustment of available-for-sale financial assets (positive euro 33,631 thousand), actuarial gains on pension funds net of the related tax effect (positive euro 22,823 thousand), offset by the negative changes related to dividend payouts (euro 156,743 thousand), and exchange differences from translation into euro of the financial statements of subsidiaries whose functional currency is not the euro (euro 226,695 thousand). The subscribed and paid-up share capital at December 31, 2013 (including treasury shares) is represented by 475,740,182 ordinary shares and 12,251,311 savings shares, without par value and having normal entitlements, for a total of euro 1,345,381 thousand. The share capital is presented net of the value of treasury shares (351,590 ordinary shares and 408,342 savings shares), for a net total of euro 1,343,285 thousand. The total of treasury shares represents 0.16% of share capital.
The equity per share was euro 4.869, compared with euro 4.790 at December 31, 2012.
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20.2 Equity attributable to non-controlling interests
The equity attributable to non-controlling interests rose from euro 52,026 thousand at December 31, 2012 to euro 60,523 thousand at December 31, 2013. The net change of euro 8,497 thousand is mainly due to the income for the year (positive euro 2,918 thousand) and to the 51% shareholding in Sino Italian Wire Tech. Co. Ltd, consolidated on a line-by-line basis beginning December 31, 2013 (positive euro 9,494 thousand), which is offset by the dividends paid out (negative euro 2,921 thousand) and by the acquisition of 40% of Yanzhou Hixih Ecotech Environment Co. Ltd. raising the Group shareholding from 60% to 100% (negative euro 3,003 thousand, equal to its carrying amount).
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21. PROVISIONS FOR LIABILITIES AND CHARGES
The changes that occurred during the period are shown below:
PROVISION FOR LIABILITIES AND CHARGES/NON-CURRENT PORTION (in thousands of euro) 12/31/2013 Opening balance at 12/31/2012 142,230 Translation differences (15,294) Increases 17,806 Uses (19,192) Reversals (13,585) Other 4,780 Closing balance at 12/31/2013 116,745
The provisions for liabilities and charges – non-current portion mainly refer to accruals made by the Brazilian subsidiary Pirelli Pneus Ltda for lawsuits and tax litigation (euro 45,223 thousand) and labour lawsuits (euro 30,239 thousand) and the parent company Pirelli & C. S.p.A. for tax litigation (euro 19,067 thousand) and commercial risks, site clean-up and labour disputes (euro 18,101 thousand).
The increases mainly refer to accruals for labour disputes at the subsidiary Pirelli Pneus Ltda – Brazil.
The uses were for costs incurred, mainly in labour lawsuits by the subsidiary Pirelli Pneus Ltda – Brazil and for labour lawsuits and site clean-up by the parent company Pirelli & C. S.p.A.
The reversals of excess provisions were largely related to tax litigation involving the parent company Pirelli & C. S.p.A. (euro 7,038 thousand) for challenges that were extinguished when the appellate court decisions against the Italian Revenue Agency (Agenzia delle Entrate) became final after that agency did not appeal to the Court of Cassation (the highest court of appeal in Italy), provisions related to license concession as at the parent company Pirelli & C. S.p.A. (euro 4,706 thousand) when the risk ceased to exist.
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PROVISION FOR LIABILITIES AND CHARGES/CURRENT PORTION (in thousands of euro) 12/31/2013 Opening balance at 12/31/2012 110,839 Translation differences (4,296) Increases 25,771 Uses (19,877) Reversals (16,128) Other (6,220) Closing balance at 12/31/2013 90,089
The provisions for liabilities and charges – current portion mainly include amounts set aside for complaints and product warranties (euro 22,815 thousand), site clean-up of disused tracts of land (euro 8,042 thousand), reorganisation and closure of business units (euro 16,521 thousand), litigation for occupational diseases (euro 10,780 thousand), tax risks (euro 4,390 thousand), labour lawsuits (euro 4,117 thousand) and industrial accident insurance (euro 3,883 thousand).
The increases mainly refer to provisions for product claims, occupational diseases, civil lawsuits and reorganisation or closure of activities.
The uses are mainly related to costs incurred to close pending actions against business units domiciled in Italy for occupational disease lawsuits and in Germany for corporate reorganisation.
The reversals of excess provisions mainly concerned technical claims (euro 8,270 thousand), product warranties (euro 1,663 thousand) and labour lawsuits (euro 1,512 thousand).
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22. EMPLOYEE BENEFIT OBLIGATIONS
This item includes:
(in thousands of euro) 12/31/2013 12/31/2012 Pension funds: - funded 222,242 271,288 - unfunded 93,763 99,681 Employees'leaving indemnity (Italian companies) 44,496 47,007 Healthcare plans 17,333 20,403 Other long term benefits 61,616 84,578 439,450 522,957
Pension funds
The following table shows a breakdown of pension funds at December 31, 2013:
(in thousands of euro) 12/31/2013 Germany Sweden Total USA UK Other Total funded unfunded countries pension funds pension funds
Funded funds Present value of funded liabilities - - - 124,986 973,635 4,527 1,103,148 Fair value of plan assets - - - (98,799) (778,403) (3,704) (880,906)
Unfunded funds Present value of unfunded liabilities 90,087 3,676 93,763 - - - - Net liabilities recognised 90,087 3,676 93,763 26,187 195,232 823 222,242
The following table shows a breakdown of pension funds at December 31, 2012:
(in thousands of euro) 12/31/2012 Germany Sweden Total USA UK Other Total funded unfunded countries pension funds pension funds Funded funds Present value of funded liabilities - - - 145,518 974,197 4,517 1,124,232 Fair value of plan assets - - - (94,134) (755,093) (3,717) (852,944) Unfunded funds Present value of unfunded liabilities 95,693 3,988 99,681 - - - - Net liabilities recognised 95,693 3,988 99,681 51,384 219,104 800 271,288
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The characteristics of the principal pension funds existing at December 31, 2013 are described as follows: Germany: this is an unfunded defined-benefit plan based on the final salary. It provides a supplementary pension in addition to the state pension. The plan was closed in October 1982; consequently the members of the plan are employees whose employment began prior to that date; USA: this is a funded defined-benefit plan based on the final salary. It provides a supplementary pension in addition to the state pension and is administered by a trust. The plan was closed in 2001 and frozen in 2003 for employees who were transferred to a defined-contribution scheme. All members of the plan are retired; UK: these are funded defined-benefit plans based on the final salary. They provide a supplementary pension in addition to the state pension and are administered in trusts. The plans were closed in 2001. The Pirelli Tyres Ltd plan was frozen in 2010 for employees hired before 2001, who were transferred to a defined contribution plan. The plan operated by the subsidiary Pirelli UK Ltd, which includes the employees in the Cables and Systems segment sold in 2005, had already been frozen at the time of the sale in 2005; Sweden: this involves a defined benefits plan (ITP2), which was closed to new participants, with the only participants being retired employees and recipients of deferred pensions.
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The following changes occurred in the net liabilities in 2013:
(in thousand of euro) Present Fair value of value of Total plan assets obligation At 1 January 2013 1,223,913 (852,944) 370,969 Exchange difference (26,077) 19,646 (6,431)
Movements through income statement: - Current service cost 923 923 - interest expense / (income) 50,201 (36,347) 13,854 51,124 (36,347) 14,777 Remeasurements: - (gain) loss from change in demographic assumptions (13,089) (13,089) - (gain) loss from change in financial assumptions 20,009 20,009 - experience (gains) losses (1,702) (1,702) - return on plan assets, excluding amounts included in interest income (23,376) (23,376) 5,218 (23,376) (18,158)
Employer's contributions - (45,888) (45,888) Plan participants' contributions 28 (28) 0 Benefits paid (56,865) 56,865 0 Other (429) 1,165 736 At 31 December 2013 1,196,912 (880,907) 316,005
The following changes occurred in the net liabilities in 2012:
(in thousand of euro) Present value of Fair value of plan Total obligation assets
At 1 January 2012 1,160,622 (809,204) 351,419 Exchange difference 18,788 (14,915) 3,873 Business combination 3,278 3,278
Movements through income statement: - Current service cost 811 811 - interest expense / (income) 55,326 (39,544) 15,782 56,137 (39,544) 16,593 Remeasurements: - (gain) loss from change in demographic assumptions - - - (gain) loss from change in financial assumptions 51,753 51,753 - experience (gains) losses (3,142) (3,142) - return on plan assets, excluding amounts included in interest income (5,298) (5,298) 48,611 (5,298) 43,313 Employer's contributions (47,508) (47,508) Plan participants' contributions 27 (27) - Benefits paid (63,109) 63,109 - Other (441) 441 - At 31 December 2012 * 1,223,913 (852,944) 370,969 * The figures of 2012 have been restated due to the new standard IAS 19 revised "employee benefits" being effective from 1/1/2013
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The service cost is included in the item “personnel expense” (note 31), while the interest expense / (income) is included in the item “financial expenses” (note 36).
The following table shows a breakdown of funded pension fund assets:
(in %) 12/31/2013 12/31/2012
listed unlisted total % listed unlisted total % Shares 70,300 170,224 240,523 27% 44,583 110,162 154,745 18% Bonds 75,664 115,653 191,318 22% 56,506 166,010 222,516 26% Insurances - 3,704 3,704 0% - 3,717 3,717 1% Deposits 102,145 43,221 145,366 17% - 211,270 211,270 25% Balanced funds - 250,004 250,004 28% - 233,239 233,239 27% Real Estate - 29,448 29,448 3% - 18,499 18,499 2% Derivatives 8,926 1,934 10,860 1% - (590) (590) 0% Other - 9,683 9,683 1% - 9,549 9,549 1% 257,036 623,871 880,906 100% 101,089 751,855 852,944 100%
The principal risks to which the Group is exposed in relation to the pension funds are detailed as follows: volatility in the assets servicing the plans: to limit the liabilities, the investment strategy privileges assets which are expected to have relatively high and stable returns over the long-term. This implies that certain investments, such as listed shares, feature high volatility over the short term, and that this exposes the plans to risks of reduction in the value of assets in the short-term, consequently increasing liabilities. However, this risk is mitigated by the diversification of the investments into different investment classes, through different investment managers and different investment styles. Moreover, the investments are continuously revised in response to market conditions, with adjustments to maintain the overall risk at adequate levels; changes in the yields of bonds and inflation forecasts: forecasts of falling returns on the bonds and/or rising inflation lead to an increase in the value of liabilities. The plans reduce this risk by making investments in “liability hedging” assets. In the United Kingdom, the protection assured by a portfolio of this type was built over the last several years, and in June 2014 the interest rate and inflation rate risks impinging on the liabilities will be fully hedged; life expectancy: growing life expectancy entails an increase in the value of plan liabilities. The plans do not protect themselves directly against this risk. The liabilities are measured by using prudent hypotheses whose adequacy is revised periodically.
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In the United Kingdom, the management of assets servicing the plans was delegated to an asset manager who manages the assets in relation to a liability benchmark, which approximates the change in value of the liabilities. The key parameters of this mandate may be summarised as follows: a mix of assets under dynamic management over time, rather than a fixed strategic allocation; hedging of about 70-75% of the risk related to interest and inflation rates – constructed as a percentage of the asset value – through the use of debt instruments (government bonds) and derivatives; management of foreign exchange risk with the goal of hedging at least 70% of the exposure to foreign currencies held in the portfolio through use of forward contracts.
In the United Kingdom, the funding arrangements and funding policies are revised once every three years. The next funding review is scheduled to take place in 2014. In the United States, the funding assessments are made annually.
The contributions expected to be paid into the pension funds during 2014 total euro 42,901 thousand.
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Employees’ leaving indemnities (TFR)
Employees’ leaving indemnities (Italian companies) changed as follows:
(in thousands of euro) 12/31/2013 12/31/2012
Opening balance 47,007 40,484 Movements through Income Statement: - Current service cost 236 259 - Interest cost 1,446 1,772 Remeasurements through equity: - actuarial (gains) losses arising from changes in demographic assumptions - - - actuarial (gains) losses arising from changes in financial assumptions (1,230) 7,231 - effect of experience adjustments (617) - Payments/advances (2,056) (2,551) Other (290) (188)
Closing balance 44,496 47,007
The service cost is included in the item “personnel expense” (note 31), while the interest expense is included in the item “financial expenses” (note 36).
Healthcare plans
This item refers exclusively to the existing healthcare plan at the United States subsidiary.
(in thousands of euro) USA
Liabilities recognised at 12/31/2013 17,333 Liabilities recognised at 12/31/2012 20,403
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The following changes took place during the period:
(in thousands of euro) 12/31/2013 12/31/2012
Opening balance 20,403 21,270 Translation differences (799) (399) Movements through Income Statement: - current service cost 5 4 - interest cost 710 881 Remeasurements through equity: - actuarial (gains) losses arising from changes in demographic assumptions - - - actuarial (gains) losses arising from changes in financial assumptions (968) 1,535 - effect of experience adjustments (777) (1,575) Benefits paid (1,240) (1,312) Closing balance 17,333 20,403
The service cost is included in the item “personnel expense” (note 31), while the interest expense is included in the item “financial expenses” (note 36).
The contributions expected to be paid into the healthcare plan during 2014 total euro 1,397 thousand.
Additional information regarding post-employment benefits
Net actuarial losses accrued in 2013 and recognised directly in equity totalled euro 22,823 thousand (at December 31, 2012 net actuarial losses totalled euro 52,713 thousand).
The principal actuarial assumptions used at December 31, 2013 are as follows:
Italy Germany Netherlands Sweden UK USA
Discount rate 3.40% 3.40% 3.40% 4.00% 4.70% 4.40% Inflation rate 2.00% 2.00% 2.00% 2.00% 3.33% - Expected rate of wage and salary increases - 3.00% 2.00% - - - Healthcare cost trend rates - initial - - - - - 7.50% Healthcare cost trend rates - final - - - - - 4.50%
The principal actuarial assumptions used at December 31, 2012 are as follows:
Italy Germany Netherlands Sweden UK USA
Discount rate 3.15% 3.15% 3.15% 3.60% 4,55% - 4,60% 3.75% Inflation rate 2.00% 2.00% 2.00% 2.00% 2,80% - 2,90% - Expected rate of wage and salary increases - 3.00% 2.00% - - - Healthcare cost trend rates - initial - - - - - 7.50% Healthcare cost trend rates - final - - - - - 4.50%
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The following table shows the analysis of the payment due dates related to the post- employment:
(in thousands of euro) within 1 year 1 to 2 years 3 to 5 years over 5 years Total
Pension funds 58,232 59,104 182,672 321,719 621,727
Employees' leaving indemnities (TFR) 1,754 1,675 6,121 31,843 41,393
Healthcare plan 1,397 1,378 4,104 6,376 13,255
61,383 62,157 192,897 359,938 676,375
The weighted average duration of the obligations for post-employment benefits is 15.72 years.
The following table shows a sensitivity analysis for the relevant actuarial assumptions at the end of the financial year:
(in %)
Impact on defined benefit obligation
Change in Increase in assumption Decrease in assumption assumption
Discount rate 0.25% decrease by 3.73% increase by 3.97%
Inflation rate (only UK plans) 0.25% increase by 3.48% decrease by 3.49%
The sole purpose of the analysis shown above consists in estimating the change in liability according to changes in the discount rates and inflation rate in the United Kingdom close to the principal assumption of the rates themselves, rather than referring to an alternative set of assumptions.
The sensitivity analysis of the liability related to post-employment benefits is based on the same method used to calculate the liability recognised in the balance sheet.
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Other long-term benefits Other long-term benefits are broken down as follows:
(in thousands of euro) 12/31/2013 12/31/2012 Long-term incentive plans - 12,371 Jubilee awards 16,093 16,419 Leaving indemnities - non Italian companies 34,898 35,931 Other long-term benefits 10,625 19,857 61,616 84,578
The long-term incentive plans, amounting to euro 12,371 thousand at December 31, 2012, represented the best estimate of the three-year Long Term Incentive 2012-2014 incentive plan reserved for Pirelli Group management. This plan was subordinated on pre-set performance targets being met at the Pirelli & C. S.p.A. Group level during the 2012-2014 period. This plan has been superseded. In fact, the Pirelli Board of Directors decided to terminate the LTI 2012-2014 plan effective December 31, 2013. It was terminated without any full or pro-rated payouts of the three-year incentive. At the same time, the Board of Directors approved adoption of a new plan linked to the targets for 2014-2016 set out in the Industrial Plan 2013-2017.
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23. BORROWINGS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS
Amounts owed to banks and other financial institutions can be broken down as follows:
(in thousands of euro) 12/31/2013 12/31/2012
Total Non-current Current Total Non-current Current
Bonds 607,157 607,157 - 614,150 614,150 - Borrowings from banks 1,659,221 1,401,490 257,731 1,735,226 1,352,850 382,376 Borrowings from other financial institutions 11,740 2,929 8,811 6,466 4,890 1,576 Finance lease payables 1,345 1,080 265 17,354 4,313 13,041 Financial accrued expenses and deferred income 43,395 97 43,298 47,565 4,413 43,152 Other financial payables 8,201 1,653 6,548 15,540 15,159 381 2,331,059 2,014,406 316,653 2,436,301 1,995,775 440,526
The item bonds refers to: the unrated bond placed by Pirelli & C. S.p.A. on the Eurobond market for an aggregate nominal amount of euro 500 million, a fixed coupon of 5.125% and maturity in February 2016; the private placement by Pirelli International Ltd on the American market for an aggregate nominal amount of USD 150 million (equal to euro 108,767 thousand at the exchange rate applicable on December 31, 2013), with a duration of between 5 and 12 years and an average coupon of 5.05%.
The carrying value of the bond was determined as follows:
(in thousands of euro) 12/31/2013 12/31/2012
Nominal value 608,767 613,688 Transaction costs (6,136) (6,149) Amortisation of effective interest rate 2,942 1,816 Adjustment for fair value hedge accounting 1,584 4,795 607,157 614,150
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Bank borrowings, amounting to euro 1,659,220 thousand, mainly consist of: loans granted by the European Investment Bank (EIB) in favour of Pirelli & C. S.p.A. and Pirelli Tyre S.p.A. for research and development projects and in favour of S.C. Pirelli Tyres Romania S.r.l. local industrial investments. These loans total Euro 250,000 thousand (euro 275,000 thousand at December 31, 2012), fully used, classified as non- current bank borrowings (at December 31, 2012 euro 25,000 thousand classified as current bank borrowings and euro 250,000 thousand classified as non-current bank borrowings); euro 575,000 thousand for utilisation of the syndicated facility (euro 575,000 thousand at December 31, 2012), granted to Pirelli & C. S.p.A., Pirelli Tyre S.p.A. and Pirelli International Limited for a total amount of euro 1,200,000 thousand, subscribed on November 30, 2010 and having a maturity of five years. These utilisations were classified as non-current bank borrowings; euro 154,542 thousand for the Schuldschein, a syndicated loan by the lender on the basis of a German law debt security, granted to Pirelli International Ltd and guaranteed by Pirelli & C. S.p.A. and Pirelli Tyre S.p.A., disbursed on December 14, 2012 with a duration of between 3, 5 and 7 years, classified under non-current bank borrowings; euro 161,839 thousand classified as non-current bank borrowings, disbursed by Banco Bilbao Vizcaya Argentaria to the Mexican subsidiaries in December 2012 with a duration of 5 years and by Bancomext in 1H 2013 with a duration of 7 years. Both of these loans are guaranteed by Pirelli Tyre S.p.A. The loan received from Bancomext is covered by a secured guarantee; euro 15,861 thousand, including euro 10,224 thousand classified as non-current bank borrowings, disbursed by Banco Nacion Argentina between October 2011 and June 2012 in favour of Pirelli Neumaticos S.A.I.C. The term of the loan is 5 years and is covered by a secured guarantee; use of credit lines at the local level, in China, Brazil and Turkey, for euro 451,302 thousand. Aside from cash and securities held for trading of euro 927,987 thousand, at December 31, 2013 the Group had unused committed credit facilities of euro 625,000 thousand (euro 625,000 thousand at December 31, 2012) maturing in 2015.
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The decrease in payables for finance leases from the previous year is mainly due (euro 12,562 thousand) to the redemption, in July 2013, of the land and building held under finance lease that house the Tyre R&D organisation in Italy and Prelios S.p.A. (euro 12,562 thousand).
The accrued financial expenses and deferred financial income (euro 43,396 thousand) mainly refer to the accrual of interest accrued on bonds (euro 21,974 thousand, unchanged from December 31, 2012) and interest rate swaps (euro 17,717 thousand; euro 17,854 thousand at December 31, 2012).
The other current financial payables include euro 6,284 thousand for the fair value of the put option in favour of the Faria da Silva family of the remaining 20% of Campneus Lider de Pneumaticos Ltda, 60% acquired by Pirelli in 1H 2012, with the obligation to acquire a first, additional share of 20% by June 30, 2014 and with an option granted to the seller to sell the last 20% to Pirelli by June 30, 2017. The decrease in other financial payables from 2012 is attributable to the aforementioned purchase of the first, successive 20%, which took place in 1H 2013, in accordance with the provisions of the agreement.
The other non-current financial payables includes the euro 1,650 thousand security deposit towards Prelios S.p.A., related to lease of the R&D building, for the entire duration of the lease (October 15, 2012 – October 14, 2018).
Current and non-current financial payables backed by secured guarantees (pledges and mortgages) totalled euro 74,503 thousand (euro 42,058 thousand at December 31, 2012).
Current financial payables include the portion of non-current financial payables, totalling euro 123,000 thousand (euro 297,000 thousand at December 31, 2012), that will be settled within one year.
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The carrying amount of current payables is considered approximate to their fair value. The fair value of non-current financial payables is shown as compared with their carrying amount:
(in thousands of euro) 12/31/2013 12/31/2012
Carrying Fair value Carrying Fair value amount amount
Bonds 499,217 533,010 501,291 533,010 Private placement - Pirelli International Ltd 107,940 108,774 112,860 108,774 Borrowings from banks 1,401,490 987,367 1,352,850 1,364,677 Othr non-current financial payables 5,759 5,759 28,775 28,775 2,014,406 1,634,910 1,995,776 2,035,236
The bond issued by Pirelli & C. S.p.A. is listed on an active market and its fair value was measured in reference to prices at the end of the year. It is thus classified at level 1 in the hierarchy. The fair value of the private placement in U.S. dollars issued by Pirelli International Ltd and of the bank borrowings was calculated by discounting each debtor cash flow at the market swap rate for the currency and at the reference maturity date, increased by the Group credit rating. This places it at level 2 in the hierarchy.
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At December 31, 2013, the breakdown of bank borrowings and other payables to lenders by interest rate and by currency of origin of the debt is as follows:
(in thousands of euro) Fixed rate Floating rate Total
EUR 46,446 6,139 52,585 BRL (Brazilian Real) 125,732 - 125,732 CNY (Chinese Renminbi) 54,835 - 54,835 RON (Romanian Leu) (205) - (205) TRY (Turkish Lira) 53,608 - 53,608 Other currencies 30,078 20 30,098
Current payables 310,494 98% 6,159 2% 316,653
EUR 1,303,486 124,531 1,428,017 USD 29,588 80,895 110,483 BRL (Brazilian Real) 104,008 93,049 197,057 CNY (Chinese Renminbi) - 58,878 58,878 RON (Romanian Leu) - 49,812 49,812 MXN (Mexican Pesos) - 160,296 160,296 ARS (Argentinian Pesos) 9,763 - 9,763 Other currencies 100 - 100
Non current payables 1,446,945 72% 567,461 28% 2,014,406
1,757,439 75% 573,620 25% 2,331,059
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The situation at December 31, 2012 was as follows:
(in thousands of euro) Fixed rate Floating rate Total
EUR 54,460 18,799 73,259 BRL (Brazilian Real) 264,645 - 264,645 CNY (Chinese Renminbi) 40,894 - 40,894 RON (Romanian Leu) 25,873 - 25,873 TRY (Turkish Lira) 29,943 - 29,943 Other currencies 5,912 - 5,912
Current payables 421,727 96% 18,799 4% 440,526
EUR 1,316,519 121,793 1,438,312 USD 37,998 81,195 119,193 BRL (Brazilian Real) 36,197 130,492 166,690 CNY (Chinese Renminbi) - 71,696 71,696 RON (Romanian Leu) - 49,996 49,996 MXN (Mexican Pesos) - 116,592 116,592 ARS (Argentinian Pesos) 22,197 - 22,197 Other currencies - 10,400 10,400
Non current payables 1,413,611 71% 582,164 29% 1,995,775
1,835,338 75% 600,963 25% 2,436,301
The value of fixed-rate payables indicated above includes those established by contract as fixed-rate payables and those established by contract as variable-rate payables, for which hedging derivatives have been put in place.
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The Group’s exposure to fluctuations in interest rates on financial payables, both in terms of the type of rate and their resetting date, are summarised below:
(in thousands of euro) 12/31/2013 12/31/2012
Total Fixed rate Floating rate Total Fixed rate Floating rate
Up to 6 months 872,224 298,604 573,620 889,636 419,430 470,206 From 6 to 12 months 6,589 6,589 - 12,701 12,701 - From 1 to 5 years 1,424,426 1,424,426 - 1,506,501 1,375,744 130,757 More than 5 years 27,820 27,820 - 27,463 27,463 - 2,331,059 1,757,439 573,620 2,436,301 1,835,338 600,963
The average cost of debt during 2013 was 6.23%.
In regard to the financial covenants and negative pledge clauses, we note that: the revolving credit line granted to Pirelli & C. S.p.A., Pirelli Tyre S.p.A. and Pirelli International Limited for a total of euro 1,200,000 thousand, and used for euro 575,000 thousand, contains just one financial covenant: a certain ratio must be maintained between consolidated net indebtedness and gross operating profit. This parameter was fully satisfied at December 31, 2013. In regard to the negative pledges, the credit facility provides for a commitment not to grant secured guarantees, above a threshold defined as the greater of euro 100,000 thousand and 3% of Total Assets (as defined in the consolidated financial statements of Pirelli & C. S.p.A.), with the exception of secured guarantees on the existing debt or debt to replace it, to be granted pursuant to law, relating to trade finance, project finance and subsidised finance or on loans provided by supranational entities; the private placement for a total of USD 150 million with due dates falling between December 5, 2017 and December 5, 2024 envisages, aside from the commitments indicated hereinabove: satisfaction of a maximum ratio between non-centralised indebtedness (at companies other than Pirelli International Limited, Pirelli & C. S.p.A. and Pirelli Tyre S.p.A.) and total assets as reported in the consolidated financial statements of Pirelli & C. S.p.A. set at 25% (and that the ratio between secured debt and total assets not exceed 15% in any event);
introduction of a financial covenant whereby the ratio between gross operating profit and financial expenses as reported in the consolidated financial statements of Pirelli & C. S.p.A. be greater than or equal to 3.5 when the ratio between net
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consolidated indebtedness and gross operating profit is greater than 2.5. Both of these parameters were satisfied at December 31,2013; the Schuldschein obtained by Pirelli International Limited for a nominal total amount of euro 155,000 thousand, with due dates falling between June 14, 2016 and December 14, 2019 envisages, in the case of negative pledges, the undertaking not to grant secured guarantees beyond the threshold defined as being the higher of euro 100,000 thousand and 3% of Total Assets (as defined in the consolidated financial statements of Pirelli & C. S.p.A.), with the exception of secured guarantees on existing debt or debt to replace it, to be granted pursuant to law, relating to trade finance, project finance and subsidised finance, or on loans granted by supranational entities.
The other outstanding financial payables do not contain financial covenants.
24. TRADE PAYABLES
(in thousands of euro) 12/31/2013 12/31/2012
Total Non-current Current Total Non-current Current Suppliers 1,233,162 - 1,233,162 1,251,404 - 1,251,404 Notes payable 11,304 - 11,304 17,279 - 17,279 1,244,466 - 1,244,466 1,268,683 - 1,268,683
The carrying amount of trade payables is considered approximate to their fair value.
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25. OTHER PAYABLES
The item is broken down in the following table:
(in thousands of euro) 12/31/2013 12/31/2012
Total Non-current Current Total Non-current Current
Trade accrued liabilities and deferred income 79,897 36,054 43,843 77,033 28,393 48,640 Tax payables 93,799 5,038 88,761 103,967 8,860 95,107 Payables to employees 111,317 856 110,461 86,555 154 86,401 Payables to social security and welfare intitutions 64,027 22,781 41,246 60,867 20,862 40,005 Dividends payable 2,076 - 2,076 1,870 - 1,870 Other payables 159,895 12,124 147,771 157,907 12,374 145,533 511,011 76,853 434,158 488,199 70,643 417,556
Non-current trade accrued liabilities and deferred income include euro 28,571 thousand for capital grants received for investments made in Mexico and Romania.
The current trade accrued liabilities and deferred income include euro 11,360 thousand for the tax incentive tied to the Gravataì project realised in Brazil and apportioned on the duration of the investment amortisation period, euro 6,402 thousand for public contributions paid by the Region of Piedmont, related to the plant financing granted to build the New Technological Centre and whose benefits are recognised in the Income Statement in proportion to the costs for which the contribution was made, and euro 3,506 thousand for insurance coverage.
The account tax payables is mainly comprised of payables for VAT or equivalent taxes, indirect taxes not related to income, and withholding tax for employees.
The current payables to employees mainly include amounts accrued during the period but not yet paid, including the estimate of incentives.
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The other current payables (euro 147,771 thousand) mainly consist of: euro 84,531 thousand for the purchase of property, plant and equipment (euro 95,568 thousand at December 31, 2012); euro 11,993 thousand for income withholding tax (euro 7,838 thousand at December 31, 2012); euro 8,993 thousand for the acquisition of 25 retail outlets belonging to Reifen Wagner I.S. Autoservice GmbH & Co and Tire Wagner GmbH (Germany); euro 8,835 thousand for customer advances (euro 7,491 thousand at December 31, 2012); euro 6,693 thousand for payables to representatives, agents, professionals and consultants (euro 5,263 thousand at December 31, 2012); euro 2,527 thousand for payables to directors, statutory auditors and supervisory bodies (euro 3,041 thousand at December 31, 2012).
For other current and non-current payables, the carrying amount is considered approximate to the fair value.
26. TAX PAYABLES
The tax receivables mainly relate to national and regional income taxes and total euro 83,809 thousand (of which euro 3,537 thousand in non-current liabilities), compared with euro 81,781 thousand at December 31, 2012 (of which euro 4,172 thousand in non-current liabilities).
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27. DERIVATIVE FINANCIAL INSTRUMENTS
This item includes the fair value of derivative instruments outstanding at December 31, 2013. The breakdown is shown as follows:
(in thousands of euro) 12/31/2013 12/31/2012
Current Assets Current Liabilities Current Assets Current Liabilities
Hedge accounting not adopted Foreign currency derivatives - commercial transactions 17,255 (13,544) 28,847 (25,588) Foreign currency derivatives - included in net financial position 4,438 (3,175) 13,065 (19,168) Other derivatives - included in net financial position 575 - 296 0
Hedge accounting adopted - cash flow hedge: Foreign currency derivatives - commercial transactions 384 (1,482) 603 (927) Interest rate derivatives 513 (38,824) (50,665) Other derivatives (14) 117 - fair value hedge Interest rate derivatives - included in net financial position 1,653 4,775 24,818 (57,039) 47,703 (96,348)
- TOTAL derivatives included in net financial position 6,666 (3,175) 18,136 (19,168)
Derivative financial instruments without adoption of hedge accounting
The value of foreign currency derivatives corresponds to the fair value of forward currency purchases/sales outstanding at the closing date of the period. These involve hedges of Group commercial and financial transactions for which hedge accounting was not adopted. The fair value is determined by using the forward exchange rate at the reporting date.
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Derivative financial instruments with adoption of hedge accounting
- Cash flow hedge
The value of interest rate derivatives, recognised under current liabilities for euro 38,824 thousand (euro 50,665 thousand at December 31, 2012), consists mainly of: euro 20,302 thousand (euro 39,566 thousand at December 31, 2012) for the fair value of 12 “plain vanilla” interest rate swaps on a total notional amount of euro 575 million maturing in February 2015, which envisage the payment of an average fixed interest rate and collection of a variable interest rate. These derivatives were made to hedge against the risk of change in interest rates associated with the variable rate revolving syndicated credit facility granted to Pirelli & C. S.p.A., Pirelli Tyre S.p.A. and Pirelli International Limited for a total amount of euro 1,200,000 thousand and of which euro 575,000 thousand was used at December 31, 2013. The amount recognised in equity during the period for the effective part was euro 15,068 thousand, broken down as follows: euro 10,669 thousand for profits recognised in equity during the period; euro 4,399 thousand for reclassification to the Income Statement of losses previously accumulated in equity (see note 36 “financial expenses”); euro 17,423 thousand (euro 8,420 thousand at December 31, 2012) for the fair value of four cross currency interest rate swaps negotiated in November 2012 to hedge exposure to currency risk and limit exposure to the interest rate risk associated with the private placement by Pirelli International Ltd on the American market for an aggregate nominal amount of USD 150 million, having a duration of between 5 and 12 years (see note 23 “Borrowings from banks and other financial institutions”). The aim is to hedge against changes in the cash flows of the payable denominated in foreign currency (both principal and interest) tied to changes in foreign exchange rates. A negative euro 4,437 thousand was recognised in equity for the year.
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- Fair value hedge
The value of interest rate derivatives recognised under current assets for euro 1,653 thousand (euro 4,775 thousand at December 31, 2012) includes the fair value of five interest rate swaps on a notional amount of euro 125 million, made to hedge the risk of changes in the fair value of a portion of the fixed rate bond issued by Pirelli & C. S.p.A. in February 2011 for euro 500 million (see note 23 “Borrowings from banks and other financial institutions”). Fair value hedge accounting was adopted for these derivative financial instruments, according to which the negative change in fair value of the derivative instrument (euro 3,122 thousand at December 31, 2013) is recognised in the Income Statement and is offset by a gain on the bond attributable to the risk hedged for the same amount, recognised in the Income Statement under financial income and that adjusted the carrying amount of the bond (“basis adjustment”).
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28. COMMITMENTS AND CONTINGENCIES
Commitments for purchase of property, plant and equipment
The commitments to purchase property, plant and equipment amount to euro 109,535 thousand (euro 120,735 thousand at December 31, 2012), mostly regarding companies in Russia, Romania, Brazil, Germany, Italy, Mexico and Turkey.
Commitments for purchase of equity interests/fund units
These refer to commitments to subscribe units of the company Equinox Two S.c.a., a private equity company specialised in investments in listed and unlisted companies with high growth potential, for a maximum countervalue of euro 2,801 thousand.
Guarantees given on the sale of Olimpia
On the sale of the equity interest in Olimpia S.p.A., the sellers (Pirelli and Sintonia) remained contractually liable for all the contingent tax liabilities regarding the years up to the date of sale. The settled or outstanding tax litigation can be summarised as follows. At the end of 2006, the Italian Internal Revenue Agency (“Agenzia delle Entrate”) served Olimpia S.p.A. with an assessment notice for 2001, concerning IRAP (regional tax on productive activity). More precisely, on the basis of an assumption which is absolutely unfounded both legally and economically, the Agenzia delle Entrate had found that non-existent financial income had been realised on the Bell Bond Loan redeemable with Olivetti shares, with a consequent IRAP tax of euro 26.5 million (with euro 21.2 million being the portion attributable to the owners of Pirelli & C. S.p.A.), plus penalties for the same amount. The Company appealed against this tax assessment, claiming that the ascertained taxable income was manifestly non-existent. At the trial level, the Trial Tax Court accepted the Company’s appeal, cancelling the entire tax assessment. The Agenzia delle Entrate subsequently appealed this decision. The appeal by the Agenzia delle Entrate was also rejected by the Regional Tax Court. Notwithstanding the unexceptionable double judgements against it, the Agenzia delle Entrate filed an appeal before the Court of Cassation, against which the Company has filed a cross-appeal. It is awaiting scheduling of the hearing before the Court of Cassation. As mentioned above, there are grounds to believe that the final judgement will be favourable.
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In the assessment for the 2002 tax year, served at the end of 2007, Olimpia was characterised as a “shell company,” on the basis of perfectly arbitrary reclassification of items on its financial statements and arbitrary statutory interpretations. The tax challenge was extinguished when the Appeal Court decision became final and the Agenzia delle Entrate did not file appeal in the Court of Cassation against the Appeal Court decision. At the end of 2008, a second notice of assessment was served for the 2003 tax year, in which Olimpia was once again characterised as a “shell company.” The IRPEG (corporate income tax) claim amounted to euro 28.5 million (with euro 22.8 million being the portion attributable to the owners of Pirelli & C. S.p.A.), plus penalties for the same amount. The Company appealed to the Tax Court of first instance against this tax assessment, which was, like the other ones, absolutely unfounded. The Tax Court ruled in favour of the Company. The Agenzia delle Entrate lodged an appeal against the Trial Tax Court decision. The Company then submitted its own counter-arguments against that appeal. Following extinguishment of the similar tax claim previously made for the 2002 tax year and the subsequent one concerning the 2004 tax year, the Agenzia delle Entrate requested at the hearing held on October 23, 2012 that discussion of the claims be postponed until February 26, 2013. After that postponement, the case was postponed a second time, until September 24, 2013. Both postponements were aimed at preparing a similar abandonment of the claims, after first obtaining the necessary authorisation to do so from the Lombardy DRE (Regional Revenue Agency Head Office). In its own written submission, the Agenzia delle Entrate formally stated its wish to abandon continuation of its claim regarding the asserted classification of Olimpia as a shell company. The Regional Tax Court accepted this abandonment of claim, thereby finalising the previous favourable decision. Instead, the Agenzia delle Entrate has appealed to the Court of Cassation against the decision by the Regional Tax Court to apply the merely formal penalty on the shareholder loss not reported in the previously submitted income tax return. The Company in turn, purely in defence of a principle, is preparing its own counterarguments. In fact, the dispute does not determine the accrual of liabilities. Finally, at the end of 2009, a third notice of assessment was served for the 2004 tax year, in which Olimpia was yet again characterised as a “shell company.” The IRES (corporate income tax) claim amounts to euro 29.6 million (with euro 23.7 million being the portion attributable to the owners of Pirelli & C. S.p.A.), plus penalties for the same amount.
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This assessment, just like the ones that preceded it, is absolutely unfounded. Therefore, the Company lodged an appeal against it too before the Tax Court of first instance, which ruled in favour of the Company just as it had done before. The Agenzia delle Entrate lodged an appeal against the Trial Tax Court decision. The Company then submitted its own counter-arguments against that appeal. At the next hearing the appeal court ruled in favour of the Company, upholding the trial court decision. Once again, the Agenzia delle Entrate did not appeal this third tax claim against the “shell companies”, just as in the case of the 2002 tax year and subsequent 2003 tax year claim. Therefore, this third tax claim has also been extinguished for failure to appeal to the Court of Cassation against the Regional Tax Court decision becoming final.
Other contingencies
As part of the investigation by the European Commission on the underground and submarine electric cable market, Pirelli received notice on July 5, 2011 of charges against it in regard and limited to its status as controlling shareholder of Prysmian Cavi e Sistemi Energia S.r.l. until July 2005. The Commission has not made any charge of direct participation by Pirelli in the alleged cartel. Pirelli has submitted its own defence arguments in regard to its involvement as parent company and has continued to maintain its own line of defence during the subsequent phases of the proceeding before the European Commission. It is expected that the European Commission will issue its decision in 2Q 2014.
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29. REVENUE FROM SALES AND SERVICES
The revenue from sales and services is broken down as follows:
(in thousands of euro) 2013 2012
Revenue from sales of goods 6,036,768 - 5,969,183 - Revenue from services 109,392 102,352
6,146,160 6,071,535
30. OTHER INCOME
This account is broken down as follows:
(in thousands of euro) 2013 2012 Gains on disposal of property, plant and equipment 37,862 22,485 Rent income 9,831 9,035 Insurance indemnities 8,485 12,676 Recoveries and reimbursements 63,000 59,519 Government grants 6,483 9,157 Other income 126,648 128,758 252,309 241,630
The gains from disposal of property, plant and equipment include euro 31,142 thousand from the sale of several properties not used for the industrial activity in Brazil and euro 2,768 thousand for the disposal of land in Great Britain.
“Recoveries and reimbursements” mainly consist of taxes and duties refunds totalling euro 26,563 thousand, and other tax refunds totalling euro 12,606 thousand resulting from tax incentives applied in the Brazilian State of Bahia, for merchandise manufactured locally and then exported.
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The account other mainly includes income from sports activities totalling euro 36,270 thousand, income from the sale of litigated receivables for euro 13,202 thousand, reversal of the euro 12,371 thousand provision accrued for the superseded three-year 2012-2014 incentive plan, and income from reversal of provisions for risks and charges (euro 22,674 thousand) and provisions for bad debts (euro 7,926 thousand).
The gains resulting from disposal of properties not used for the industrial activity in Brazil (euro 31,142 thousand) and the income resulting from sale of litigated receivables (euro 13,202 thousand) are classified as non-recurring events (17.6% of the total). In 2012 this item included the gains on disposal of properties in Brazil and the income resulting from elimination of the earn-out associated with the acquisition in Russia, for a total of euro 29,646 thousand (12.3% of the total).
31. PERSONNEL EXPENSE
This account is broken down as follows:
(in thousands of euro) 2013 2012
Wages and salaries 937,560 898,059 Social security and welfare contributions 168,049 193,306 Expenses for employees' leaving indemnity and similar costs (*) 29,498 31,396 Expenses for defined contribution pension funds 20,577 19,798 Expenses for defined benefit pension funds 923 811 Expenses for jubilee awards 888 2,594 Expenses for defined contribution healthcare plans 36,140 39,032 Other costs 18,126 8,931 1,211,761 1,193,927 * Includes Italian and foreign companies Personnel expense includes non-recurring events totalling euro 45,445 thousand (3.8% of the total), including euro 25,447 thousand for restructuring costs (euro 28,827 thousand in 2012, or 2.4% of the total) and euro 19,998 thousand for charges related to the settlement of a lawsuit in Brazil.
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32. AMORTISATION, DEPRECIATION AND IMPAIRMENT
This account is broken down as follows:
(in thousands of euro) 2013 2012
Amortisation 19,016 11,342 Depreciation 269,917 260,065 Impairment of property, plant and equipment 7,559 10,839 296,492 282,246
Impairmentis essentially related to reduction of the anti-particulate filter activities (in China and Romania), also in consequence of the focus on the Tyre Business.
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33. OTHER COSTS
This item is broken down as follows:
(in thousands of euro) 2013 2012
Selling costs 293,627 274,928 Purchases of goods for resale 302,857 381,326 Fluids and power 235,476 228,468 Advertising 200,189 196,208 Professional advice 47,197 54,252 Maintenance 66,223 64,767 Warehouse operating costs 44,908 46,485 Leases, rental and lease instalments 101,619 91,103 Outsourcing 36,276 25,350 Travel expenses 47,852 49,252 IT expenses 27,060 26,156 Compensation of key managers 7,724 6,255 Other provisions 32,542 13,352 Duty stamps, duties and local taxes 37,263 35,876 Canteen 18,047 14,014 Bad debts 6,250 8,129 Insurance 29,579 27,149 Cleaning expenses 19,533 17,756 Waste disposal 23,295 26,286 Security expenses 12,286 12,234 Telephone expenses 11,109 11,556 Other 226,639 180,769 1,827,550 1,791,671
It includes euro 2,716 thousand that is qualified as non-recurring events (0.1% of the total) connected with the real estate gains realised in Brazil.
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34. NET INCOME (LOSS) FROM EQUITY INVESTMENTS
34.1 Share of net income (loss) of associates and joint ventures
The Group’s share of net income (loss) of associates and joint ventures accounted for using the equity method was a negative euro 25,835 thousand, compared with a negative euro 21,293 thousand in 2012. This result mainly consists of the amounts recognised for the shareholding in RCS Mediagroup S.p.A. (negative euro 13,573 thousand, compared with a negative euro 20,132 thousand in 2012), in Prelios S.p.A. (negative euro 12,838 thousand), in Sino Italian Wire Technology Co. Ltd (positive euro 350 thousand in 2013, compared with a negative euro 2,453 thousand in 2012), in GWM Renewable Energy II S.p.A. (negative euro 191 thousand, compared with a negative euro 1,568 thousand in 2012) and in PT Evoluzione Tyre (positive euro 637 thousand). In this regard, reference is also made to the previous note 11 “Investments in associates and joint ventures”.
34.2 Gains from equity investments
These are broken down as follows:
(in thousands of euro) 2013 2012 Fair value adjustment of RCS Mediagroup S.p.A 8,638 - Other gains on equity investments 913 513 9,551 513
In regard to the fair value adjustment of RCS Mediagroup S.p.A., reference is made to the previous note 11 “Investments in associates and joint ventures”.
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34.3 Losses from equity investments
This item is broken down as follows:
(in thousands of euro) 2013 2012 Impairment of avaible-for-sale financial assets 19,018 33,290 Evaluation of financial assets designated at fair value through profit and loss 44,286 -
Other losses on equity investments - 69 63,304 33,359
The impairment of available-for-sale financial assets refers mainly to the equity investments in Mediobanca S.p.A (euro 10,429 thousand), Alitalia S.p.A. (euro 4,925 thousand), Equinox Two SCA (euro 1,232 thousand), Fin. Priv. S.r.l. (euro 1,345 thousand) and S.In.T S.p.A (euro 917 thousand). In 2012 this item mainly included impairment of the holdings in Mediobanca S.p.A. (euro 16,805 thousand), F.C. Internazionale Milano S.p.A. (euro 6,655 thousand), Alitalia S.p.A. (euro 4,775 thousand) and Fin. Priv. S.r.l. (euro 4,217 thousand).
The “evaluation of financial assets designated at fair value through profit or loss refers to impairment of the equity instrument of Prelios S.p.A. (“convertendo”) owned by Pirelli & C. S.p.A. following the financial reorganisation of Prelios S.p.A. In this regard, also see note 12 – Other financial assets.
34.4 Dividends
The dividends received in 2013 totalled euro 1,290 thousand and mainly refer to euro 610 thousand in income from mutual funds (euro 924 thousand in 2012), euro 103 thousand from Fin. Priv. S.r.l. (same amount as in 2012) and euro 481 thousand from Sint S.p.A..
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35. FINANCIAL INCOME
This account is broken down as follows:
(in thousands of euro) 2013 2012
Interest 31,170 35,520 Other financial income 10,180 7,492 Fair value measurement of securities held for trading 353 - Fair value measurement of currency derivatives 23,084 - 64,787 43,012 Interest largely consists of euro 9,551 thousand in interest on interest rate swaps (euro 3,194 thousand at December 31, 2012) and euro 8,622 thousand for interest on fixed income securities (euro 6,123 thousand at December 31, 2012). In 2012 this item also included euro 13,467 thousand for the financial receivable from Prelios S.p.A., which was converted into equity instruments in 2013.
The other financial income includes interest income on receivables claimed from the Brazilian tax authorities for euro 5,688 thousand and income for euro 3,211 thousand from the basis adjustment of the financial liabilities that were hedged against interest rate risk, for which fair value hedge accounting has been applied. This adjustment is offset by the negative change in fair value of the hedging instrument included in the financial expenses recognised under “fair value measurement of other derivative instruments” (see note 36).
The item fair value measurement of currency derivatives relates to forward purchases/sales of foreign currencies to hedge commercial and financial transactions, in accordance with the Group foreign exchange risk management policy. For transactions open at the end of the year, the fair value is determined using the forward exchange rate at the reporting date. Measurement at fair value is made up of two elements: the interest component linked to the interest rate spread between the two currencies subject to the individual hedges, a net hedging cost of euro 35,219 thousand, and the exchange rate component, a net gain of euro 58,303 thousand.
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36. FINANCIAL EXPENSES
This account is broken down as follows:
(in thousands of euro) 2013 2012
Interest 119,105 106,388 Commissions 19,987 20,865 High inflation effect 18,680 6,427 Other financial expenses 1,870 4,588 Net losses on exchange rates 73,576 24,356 Net interest costs on employee benefit obligations 19,374 20,969 Fair value measurement of securities held for trading - 85 Fair value measurement of currency derivatives - 7,041 Fair value measurement of other derivatives 8,027 2,733 260,619 193,452
Interest includes euro 26,673 thousand on the bond issued by Pirelli & C. S.p.A. in 2011 (euro 26,620 thousand at December 31, 2012), euro 5,894 thousand on the private placement made by Pirelli International Ltd on the American market at the end of 2012 (euro 419 thousand at December 31, 2012) and euro 18,262 thousand for interest on interest rate swaps (euro 18,829 thousand at December 31, 2012).
The net losses on exchange rates of euro 73,576 thousand (exchange rate losses of euro 886,008 thousand and exchange rate gains of euro 812,432 thousand) refer to adjustment to year-end exchange rates of items expressed in currencies other than the functional currency outstanding at the reporting date and the net losses realised on items closed during the financial year. Comparison of these net losses with the fair value measurement of the foreign exchange component of currency hedges negotiated as part of the Group currency risk management strategy (net gain of euro 58,304 thousand, as previously indicated at the item “fair value measurement of currency derivatives” included in “financial income”) shows that management of foreign exchange risk is substantially in balance, considering that the negative imbalance, amounting to euro 15,272 thousand, is mainly related to devaluation of euro 8,539 thousand in the local currency by the Venezuelan subsidiary and the foreign exchange losses of euro 2,270 thousand at the Egyptian subsidiary.
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The “net interest cost on employee benefit obligations” includes the new quantity introduced by the revised version of IAS 19 – Employee Benefits, which came into force on January 1, 2013, and which replaced the “expected return on plan assets” and “interest expense”. The net interest is calculated by applying the discount rate previously used only for the gross liability to the net liability (i.e. the gross liability net of the plan assets). This item mainly consists of euro 13,854 thousand for pension funds, euro 1,446 thousand for employees' leaving indemnities (TFR), and euro 710 thousand for healthcare plans (see note 22 "Employee benefit obligations").
The fair value measurement of other derivative instruments (see note 27 “Derivative financial instruments”) mainly consists of: negative euro 4,399 thousand for reclassification in the Income Statement of losses that were previously accumulated in equity and associated with interest rate derivatives for which hedge accounting was interrupted (negative euro 3,749 thousand at December 31, 2012); euro 3,211 thousand in fair value adjustment of interest rate swaps made to hedge the interest rate associated with financial liabilities, for which hedge accounting (fair value hedge) has been implemented (positive euro 653 thousand at December 31, 2012).
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37. INCOME TAXES
Income taxes for the period are broken down as follows:
(in thousands of euro) 2013 2012
Current taxes 209,307 195,031 Deferred taxes 1,085 3,194
210,392 198,225
The reconciliation between theoretical taxes and effective taxes is presented below:
(in thousands of euro) 2013 2012
Income (loss) before income taxes 516,884 599,073 Reversal of net income (loss) of associates and joint ventures 25,835 21,293 A) Total taxable income 542,719 620,366
B) Theoretical taxes 174,877 206,724
Main causes for changes between theoretical and effective taxes: Income not subject to taxation (59,012) (54,819) Non-deductible costs 43,579 47,063 Use of tax losses carried forward (2,894) (7,897) Unrecognised deferred tax assets 36,829 20,269 Taxes not related to income and costs for tax assessment 42,792 17,792 Oher (25,779) (30,908)
C) Effective taxes 210,392 198,225
Theoretical Tax rate (B/A) 33% 33% Effective tax rate (C/A) 39% 32%
The Group’s effective tax burden for 2013 is attributable mainly to taxes payable by the Tyre Business (euro 176,617 thousand) for the positive taxable income of its subsidiaries. The amount of taxes also includes accounting recognition by Pirelli & C. S.p.A. of the positive effects deriving from the option for domestic tax consolidation. The total tax burden reflects the impact resulting from assessment of the sustainability of deferred tax assets recognised in relation to prior-period tax losses.
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The percentage of actual taxes in relation to total taxable income was 39%, considering the impairment of the Prelios S.p.A. “convertendo”, which negatively impacted pre-tax income.
The Group’s theoretical tax burden is calculated taking into account the nominal tax rates of the countries where the Group’s principal companies operate, as shown below:
2013 2012
Europe Italy 31.40% 31.40% Germany 29.55% 29.48% Rumania 16.00% 16.00% Great Britain 23.25% 24.50% Turkey 20.00% 20.00% Russia 20.00% 20.00% NAFTA USA 40.00% 40.00% Mexico 30.00% 30.00% Central and South America Argentina 35.00% 35.00% Brazil 34.00% 34.00% Venezuela 34.00% 34.00% Asia / Pacific China 25.00% 25.00% Middle East / Africa Egypt 25.00% 0.00%
The nominal tax rate in Great Britain fell from 24.50% in 2012 to 23.25% in 2013, in accordance with local tax laws (Finance Act 2012).
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38. EARNINGS (LOSSES) PER SHARE
Basic earnings (losses) per share are given by the ratio between net income (loss) attributable to the owners of the parent (adjusted to take into account the minimum dividend allocated to savings shares) and the weighted average of the number of ordinary shares outstanding during the period, with the exclusion of treasury shares.
(in thousands of euro) 2013 2012
Net income (loss) attributable to owners of the Parent 303,574 387,109
Net income (loss) attributable to savings shares reflecting 2% minimun dividend (7,523) (9,593)
Adjusted net income (loss) attributable to owners of the Parent 296,051 377,516
Basic earning (loss) per ordinary share (in euro per share) 0.623 0.794
Weighted average of outstanding ordinary shares (in thousands) 475,389 475,389
The diluted earnings (losses) per share have not been calculated because, following expiration of the stock option plans, the prerequisites for such calculation are not met.
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39. DIVIDENDS PER SHARE
In 1H 2013, Pirelli & C. S.p.A. paid to its shareholders dividends based on 2012 earnings equal to euro 0.32 per each of the 475,388,592 ordinary shares (excluding treasury shares) and euro 0.39 per each of the 11,842,969 savings shares (excluding treasury shares). The total dividends paid out amounted to euro 156,743 thousand.
In 2012 Pirelli & C. S.p.A. paid to its shareholders dividends based on 2011 earnings equal to euro 0.27 per ordinary share (excluding treasury shares) and euro 0.34 per savings share (excluding treasury shares). The total dividends paid out amounted to euro 132,382 thousand.
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40. HYPERINFLATION
In accordance with Group accounting policies regarding the criteria for introducing/ending inflation accounting, the subsidiary Pirelli de Venezuela C.A. adopted inflation accounting beginning with preparation of the consolidated financial statements at December 31, 2009. It is the only Group company operating in a high-inflation country. For this purpose, a blended price index has been used: a consumer price index (IPC) covering only the cities of Caracas and Maracaibo was used until December 31, 2007. Beginning in 2008 the Banco Central de Venezuela and the National Institute for Statistics started to publish a national consumer price index (Indice Nacional de precios al consumidor - INPC) that covers the entire country and uses December 2007 as its basis for calculation.
Coversion Index Factor December 31, 2011 265.6 1.2007 December 31, 2012 318.9 1.5619 December 31, 2013 498.1 1.0000
The losses on the net monetary position are recognised in the income statement under the item “Financial expenses” (note 36) for an amount of euro 18,680 thousand (euro 6,427 thousand at December 31, 2012).
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41. RELATED PARTY TRANSACTIONS
Related party transactions, including intercompany transactions, are neither unusual nor exceptional, but are part of the ordinary course of business of Group companies. Such transactions, when not carried out at standard conditions or dictated by specific laws, are in any case settled on an arm’s length basis and executed in compliance with the rules set out in the Group Procedure for Related Party Transactions.
The statement below shows a summary of the balance sheet, income statement and statement of cash flows that includes transactions with related parties and their percentage impact:
(in millions of euro) Total of which % share Total of which % share reported at related reported at related 12/31/2013 parties 12/31/2012 parties
BALANCE SHEET Non-current assets Other financial assets 289.1 104.1 0.4 118.1 - - Other receivables 169.5 - - 370.2 174.0 46.99% Current assets Trade receivables 666.4 1.4 0.21% 704.6 6.4 0.91% Other receivables 267.5 8.5 3.17% 341.4 40.5 11.87% Non-current liabilities Borrowings from banks and other financial institutions 2,014.4 1.7 0.08% 1,995.8 2.6 0.13% Current liabilities Borrowings from banks and other financial institutions 316.7 - - 440.5 0.9 0.20% Trade payables 1,244.5 41.1 3.30% 1,268.7 5.3 0.42% Other payables 434.2 0.1 0.02% 417.6 0.1 0.03% Tax payables 80.3 0.0% - - -
Total 2013 of which % share Total 2012 of which % share related related parties parties INCOME STATEMENT Revenue from sales and services 6,146.2 1.9 0.03% 6,071.5 3.8 0.06% Other income 252.3 3.1 1.24% 241.6 0.8 0.35% Personnel expense (1,211.8) (3.4) 0.28% (1,193.9) (9.4) 0.78% Other costs (1,827.6) (70.1) 3.83% (1,791.7) (40.3) 2.25% Financial income 64.8 1.5 2.36% 43.0 14.4 33.41% Taxes (210.4) - (0.6) - 0.3% (198.2) - - -
Total 2013 of which % share Total 2012 of which % share related related parties parties Cash flow Disposals (Acquisition) of equity investments in associates and joint ventures (55.4) (55.4) 100.00% - - - Disposals (Acquisition) of equity investments (9.9) (0.6) 5.62% 3.6 (0.8) n.s.
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The effects of related party transactions on the consolidated income statement, balance sheet, and statement of cash flows of the Pirelli & C. Group at December 31, 2013 are shown below.
RELATIONS WITH ASSOCIATES and JV
(in millions of euro) Revenue from sales and services 1.6 The amount mainly concerns services provided by: Pirelli Tyre S.p.A. (euro 0,6 million) and Pirelli Steelcord S.r.l. (euro 0.1 million) to Sino Italian Wire Technology Co. Ltd; Pirelli & C. Ambiente S.p.A. to Idea Granda Società Consortile S.r.l. (euro 0.6 million); Poliambulatorio Bicocca S.r.l. to Prelios S.p.A. ( euro 0.2 million) and costs recovered by Pirelli & C. S.p.A. from Fenice S.r.l. (euro 0.1 million). Other income 2.9 The amount mainly refers to rental income and associated operating expenses to Prelios Group (euro 2.2 million) and services provided by Pirelli Tyre Co. Ltd to Sino Italian Wire Technology Co. Ltd. (euro 0.3 million). Other costs 47.6 The amount mainly concerns: costs for purchase of products of Pirelli Tyre Co. Ltd (euro 21.6 million) from Sino Italian Wire Technology Co. Ltd., purchase of energy of Pirelli Deutschland GmbH from Industriekraftwerk Breuberg GmbH (euro 25.2 milion), services provided by CORIMAV to Pirelli & C. S.p.A. (euro 0.2 million) and other services received by Prelios Group S.p.A. (euro 0.1 million). Financial income 1.5 The amount relates to interest income on the loan granted by Pirelli International Ltd (euro 0.4 milion) and Pirelli Tyre Co. Ltd (euro 0.7 million) to Sino Italian Wire Technology Co. Ltd. and to interest income on the loan granted by Pirelli & C. Ambiente S.p.A. to GWM Renewable Energy II S.p.A. (euro 0.4 million). Taxes 0.6 The amount refers to tax charges due to the companies of Prelios Group participating to the Tax Consolidation. Other financial assets 104.1 The amount concerns the convertible loan of Prelios S.p.A.. Current trade receivables 1.1 The amount mainly concerns receivables for services provided by: Pirelli Tyre S.p.A. to Prelios Group S.p.A. (euro 0.3 million) and PT Evoluzione Tyre (euro 0.1 million); Pirelli & C. Ambiente S.p.A. to Idea Granda Società Consortile S.r.l. (euro 0.4 million) and Pirelli & C. S.p.A. to Fenice S.r.l. (euro 0.1 million). Current other receivables 0.3 The amount concerns: receivable by the disposal of Pirelli & C. Ambiente S.p.A. plant to GWM Renewable Energy II S.p.A. (euro 0.3 million). Current financial receivables 8.2 The amount concerns mainly of receivables of: Pirelli & C. Ambiente S.p.A. to GWM Renewable Energy II S.p.A. (euro 8.2 million). Non-current borrowings from banks and 1.7 Guarantee deposit to Prelios Group S.p.A.. other financial institutions Current trade payables 37.8 The amount consists of payables for services provided by: Pirelli & C. S.p.A. to Prelios Group S.p.A. (euro 0.1 million) and Corimav (euro 0.1 million), and by Industriekraftwerk Breuberg GmbH to Pirelli Deutschland GmbH (euro 37.5 million) for energy purchases. 0.1 The amount refers to payables of Pirelli & C. S.p.A. to Prelios S.p.A. for R&D Current other payables building rental. Tax payables 0.6 The amount refers to payables to the companies of Prelios Group participating to the Tax Consolidation. Cash flow - increase in share capital 55.4 The amount mainly relates to the subscription of the share capital in the associated companies Fenice S.r.l. ( euro 23.0 million), RCS Mediagroup S.p.A. (euro 21.3 million) and in the indonesian company JV PT Evoluzione Tyre (euro 10.4 million).
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TRANSACTIONS WITH RELATED PARTIES THROUGH DIRECTORS (in millions of euro) Revenue from sales and services 0.3 The amount mainly refers to services provided by Poliambulatorio Bicocca S.r.l., Pirelli Sistemi Informativi S.p.A. and Pirelli & C. S.p.A. to Camfin Group Other income 0.3 The amount mainly refers to rental income and related operating expenses to Camfin Group (euro 0,1 million). Other costs 13.0 The amount refers to advertising costs owed to FC Internazionale Milano S.p.A. Current trade receivables 0.2 The amount refers to receivables connected to the services provided to Camfin Group Current trade payables 3.3 The amount refers to payables to FC Internazionale Milano S.p.A. Investments in other financial assets (cash outflow) 0.6 This refers to the share capital increase of F.C. Internazionale Milano S.p.A.
TRANSACTIONS WITH OTHER RELATED PARTIES (in milllions of euro) Other costs 1.8 The amount mainly refers to insurance costs of Pirelli Industrie Pneumatici S.r.l. (euro 0.2 million), Pirelli Tyre S.p.A. (euro 1,1 million) and Pirelli & C. S.p.A. (euro 0.4 million) owed to Allianz S.p.A., Assicurazioni Generali S.p.A. and Fonsai S.p.A..
Benefits for key managers of the Company The remuneration payable to key managers, i.e. to those who have the power and responsibility, directly or indirectly, for planning, managing and controlling the business of Pirelli & C. S.p.A., totalled euro 11,086 thousand at December 31, 2013 (euro 15,620 thousand at December 31, 2012). The portion relating to employee benefits was recognised in the income statement item “personnel expense” for euro 3,362 thousand (euro 9,365 thousand at December 31, 2012) and euro 7,724 thousand for the income statement item “other costs” (euro 6,255 thousand at December 31, 2012). The remuneration also includes euro 960 thousand for employees' leaving indemnity (TFR) and retirement benefits (euro 983 thousand at December 31, 2012).
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42. SIGNIFICANT EVENTS SUBSEQUENT TO THE END OF THE YEAR
On January 16, 2014, following up on the decision by the World Motor Sport Council that confirmed Pirelli as sole supplier of tyres to the FIA Formula One World Championship, Pirelli announced that it had renewed that agreement with FIA. The duration of the agreement is three years, beginning with the 2014 season. Pirelli will continue to define the tyre specifications and manage all aspects of their development, in close collaboration with FIA and the teams, and within the parameters established by the FIA Formula One Sporting and Technical Regulations.
On February 28, 2014 Pirelli & C. S.p.A. and Bekaert announced that they had signed an agreement for sale of 100% of the Pirelli steel cord activities to Bekaert for an enterprise value of about euro 255 million. The sale of the steel cord business enables Pirelli to withdraw from a business which is too small to be competitive, and to focus on the premium tyre segment, which has higher profit margins. As part of the sale and purchase agreement, a long-term agreement was also made for long-term supply and joint development of products to boost R&D activities and guarantee that the transition to the new agreement be consistent with the companies' respective growth and development plans. The closing of the deal, which is subject to regulatory approval, is expected to take place in the second half of the year and affects all five of the Pirelli steel cord plants located in Italy, Turkey, Romania, China and Brazil.
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On February 28, 2014 Pirelli & C. S.p.A. announced that effective December 31, 2013, it had closed the medium-long term management cash incentive plan – Long Term Incentive (LTI) – adopted in 2012 in support of the 2012-2014 three-year objectives without any pay- out, either full or pro-rated, of the three-year incentive. The Company announced that it had adopted a new plan – also applicable to all of management (about 330 participants) – related to the targets for the period 2014-2016 contained in the business plan presented on November 6, 2013. Consistently with the variable compensation mechanisms adopted internationally, the three-year LTI plan is also based on the performance of Pirelli stock (“TSR”) and makes it possible to align the interests of management with those of shareholders. Just like previous plans, the 2014-2016 plan is entirely self-funded, insofar as the related expenses are included in the financial figures of the Industrial Plan. Participants in the LTI Plan 2014-2016 include, inter alia, the Chairman and Chief Executive Officer of Pirelli & C., Marco Tronchetti Provera, the Deputy Chairman, Alberto Pirelli (as senior manager), the General Manager Operations, Gregorio Borgo, the key managers Maurizio Boiocchi (Chief Technical Officer), Maurizio Sala (Chief Planning and Controlling Officer), Francesco Tanzi (Chief Financial Officer and Financial Reporting Manager) and Christian Vasino (Chief Human Resources Officer).
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43. OTHER INFORMATION
Research and development expenses Research expenses rose from euro 178.9 million in 2012 (2.9% of sales) to euro 199.2 million in 2013 (3.2% of sales). They were expensed on the income statement insofar as they did not satisfy IFRS requirements for capitalisation.
Compensation of directors and statutory auditors
(in thousands of euro) 2012 2011
Directors 6,928 5,351 Statutory Auditors 200 189 7,128 5,540
Employees The average headcount of employees at consolidated companies is as follows, broken down by category:
2013 2012
Executives and white collar staff 7,461 7,060 Blue collar staff 27,593 26,595 Temporary workers 2,701 2,729 37,755 36,384
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Compensation of independent auditors The following statement, prepared pursuant to Art. 149–duodecies of the Consob Issuers Regulation, shows the fees accruing to financial year 2013 for auditing services and for services other than auditing, rendered by the accounting firm Reconta Ernst & Young S.p.A. and by entities belonging to its network:
(in thousands of euro) Company that provided the Company that received Partial fees Total fees service the service Independent auditing services and certification services (1) Reconta Ernst & Young S.p.A. Pirelli & C. S.p.A. 530 Reconta Ernst & Young S.p.A. Subsidiaries 705 Network Ernst & Young Subsidiaries 1,811 3,046 98.8% Services other than auditing Reconta Ernst & Young S.p.A. Pirelli & C. S.p.A. - Reconta Ernst & Young S.p.A. Subsidiaries 35 (2) Network Ernst & Young Subsidiaries 1 (3) 36 1.2% 3,082 100.0%
(1) the item "independent auditing services and certification services" includes amounts paid for auditing services and other services that envisage the issuance of an auditor's report as well as amounts paid for the so called certification services since they create synergies with the auditing services.
(2) supporting activities for the Framework consolidation of critical suppliers and for the assessment in an additional production site (3) tax assistance services
Transactions resulting from unusual and/or exceptional operations Pursuant to Consob Notice of July 28, 2006, the Group certifies that it did not carry out any unusual and/or exceptional transactions in 2013, as defined in the Notice itself.
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Exchange rates The main exchange rates used for consolidation purposes are as follows:
(local currency against euro) Period-end Change in Average Change in % % 12/31/2013 12/31/2012 2013 2012 Venezuela Bolivar Fuerte 8.6883 5.6734 53.14% 8.6883 5.6734 53.14% Swedish Krona 8.8591 8.5820 3.23% 8.6513 8.7052 (0.62%) Australian Dollar 1.5423 1.2712 21.33% 1.3769 1.2413 10.92% Canadian Dollar 1.4671 1.3137 11.68% 1.3681 1.2846 6.50% Singapore Dollar 1.7414 1.6111 8.09% 1.6615 1.6059 3.46% U.S. Dollar 1.3791 1.3194 4.52% 1.3279 1.2854 3.31% Taiwan Dollar 41.0572 38.2666 7.29% 39.4096 38.0010 3.71% Swiss Franc 1.2276 1.2072 1.69% 1.2308 1.2053 2.12% Egyptian Pound 9.5821 8.3964 14.12% 9.1343 7.8059 17.02% Turkish Lira (new) 2.9418 2.3630 24.49% 2.5345 2.3153 9.47% New Romanian Leu 4.4710 4.4445 0.60% 4.4191 4.4581 (0.88%) Argentinian Peso 8.9931 6.4888 38.59% 7.2835 5.8516 24.47% Mexican Peso 18.0291 17.1902 4.88% 16.9666 16.9191 0.28% South African Rand 14.5660 11.1727 30.37% 12.8251 10.5537 21.52% Brazilian Real 3.2265 2.6962 19.67% 2.8716 2.5129 14.27% Chinese Renminbi 8.4082 8.2931 1.39% 8.2243 8.1140 1.36% Russian Ruble 44.9699 40.2286 11.79% 42.4001 39.9083 6.24% British Pound 0.8337 0.8161 2.16% 0.8490 0.8110 4.68% Japanese Yen 144.7200 113.6100 27.38% 129.6245 102.6099 26.33%
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Net financial (liquidity)/debt position
(alternative performance measure not envisaged by the accounting standards)
(in thousands of euro) 12/31/2013 12/31/2012 Note
of which of which related related parties parties
Current borrowing from bank and other financial institutions 23 316,653 - 440,526 877 Current derivative financial instruments (liabilities) 27 3,175 - 19,168 -
Non-current borrowing from bank and other financial institutions 23 2,014,406 - -- 1,995,775 - 2,565 - Total gross debt 2,334,234 - 2,455,469 - Cash and cash equivalents 19 (879,897) - (679,794) - Securities held for trading 18 (48,090) - (224,717) - Current financial receivables 15 (17,738) 8,234 (66,290) (38,723)
Current derivative financial instruments (assets) 27 (6,666) - - (18,136) - - Net financial debt * 1,381,843 - 1,466,532 -
Non-current financial receivables 15 (59,460) - -- (261,327) - (173,506) - Total net financial (liquidity) debt position 1,322,383 1,205,205
* Pursuant to Consob Notice of July 28, 2006 and in compliance with CESR recommendation of February 10, 2005 "Recommendations fot the consistent implementation of the European Commission regulation on Prospectuses".
Gross debt decreased by a total of euro 121.3 million from December 31, 2012, falling from euro 2,455.5 million to euro 2,334.2 million. Following conclusion of the capital transaction resolved by Prelios S.p.A. at the end of March 2013, aimed at relaunching the business development prospects of the real estate group and strengthening the financial position of the group owned by Prelios S.p.A., as well as rebalancing its overall financial structure, and as accepted by Pirelli, the non-current portion of the financial receivable of euro 173.5 million outstanding at December 31, 2012 was converted into Prelios S.p.A. ordinary shares for euro 21.5 million, into equity instruments (the “convertendo”) for euro 148.4 million, while the remaining euro 3.6 million was repaid by Prelios and thus collected. The reduction in non-current financial receivables also reflected recognition in Brazil of the release and consequent receipt of about euro 19 million in amounts posted as a bond in tax litigation and lawsuits.
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In regard to current financial receivables, the reduction from December 2012 includes about euro 33 million resulting from the effects of line-by-line consolidation of the Chinese subsidiary operating in the steel cord business at December 31, 2013 (previously classified as an associate and by which a financial receivable was owed at December 31, 2012).
Pirelli & C. S.p.A.
2013 Report on Corporate Governance and Structure of Share Ownership
March 27, 2014
www.pirelli.com The volume is a specific, integral section of the Directors’ Report on operations
1 An Executive Summary of the 2013 Report on Corporate Governance and the Structure of Share Ownership is provided below that contains a brief description of the operation of Pirelli’s corporate governance. The reader is referred to the specific sections of the Report for further details.
EXECUTIVE SUMMARY The Company adopts the traditional system of administration and control. Pirelli's Corporate Governance system is based on the following: (i) the central function of the Board of Directors, responsible for the strategic guidance and supervision of the Company's overall business activities, with policy-making powers in relation to the overall administration and the authority to intervene directly in a series of significant decisions necessary or useful to achieve the company purpose; (ii) the central role of the Independent Directors; (iii) an effective internal control system; (iv) a pro-active risk management system; (v) a remuneration system, in general, and an incentive system, in particular, for Managers associated with medium and long-term economic targets in order to align the management's interests with the shareholders' interests, by pursuing the priority objective of creating sustainable value in the medium/long-term, by establishing a strong link between remuneration, on the one hand, the performance of individuals and Pirelli's performance, on the other hand; (vi) a strict discipline concerning potential conflicts of interest and solid principles of conduct to execute transactions with related parties. Pirelli complies with the Self-Regulatory Code of companies listed on the Italian Stock Exchange (Borsa Italiana) from the date the Code was first issued. The governance system is formally defined in the Code of Ethics, in the Company Bylaws, in the Regulation that governs Shareholders' Meetings and in a series of principles and procedures which are updated periodically to assure best practices. Pirelli has been declared the "Best Corporate Governance in Italy" for the fourth consecutive year in the framework of the World Finance Corporate Governance Award 2013. During 2013, and for the second consecutive year, Pirelli sponsored the ICGN Annual Conference held in New York, confirming the importance that Corporate Governance aspects represent for Pirelli.
BOARD OF DIRECTORS The Board of Directors is responsible for the strategic guidance and supervision of the Company's overall business activities, with policy-making powers in relation to the overall administration and the authority to intervene directly in a series of significant decisions
2 necessary or useful to achieve the company purpose. When executing its activities, the Board of Directors avails itself of the support of special Board Committees which have fact-finding, proposing and/or advisory duties, as well as managerial committees comprising the senior management which implement the directives and the policies established by the Board of Directors and by the Executive Directors (in this regard, the reader is referred to the “Managerial Committees” section) and collaborate with the latter to define the respective proposals to be submitted to the Board concerned. The Board of Directors is appointed by means of the “voting slate” system, thereby assuring that the so-called “minorities” are able to appoint one fifth of the Board Members, if at least two slates are presented. The Board of Directors in office at the Date of this Report comprises 20 Directors which fall from office with the Shareholders’ Meeting convened to approve the Financial Statements for the year closed as of December 31, 2013. By adopting the voting slate system, the so-called minorities were able to appoint 4 Directors, corresponding to one fifth of the total.
EXECUTIVE DIRECTORS The Board appointed Marco Tronchetti Provera as Chairman and Managing Director in the meeting held on April 21, 2011. In addition to the Chairman and Managing Director, the Board considered the Deputy Chairman Alberto Pirelli to be an Executive Director, in view of the operational offices held in the subsidiary company Pirelli Tyre. The Board of Directors redefined its organisational model during the 2013 financial year, with the aim of maximising business supervision and the geographic coordination of all the operational activities associated with product development and management. In particular, the Operations General Division was established reporting directly to the Chairman and Managing Director, this Division has been entrusted to Gregorio Borgo, to which, in turn, the organisational units associated with the operational management (Industrial Operations, Supply Chain, Product and OE Aftermarket and Marketing), the Industrial and Motorcycle Business Units and the various “Regions” (Africa, Middle East and India, Asia-Pacific, Central Europe, North West Europe, South Europe, Latam, Nafta and Russia and Nordics) report. The Regions continue to report directly to the Chairman and Managing Director with regard to the governance and overall coordination aspects. In addition to the Operations General Division, the staff functions and the Chief Technical
3 Officer, Maurizio Boiocchi also report to the Chairman and Managing Director, to whom the Product, Processes, Quality, Original equipment and Motorsport areas continue to report.
INDEPENDENT DIRECTORS The Board of Directors is characterised by a number of Independent Directors who, in general, represent the absolute majority of its members since 2006, with a more rigorous approach also concerning the Self-Regulatory Code that in the case of companies included in the FTSE-MIB index makes a recommendation that at least one third of the Board is to be composed of Independent Directors. There are two Executive Directors and ten Independent Directors at the Date of the Report, while the other eight Directors can be quantified as “non-executive Directors”. Accordingly, the Independent Directors represent 50% of the Directors in office and approximately 55% compared to the total of the “non-executive Directors”. Pirelli deems that the central function of the Board of Directors is to define the strategic policy guidelines and to supervise the Company's business activities and in order to perform this task effectively the presence of an adequate number of Independent Directors with high professional and personal skills and expertise on the Board of Directors, plays a central role. This is actually the case and the Remuneration Committee and the Committee for Internal Control, Risks and Corporate Governance (“CICRCG”) are composed only of Independent Directors since 2000. The significant representation of Independent Directors is also assured in the framework of the Appointments and Succession Committee (the majority of its members are Independent Directors) and the Strategies Committee, and its composition reflects the mix of expertise and the presence of executive, non-executive and Independent Directors of the Board of Directors.
LEAD INDEPENDENT DIRECTOR The Board of Directors decided to introduce the figure of the Lead Independent Director already from November 2005, in order to further enhance the role played by the Independent Directors. The Lead Independent Director (represented by the Independent Director Carlo Secchi, Chairman of the CICRCG) represents the reference and coordination point for the requests and contributions of the Independent Board Members.
BOARD COMMITTEES
4 The Board established four committees after its renewal on April 21, 2011, two of which were new committees: the CICRCG, the Remuneration Committee; the Appointments and Succession Committee and the Strategies Committee.
APPOINTMENTS AND SUCCESSION COMMITTEE The Appointments and Succession Committee is composed of 3 Board Members, the majority of whom are independent and in particular: Marco Tronchetti Provera (Chairman); Luigi Campiglio; Luigi Roth. When defining the responsibilities of the Appointments and Succession Committee the Board of Directors assessed the increasing importance for Pirelli and for the market of the Board's direct involvement in defining the succession policies (i) not only and not just in relation to possible natural changes of the Executive Directors, for which however, the decisions made by the shareholders assume a decisive role, but in general (ii) concerning the top and senior management to assure the necessary continuity of the management action. The responsibilities attributed to the Committee are outlined in detail below in the Report.
STRATEGIES COMMITTEE The Strategies Committee is composed of 9 Board Members, 4 of whom are independent, and in particular: Marco Tronchetti Provera (Chairman); Alberto Bombassei; Franco Bruni; Paolo Fiorentino; Gaetano Micciché; Renato Pagliaro; Carlo Secchi; Manuela Soffientini; Claudio Sposito. The Committee has advisory and proposing functions when defining the strategic guidelines, as well as to identify and define the conditions and terms of individual transactions of strategic importance. The responsibilities attributed to the Committee are outlined in greater detail below in the Report.
REMUNERATION COMMITTEE The Remuneration Committee is composed of 4 members, who are exclusively independent, and in particular: Luigi Roth (Chairman); Anna Maria Artoni; Luigi Campiglio; Pietro Guindani. The Committee has advisory, proposing and supervisory functions to assure the definition and implementation of remuneration policies within the Group which, on the one hand, are designed to attract, motivate and retain the resources which have the professional qualities
5 required to achieve the Group's objectives profitably, and on the other hand, are able to align the management's interests with the shareholders' interests. The Committee's specific responsibilities are outlined in detail later in the Report.
GENERAL REMUNERATION POLICY Pirelli has already defined a Remuneration Policy from the 2011 financial year, one year early compared to the legal obligation and each year the policy is submitted to the advisory vote of the shareholders. The definition of the Policy is the result of a clear and transparent process in which the Remuneration Committee and the Board of Directors play a central role.
COMMITTEE FOR INTERNAL CONTROL, RISKS AND CORPORATE GOVERNANCE The CICRCG is composed of 4 members, who are exclusively independent, and in particular: Carlo Secchi (Chairman); Franco Bruni; Elisabetta Magistretti; Luigi Roth. The Committee has advisory and proposing functions and has the mission, on the one hand, of assuring the efficiency, effectiveness and correctness of the internal control system and the corporate governance structure, in general, on the other hand. Furthermore, on April 21, 2011 the Board of Directors confirmed the responsibilities originally assigned to the Committee for Internal Control and Corporate Governance, moreover, in line with the responsibilities set out in the Self-Regulatory Code, and also confirmed the prerogatives concerning corporate governance which characterise the Committee from the date it was established. The responsibilities assigned to the CICRCG are outlined in detail later in the Report.
MANAGERIAL COMMITTEES Specific managerial committees are established within the Group comprising top and senior management with the responsibility of assisting the Board of Directors and the Executive Directors in defining the Company's business guidelines and to implement the policies established by the Board.
SUCCESSION PLANS First of all, the Appointments and Succession Committee examined the corporate processes relating to the identification, management and development of “talents” which assure the Group has a “natural source” of in-house growth over time, thereby ensuring a constant
6 generational change. The Committee also examined the main initiatives implemented to assure the development of management responsibilities and the process to define the so-called “succession tables”. The Board of Directors examined the Committee's proposals during 2013 and adopted the succession plan for the Company's top management to be implemented in the case of urgency and also approved the process to be followed to define the natural succession plan of the Company's top management.
INTERNAL CONTROL SYSTEM In general, Pirelli's internal control system is structured to assure correct information and adequate control of all the Group's activities, with particular attention paid to the areas deemed to represent a potential risk. Pirelli’s internal control system developed as a direct process to achieve the values of substantial and procedural fairness, transparency and accountability, assuring: efficiency, transparency and traceability of the transactions and, more in general, the management related activities; the dependability of the accounting and management data and the financial information; compliance with the laws and regulations; protecting the Company's integrity, also for the purpose of preventing fraud to the detriment of the Company and the financial markets.
THE RISK GOVERNANCE SYSTEM The risk supervision and governance model adopted by the Group in July 2009, has the following aims: “to manage” risks in terms of prevention and mitigation; “to seize” the opportunity factors proactively; to disseminate the “culture” of the value at risk within the company, in particular, in the strategic planning and operational processes and in the most important corporate decisions; to assure transparency in terms of the risk assumed and the management strategies implemented, based on periodic and structured reporting to the Board of Directors and to the Top Management and adequate information to the shareholders, and more in general, to all the so-called stakeholders. It is important to observe the central role played by the Board of Directors with reference to the governance of the new model, since the Board of Directors is responsible for supervising the risk management process so that the risks assumed in the framework of the Company's
7 business activities are consistent with the strategies (so-called monitoring action).
CODE OF ETHICS – POLICY GUIDELINES The Code of Ethics outlines the general principles adopted as a reference for the performance and conduction of business within Pirelli; the Code of Ethics indicates the aims and values underlying the Company's business activities. Indeed, Pirelli states that its internal and external business is based on complying with the Code of Ethics, in the belief that business success cannot be separated from ethics in business. The Policy Guidelines contain an “operative” statement of the principles contained in the Code of Ethics and establish rules, for the whole Group, designed to prevent the creation of an environment favourable to committing offences in general. The Code of Ethics and the Policy Guidelines are translated into all the languages used within the Pirelli Group (22 different languages).
THE SUPERVISORY BODY A special Supervisory Body supervises the functioning and compliance with the Organisational Model 231 adopted by the Company, the Supervisory Body is economically independent and is composed of the Board Member Carlo Secchi, Lead Independent Director and the Chairman of the CICRCG, by the Statutory Auditor Antonella Carù and by Maurizio Bonzi, the Internal Audit Function Manager.
AUDITING COMPANY The statutory audit activities are performed by a company appointed by the Shareholders' Meeting from among the companies enrolled in the respective register. Reconta Ernst &Young S.p.A. was conferred the mandate to audit the financial statements, the consolidated financial statements and the abridged interim financial statements referred to the 2008 – 2016 financial years.
OFFICER RESPONSIBLE FOR PREPARING THE COMPANY'S ACCOUNTING DOCUMENTS The Board of Directors, with the favourable opinion expressed by the Board of Statutory Auditors, confirmed Francesco Tanzi, Chief Financial Officer as the Responsible Officer in the meeting held on April 21, 2011, the Responsible Officer is also responsible for the Group's Financial Statements and Taxes functions.
8 DIRECTORS’ INTERESTS AND TRANSACTIONS WITH RELATED COMPANIES The Company established principles of conduct to execute transactions with related parties from 2002, these principles are designed to assure an effective substantial and procedural correctness and transparency in the transactions of this nature undertaken by the Company directly or through subsidiaries. Following Consob's adoption of a special Regulation to govern transactions with related parties in March 2010, the Company subsequently approved a specific and structured procedure (on November 3, 2010) concerning transactions with related parties. The procedural decisions adopted by the Company are more rigorous compared to the requirements envisaged by the Consob Regulations. Considering the Company has adopted the Consob recommendation to envisage a review of the TRP Procedure at least every three years, in the meeting held on November 5, 2013 (therefore, after three years have elapsed from adoption of the TRP Procedure), the Board of Directors approved some marginal amendments to the TRP procedure, taking into account the opinion expressed by the Committee for Transactions with Related Parties and the assessment expressed by the Board of Statutory Auditors (with the unanimous vote of the respective members), confirming the model adopted during 2010.
BOARD OF STATUTORY AUDITORS At the Date of the Report, the Board of Statutory Auditors was appointed for the 2012 - 2014 financial years with the voting slate system and is composed of Francesco Fallacara (appointed as Chairman, since selected from the slate presented by the minorities); Antonella Carù and Enrico Laghi; the Alternate Auditors are Umile Sebastiano Iacovino and Andrea Lorenzatti (selected from the minority slate). The appointment is envisaged to be made by means of the so-called “voting slate” system, so as to ensure that, if two slates are presented, one Statutory Auditor and one Alternate Auditor are selected from the slate that obtained the second highest number of votes (so-called minority slate).
RELATIONS WITH SHAREHOLDERS In its tradition of transparency the Company manages with special attention the relations with Shareholders, with Investors (institutional and private investors), with financial analysts, with other market players and with the financial community in general, in
9 compliance with their reciprocal roles and by promoting periodic meetings in Italy and abroad. The Pirelli Internet website dedicates a section called Investors designed to establish an open, immediate and transparent dialogue with all parties requiring financial information concerning Pirelli; the Investors section includes the details required for an initial contact with Pirelli for evaluation purposes. Furthermore, Pirelli has prepared a section on the website dedicated to Retail investors in the case of individual investors. Investor Relations has an e-mail address ([email protected]) to facilitate the dialogue with the Company.
SHAREHOLDERS' MEETINGS The discipline that governs the operation of the Shareholders' Meetings has been profoundly innovated following the provisions introduced into Italian legislation by Legislative Decree No. 27 of 2010 that adopted Directive 2007/36/EC in the legal system, designed to facilitate the participation by shareholders of listed companies in Shareholders' Meetings. The operation of the Shareholders' Meetings is governed by the Shareholders' Meetings Regulation duly approved by the Shareholders' Meeting held on May 11, 2004 and subsequently amended by the Shareholders' Meeting held on April 23, 2007, in addition to the law and the Company Bylaws. With regard to the shareholders' meeting of the holders of savings shares this meeting is called by the Company's Common Representative of savings shareholders or by the Company's Board of Directors whenever deemed appropriate or whenever the call is requested, as required by law. The savings Shareholders' Meeting that was held on January 31, 2012 appointed prof. Giuseppe Niccolini as the Common Representative for the 2012-2014 financial years. The Pirelli Internet website includes sections which are dedicated to the Shareholders' Meetings and to the figure of the Common representative of the Company's savings shareholders.
10 GLOSSARY Shareholders' Meeting to approve the Financial Statements for 2012: means the Shareholders' Meeting convened to approve the Financial Statements as of December 31, 2012; Shareholders' Meeting to approve the Financial Statements for 2013: means the Shareholders' Meeting convened to approve the Financial Statements as of December 31, 2013; C.C.: indicates the Italian Civil Code; Self-Regulatory Code: indicates the Self-Regulatory Code of Conduct promoted by Borsa Italiana S.p.A. with which the Company complies and is published on the following website: www.borsaitaliana.it.; Board or Board of Directors: indicates the Board of Directors of Pirelli & C. S.p.A.; CICRCG: indicates the Committee for Internal Control, Risks and Corporate Governance establish within the Board of Directors Consob: indicates the National companies and stock exchange commission; Date of the Report: indicates the Board of Directors' Meeting held on March 27, 2013 that approved this report; Responsible Officer: means the Executive Manager responsible for preparing the Company’s accounting documents, as set out under Article 154-bis of the Unified Finance Law (TUF); 2012 financial year: indicates the financial year closed as of December 31, 2012; 2013 financial year: indicates the financial year closed as of December 31, 2013; Pirelli: indicates the group of which Pirelli & C. S.p.A. is the Parent Company; Pirelli & C.: indicates Pirelli & C. S.p.A. with registered office in Milan, Tax Code, VAT registration and registration number in the Milan Register of Companies under No. 00860340157; Pirelli Tyre: indicates Pirelli Tyre S.p.A. with registered office in Milan, Tax Code and registration number in the Milan Register of Companies under No. 07211330159; Issuer Regulations: indicates the Regulations issued by Consob with resolution No. 11971 of 1999 relating to issuers and the subsequent amendments and supplements; Market Regulations: indicates the Regulations issued by Consob with resolution No. 16191 of 2007 relating to markets and the subsequent amendments and supplements; Report: indicates this report on corporate governance and the structure of share ownership prepared in accordance with Article 123 bis of the Unified Finance Law (TUF); Pirelli Internet website: the institutional Pirelli website containing, inter alia, information
11 relating to the Company and reachable at the Internet domain: www.pirelli.com; Company: indicates Pirelli & C. S.p.A.; Company Bylaws: indicates the Company Bylaws of Pirelli & C., available on the Pirelli Internet website; Unified Finance Law (TUF): indicates Legislative Decree No. 58 dated February 24, 1998, (Unified Finance Law).
12 1. PROFILE OF THE COMPANY ISSUING THE REPORT Pirelli & C. is the joint-stock company listed on the Italian Stock Exchange (Borsa Italiana) and is the Parent Company of the multinational group specialising in the tyre sector, and a leading company in the top of the range and high technological content segments. The company was founded in 1872, and today Pirelli has production facilities in four continents and operates in more than 160 countries worldwide. Pirelli stands out for its long industrial tradition that has always been combined with a capacity for innovation, product quality and a strong brand. This strength has also been supported from 2002 by the fashion and high-tech project of PZero and further enhanced by the Formula 1, for which Pirelli is the exclusive supplier. Pirelli has always focused on research and development in line with its green performance strategy and works with constant and growing attention paid to products and services of high quality and technology and a low environmental impact. The awareness that an efficient corporate governance system represents one of the essential factors to achieve the objectives of creating sustainable value drives Pirelli to maintain its corporate governance system constantly in line with national and international best practices. The Company adopts the traditional system of administration and control. Pirelli's Corporate Governance system is based on the following factors: (i) the central function played by the Board of Directors that is responsible for the strategic guidance and supervising the Company's overall business activities, with policy-making powers in relation to the overall administration and the authority to intervene directly in a series of significant decisions necessary or useful to achieve the company purpose; (ii) the central role of Independent Directors (iii) an effective internal control system; (iv) a pro-active risk management system; (v) a remuneration system, in general, and an incentive system, in particular, for Managers associated with medium and long-term economic objectives in order to align the management's interests with the shareholders' interests, by pursuing the priority objective of creating sustainable value in the medium/long term, by establishing a strong link between remuneration, on the one hand, the performance of individuals and Pirelli's performance, on the other hand; (vi) a strict discipline concerning potential conflicts of interest and solid principles of conduct to execute transactions with related parties. The governance system is formally defined in the Code of Ethics, in the Company Bylaws, in the Regulations concerning Shareholders' Meetings and in a series of principles and procedures which are periodically updated to assure best practices. It is important to confirm that in the interim financial report Pirelli highlights the updates and integrations made to its corporate governance system compared to the information contained
13 in the annual report. Pirelli was declared the "Best Corporate Governance in Italy" for the fourth consecutive year in the framework of the World Finance Corporate Governance Award 2013. During 2013, and for the second consecutive year, Pirelli sponsored the ICGN Annual Conference held in New York, confirming the importance that Corporate Governance aspects represent for Pirelli.
2. INFORMATION ON THE STRUCTURE OF SHARE OWNERSHIP (in accordance with Article 123-bis, paragraph 1 of the Unified Finance Law (TUF)) as of March 27, 2014 a) Structure of the share capital The subscribed and paid-in share capital amounts to euro 1,345,380,534.66, divided into a total of 487,991,493 shares without par value indicated, of which 475,740,182 (euro 1,311,603,971.79) are ordinary shares and 12,251,311 (euro 33,776,562.87) are savings shares. The Share Capital has not changed during the 2013 financial year.
Rights and obligations The shares are divided into ordinary shares and savings shares, without par value. The ordinary shares entitle the holder to one vote per share; they are registered shares or bearer shares to the extent permitted by law, and in this case, can be converted from one type of share to the other type of share at the holder's request and expense. Savings shares do not have voting rights and are bearer shares, unless otherwise provided for by law, and can be converted into registered savings shares at the shareholder's request and expense. In addition to the rights and privileges envisaged by law and by the Company Bylaws, savings shares have the right of first refusal in the reimbursement of capital up to the amount of euro 3.19 per share. If the share capital is reduced due to losses, the reduction does not affect the savings shares, except for the part of the loss that exceeds the portion of capital represented by the other shares. Savings shares retain the rights and privileges set forth by law and by the Company Bylaws, even if the ordinary shares and savings shares are excluded from trading. If the share capital is increased by issuing shares of a single category, these shares must be offered as an option to all categories of shareholders. If the share capital is increased by issuing ordinary and savings shares:
14 a) holders of ordinary shares are entitled to receive options for ordinary shares and savings shares for any possible difference; b) holders of savings shares are entitled to receive options for savings shares and ordinary shares for any possible difference. The net annual profit is divided as follows, after the legal allocation to reserve has been made: a) savings shares are attributed an amount up to 7% of euro 3.19; if the savings shares are assigned a dividend of less than 7% of euro 3.19 in a given financial year, the difference is added to the preference share dividend in the two following financial years; the profit that remains after the dividend specified above has been assigned to the savings shares is apportioned among all the shares so that the savings shares receive a dividend that is 2% of euro 3.19 higher, overall, compared to the dividend received by the ordinary shares; b) ordinary shares are attributed an amount of up to 5% of their par value in accounting terms (defined as the ratio between the amount of the share capital and the overall number of shares issued), without prejudice to the above provisions concerning the overall increased dividend payable to savings shares. The remaining profit will be distributed among all the shares, in addition to the sums assigned as outlined above, unless the Shareholders' Meeting resolves special allocations to extraordinary reserves or for other uses, or decides to carry forward part of the foregoing portion of profit. Savings shares have the same rights as the other shares if reserves are distributed. Advances on dividends may be distributed as provided for by law.
Financial instruments which attribute the right to subscribe to new issue shares. No financial instruments which attribute the right to subscribe to new issue shares were issued at the Date of the Report.
Stock incentive plans. The Company does not currently have stock incentive plans. In the meeting held on February 27, 2014, based on the proposal by the Remuneration Committee and with the favourable opinion of the Board of Auditors, the Company's Board of Directors resolved to anticipate the closure of the three-year cash incentive plan - Long Term Incentive 2012-2014 - for the Pirelli Group Management (so-called LTI Plan) and concurrently approved the “launch” of a “new” 2014-2016 LTI Plan to support the aims set out in the 2013-2017 Industrial Business Plan presented to the financial community in
15 London last November 6, 2013. Pursuant to Article 114-bis of the Unified Finance Law (TUF), the 2014-2016 LTI Plan will be submitted to the approval of the Shareholders' Meeting to approve the Financial Statements for 2013 regarding the part in which this LTI plan, as previously, envisages, inter alia, that part of the incentive is determined on the basis of a Total Shareholder Return objective. Further details on the “new” LTI Plan are provided in the information document prepared, in accordance with the combined provisions of Article 114-bis of the Unified Finance Law (TUF) and Article 84-bis of the Issuers Regulation and in the Remuneration Policy referred to the 2014 financial year; these documents will be available on the Pirelli Internet website, at the latest 30 days and 21 days, respectively, prior to the Shareholders' Meeting to approve the Financial Statements for 2013. b) Restrictions on the transfer of securities. There are no restrictions on the transfer of securities. c) Significant shareholdings. The parties owning shares with voting rights in the Ordinary Shareholders' Meeting, and representing more than 2% of the ordinary capital, according to the requirements published by Consob, are listed in Table 2. d) Securities which confer special rights. There are no securities which confer special rights of control. e) Employee shareholdings: mechanism to exercise voting rights. There are no mechanisms to exercise voting rights in the case of employee shareholdings when such voting rights are not exercised directly by the employees concerned. f) Restrictions on voting rights. There are no restrictions on voting rights (such as, for example: limitations on voting rights at a given percentage or at a certain number of votes, time limits imposed to exercise the voting rights or systems in which, with the Company's co-operation, the financial rights associated with the securities are separate from ownership of the securities). g) Shareholder agreements.
16 On March 15, 2014 UniCredit S.p.A.; Intesa Sanpaolo S.p.A.; Nuove Partecipazioni S.p.A. and Rosneft Oil Company entered into general agreements (in the form of a term sheet) which include some shareholder agreements, as well as the principles, essential terms and conditions and the aims of a partnership for an investment/reinvestment transaction in a special vehicle company (so-called Holdco) – 50% of the respective share capital will be held by Rosneft Oil Company and 50% will be held by a newco, that in turn, is 80% owned by Nuove Partecipazioni S.p.A., 10% owned by UniCredit S.p.A. and 10% owned by Intesa Sanpaolo S.p.A.. The Holdco would own the Pirelli shareholding that is currently owned by Camfin S.p.A. and by its subsidiaries. The foregoing transaction will be implemented through a series of corporate transactions subject to an agreement being entered into among the parties and subject to obtaining all the necessary consents and approvals from their respective competent corporate bodies and from any possible competent Authorities. The reader is referred to the abstract available on the Pirelli Internet website for further information on the general agreements and on the agreements concerning Pirelli’s future governance, as well as the standstill clause envisaged by the above agreements. A shareholders' agreement was entered into on June 4, 2013 between the following parties, in the framework of an operation to rationalise the share ownership structures of Camfin S.p.A.: on the one hand, Marco Tronchetti Provera & C. S.p.A., Marco Tronchetti Provera Partecipazioni S.p.A., Gruppo Partecipazioni Industriali S.p.A., Nuove Partecipazioni S.p.A. and on the other hand, Lauro Cinquantaquattro S.r.l., Intesa Sanpaolo S.p.A. and UniCredit S.p.A. The shareholders’ agreement included, inter alia, provisions relating to the governance of Lauro Sessantuno S.p.A. and Camfin1 S.p.A., as well as Pirelli & C. S.p.A., with reference to some aspects and within the limits permitted by the legal regime and the nature of the subsidiary, in order to achieve the shared objective of providing stability to the share ownership structures of Camfin S.p.A. and thereby to create the best conditions to create further value with reference to the shareholding held thereby in Pirelli. The reader is referred to the extract available on the Pirelli Internet website for further details concerning the provisions contained in the so-called “Lauro Shareholders' Agreement”. Completion of the final agreements envisaged by the foregoing general agreement entered into among UniCredit S.p.A.; Intesa Sanpaolo S.p.A.; Nuove Partecipazioni S.p.A. and Rosneft Oil Company will entail superseding the so-called “Lauro Shareholders' Agreement”.
1 At the Date of the Report, Lauro Sessantuno S.p.A. owns the entire share capital of Camfin S.p.A.
17 Furthermore, it is important to note that on October 31, 2013, the parties participating in the “Sindacato Blocco Azioni Pirelli & C. S.p.A.” (Pirelli & C. S.p.A. Shareholders' Agreement) (in particular: Camfin S.p.A., Edizione S.r.l., Fondiaria-Sai S.p.A., Assicurazioni Generali S.p.A., Intesa Sanpaolo S.p.A., Mediobanca S.p.A., Massimo Moratti and Sinpar S.p.A.) notified that they had terminated this shareholders' agreement mutually and in advance (expiring on April 15, 2014) effective from October 31, 2013. h) Amendments to Company Bylaws. Amendments to the Company Bylaws are resolved as provided for by law. i) Regulations applicable to the appointment and substitution of Directors and the Board of Auditors. In this regard, the reader is referred to the Board of Directors Section and to the Board of Auditors Section. l) Change of control clauses and statutory provisions concerning a public purchase offer. Change of control clauses There is no party that can exercise control over Pirelli & C., either directly or indirectly, also by virtue of shareholder agreements, individually or jointly with other parties included in shareholders' agreements. It follows that no change of control of the Company can be envisaged at present. For the sake of completeness, the following is confirmed. The bond loan amounting to 500 million euro placed on the market by Pirelli & C. envisages that the bondholders are entitled to avail of the clause to request early repayment if a “Change of Material Shareholding” occurs that corresponds to the following cases: (i) Pirelli & C. no longer holds (directly or directly) a percentage of at least 85% of the share capital of Pirelli Tyre (barring the case that Pirelli Tyre is not incorporated in or does not incorporate Pirelli & C. or in another company of the Pirelli Group); (ii) a party other than one or more of the shareholders participating in the Pirelli Shareholders' Agreement (provided Camfin S.p.A. continues to participate as the first shareholder of Pirelli & C. among the participants) holds more than 50% of the share capital of Pirelli & C. with voting rights or acquires the
18 right to appoint or remove the majority of the members of the Board of Directors2; (iii) Camfin S.p.A. no longer holds (directly or indirectly) at least 20% of the share capital of Pirelli & C. with voting rights. A similar clause is envisaged, except for the provision indicated in point (iii) above: (a) in the agreement entered into among Pirelli & C., Pirelli Tyre and Pirelli International Ltd. and a pool of lending banks in relation to granting Pirelli a revolving line of credit amounting to 1.2 billion euro; (b) in the bond loan issued by Pirelli International Limited on the American market for an overall value of 150 million American dollars and guaranteed by Pirelli Tyre; (c) in the “Schuldschein” loan obtained by Pirelli International Limited and guaranteed by Pirelli & C. and by Pirelli Tyre for 155 million euro, overall. Lastly, it is important to note that the joint venture agreement currently in place between Pirelli Tyre and PT Astra Otoparts Tbk envisages that in the event of a change of control of one party, the other party shall have a so-called right to terminate the joint-venture. In particular, if the change of control concerns Pirelli Tyre then PT Astra Otoparts Tbk would have a so-called put option to sell its shareholding to Pirelli, whereas in the opposite case, Pirelli Tyre would have a so-called call option to purchase the shareholding owned by PT Astra Otoparts Tbk.
Statutory provisions concerning a public purchase offer. On a preliminary count, it is important to remember that Article 104 of the Unified Finance Law (TUF) envisages that Italian listed companies whose securities are subject to the offer shall refrain from executing actions or transactions which may conflict with achieving the offer's objectives (so-called passivity rule), barring an authorisation by the Shareholders' Meeting. It is also envisaged that the companies' bylaws may derogate from the passivity rule foreseeing that the Board of Directors may adopt “defensive measures”, even without an authorisation expressed in this sense by the Shareholders' Meeting. Furthermore, Article 104-bis of the Unified Finance Law (TUF) (recorded as the “Breakthrough rule) establishes that the bylaws of Italian listed companies can foresee that when a public purchase offer or an exchange is promoted and involves the securities issued by them: (i) the restrictions on the transfer of securities envisaged in the Company Bylaws are not applicable in relation to the bidder during the offer acceptance period, nor are the restrictions on voting rights envisaged in the Company Bylaws or in the Shareholders'
2 It is important to note that on October 31, 2013, the parties participating in the “Sindacato Blocco Azioni Pirelli & C. S.p.A.” (Pirelli & C. S.p.A. Shareholders' Agreement) (namely: Camfin S.p.A., Edizione S.r.l., Fondiaria-Sai S.p.A., Assicurazioni Generali S.p.A., Intesa Sanpaolo S.p.A., Mediobanca S.p.A., Massimo Moratti e Sinpar S.p.A.) notified that they had terminated this shareholders' agreement mutually and in advance (expiring in April 15, 2014) effective from October 31, 2013.
19 Agreements applicable in the Shareholders' Meetings convened to resolve the actions and transactions envisaged under Article 104 cited above; (ii) when the bidder, after an offer, holds at least 75% of the share capital with voting rights in resolutions concerning the appointment or revocation of Directors or Members of the Management Board or Supervisory Board, then the following conditions shall not apply in the first Shareholders' Meeting convened to amend the Company Bylaws or to revoke or appoint Directors or Members of the Management Board or Supervisory Board after closing the offer: the restrictions on voting rights envisaged in the Company Bylaws or in shareholders’ agreements, nor any special right concerning the appointment or revocation of the Directors or Members of the Management Board or Supervisory Board envisaged in the Company Bylaws. The Company Bylaws of Pirelli & C. do not envisage departures from the provisions concerning the passivity rule illustrated previously or the application of the breakthrough rule contemplated under Article 104-bis. m) Powers to increase the share capital and authorisations to purchase treasury shares. Powers to increase the share capital. Directors have not been given powers to increase the share capital against payment in one or more operations or given the authority to issue bonds convertible into both ordinary and savings shares or with warrants valid to subscribe to shares.
Authorisations to purchase treasury shares. At the Date of the Report, the Board of Directors of Pirelli is authorised to purchase and to dispose of ordinary and savings treasury shares, up a maximum number of (treasury) shares which do not exceed 10% of the share capital, also considering the treasury shares held by the company, either directly or indirectly (through subsidiary companies) - by virtue of a special resolution passed last May 10, 2013, by the Shareholders' Meeting that granted authorisation for a period of 18 months. At the date of the Report, the Company holds 351,590 ordering treasury shares corresponding to around 0.07% of the category capital and of the whole share capital and 408,342 savings treasury shares corresponding to around 3.33% of the category capital and around 0.08% of the whole share capital, already owned prior to May 10, 2013. Accordingly, the Board of Directors of Pirelli has not purchased and has not disposed of treasury shares from the cited Shareholders' Meeting authorisation. The Board of Directors deemed it useful to submit to the Shareholders' Meeting to approve the
20 Financial Statements for 2013 the proposal to renew the authorisation to purchase and dispose of treasury shares subject to the same terms and conditions set out in the current authorisation, since the same opportunities exist which induced the Directors to propose the foregoing authorisation to the Shareholders' Meeting to approve the Financial Statements for 2012, in the Meeting held on March 27, 2014, and in order to avoid convening a new Shareholders' Meeting near the expiry date of the 18 months referred to the current authorisation. For further information, the reader is referred to the respective Directors' Report to the Shareholders' Meeting to approve the Financial Statements for 2013 that will be made available on the Pirelli Internet website no later than 21 days prior to the Shareholders' Meeting to approve the Financial Statements for 2013. n) Directors' indemnity in the case of resignation, dismissal or termination of the employment relationship following a public purchase offer3 Pirelli has a policy not to enter into agreements with Directors, Executive Managers with strategic business responsibilities, Senior Managers and Executives, which regulate beforehand economic aspects relating to the possible early termination of the employment relationship at the Company's initiative or at the individual's initiative (so-called “parachutes”). Indeed, the agreements entered into with Pirelli in the event the employment relationship is interrupted for reasons other than just cause do not represent “parachutes”. Pirelli adopts a policy that seeks to come to agreements to reach a consensual conclusion of the employment relationship. In any event, the possible agreements reached to terminate the employment relationship with Pirelli relate to the reference benchmarks applicable in this area and fall within the limits defined by the jurisprudence and accepted practice of the country in which the agreement is made, without prejudice to legal and/or contractual obligations. The Company defines internal criteria which are also complied with by the other Group companies when managing the agreements which discipline the early termination of relationships concerning Executives and/or Directors assigned special duties. Pirelli does not envisage the payment of an extraordinary indemnity or compensation associated with the end of the mandate with regard to Directors assigned special duties in Pirelli & C. who are delegated with specific powers and are not bound by management level employment relationships. The payment of a specific indemnity (that, accordingly, can be considered a “parachute”)
3 The information contained in this section is provided also in compliance with the requirements set out in Consob Communication DEM/11012984 dated February 24, 2011.
21 may be acknowledged, always subject to the assessment by the competent company bodies in the following cases: - termination at the Company's initiative not supported by a just cause - termination at the Directors' initiative for just cause, meaning, by way of example, a substantial change of role, or of the powers assigned and/or the cases of a so-called “hostile” public purchase offer. In these cases the indemnity – defined by the Board of Directors during the 2013 financial year based on the Remuneration Committee's proposal - is equal to 2 annuities of the gross annual payment, meaning the sum of the fixed annual gross payments for the positions held in the Group, the average variable annual remuneration (MBO) accrued during the previous three year period and the End of Mandate Indemnity on the foregoing amounts. For further information, the reader is referred to the 2014 Remuneration Report that will be made available on the Pirelli Internet website no later than 21 days prior to the Shareholders' Meeting to approve the Financial Statements for 2013. o) Management and coordination activities (pursuant to Article 2497 and following articles of the Italian Civil Code). There is no party that can exercise control over Pirelli & C., directly or indirectly, also by virtue of shareholders' agreements, individually or jointly with the other parties participating in such agreements. Nor is the Company subject to management and coordination activities by another company or body, pursuant to Article 2497 and following articles of the Italian Civil Code. By contrast, Pirelli & C., heads the Group of the same name and exercises management and coordination activities over numerous subsidiary companies and has disclosed the information envisaged under Article 2497-bis of the Italian Civil Code.
3. COMPLIANCE Pirelli complies with the Self-Regulatory Code for listed companies issued by the Italian Stock Exchange (Borsa Italiana) and published on the following website: www.borsaitaliana.it, since the Code was first issued (in October 1999), having then complied with the July 2002 version and subsequently with the March 2006 and the December 2011 versions. It is important to note that since Pirelli & C. is one of the companies included in the FTSE- MIB index it is subject to the recommendations of the Self-Disciplinary Code envisaged specifically for such companies.
22 The Report is also written on the basis of the experimental format prepared by the Italian Stock Exchange (Borsa Italiana). Non-Italian statutory provisions which may influence the Company's corporate governance structures do not apply to Pirelli & C. at the Date of the Report.
4. BOARD OF DIRECTORS The Board of Directors is responsible for the strategic guidance and supervision of the Company's overall business activities, in line with the requirements relating to the traditional administration and control model and with the power to direct its overall administration and the power to intervene directly in a series of significant decisions necessary or useful to achieve the company purpose. Indeed, the Board of Directors is empowered to assume the most important decisions in economic/strategic terms or in terms of the structural impact on operations, or functional to Pirelli exercising the control and policy-making activity. When carrying out its duties, the Board of Directors avails of the support provided by special Board Committees with fact-finding, proposing and/or advisory duties, as well as managerial committees composed of senior management which implement the directives and the policies established by the Board of Directors and by the Executive Directors and collaborate with the latter to define the proposals to be submitted to the Board concerned. The Board of Directors' meetings are attended by members of management, at the invitation of the Chairman and the Managing Director, to favour precise and in-depth knowledge of the business engaged in by the Company and by the Group, as well as to favour access to senior management to enhance the Board of Directors' ability to supervise the business activities4. In particular, the participation of the Operations General Manager, the Chief Technical Officer, the Chief Planning and Controlling Officer, the Chief Financial Officer, the Officer Responsible and the Senior Advisor Governance in the Board of Directors' meetings to prepare the Company's accounting documents is now a long-established practice. Other members of management may be invited, from time to time, to participate in individual meetings to discuss specific topics on the Agenda.
4.1 APPOINTMENT AND REPLACEMENT OF DIRECTORS Since 2004, the Company Bylaws5 envisage that the Board of Directors is to be appointed based on the “voting slate” system, thereby assuring that the so-called “minorities” can
4 2011 Self-Disciplinary Code: Application Criterion 1.C.6. 5 Article 10 of the Company Bylaws.
23 appoint one fifth of the Board Members, if at least two slates are presented. The slates presented by the shareholders, and duly signed by those presenting them, must be filed at the Company's registered office, available to anyone who submits a request, at least 25 days prior to the date established for the Shareholders' Meeting and are made available to the general public at the Company's registered office, on the Pirelli Internet website and using the other methods envisaged by Consob at least 21 days prior to the date of the Shareholders' Meeting. Each shareholder may present or participate in the presentation of a single slate and each candidate may be presented on only one slate under penalty of ineligibility. Shareholders who, alone or together with the other shareholders, hold a total number of shares representing at least 1% of the share capital entitled to vote in the ordinary shareholders' meeting or the lower percentage required by the regulatory discipline issued by Consob6 are entitled to present slates, subject to the obligation of demonstrating the ownership of the number of shares required to present the slates within the deadline envisaged for their publication by the Company (21 days prior to the Shareholders' Meeting). Declarations in which the individual candidates accept their candidacy and declarations in which the individual candidates concerned attest that there are no causes for ineligibility and incompatibility, and that they satisfy the requirements for the respective offices, if prescribed, are to be deposited with each slate. A curriculum vitae is to be registered for each candidate together with the declarations detailing the personal and professional characteristics and providing information concerning (i) the administration and control positions held with other companies and (ii) the eligibility to be qualified as independent, in accordance with the criteria established by law and the criteria adopted by the Company. Slates which are presented in breach of the provisions described are deemed not to have been presented. Each person entitled to vote in the Meeting may only vote for one slate. The procedure outlined below will be adopted in the election: a) four fifths of the Directors to be elected are selected in the progressive order in which they are listed from the slate that obtained the majority of the votes cast rounding down to the nearest whole number, in the case of a fractional number; b) the remaining Directors are appointed from the other slates; for this purpose the votes obtained by the slates will be divided subsequently by progressive whole numbers from
6 Refer to Consob Resolution No. 18775 dated January 29, 2014 that established that the percentage shareholding required for shareholders to present lists of candidates to elect the administration and control bodies of Pirelli & C. for the 2014 financial year corresponds to 1% of the share capital with voting rights in the ordinary shareholders' meeting.
24 one to the number of Directors still to be the elected. The quotients obtained in this way are assigned progressively to the candidates of each of these slates, according to the order in which they are listed, respectively. The quotients attributed to the candidates of the various slates are arranged in a single ranking in decreasing order. The persons that obtained the highest quotients are elected. If more than one candidate obtained the same quotient, then the candidate from the slate that has not yet elected a Director or that has elected the fewest Directors is elected. If none of these slates has yet elected a Director or if all the slates have all elected the same number of Directors, then the candidate who obtained the highest number of votes within these slates is elected. In the case of parity votes on a given slate and again with the same quotient, then the votes shall be cast again by the entire Shareholders' Meeting and the candidate who obtains a simple majority of the votes cast is elected. If the application of the voting slate mechanism does not assure the minimum number of Independent Directors envisaged by the applicable laws and regulations then the non- independent candidate elected, indicated with the highest progressive number in the slate and who received the highest number of votes, will be replaced by the unelected independent candidate from the same slate, in accordance with the progressive order of presentation and so on, slate by slate, until the minimum number of Independent Directors has been completed. The Shareholders Meeting resolves with the majorities required by law when appointing Directors, who, for whatever reason, were not appointed in accordance with the procedure required by law. The Company Bylaws envisage that the slates to elect the Board of Directors which include a number of candidates equal to or greater than three shall include a number of candidates of the gender less represented that corresponds to at least the minimum number required by the applicable legislation and/or regulations, in compliance with the requirements specified in the Notice of Call of the Shareholders' Meeting in order to take into account the changes introduced by Law No. 120 dated July 12, 2011 concerning gender quotas in relation to the composition of company bodies of listed companies, and therefore, with the aim of assuring a balance between genders. In this regard, it is important to note that Pirelli will be called, inter alia, to appoint the Company's “new” administrative body, effective from the Shareholders' Meeting to approve the Financial Statements for 2013, and that on this occasion at least one fifth of the Directors must be reserved to the gender that is less represented, since this is the first renewal after the cited law became effective. The Company Bylaws establish an automatic progressive substitution mechanism in order to
25 assure compliance with the balance between genders, if the application of the voting slate mechanism does not assure the required minimum number of Directors from the gender less represented. Furthermore, the balance between genders within the Board of Directors must be complied with, in any event, when the Shareholders' Meeting or the Board of Directors (in the case of co-option) must appoint Directors without following the voting slate procedure. The provisions set out under Article 2386 of the Italian Civil Code will apply if one or more Directors fall from office during the financial year. Loss of the independence requirements by a Director does not represent a cause for the Director's appointment to lapse provided the minimum number of Directors in possession of the legal requirements for independence remain in office, as envisaged by the applicable laws and regulations. In accordance with best practices, when the Board of Directors is to be renewed it is the Company's accepted practice to allow shareholders to express their opinions with separate votes concerning the following aspects, respectively: (i) establishing the number of members of the Board of Directors (ii) appointing Directors by voting the slates presented (iii) establishing the term of office of the Board of Directors and (iv) establishing the fee due to the Directors. The reader is referred to the Company Bylaws available on the Pirelli Internet website, as well as the documentation that will be made available at least 40 days prior to the Shareholders' Meeting to approve the 2013 Financial Statements for further information regarding the mechanisms to elect members of the Board of Directors.
4.2. COMPOSITION The Company's Board of Directors is composed of no less than 7 and no more than 23 members, in accordance with the Company Bylaws, who remain in office for 3 financial years (unless a shorter period is established by the Shareholders' Meeting at the date of the appointment) and they may be re-elected. The Board of Directors was composed of 20 Directors at the Date of the Report and was appointed by the Shareholders' Meeting held on April 21, 2011 for 3 financial years, falling from office with the Shareholders' Meeting convened to approve the Financial Statements as of and for the year ending December 31, 2013. At the Date of the Report the average age of the Directors in office was approximately 64 years with an average term in office of slightly less than 6 years. By adopting the voting slate system the so-called minorities were able to appoint 4 Directors, corresponding to one fifth of the total (in particular, the Directors Franco Bruni, Elisabetta
26 Magistretti, Pietro Guindani and Francesco Profumo7). 2 slates were presented to the Shareholders' Meeting held on April 21, 2011: one slate from the shareholders participating in the “Sindacato di Blocco Azioni Pirelli & C.” (Pirelli & C. Shareholders' Agreement) that obtained 84% of the votes of the voting capital represented in the Shareholders' Meeting8, and one slate from a group of institutional investors9 that obtained 15.6% of the votes of the voting capital represented in the Shareholders' Meeting10. The updated version of the curriculum vitae of each Director is published on the Pirelli Internet website. The following events occurred during the 2013 financial year: - the Shareholders' Meeting to approve the Financial Statements for 2012 confirmed the Director Carlo Salvatori (co-opted on July 26, 2012), who subsequently resigned on October 16, 2013 and appointed prof. Jean Paul Fitoussi and Mr. Luca Rovati as Directors to substitute prof. Paolo Ferro-Luzzi (who died on November 11, 2012) and Mr. Mario Greco (who resigned on March 4, 2013); - pursuant to Article 2386 of the Italian Civil Code, the Board of Directors appointed the following Directors (i) Mr. Paolo Fiorentino and Mr. Claudio Sposito in the meeting held on October 21, 2013 to substitute Mr. Vittorio Malacalza (who had resigned in May 10, 2013) and Ms. Giulia Maria Ligresti (who had resigned in July 24, 2013) and (ii) appointed Mr. Gaetano Micciché in the meeting held on November 5, 2013 to substitute Mr. Carlo Salvatori.
7 Prof. Francesco Profumo resigned from the office as Director on November 16, 2011 following his appointment as a Minister of the Italian Republic. In the meeting held on March 1, 2012, the Board of Directors appointed Ms. Manuela Soffientini to substitute Prof. Francesco Profumo, in accordance with Article 2386 of the Italian Civil Code. Even though the Appointments and Succession Committee was responsible for defining the candidates to be submitted to the Board in order to proceed with co- option and to substitute an Independent Director, in this case the Committee concerned deemed it appropriate to involve Assogestioni to identify the candidate to be proposed to the Board to substitute Prof. Profumo, since he was a Board Member elected from the list presented by institutional investors under the auspices of Assogestioni. The latter proposed a list of two names to the Committee from which the Committee decided to propose Ms. Manuela Soffientini to the Board of Directors, also having considered the opportunity of a further enhancement of the gender diversity within the Board, and, as has been said, Ms. Manuela Soffientini was appointed in the Meeting held on March 1, 2012 and confirmed by the Shareholders' Meeting held on May 10, 2012. 8 Data obtained from the summary statement of the votes cast in the Shareholders' Meeting held on April 21, 2011 available on the Pirelli Internet website. 9 The minority list was presented by: Amber Capital Italia SGR S.p.A. (manager of the Amber Italia Equity fund); Amber Capital LP (manager of the PM Manager Fund, SPC); Amber Global Opportunities Master Fund Ltd.; Anima SGR S.p.A. (manager of the Europa, Sforzesco, Visconteo Italia, Iniziativa Europa, Anima Europa funds); APG Algemene Pensione Groep N.V. (manager of the Stichting Depositary APG Developed Markets Equity Pool fund); Arca Sgr S.p.A. (Manager of the Arca Azioni Italia and Arca BB funds); Ersel Sicav; Ersel Asset Management SGR S.p.A. (manager of the Fondersel Italia fund); Eurizon Capital SGR S.p.A. (manager of the Eurizon Focus Azioni Italia and Eurizon Italia 130/30 funds); Eurizon Capital SA (manager of the Eurizon Stars Fund European Small Cap Equity, Eurizon Stars Fund Italian Equity, Eurizon Easy Fund Equity Consumer Discretionary, Eurizon Easy Fund Equity Europe, Eurizon Easy Fund Euro, Eurizon Easy Fund Equity Italy funds); Fideuram Investimenti SGR S.p.A. (manager of the Fideuram Italia fund); Fideuram Gestions SA (manager of the Fonditalia Equity Italy, Fondiatalia Euro Cyclical, Fideuram Fund Equity Italy, Fideuram Fund Equity Europe, Fideuram Fund Equity Europe Growth funds); Interfund Sicav (manager of the Interfund Equity Italy fund); Kairos Partners SGR S.p.A. (manager of Kairos Italia – Hedge Fund); Mediolanum International Funds Limited (manager of the Challenge Funds); Pioneer Asset Management SA; Pioneer Investment Management SGR S.p.A. (manager of the Pioneer Azionario Crescita fund); Pioneer Alternative Investment Management Limited; Prima SGR S.p.A. (manager of the Prima Geo Italia S.p.A. fund). 10 Data obtained from the summary statement of the votes cast in the Shareholders' Meeting held on April 21, 2011 available on the Pirelli Internet website.
27 The Shareholders' Meeting to approve the Financial Statements for 2013 will be called to resolve the appointment the Company's “new” Board of Directors, due to fall from office, as mentioned previously, with the approval of the Financial Statements for the financial year ended as of December 31, 2013. Table 3 illustrates the composition of the Board of Directors at the Date of the Report.
4.2.1 Maximum number of positions held in other companies. The Board of Directors11 passed a resolution on April 21, 2011 confirming the Policy12, adopted by the Board of Directors in 200713, whereby, in principle, it was deemed that serving as a Director or Auditor in more than 5 companies other than those subject to management and coordination by Pirelli & C. S.p.A. or controlled by or affiliated therewith, was not considered compatible with the role of Director of the company when concerning (i) listed companies included in the FTSE/MIB index (or also in equivalent foreign indexes), or (ii) companies which engage in banking or insurance activities; moreover, it is not deemed compatible for the same Director to hold more than 3 executive positions in the companies described in sub (i) and (ii). The offices held in several member companies of the same group are considered to be a single office and an executive position prevails over a non-executive position. The Board of Directors retains the right to make a different assessment and this assessment is disclosed in the Report and the motives are to be duly substantiated. Shareholders intending to present slates concerning the Board of Directors' appointment at the time of the Board's forthcoming renewal will be invited to examine the cited policy, as was the case at the date of renewal in 2011. In the meeting held on March 27, 2014 the Board of Directors examined the positions held by individual Directors (based on the information duly notified by them) and after examination by the CICRCG it was found that all the Directors held a number of positions compatible with the role of a Director of Pirelli & C. in compliance with the policy adopted by the Company. The principal offices held by the Directors in companies other than member companies of
11 Self-Regulatory Code: Application criterion: 1.C.3. 12 The cited Policy is annexed to the Report and is also available on the Company's Internet website. 13 Board of Directors' Meeting held on November 7, 2007. In the meeting held on March 8, 2011 the Board of Directors, after having acknowledged the amendments to the so-called unified banking law which entailed, inter alia, the abrogation of the so-called “special list” of companies operating in the financial sector aimed at the general public (the former Article 107 of Legislative Decree No. 385 of 1993 introduced with Legislative Decree No. 141/2010), resolved to adopt the foregoing amendment in the policy governing the maximum number of offices which previously also included the companies included in the foregoing list among the companies to be considered for the purposes of the “maximum number”, consequently, the reference made to such companies was eliminated.
28 the Pirelli Group are detailed in an annex to the Report14.
4.3. ROLE OF THE BOARD OF DIRECTORS The Company Bylaws envisage a minimum quarterly interval between Board Meetings15. Pirelli has circulated a calendar that schedules 4 meetings for the 2014 financial year: March 11, 2013: Board of Directors' meeting to examine the draft Financial Statements and the Consolidated Financial Statements as of December 31, 201316; May 7, 2013: Board of Directors' meeting to examine the interim report on operations as of March 31, 2014; August 5, 2013: Board of Directors' meeting to examine the half-yearly financial report as of June 30, 2014; November 6, 2014: Board of Directors' meeting to examine the interim report on operations as of September 30, 2014. A Board of Directors meeting is also foreseen at the end of the Shareholders' Meeting to approve the 2013 financial statements called to appoint the Company's “new” administrative body. Directors and Auditors have always received the necessary documentation and information with sufficient notice in order to express their informed opinion on the matters submitted to their examination. In general, the documentation to be examined by the Board of Directors is sent during the three days prior to the Board meeting, this notice is generally deemed to be fair for the transmission of documentation17. In the limited and exceptional cases in which it has not been possible to transmit the documentation with adequate notice, complete information concerning the matter to be examined was provided during the Board Meeting, thereby assuring informed resolutions were passed.
4.3.1 Functions of the Board of Directors. The Board of Directors plays a central role in the strategic guidance, as well as in supervising the Company's overall business activities, with the power to guide the overall
14 Self-Regulatory Code: Application criterion 1.C.3. 15 Article 11 of the Company Bylaws. 16 On February 7, 2014, the Company informed the market of the change from March 11, 2014 to March 27, 2014 of the Board of Directors' meeting to examine the draft Financial Statements and the Consolidated Financial Statements, as of December 31, 2013.The change of date followed the announcement by the subsidiary company Prelios S.p.A. of the deferment of the Board of Directors' meeting to examine the draft Financial Statements and the Consolidated Financial Statements as of December 31, 2013. 17 2011 Self-Regulatory Code: Application criterion 1.C.5.
29 administration and the power to intervene directly in the decisions necessary or useful to achieve the company purpose. The Board of Directors represents the body responsible for making the most important decisions in terms of the economic/strategic aspects or in terms of the structural impact on operations or functional to exercising Pirelli’s policy-making and control activity. In particular, the Board of Directors18: examines and approves the strategic, industrial and financial plans of the Company and of the Group, periodically monitoring the implementation; draws up and adopts the Company's corporate governance rules and defines the Group's corporate governance guidelines; defines the guidelines for the internal control system and appoints a Director designated to supervise the internal control system, defining the respective duties and powers; supervises the risk management process, defining the acceptable overall risk threshold (so-called risk appetite); evaluates the adequacy of the general organisational, administrative and accounting structure of the Company and of the subsidiaries of strategic importance; establishes one or more Board Advisory Committees, appointing the members and establishing the duties, powers and fees; confers and revokes the powers on the Managing Directors and on the Executive Committee – if established – defining their limits and operating procedures; also establishes the frequency, however, not more than on a quarterly basis, with which the delegated bodies are to report to the Board concerning the activity performed when exercising the powers of attorney; defines the general remuneration policy; determines the remuneration of the Managing Directors and the other Directors who have special duties after having examined the proposals submitted by the Remuneration Committee and after consulting with the Board of Statutory Auditors, as well as subdividing the total remuneration due to the Board Members, if the Shareholders' Meeting has not already resolved this aspect; evaluates the general operating performance, in particular, taking into consideration the information received from the delegated bodies, as well as periodically comparing the results achieved with the planned results;
18 Self-Regulatory Code: Application criterion 1.C.1., sub-section. a).
30 examines and approves in advance the transactions involving the Company and its subsidiaries, when such transactions have a significant strategic, economic, equity or financial impact; evaluates the size, composition and operation of the Board and its Committees, at least once a year, possibly expressing opinions concerning the professional figures whose presence on the Board is deemed appropriate; establishes the Supervisory Body, pursuant to Legislative Decree No. 231 dated June 8, 2001; appoints the General Managers and the Director responsible for preparing the Company's accounting documents, determining their responsibilities and powers and identifies the Directors with strategic responsibilities; appoints and revokes the internal control officer based on the proposal made by the Director appointed to supervise the internal control system and determines the Officer's duties and remuneration, after having heard the opinions of the CICRCG and the Board of Statutory Auditors; assesses and approves the periodic statement documentation envisaged by the applicable laws and regulations; assesses and approves the transactions with related parties, in accordance with the conditions envisaged by the Procedure for Transactions with Related Parties; prepares the proposals to be submitted to the Shareholders' Meeting; exercises the other powers and fulfils the duties assigned to it by law and by the Company Bylaws.
4.4. ACTIVITIES OF THE BOARD OF DIRECTORS The Board of Directors met 7 times during the 2013 financial year, each meeting had an average duration of approximately 2 hours and 30 minutes and the percentage attendance of the Directors corresponding to approximately 87% and the percentage attendance of the Independent Directors exceeded 89%. The Lead Independent Director attended all the Board of Directors' meetings. 3 Board Meetings were held in 2014 at the Date of the Report. The Board of Directors dedicated the time necessary to the items on the Agenda in the cited meetings, to allow a constructive debate, favouring the contributions made by individual Directors.
31 4.4.1 Evaluation of the general trend of operations19 and strategic Plans. The Board of Directors evaluated the general trend of operations and the foreseeable outlook at least on a quarterly basis, in accordance with the law20 and the Company Bylaws21. More in particular, during the 2013 financial year the Board approved: - the compliance of the impairment test procedure with the requirements of the international accounting standard IAS 36 independently and in advance compared to the approval of the Financial Statements; - the periodic accounting reports, and on these occasions, the Board received information concerning the results achieved by Pirelli compared with: (i) the historical data; (ii) the defined budget targets, with a focus on any deviations; (iii) the results achieved by the main competitors; - the review of the targets notified to the market; - the 2013 Business Plan on the basis of the 2012-2014 Industrial Business Plan with an outlook extended to 2015 (approved in the meeting held on November 8, 2011); - the “new” 2013-2017 Industrial Business Plan.
4.4.2 Internal control system and governance system22 The Board of Directors also approved: - the reports on each of the matters on the Agenda of the Shareholders’ Meetings; - the “new” Whistleblowing Policy and the Anti-Corruption Compliance Programme; - the Audit Plan and defined the structure for the variable incentive referred to the Internal Audit function Manager, after hearing the opinion expressed by the Board of Statutory Auditors; - amendments to the “Organisational Model 231”. In this regard the reader is referred to the “Code of Ethics, the Policy Guidelines and the Organisational Model 231” section; - the Pirelli group's “new” organisational structure. In this regard the reader is referred to the “Company organisation” section; - amendments to the Procedure for Transactions with Related Parties. In this regard the reader is referred to the following section: “Directors’ Interests and Transactions with related parties”. In addition, the Board of Directors initiated the verification of the requirements envisaged to
19 Self-Regulatory Code: Application criterion 1.C.1., sub-section e). 20 Article 150 of the Unified Finance Law (TUF). 21 Article 11 of the Company Bylaws. 22 Self-Regulatory Code: Application criterion 1.C.1., sub-section. b).
32 be assigned the office as a Director referred to each Board Member and the requirements to be qualified as Independent Directors referred to the Directors elected and qualified as such at the date their candidacy was proposed, as well as the suitability of the means and the powers attributed to the officer responsible and endorsed the activities implemented thereby for the purposes of issuing the own certificates. In this regard the reader is referred to the following section: “Officer responsible for preparing the company's accounting documents”. The Board then assessed the adequacy of the internal control system on a half-yearly basis and, more in general, Pirelli's governance system and endorsed the considerations expressed by the CICRCG, and expressed a positive opinion concerning the adequacy of the Company's organisation, administrative and accounting structure, as well as the internal control system and, more in general, on the governance system of the Company and of the Group. The Board of Directors also supervised the risk management process, in line with the recommendations of the Self-Regulatory Code, defining the policy guidelines (and therefore, the overall risk threshold considered acceptable, so-called risk appetite, so that the principal risks to which Pirelli is exposed are identified correctly and measured, managed and monitored adequately) and verifying the compatibility with the strategic targets identified during approval of the industrial business plan23 by approving the annual risk assessment and examining the subsequent risk assessment update. In this regard the reader is referred to the “Risk management system” section. Furthermore, the Board: - endorsed the evaluation by the CCIRCG in relation to the fees paid to the Audit Company for non-audit services, noting that the fees in question were not high, and therefore, did not prejudice the external auditor's independence in any way. The reader is referred to the “audit company” section; - noted that the analysis of the so-called “Management Letter” did not indicate “significant shortcomings” in the internal control system in relation to the financial information process, also taking into account the positive evaluation made by the CCIRCG and by the Board of Statutory Auditors. In this regard the reader is referred to the following section: “risk management and internal control system in relation to the financial information process”; - defined a structured succession plan for the Company's top management to be
23 Self-regulatory code: Application criterion 7.C.1., sub-section a).
33 implemented in the case of an “emergency”, as well as outlining the process to be followed to define the natural succession plan in relation to the top management. In this regard the reader is referred to the “Succession plans” section; - identified the Operations General Manager Gregorio Borgo, effective from September 26, 2013, the Chief Technical Officer Maurizio Boiocchi, effective from November 5, 2013, the Chief Human Resources Officer Christian Vasino, effective from January 1, 2014 and the Senior Vice President Manufacturing Giuliano Menassi effective from March 27, 2014 as additional “Directors with strategic business responsibilities” in relation to the duties and powers attributed to them.
4.4.3 Remuneration of Directors invested with special offices. During the 2013 financial year, the Board of Directors approved the Remuneration Report for the 2013 financial year, pursuant to the applicable legislation, also the regulatory provisions; the Report consisted of the Remuneration Policy for the 2013 financial year - subsequently submitted to the advisory vote of the Shareholders' Meeting to approve the Financial Statements for 2012 - and the Remuneration Statement for the 2012 financial year. The Board of Directors expressed its intention to proceed with the anticipated closure of the 2012-2014 LTI Plan at the end of the 2013 financial year, taking into account the approval of the “new” 2013-2017 Industrial Business Plan, and to “launch” a “new” 2014-2016 LTI Plan; this intention was subsequently confirmed by the Board in the meeting held on February 27, 2014. For further details regarding the 2014-2016 LTI Plan, the reader is referred to the press release distributed by the Company on February 27, 2014, and available on the Pirelli Internet website, together with the documentation relating to the LTI Plan. Furthermore, the Board of Directors approved the Remuneration Report referred to the 2014 financial year consisting of the Remuneration Policy referred to the 2014 financial year and the Remuneration Statement referred to the 2013 financial year, again based on a proposal by the Remuneration Committee and after hearing the opinion of the Board of Statutory Auditors. The Remuneration Report referred to the 2014 financial year will be made available on the Pirelli Internet website no later than 21 days prior to the Shareholders' Meeting to approve the Financial Statements for 2013.
34 4.4.4 Transactions of significant strategic, economic, equity or financial importance24 The Board of Directors is responsible for the prior approval of some actions and transactions which are not intragroup (determined on the basis of qualitative criteria and quantitative thresholds) when executed by Pirelli & C. or by Italian and also foreign companies which are not listed and are subject to management and coordination activities by Pirelli & C.25 without prejudice to (i) the responsibilities and powers reserved by law and the Company Bylaws; (ii) the structure of the powers and (iii) internal procedures. With regard to the last aspect it is important to note that during the 2013 financial year, the Board of Directors approved the principal transactions executed by Pirelli. The reader is referred to the Directors' Report for further information. In addition, the “procedure regarding information flows to Directors and Auditors”26 envisages general and periodic information on the activities performed.
4.4.5 Transactions with related parties As regards transactions with related parties, the reader is referred to the section “Directors’ Interests and transactions with related parties”.
4.4.6 Board performance evaluation The Board of Directors has performed a self-evaluation process of its performance, so-called “Board performance evaluation”27 since the 2006 financial year. The Board deemed it appropriate to confirm the self-evaluation process also with reference to the 2013 financial year based on the procedure adopted in 2012 - in line with the proposal by the CICRCG and taking into account the positive experience of the previous year - entrusting the foregoing Committee directly to manage the self-evaluation process referred to the 2013 financial year, by using a questionnaire prepared by the Committee in question (with the support of Spencer Stuart), in order to prepare a final report on the self-evaluation process to be presented to the Board of Directors. The self-evaluation process focused on the following aspects: to provide continuity to the self-evaluation over time, to verify the procedures followed to implement the decisive actions to improve the operation of the Board's activities and to
24 Self-Regulatory Code: Application criterion 1.C.1., sub-section. f). 25 In this regard, the reader is referred to the “General criteria to identify transactions of significant strategic economic, equity or financial importance” indicated in their up-to-date version on the Company's Internet website. 26 The “procedure regarding information flows to Directors and Auditors” is available on the Company's Internet website. 27 Self-Regulatory Code: Application criterion 1.C.1., sub-section. g).
35 identify the level of satisfaction of the Board Members; to take into account the changes in the Board's composition, and therefore, the presence of new Board Members. More in particular, the following aspects were examined in detail: the information flow, the completeness of the investigations performed and the Board's involvement in relation to a number of important resolutions passed, for example, the resolutions concerning Prelios; to consider the agreements entered into among shareholders of the Pirelli Group and communicated to the Company, which also concerned some aspects relating to governance, including those referring to the size and composition of the Board of Directors of Pirelli and its Committees. The Board of Directors confirmed its appreciation concerning the size, composition and function of the Board itself with reference to the 2013 financial year based on the outcome of the self-evaluation process. The self-evaluation process, inter alia, indicated satisfaction (i) regarding the further improvement - in quantitative terms (frequency of the meetings, duration) and in qualitative terms (accurate preparation of the meetings, presentation of the topics, the presence of managers at the meetings, greater company knowledge favoured by informal meetings and by the visit to the technological centre at Settimo Torinese) - recorded in relation to the Board's involvement in the plan's definition; (ii) regarding the wealth of information made available to the Board Members; (iii) in relation to the positive role played by the Lead Independent Director, also in the organisation of the Independent Directors' work; (iv) the role played by the CICRCG, concerning the significant and detailed work performed regarding the “transactions with related parties”, as well as the risk analysis, in relation to which appreciation was confirmed regarding the very precise risk quantification/calculation work performed, deemed by the Board to be a best practice in this area. The attribution of sustainability issues to a Board Committee that already exists or to be newly established was advocated, based on the outcome of the self-evaluation process, considering that such issues represent an aspect that will increasingly permeate the Company's business activities and its development plans. As regards the size and composition of the Board, the self-evaluation process that also considered the agreements entered into among Pirelli's shareholders, indicated a marked appreciation for the composition of the current Board of Directors that comprises of persons with a high personal and professional standing. It was deemed desirable that at the next renewal of the Board of Directors (i) the diversity of skills and expertise is enhanced, as well as the presence of Independent Directors, which could also constitute the majority of the
36 Board and must represent a sufficient number to guarantee the operation of the Committees; (ii) the concentration of skills and expertise regarding financial aspects is avoided, thereby guaranteeing a balance among the different professional skills, knowledge and experience; (iii) the presence of economists is ensured, useful to support the Board in the analysis of scenarios and to understand the development of the business and of the markets; (iv) a certain continuity in the Board's composition is guaranteed in order to preserve the wealth of knowledge, acquired over time, within the Company and the Group.
4.4.7 Article 2390 of the Italian Civil Code. Article 10, last paragraph of the Company Bylaws envisages that Directors are not bound by the competition prohibition set out under Article 2390 of the Italian Civil Code, unless otherwise resolved by the Shareholders' Meeting.
4.5. DELEGATED BODIES 4.5.1 Chairman and CEO. The Board of Directors appoints its Chairman, in accordance with the Company Bylaws when the Shareholders' Meeting has not already done so. The Board of Directors appointed Marco Tronchetti Provera as Chairman and CEO in the meeting held on April 21, 2011. The Chairman is the Company's legal representative. The Chairman and CEO, Marco Tronchetti Provera, is responsible for the following organisational functions: . relations with shareholders and the information provided to them; . defining the strategies concerning the general policy and the development policy for the Company and the Group, as well as the extraordinary transactions to be submitted to the Board of Directors; . proposals to appoint General Managers and the remuneration due and payable to them, after having consulted the Remuneration Committee; . all forms of communications to the market. As has been said, the Chairman of the Board of Directors shall use all reasonable endeavours so that the documentation relating to the items on the Agenda is submitted to the Directors and to the Auditors suitably in advance to permit the Directors to express an informed opinion on the topics to be examined by them28. In this regard, the reader is referred to the section “Role of the Board of Directors”.
28 2011 Self-Regulatory Code: Application criterion 1.C.5.
37 The Chairman and CEO is conferred with full powers – to be exercised with separate signature – necessary to perform the actions concerning the Company’s business in its various executions, none excluded. All the foregoing with the power to issue special and general mandates, conferring on the representative the authority to sign, individually or collectively, on behalf of the Company and with the responsibilities he shall deem appropriate to assure the Company's best interests, including the power to subdelegate. The Board of Directors has identified the limits to the management powers conferred on the Chairman and CEO, which have been qualified as the internal limits of the relationship between the delegating collegial body and the person with delegated powers. In particular, the following internal limits have been identified: the power to issue guarantees for the Company's bonds and the subsidiaries' bonds for a value exceeding euro 25 million, or in the interests of third parties concerning bonds with a value exceeding euro 10 million; in the latter case the Chairman's signature is to be accompanied by that of another legal representative with similar powers (in particular, reference is made to “Executives with strategic business responsibilities”).
4.5.2 Company organisation. The Board of Directors redefined its own organisational model during the 2013 financial year, with the aim of maximising supervision of the business activities and the geographic coordination of all the operating activities associated with product development and management. In particular, the Operations General Division has been established that reports directly to the Chairman and CEO, this Division has been entrusted to Gregorio Borgo (previously responsible for the Asia-Pacific region), to which, in turn, the organisational units associated with the operational management (Industrial Operations, Supply Chain, Product and OE Aftermarket and Marketing), the Industrial and Motorcycle Business Units and the various Regions (Africa, Middle East and India, Asia-Pacific, Central Europe, North West Europe, South Europe, Latam, Nafta and Russia and Nordics) report. The aim is to strengthen the industrial and commercial synergies to support the commercial development in the best way possible, in the context of increasingly competitive markets. The Regions continue to report directly to the Chairman and Managing Director regarding governance and overall coordination aspects. In addition to the Operations General Division, the staff functions and the Chief Technical Officer Maurizio Boiocchi also report to the Chairman and CEO, and the Product, Processes, Quality, Original Equipment and Motorsport areas continue to report to the Chief Technical
38 Officer, the foregoing are all strongly associated with research, innovation and type approvals with car manufacturers, the latter representing fundamental leverages to implement the Premium strategy. These areas report to the Chief Technical Officer, also with reference to the various countries. The current organisation that was decisive for the distribution and consolidation of best practices between the headquarters and the various Regions has developed towards a model that exceeded the role of the Chief Commercial Officer, previously entrusted to Andrea Pirondini who left Pirelli at the end of 2013. It is important to note that, at the Date of the Report, the following executives have strategic responsibilities within Pirelli, taking into account that during the 2013 financial year, and in the early months of the 2014 financial year, the Board of Directors extended the range of executives with strategic responsibilities (namely, officers who have the power to adopt management decisions which can impact the development and future prospects): the Chief Financial Officer Francesco Tanzi, the Chief Planning and Controlling Officer Maurizio Sala, the Operations General Manager Gregorio Borgo, the Chief Technical Officer Maurizio Boiocchi, the Chief Human Resources Officer Christian Vasino and the Senior Vice President Manufacturing Giuliano Menassi. The powers relating to the specific functions assigned were attributed to the above- mentioned Key Managers, while more limited powers are conferred on other senior managers and managers, to be used in the context of the respective responsibilities.
4.5.3 Information to the Board. The Board of Directors and the Board of Statutory Auditors are kept informed of the activities performed, the general performance, the foreseeable outlook and the most significant transactions with a strategic, economic, financial and equity impact carried out by the Company or by its subsidiaries, in accordance with the provisions envisaged by law29 and by the Company Bylaws30. Pirelli believes that the completeness of the information made available to the Directors represents an essential condition to exercise correctly the tasks and responsibilities in management, policy-making and control inherent to the position of Directors and Statutory Auditors. For this reason, Directors and Statutory Auditors receive a continuous flow of information from the Chairman and CEO to assure the transparency of company management; to assure
29 Article 150, paragraph 1 of the Unified Finance Law (TUF). 30 Article 11 of the Company Bylaws.
39 the conditions to achieve an efficient and effective guidance and control of the Company's activities and operation of the business by the Board of Directors and to provide the Board of Statutory Auditors with the information required to perform its role efficiently. Where appropriate, the delegated bodies report on the transactions in which they have an interest, in their own right or on behalf of third parties. The notification is made promptly, and however, at least every three months, at the date of the Board of Directors' meetings (and the meetings of the Executive Committee, if appointed) or by means of a written memorandum. The Company has developed a special procedure to favour the orderly organisation of the flow of information, this procedure has been implemented since July 2002 and defines in detail, the rules to be followed in order to comply with the information reporting obligations. The updated version of the Procedure on information flows to Directors and Statutory Auditors is reported on the Pirelli Internet website.
4.6. OTHER DIRECTORS The Board of Directors has considered that the Chairman of the Board of Directors and CEO Marco Tronchetti Provera and the Deputy Chairman Alberto Pirelli are Executive Directors, the latter by virtue of his operational offices held in the subsidiary company Pirelli Tyre. Several informal meetings were organised during the financial year designed to examine in greater detail specific business and corporate governance issues, to increase the knowledge of all Directors and Auditors concerning the Company's reality and dynamics, in compliance with the recommendations of the Self-Regulatory Code31 and with what is now a consolidated practice within the Company. In particular, an in-depth examination of the macroeconomic scenario was performed, in consideration of the “launch” of the “new” industrial business plan, as well as the self-evaluation process, also in order to enable the CICRCG to prepare a final report on the self-evaluation process to be presented to the Board of Directors. In addition, the Directors and Statutory Auditors attended the presentation of the “new” 2013-2017 Industrial Business Plan held in London.
4.7. INDEPENDENT DIRECTORS The Company's Board of Directors has been characterised from 2006 by a number of Independent Directors who generally represent the absolute majority of its members, with a
31 Self-Regulatory Code: Application criterion 2.C.2.
40 more rigorous approach of the Self-Regulatory Code that in the case of member companies of the FTSE-MIB index makes a recommendation that at least one third of the Board of Directors is to be comprised of Independent Directors32. At the date of their appointment and subsequently once a year, the Board assesses the continued validity of the requirements of independence envisaged by the Self-Regulatory Code and the requirements envisaged by the Unified Finance Law (TUF) in relation to non- executive Directors who are qualified as Independent. The Board of Directors identifies the independence of its Directors in terms of their freedom from relations with the Company and/or its principal shareholders and executives which may influence their opinion. The Board referred to the requirements recommended by the Self-Regulatory Code33 adopted by the Italian Stock Exchange (Borsa Italiana). The Board of Directors duly confirmed the applicability of the requirements of independence, with the sole exception of Director Carlo Acutis, in the meeting held on March 27, 2014 in the light of a substantial evaluation of the information provided by the Directors and the information available to the Company, also on the basis of the requirements envisaged by the Unified Finance Law (TUF), in relation to the Directors in office at that date and who were qualified as independent at the date of their appointment, and in particular: Anna Maria Artoni; Alberto Bombassei; Franco Bruni; Luigi Campiglio; Jean- Paul Fitoussi; Pietro Guindani; Elisabetta Magistretti; Luigi Roth, Carlo Secchi and Manuela Soffientini. With reference to the Director Carlo Acutis, it is important to note that in July 2013, Carlo Acutis informed that he considered he no longer met the independence requirements due to his role as a controlling shareholder of Vittoria Assicurazioni S.p.A. and Yura International B.V., companies which acted together with Lauro Sessantuno S.p.A. in the full public purchase offer promoted with reference to the shares of Camfin S.p.A., a company that holds approximately 26.2% of Pirelli's share capital. It is also important to note that, as in the previous year, the Board of Directors focused on the position of the Director Secchi and considered the fact that he had exceeded nine years in office during the last twelve years, since he had been appointed as a Director of Pirelli for the first time on February 19, 2004. In particular, the Board of Directors noted the personal characteristics and the proven professionalism, as well as the specific experience gained (more than 40 years academic experience at the highest national and international levels; top
32 2011 Self-Regulatory Code: Application criterion 3.C.3. 33 2011 Self-Regulatory Code: Application criteria 3.C.1. and 3.C.2.
41 ranking national and international political offices and, above all, having held the office as a director of important listed companies) the fact of having exceeded nine years as a Board Member of Pirelli during the last twelve years does not appear to compromise the qualification as an Independent Director in any way. At the Date of the Report, a further eight Board Members (Carlo Acutis; Gilberto Benetton; Paolo Fiorentino; Gaetano Micciché; Massimo Moratti; Renato Pagliaro; Luca Rovati and Claudio Sposito) were eligible to be qualified as “non-executive Directors”. It follows that the Independent Directors represent 50% of the Directors in office and approximately 55% of the total number of “non-executive Directors”. The average age of the Independent Directors at the Date of the Report is just over 63 years with an average term in office that corresponds to approximately 5 years. The Board of Statutory Auditors verified that the assessment criteria and procedures adopted by the Board to establish the independence of its members were applied correctly, in line with the recommendations of the Self-Regulatory Code34.
4.7.1 Meetings of the Independent Directors. In line with the recommendations of the Self-Regulatory Code35, the Independent Directors met 2 times during the 2013 financial year in the absence of the other Directors. One of the foregoing meetings was held at the Settimo Torinese industrial facility. The Independent Directors examined in detail aspects relating to the control system and risk management and the Board performance evaluation activity. Furthermore, 4 informal meetings of the Directors were held during the 2013 financial year.
4.7.2 Role of Independent Directors on committees. Pirelli deems that the central function of the Board of Directors is to define the strategic policy guidelines and to supervise the Company's business activities and in order to perform this important task effectively a central role is represented by the presence of an adequate number of Independent Directors on the Board of Directors and on the Committees with high professional and personal skills and expertise. This applies in particular from 2006, since a large portion of the Board of Directors is composed of Independent Directors and the Remuneration Committee and the CICRCG are composed only of Independent Directors from 2000. The majority of the members of the Appointments and Succession Committee are Independent Directors and a significant representation of Independent Directors is
34 Self-Regulatory Code: Application criterion 3.C.5. 35 Self-Regulatory Code: Application criterion 3.C.6.
42 guaranteed in the Strategies Committee, and its composition reflects the mix of skills and expertise and the presence of executive, non-executive and independent Directors of the Board of Directors.
4.8. LEAD INDEPENDENT DIRECTOR The Board of Directors decided to introduce the figure of the Lead Independent Director already in November 2005, in order to further enhance the role of the Independent Directors. The Lead Independent Director (identified as the Independent Director Carlo Secchi, Chairman of the CICRCG) represents the key figure to coordinate the requests and contributions made by Independent Directors. In this capacity, the Lead Independent Director: - collaborates with the Chairman of the Board of Directors to achieve the best functioning of the Board; - has the authority to convene meetings, also informal meetings, involving only the Independent Directors, independently, or at the request of the other Directors in order to discuss issues in relation to the functioning of the Board of Directors, in particular, and the Corporate Governance System, more in general, with the possibility of also inviting management representatives to discuss with the organisational structure; - collaborates with the Chairman of the Board of Directors in order to ensure that the Directors receive complete and timely information flows. The Lead Independent Director can avail of the collaboration of the Board of Directors' Secretary when exercising his powers. The Lead Independent Director has participated in all the Board of Directors' meetings in the framework of the mandate received up to the Date of the Report, in all the meetings of the Committee for Internal Control and Corporate Governance, and the Lead Independent Director has been constantly in contact with the Chairman of the Board of Directors and CEO, as in the past, also with reference to the 2013 financial year, precisely to achieve a constant improvement of the Board information process. The Lead Independent Director also organised 2 meetings during the 2013 financial year involving only the Independent Directors, as mentioned previously, to examine in detail issues relating to the Company's corporate governance system, confirming the special attention paid to these aspects, as has become accepted practice. Furthermore, as already mentioned, 4 informal meetings of the Directors were held during the 2013 financial year. The Lead Independent Director together with other Directors and Statutory Auditors also attended the presentation of the “new” 2013-2017 Industrial Business Plan held in London.
43 5. PROCESSING CORPORATE INFORMATION Market transparency, fair, complete and clear information represent the values which are upheld by the conduct of the corporate bodies, the management and all the staff employed by Pirelli. In this context the Board of Directors adopted a Procedure from March 2006 to manage and disclose privileged information to the market that takes into account the regulations concerning market abuse, governs the management of privileged information concerning Pirelli & C., its unlisted subsidiaries and the listed financial instruments issued. The Procedure also applies as an instruction to all subsidiaries, in order to obtain from them, without delay, the information required for the timely and correct compliance with the reporting obligations to the general public. The updated version of the Procedure is available on the Pirelli Internet website, and also governs the institution of the register of persons with access to privileged information, also in operation from April 1, 2006. The issue concerning the transparency of transactions involving the Company's shares or the financial instruments linked to them, performed directly or through third parties by relevant persons or by persons closely related to them (so-called insider dealing) is currently governed entirely by law and by the Consob implementation regulation. Although no regulatory obligations are applicable in this regard, the Board of Directors has decided to continue to impose an obligation on the parties indicated above not to perform transactions involving the Company's shares or involving financial instruments linked to them during specific periods of the year (so-called Blackout periods36), in harmony with the approach adopted in the previous mandate. Moreover, these periods may be extended or suspended by the Board of Directors in extraordinary circumstances.
6. BOARD COMMITTEES The Committees set up within the Board have fact-finding, proposing and/or advisory duties in relation to the issues which particularly require an in-depth examination so that there can be an effective and informed discussion of opinions also on such issues. It is a consolidated practice in Pirelli, in harmony with best practices, for the Board to formally define the duties and powers of the specific committee at the date the committee is established (by means of a so-called written charter), and to render them public by
36 The procedure relating to the blackout periods is available on the Company's Internet website.
44 publication on the Pirelli Internet website and also reporting on them in this Report. The Board of Directors set up four committees following its reappointment, on April 21, 2011, including two new committees: the Committee for Internal Control, Risks and Corporate Governance, the Remuneration Committee; the Appointments and Succession Committee and the Strategies Committee. The composition of the Board Committees is detailed in table 4.
7. APPOINTMENTS AND SUCCESSION COMMITTEE 7.1 Composition. The Board of Directors set up the Appointments and Succession Committee in the meeting held on April 21, 2011, and at the Date of the Report, the Committee is composed of 3 Board Members, the majority of whom are Independent Directors 37 and in particular: Marco Tronchetti Provera (Chairman); Luigi Campiglio; Luigi Roth. It is important to note that compared to the Committee's composition as at December 31, 2012, on May 10, 2013, Mr. Vittorio Malacalza resigned as a Committee member. The Senior Advisor Human Resources, Mr. Gustavo Bracco acts as the Committee's Secretary.
7.2 Duties assigned to the Committee. When defining the duties of the Appointments and Succession Committee the Board of Directors assessed the increasing importance for Pirelli and the market of the Board's direct involvement in defining the succession policies (i) not only and not just in relation to possible natural changes of the Executive Directors, for which however the decisions made by the shareholders assume a decisive role, but in general (ii) concerning the top and senior management to assure the necessary continuity of the management action. Accordingly, the Committee: proposes to the Board of Directors the candidates to be co-opted, if an Independent Director is to be substituted; proposes the definition of “emergency” succession plans concerning the Company's top management by identifying professional figures (inside and outside Pirelli) who can
37 The 2011 Self-Regulatory Code (Principle 5.P.1) recommends the establishment of an Appointments and Succession Committee with the majority of its members being Independent Directors. Although in the case of Pirelli the application of this principle will be effective from the next renewal of the Board of Directors with the approval of the financial statements as at December 31, 2013, the current composition is already in line with the provisions of the cited Code.
45 assure the succession, in particular, of the C.E.O.38; identifies the criteria for the succession plans in relation to the top and senior management, in general, in order to ensure continuity in the business strategies; periodically examines the organisational structure of the Company and the Group presenting possible suggestions and opinions to the Board in this regard.
7.3 Operation. The Committee meets whenever its Chairman deems it appropriate, or whenever a request is made by at least one member, by the Chairman of the Board of Directors or by the CEO, if appointed, and however, as often as appropriate to ensure the Committee performs its functions correctly. The Committee's meetings are convened by a notice, also sent by the Secretary, duly appointed by the Committee Chairman. The documentation and the information available (and in any event, the documentation and information required) are transmitted to all the Committee members sufficiently in advance to enable the members to express their opinion in the meeting. The Committee's meetings are validly constituted provided the majority of its members in office are present and the resolutions are passed with the absolute majority of the members in attendance. The Committee's meetings may also be held using telecommunications media and are regularly reported under the Secretary's responsibility and transcribed in the special register. The Committee may avail itself of external consultants when performing its functions and has adequate financial resources to perform its duties with absolute expenditure autonomy. The Committee has the authority to access company information and functions which are important to perform its duties and can avail itself of the Secretary's support for this purpose. The Chairman of the Board of Statutory Auditors has the authority to participate in the Committee's meetings.
7.4 Activities performed during the financial year. The Appointments and Succession Committee met 2 times during the 2013 financial year; the duration of the meeting was approximately 2 hours; the tables provided at the end of the Report summarise the participation of the members at the Committee's meetings.
38 It is important to note that at the time the Appointments and Succession Committee was set up its duties also envisaged assuring “emergency” succession plans for the C.O.O. It is to be noted that the C.O.O. Francesco Gori resigned from this office on May 10, 2012.
46 In particular, the Committee submitted to the Board of Directors a structured succession plan for the Company's top management, to be implemented in the case of an “emergency” - the plan was subsequently approved by the Board - as well as the process to be followed to define the natural succession plan referred to the Company's top management. In this regard the reader is referred to the “Succession Plans” section. Members of Senior Management and external consultants participated in the Committee's work, at the Chairman's invitation, in relation to several items on the Agenda of the above- mentioned meetings, in order to assist the Committee to perform its functions.
8. STRATEGIES COMMITTEE 8.1 Composition. The Board of Directors set up the Strategies Committee in the meeting held on April 21, 2011, and at the Date of the Report the Committee is composed of 9 Board Members, including 4 Independent Directors, and in particular 39: Marco Tronchetti Provera (Chairman); Alberto Bombassei Franco Bruni; Paolo Fiorentino; Gaetano Micciché; Renato Pagliaro; Manuela Soffientini; Carlo Secchi; Claudio Sposito; It is important to note that compared to the Committee's composition as at December 31, 2012 (i) on May 10. 2013 Mr. Vittorio Malacalza resigned as a Committee member; (ii) Mr. Claudio Sposito was appointed as a Committee member on October 21, 2013; (iii) Mr. Paolo Fiorentino and Mr. Gaetano Micciché were appointed as Committee members on November 5, 2013; (iv) Mr. Chiappetta, resigned as a Committee member effective from January 31, 2014. In this regard, it is important to note that Mr. Chiappetta will continue to support the Committee, of which he is no longer a member, due to the “new” role as Senior Advisor Governance. The Investor Relations function Manager (Valeria Leone) and the Sustainability and Risk Management function Manager (Filippo Bettini) act as Secretaries to the Committee.
39 The reader is referred to Table 4 for further details.
47 8.2 Duties assigned to the Committee. The Committee has advisory and proposing functions when defining the strategic guidelines, as well as to identify and define the terms and conditions of individual transactions of strategic importance. In particular, the Committee: examines in advance the strategic, industrial and financial plans, also long-term plans of the Company and of the Group to be submitted to the examination of the Board of Directors; supports the Board to assess transactions, initiatives and activities of strategic importance and, in particular: o entry in new markets, both geographic and business; o industrial alliances (for example: joint-ventures); o extraordinary transactions (merges, spin-offs, share capital increases or decreases other than decreases due to losses); o investment projects; o industrial and/or financial restructuring programmes and projects.
8.3 Operation. The Committee is appointed by the Board of Directors (and the Board also indicates the Committee's Chairman) and remains in office for the Board of Directors' entire mandate. The Committee meets whenever its Chairman deems it appropriate, or when a request is made by at least one member, by the Chairman of the Board of Directors or by the CEO, if appointed, and however, as often as appropriate to ensure its functions are performed correctly. The Committee appoints the secretary of its meetings. The Committee's meetings are convened by a notice, also sent by the secretary, at the request of the Committee Chairman. The documentation and the information available (and in any event, the documentation and information required) are transmitted to all the Committee members sufficiently in advance to enable the members to express their opinion in the meeting. The Committee's meetings are validly constituted provided the majority of its members in office are present and the resolutions are passed with the absolute majority of the members in attendance. The Committee's meetings may also be held using telecommunications media
48 and are regularly reported under the responsibility of the Secretariat office and transcribed in the special register. The Committee has adequate financial resources to perform its duties with absolute expenditure autonomy and may avail itself of external consultants when performing its functions. The Chairman of the Board of Statutory Auditors is invited to attend the Committee's meetings.
8.4 Activities performed during the financial year. The Strategies Committee met 3 times during the 2013 financial year; the average duration exceeded one hour and 30 minutes; the tables provided at the end of the Report summarise the participations of the members in the Committee's meetings recorded during the 2013 financial year. In particular, the Committee examined industrial partnership scenarios and/or enhancement of the steelcord business unit, as well as the preliminary guidelines and the subsequent integral version, referred to the “new” 2013-2017 Industrial Business Plan.
9. REMUNERATION COMMITTEE 9.1 Composition. The Corporate Governance System adopted by Pirelli & C. since 2000 envisages establishing a Remuneration Committee. The Committee is composed of four members who are exclusively independent based on the more rigorous approach recommended by the Self-Regulatory Code of the Italian Stock Exchange (Borsa Italiana) of December 201140. The Committee is appointed by the Board of Directors (that also indicates the Chairman) and remains in office for the Board of Directors' entire mandate. The entire Board of Statutory Auditors has the authority to participate in the Committee's activities. The Committee was composed of the following persons at the Date of the Report 41: Luigi Roth (Chairman); Anna Maria Artoni; Luigi Campiglio; Pietro Guindani.
40 The 2011 Self-Regulatory Code Principle 6.P.3. 41 The reader is referred to Table 4 for further details.
49 It is important to note that compared to the Committee's composition as at December 31, 2012, following the resignation on August 5, 2013 of the Director Carlo Acutis42 as a Member and Chairman of the Committee, the Board of Directors appointed the Director Roth - already a Committee member - as the Committee's Chairman and appointed the Director Luigi Campiglio as a “new” member of the Committee. Two members of the Committee (Anna Maria Artoni and Pietro Guindani) have adequate experience in financial and remuneration matters as duly assessed by the Board of Directors at the date the appointment was made. The Secretary of Board of Directors, Ms. Anna Chiara Svelto, acts as the Secretary to the Committee.
9.2 Duties assigned to the Committee. The Committee has advisory, proposing and supervisory functions to assure the definition and application of the remuneration policies to the entire Group which are designed, on the one hand, to attract, motivate and retain the resources which have the professional qualities requested to achieve profitably the Group's objectives and, on the other hand, are capable of aligning the management's interests with the interests of the shareholders. In particular, the Committee43: supports the Board to define the Group's General Remuneration Policy and the respective Implementation Criteria; periodically assesses the adequacy, overall consistency and the effective application of the General Remuneration Policy and the Implementation Criteria; formulates proposals to the Board with reference to the Directors invested with special offices, the General Managers and the Executives with strategic responsibilities: o concerning their remuneration, in line with the General Remuneration Policy and with the respective Implementation Criteria; o establishing the performance objectives related to the variable component of such remunerations; o defining possible non-competition agreements;
42 On July 17, 2013 the Director Carlo Acutis informed that he considered he longer met the independence requirements due to his role as a controlling shareholder of Vittoria Assicurazioni S.p.A. and Yura International B.V. - companies which acted together with Lauro Sessantuno S.p.A. in the full public purchase offer promoted with reference to the shares of Camfin S.p.A. - and for this reason he resigned as Chairman and member of the Remuneration Committee. 43 2011 Self-Regulatory Code Application Criterion 6.C.5.
50 o defining possible agreements to terminate the relationship, also on the basis of the principles established in the General Remuneration Policy and in the respective Implementation Criteria; supports the Board of Directors to examine the proposals to be submitted to the Shareholders' Meeting concerning the adoption of stock option plans based on financial instruments; monitors the application of the decisions adopted by the Board, in particular, verifying that the performance objectives established have actually been achieved; examines and submits the Annual Remuneration Statement to the Board of Directors that, by name, in the case of the members of the administration and control bodies and for General Managers, and in a cumulative form in the case of Executives with strategic responsibilities: a) provides an adequate representation of each of the items comprising the remuneration; b) illustrates in detail the fees paid by the Company and by its subsidiaries during the reference financial year for whatever reason and in whatever form. The Procedure for Transactions with Related Parties envisages that the respective Procedure adopted by the Company does not apply to the resolutions relating to remunerations of Directors and Executives with strategic responsibilities provided (i) the Company has adopted a remuneration policy that includes policies relating to agreements to consensually terminate the employment relationship; (ii) a Committee comprising exclusively of non- executive Directors, the majority of whom are independent was involved in defining the remuneration policy (the Remuneration Committee); (iii) a report that illustrates the remuneration policy was submitted to the advisory vote of the shareholders' meeting; (iv) the remuneration assigned is consistent with this policy. The reader is referred to the paragraph “Remuneration Policy” for further information. As has been stated, it is important to remember that the Board of Directors assigned the Remuneration Committee the responsibilities of the Committee for Transactions with related parties envisaged by the Consob regulatory provisions for matters concerning the remuneration of Directors and Executives with strategic responsibilities.
9.3 Operation. The Committee meets whenever its Chairman deems it appropriate, or when requested by at least one member, by the Chairman of the Board of Directors or by the CEO, if appointed, and however, as frequently as necessary to ensure that its functions are performed correctly.
51 The entire Board of Statutory Auditors44 participates in the Committee's meetings, as well as other representatives of the Company and/or the Group, as well as of the audit company, if deemed appropriate and at the Committee's invitation. Directors invested with special offices do not participate in the Remuneration Committee's meetings, in line with the recommendations of the Self-Regulatory Code45 and best practices. The Committee's meetings are convened with a notice, also sent by the Secretary, at the request of the Committee's Chairman. The documentation and information available (and in any event the documentation and information required) are transmitted to all the Committee members sufficiently in advance to enable the members to express their opinion in the meeting. The presence of the majority of the members in office is necessary for the Committee's meetings to be valid and the resolutions are passed with the absolute majority of the members in attendance. The Committee's meetings may also be held using telecommunications media and are duly reported under the Secretary's responsibility and transcribed in the special register46. The Committee has adequate financial resources to perform its duties with absolute expenditure autonomy and may avail itself of external consultants when performing its functions. The Committee has the authority47 to access company information and the functions relevant to performing its duties, availing of the Secretary's support for this purpose.
9.4 Activities during the financial year. The Remuneration Committee met 5 times during the 2013 financial year; the average duration was approximately one hour and 30 minutes. The tables provided at the end of this Report summarise the participations of the members at the Committee's meetings reported during the 2013 financial year. The Committee approved the proposals relating to the annual variable remuneration paid to the Chairman and CEO, and to the Deputy Chairman Alberto Pirelli (as a Senior Manager) and to the Executives with strategic business responsibilities in relation to the results achieved in the previous financial year and the proposals relating to the structure of the variable remuneration paid to the same persons and referred to the 2013 financial year.
44This circumstance characterises the corporate governance rules adopted by the Company and offers the entire Board of Statutory Auditors the opportunity to directly oversee the Committee's activities and to perform more effectively the control functions assigned to it. 45 2011 Self-Regulatory Code: Application criterion 6.C.6. 46 Also in line with the recommendations of the 2011 Self-Regulatory Code: Application Criterion 4.C.1 sub-section d). 47 Also in line with the requirements of the 2011 Self-Regulatory Code: Application Criterion 4.C.1., sub-section e).
52 The Committee then approved the 2013 Remuneration Report and submitted the Report to be examined by the Board of Directors, and subsequently submitted the Report to the advisory vote by the Shareholders' Meeting to approve the Financial Statements referred to 2013 concerning the part related to the Remuneration Policy. The Committee then proposed to the Board, and the Board subsequently approved, the introduction of non-competition Agreements referred to Executives with strategic responsibilities and referred to some senior managers and the compensation package for the newly appointed Operations General Manager. Furthermore, during the 2013 financial year, the Committee considered launching the “new” 2013/2017 Industrial Business Plan and expressed its intention to proceed, on the one hand, to anticipate the closure of the existing LTI Plan and, on the other hand, to “launch” a “new” Long Term Incentive Plan. The Committee duly defined the proposal during the 2014 financial year, based on its intention (and the proposal was subsequently approved by the Board of Directors) to anticipate the closure of the 2012-2014 LTI Plan and concurrently launch a “new” 2014-2016 LTI Plan. For further details, the reader is referred to the 2014 Remuneration Report that will be available on the Pirelli Internet website no later than 21 days prior to the Shareholders' Meeting to approve the Financial Statements referred to 2013. Members of the Senior Management and external consultants participated in the Committee's work, at the Chairman's invitation, with reference to several items on the Agenda of the above-mentioned meetings in order to assist the Committee to perform its functions. The Committee met 3 times at the Date of the Report.
10. REMUNERATION POLICY Pirelli has already defined a Remuneration Policy, starting from the 2011 financial year, one year earlier compared to the legal obligation and has submitted the Policy to an advisory vote by the shareholders. In this regard, it is important to note that the Remuneration Report updated for the 2014 financial year will be submitted to the Company's Shareholders' Meeting (the Report contains the Remuneration Policy referred to the 2014 financial year and the Remuneration Statement referred to the 2013 financial year). The Remuneration Report referred to the 2014 financial year will be made available on the Pirelli Internet website no later than 21 days prior to the Shareholders' Meeting to approve the Financial Statements referred to 2013.
11. COMMITTEE FOR INTERNAL CONTROL, RISKS AND CORPORATE GOVERNANCE
53 11.1 Composition. The Corporate Governance System adopted by Pirelli & C. S.p.A. (hereafter, “Pirelli & C.” or the “Company”) from 2000, envisages setting up a Committee for Internal Control and Corporate Governance (hereafter, the “Committee”), in 2009 this Committee was renamed “Committee for Internal Control, Risks and Corporate Governance”. The Committee has advisory and proposing functions and its mission is to assure the efficiency, effectiveness and correctness of the internal control system, on the one hand, and the corporate governance structure, in general, on the other hand, based on an appropriate preparatory activity in relation to the risk management system. The Committee is appointed by the Board of Directors (that also indicates the Chairman) and remains in office for the duration of the Board of Directors' mandate. At the Date of the Report the Committee is composed of four members, who are exclusively Independent Directors based on the more rigorous approach recommended by the “new” Self-Regulatory Code issued by the Italian Stock Exchange (Borsa Italiana) dated December 201148: Carlo Secchi (Chairman): Franco Bruni; Elisabetta Magistretti; Luigi Roth. Two members of the Committee (Carlo Secchi and Franco Bruni) have adequate experience in accounting and finance matters, as duly assessed by the Board of Directors at the date the appointment was made. The Secretary of the Board of Directors, Ms. Anna Chiara Svelto acts as the Secretary to the Committee. The entire Board of Statutory Auditors has the authority to participate in the Committee's activities.
11.2 Duties assigned to the Committee. The Board of Directors was convened on April 21, 2011 and confirmed the duties – of a fact- finding and advisory nature – originally assigned to the Committee for Internal Control and Corporate Governance, moreover, in line with the duties indicated in the Self-Regulatory Code and also confirmed the corporate governance prerogatives which have characterised the Committee since it was established. In particular, the CICRCG:
48 2011 Self-Regulatory Code - Principle 7.P.4.
54 assists the Board of Directors: o (i) in defining the policy guidelines for the internal control system and risk management, so that the main risks concerning the Company and its subsidiaries are identified correctly and adequately measured, managed and monitored; (ii) in determining the degree of compatibility of these risks to assure a business management that is consistent with the strategic objectives identified. Following the Company's approval of a new risk management and supervision model, the Committee was assigned advisory and/or proposing duties in relation to the new risk assessment and risk management model. In this regard the reader is referred to the paragraph “Risk governance system”. o in identifying an Executive Director appointed to supervise the operations of the internal control system and risk management in relation to the Company's characteristics and risk profile; o in assessing the adequacy, efficiency and the effective operation of the internal control system at least once a year; o in describing the essential aspects of the internal control system in the corporate governance report, expressing its assessment concerning the system's overall adequacy; expresses an opinion on the proposals relating to the appointment, revocation, duties assignment and remuneration of the officer responsible for the Internal Audit function and assures that the officer obtains suitable resources to fulfil its functions; assesses (a) the correct use of the accounting standards and their consistent application within the Group together with the Board of Statutory Auditors, the Company's administration Managers, the Officer Responsible for preparing the company’s accounting documents and the auditors, for the purposes of preparing the Consolidated Financial Statements, (b) the possible letter issued by the statutory auditor outlining suggestions for the Company's management and the possible report concerning the key questions which emerged during the statutory audit; expresses opinions concerning specific aspects relating to the identification of the principal company risks, at the request of the designated Director, as well as the design, implementation and management of the internal control system; examines the audit plan prepared by the Internal Audit Manager, as well as the periodic reports prepared thereby; assesses the “Compliance Plan” once a year and the consequent report on the activities performed;
55 reports to the Board of Directors on the activity performed and the adequacy of the internal control system, at least at the time the Financial Statements and the interim report are to be approved; supervises compliance with and the periodic update of the corporate governance rules and compliance with the rules of conduct which may be adopted by the Company and its subsidiaries. In particular, the Committee is also responsible for proposing the procedures and the timing for the Board of Directors to perform the annual self-evaluation; performs the additional duties assigned to it by the Board of Directors, also in relation to supervising the procedural correctness and the substantial fairness of the operations. As has been stated, the Board of Directors then assigned the responsibilities of the Committee for Transactions with Related Parties envisaged by the Consob regulatory requirements to the CICRCG, with the sole exception of issues concerning the remuneration of Directors and Executives with strategic responsibilities which are entrusted to the Remuneration Committee.
11.3 Operation. The Committee meets whenever its Chairman deems it appropriate, or whenever a request is made by at least one Committee Member, or by the Chairman of the Board of Directors or by the CEO, if appointed, and however, as often as appropriate to ensure that its functions are performed correctly. The Secretary of the Board of Directors acts as the Secretary to the Committee. The Senior Advisor Governance, the Internal Audit Manager, the Risk Officer and the Responsible Officer, as well as additional representatives of the Company and/or the Group generally attend the Committee's meetings concerning specific matters when deemed appropriate by the Committee and representatives of the Audit Company are invited to attend when issues concerning the statutory audit of the accounts are discussed. The Internal Audit Manager (who reports to the CICRCG and to the Board of Statutory Auditors) reports on his activities on a quarterly basis and presents the annual Audit Plan. In addition, the Responsible Officer reports on the activities performed at least once a year. The entire Board of Statutory Auditors has the authority to participate in the Committee's activities. The Committee's meetings are convenient by a notice, also sent by the Secretary, at the request of the Committee's Chairman. The documentation and information available (and in any event the documentation and information required) are transmitted for the Committee members sufficiently in advance to
56 enable the members to express their opinion in the meeting. The presence of the majority of the members in office is required for the Committee's meetings to be valid and the resolutions are passed with the absolute majority of the members in attendance. The Committee's meetings may also be held using telecommunications media and are duly reported under the Secretary's responsibility and transcribed in the special register49. The Committee has adequate financial resources to perform its duties with absolute expenditure autonomy and may avail itself of external consultants when performing its functions. The Committee has the authority to access company information and the functions relevant to performing its duties, availing of the Secretary's support for this purpose50.
11.4 Activities during the financial year. The CICRCG met 17 times during the 2013 financial year; the average duration of the meetings was approximately one hour and 30 minutes. The tables provided at the end of the Report summarise the participation of the members in the Committee's meetings reported in the 2013 financial year. The Committee met 4 times during the 2014 financial year up to the Date of the Report.
Activities relating to Corporate Governance. The Committee made a real contribution to the process of implementing and constantly updating the corporate governance tools of the Company and of the Group. During the 2013 financial year, the Committee expressed its positive assessment in relation (i) to the “new” whistleblowing policy, (ii) to the so-called Anti-Corruption Compliance Programme and (iii) to some amendments to the Company's Organisational Model 231. In addition, the Committee endorsed the proposals relating to the changes to Pirelli's Company Bylaws, subsequently approved by the Shareholders' Meeting convened to approve the Financial Statements referred to 2012. The Committee then examined the results of the 2012 Board performance evaluation and initiated the self-evaluation process referred to the 2013 financial year, examining the results during 2014. In this regard the reader is referred to the respective section. Again, with reference to “corporate governance”, the Committee managed the investigation concerning the existence of the independence requirements of Directors and compliance with
49 Also in line with the requirements of the Self-Regulatory Code Application Criterion 4.C., sub-section d). 50 2011 Self-Regulatory Code: Application Criterion 4.C.1., sub-section e).
57 the Policy concerning the maximum number of appointments deemed to be compatible with the position of a Director of Pirelli, the results of which are reported in the following paragraphs: “Independent Directors” and “Maximum number of positions held in other companies”. The Committee expressed its assessment on the activity performed by the Internal Audit management in order to acknowledge the 2012 variable incentive and expressed an opinion in relation to the 2013 incentive scheme, establishing a significant incidence of the qualitative targets to be assessed by the Committee. The Committee also endorsed the policy to qualify the Chief Technical Officer Maurizio Boiocchi and the Chief Human Resources Officer Christian Vasino as “Executives with strategic business responsibilities”. Lastly, the Committee submitted the 2012 Annual Corporate Governance and structure of share ownership Report to the Board of Directors for approval, as well as the half-yearly Corporate Governance Report published as a single document together with the half -yearly Financial Report as of June 30, 2013.
Activities relating to Internal Control. The Committee approved the final results of the activities performed to implement the annual Audit Plan and approved the Audit Plan for the next financial year. The Committee focused on the analysis of the structure and the operation of the Internal Audit Function, and in particular, the procedures to set out the 2013 Audit Plan, in this regard the reader is referred to the “Internal Control System” section. The Committee constantly monitored the work performed by the Internal Audit Department and the implementation of the plans of action concerning the corrective measures required to assure an on-going improvement of the system and periodically examined the report of the activities performed. The Committee met with the Responsible Officer during the 2013 financial year and the Responsible Officer reported on the suitability of the means and the powers attributed, as well as on the activities performed in relation to the Financial Statements for the year ended December 31, 2012. A similar activity was performed in relation to the interim Financial Statements as of June 30, 2013 and the Annual Financial Statements as of December 31, 2013. In addition, the Committee: - endorsed the procedure and the results of the so-called impairment test; - was informed of the periodic meetings between the Board of Statutory Auditors and the Audit Company which did not reveal any significant situations and/or information;
58 - examined and positively evaluated the Audit Plan referred to the 2013 financial year submitted by the audit company Reconta Ernst & Young, and acknowledged that the analysis of the so-called Management Letter did not indicate "significant shortcomings" in the internal control system with reference to the financial information process; - assessed that the fees paid to the audit company for “non-audit services” were not excessive and did not influence the independence of the statutory auditor in any way. The Committee confirmed its positive opinion concerning the adequacy of the internal control system and the governance system of the Company and the Group based on the activities performed, the assessments made, the information received and the documentation examined.
Activities relating to transactions with related parties. The Committee expressed its preliminary favourable opinion concerning a number of transactions of minor importance implemented by the Company or by its subsidiary companies with related parties. The Committee also examined and constantly monitored the negotiations relating to the transaction (with a major related party) intended to enhance the equity and financial position, as well as to relaunch the industrial prospects of Prelios S.p.A. (to be implemented by recapitalising and restructuring the financial debt of Prelios S.p.A.), as a result of which the Committee expressed its preliminary favourable opinion. In this regard, the reader is referred to the information document relating to the transaction published on the Pirelli Internet website. The Committee also received a periodic information flow regarding the execution of transactions with minor related parties authorised by the Committee. Furthermore, the Committee has taken into account that the Company adopted the Consob recommendation that envisages a review of the TRP Procedure at least every three years, and with the unanimous vote of its members has assessed the overall TRP Procedure to be valid and effective and proposed to the Board some marginal amendments to the TRP Procedure concerned (and the Board subsequently approved them). In this regard, the reader is referred to the section: “Directors’ Interests and transactions with related parties”.
Activities relating to Risk Governance. During the 2013 financial year the Committee constantly supervised the risk assessment activity and the possible “mitigation” strategies relating to the principal risks.
59 12. MANAGERIAL COMMITTEES The Group has set up specific managerial committees composed of the Group's top and senior management with the task of assisting the Board of Directors and the Executive Directors to define the guidelines for the business activities and to implement the policies established by the Board. In particular, the following principal Managerial Committees have been established.
Management Committee. The Management Committee includes all the Managers of the Business Units, Regions and Departments who report directly to the Chairman and the CEO. The Management Committee is chaired by the Chairman of the Board of Directors and CEO and has the task of supporting the latter in preparing the Group's strategic guidelines to be submitted to the Board's examination and to execute and implement the decisions taken by the Board of Directors in this regard, and to monitor their implementation. The Management Committee meets once a month to verify constantly the Group's economic performance; the development of the programmes, plans and initiatives common to the Group and the Business Units or Regions which have joint importance.
Risk Management Committees. The review of the risk model has led to identifying three risk macro families, namely: (i) external environment risks, (ii) strategic risks and (iii) operating risks which guide the risk management objectives, the control model and the governance bodies (in this regard, the reader is referred to the section: “risk governance system”). Two Risk Management Committees were set up: the Strategic Risks Committee with responsibility for risks related to strategic business choices or due to the external environment in which the Group operates; the Operating Risks Committee that focuses on preventing and managing risks related specifically to the organisational structure, to the Group's processes and systems. Both Committees have the task (i) of adopting and promoting a systematic and structured process to identify and measure risks; (ii) to examine information on internal and external, existing and future risks to which the Group is exposed; (iii) to propose strategies to respond to the risk based on the overall and precise exposure to the different risk categories; (iv) to propose the implementation of a risk policy to assure that the risk is reduced to “acceptable” levels; (v) to monitor the implementation of the defined risk response strategies and
60 compliance with the risk policies adopted.
Sustainability Steering Committee. The Sustainability Steering Committee is chaired by the Chairman of the Board of Directors and is responsible for policy-making and supervising the sustainability development by formulating the sustainability plans fully integrated with the Group's industrial business plan and based on the international policies and principles applicable to this area. The Sustainability Steering Committee includes all the functions of the “value chain” represented by the respective Group Director: Sustainability and Risk Governance, Institutional Affairs, Corporate Governance, Human Resources and Organisation, Administration and control, Product, Process, Procurement, Research & Development, Investor Relations, Environment, Health and Safety, Marketing, Media Relations - as well as the business managers. The reader is referred to the Sustainability Report (Volume 3 of the document “Financial Report as of 31/12/2013”) for a complete description of Pirelli's sustainable performance in 2013 and the respective long-term targets.
13. SUCCESSION PLANS51 After being set up in April 2011 the Appointments and Succession Committee has examined the Company’s processes relating to the identification, management and development of the so-called “talents” which assure the Group has a “natural” internal growth potential, over time, thereby ensuring a constant generational change. The Committee also examined the main initiatives to develop the management's skills and expertise and the process to define the so-called “succession tables”. The Committee was able to verify the structure and implementation status of the systems which allow Pirelli (i) to monitor the key resources and to verify the existence of any persons in-house who are capable of assuming roles of greater responsibility or (ii) to define the qualifications required to fill these roles in the event of recruiting from outside the Company in the case of “emergency” changes”. During the 2013 financial year, the Appointments and Succession Committee – with the support of a specialised consultancy company forming part of a global network – prepared a proposal to be submitted to the Board of Directors for a structured succession plan of the Company's top management to be implemented in the case of an emergency, envisaging the
51 The information included in this section is also provided in compliance with the Consob recommendation contained in Communication DEM/11012984 dated February 24, 2011.
61 roles and responsibilities of the various players involved in the process, and in relation to the process to be followed to define the natural succession plan for the Company's top management. The Plan, duly approved by the Board of Directors, envisages that in the event of a supervening impossibility, the Board of Directors defines the powers and proxies to guarantee the ordinary and extraordinary management during the so-called transition period with reference to the succession of the Company's top management in the case of urgency and with specific reference to the role of the CEO. In particular, the Board of Directors is expected: (i) to appoint a restricted ad hoc Management Committee, comprising three Board Members with consolidated management and entrepreneurial experience; on the one hand, the Committee is called on to perform a proactive and management role concerning possible extraordinary transactions which cannot be postponed, and on the other hand, to guarantee the ordinary management and the operational decisions for which the CEO is normally responsible; (ii) to identify a “spokesperson” within the Senior Management to cover the necessary role to liaise between the ad hoc Management Committee and the corporate structures and for external and internal communications and; (iii) to evaluate whether to define a temporary extension of powers for the ordinary activities referred to the operational management, within the limits of the approved budget. The ad hoc Management Committee, with the support of the Appointments and Succession Committee evaluates the (internal and external) candidacies and submits a shortlist to the Board of Directors for the final selection. At the end of the process the Board of Directors co-opts the selected candidate and confers on the candidate the powers and management proxies. The proposal by the Appointments and Succession Committee, duly approved by the Board of Directors, also envisages a series of preparatory activities intended for the natural succession of the CEO and also useful for the emergency succession scenario: (i) the definition of separate “prepared” powers and proxies between the Chairman and the CEO; (ii) identification of the key internal executives based on the senior management responsibilities model; (iii) constant “market monitoring unit”. The Chairman and the CEO inform the Board of Directors periodically and confidentiality regarding the progress of these activities.
14. INTERNAL CONTROL SYSTEM Pirelli's Internal Control System is represented by the set of structural and process factors which are able to achieve the following objectives: (i) the efficiency and effectiveness of the operating activities; (ii) the dependability of information; (iii) protecting the corporate equity
62 and (iv) respect of and compliance with the laws and regulations to assure correct information and an adequate control structure for all the Group's activities, with particular attention focused on the areas considered potentially at risk. In particular, the internal control system permits monitoring of compliance with the rules and procedures which govern the performance of the Company's business activities in its various forms. Pirelli's internal control system was developed as a direct process aimed at achieving values of substantial and procedural fairness, transparency and accountability, assuring: efficiency, transparency and traceability of transactions and, more in general, of management-related activities; dependability of the accounting and management data and financial information; compliance with the laws and regulations; protecting the Company's integrity, also to prevent fraud damaging the Company and the financial markets. The following represent the key rules underlying the Company's internal control system: (i) separation of roles when performing the principal activities involved in individual operating processes; (ii) traceability of the choices made; (iii) management of the decision-making processes based on objective criteria.
14.1. Internal Control System Director. The Board of Directors is responsible for the internal control system as a whole, the Board establishes the policies and verifies periodically its adequacy and effective operation. For this purpose, the Board avails itself of the CICRCG, as well as the Internal Audit Management with an appropriate level of independence and suitable means to perform the activities, which are assigned the typical functions of verifying the system's adequacy and efficiency and to propose the necessary corrective solutions, if anomalies are identified. After its renewal, the Board of Directors, in the meeting held on April 21, 2011, identified the Chairman and CEO as the Director with responsibility for the internal control system, and the duties recommended by the 2006 version of the Self-Regulatory Code52 were duly assigned. In particular, during the 2013 financial year, the Director with responsibility for the internal control system: . identified the principal risks to which the company is exposed, taking into account the characteristics of the activities performed by the Company that issued the Report and by its subsidiaries and to submit them periodically to the Board of Directors' examination; . implemented the policies defined by the Board of Directors, by managing the
52Also to implement the recommendations of the 2011 Self-Regulatory Code Principle 7.P.3.
63 implementation and management of the internal control system and risk management and verifying constantly the adequacy and effectiveness; . adapted the system to the dynamics of the operating conditions and the legislative and regulatory scenario; . proposed the remuneration of the Internal Audit function Manager in line with company policies. The Director responsible for the internal control system and risk management can request the internal audit function to perform audits on specific operating areas and concerning compliance with the internal rules and procedures during the execution of corporate transactions. The Internal Audit function Manager reports to the CICRCG and to the Board of Directors regarding problems or critical situations which emerged during the performance of its activities of which it has been made aware in order to permit appropriate initiatives to be defined.
14.2. Internal Audit Department. The Internal Audit Department (managed by Maurizio Bonzi) plays a significant role in the internal control system with the principal task of assessing the adequacy and functional operation of Pirelli's control processes, through independent assurance and consultancy activities. The Internal Audit Department's activity is performed in line with the mandate received and duly approved by the Committee for Internal Control and Corporate Governance, in compliance with international standards, in relation to the following aspects: • mission; • targets and responsibilities (independence, complete access to information, field of activity, disclosure of results); • improving the quality of the internal audit activities; principles of professional conduct; • professional reference standards. The Internal Audit function Manager (who does not have responsibility for any operational area) reports hierarchically to the Chairman and CEO and functionally to the CICRCG and to the Board of Statutory Auditors. The Internal Audit Department operates on the basis of an annual audit report approved in advance by the CICRCG and subsequently by the Board of Directors. The companies and corporate departments “subject” to possible audits are identified once a year to define the Audit Plan and these are subsequently classified in relation to the need to ensure “coverage” and their respective degree of risk. The following factors are involved in
64 defining the (risk-based) ranking: (i) the level of control identified in the previous audits performed in the specific company and/or organisational unit; (ii) the “vulnerability” factor in relation to specific assessments which take into account, by way of example, country risk, market risk, the size and organisational complexity, recent organisational changes made, the extent of any critical aspects identified, the time that has elapsed since the last audit (iii) the Company's impact on the Group in relation to the consolidated data, in terms of the operational results or the invested capital, as well as (iv) the risk assessment activities performed during the previous financial year. The Audit Plan evidently does not have a rigid structure, since the Plan can be integrated during the financial year in relation to specific control requirements. Specific interventions were also performed on the information systems, including the accounting-related information systems, in the framework of the audit activities. The Internal Audit function Manager reports, on a quarterly basis, to the CICRCG, to the Board of Auditors and sends a report to the Board of Directors on a half-yearly basis outlining the activity performed. In particular, the Internal Audit function Manager reports on the outcomes of the audits performed, compliance with the action plans defined and expresses an assessment relating to the suitability of the internal control system. In addition to the Internal Audit Management, the internal control system is completed by the following: (i) a planning and control system, structured by sector and operating unit that produces a detailed monthly report for the top management to provide the top management with a useful tool to supervise the specific activities; (ii) the Group Compliance Function that reports to the Legal, Corporate Affairs and Group Compliance Manager (therefore, separate from the Internal Audit Management), called on to collaborate with the other group functions in order to guarantee the constant alignment of the internal regulations, processes, and more in general, the business activities with the applicable regulatory framework; (iii) the “whistleblowing policy”, amended during the 2013 financial year, also gives the “external community” the possibility of reporting forms of conduct which can represent a breach, or incitement to breach laws and regulations, principles sanctioned in the Code of Ethics, internal control principles, policies, corporate rules and procedures and/or which may produce direct or indirect economic-equity damage or damage the reputation of Pirelli. The Procedure envisages the express protection against reprisals of any nature in relation to the reporting persons or the employees who collaborated with the in-depth
65 investigation to verify the grounds of the notification.
14.3. Risk governance system. The risk supervision and governance model that the Group adopted in July 2009, has the following aims: “to manage” risks in terms of prevention and mitigation; “to seize” proactively the opportunity factors; to disseminate the “culture” of the value of risk within the Company, in particular, in the strategic planning and operating processes and in the most significant business choices; to assure transparency in relation to the risk profile assumed and the management strategies implemented, based on periodic and structured reporting to the Board of Directors and to the Top Management and adequate information to the shareholders, and more in general, to the so-called stakeholders. In harmony with these aims, Pirelli's Enterprise Risk Management model is: enterprise-wide: extended to all types of potentially significant risks/opportunities; value-driven: focused on the more significant risks/opportunities in relation to their capacity to prejudice the achievement of Pirelli's strategic objectives or to erode critical corporate assets (so-called Key Value Drivers); top-down: the Top Management identifies the priority risk areas and the events of greatest impact for the business; quantitative; where possible, based on an accurate measurement of the impacts caused by the risks on the expected economic/financial results in relation to their probable occurrence. integrated in the decision-making/business processes and, in particular, in the strategic planning and operational process. The Board of Directors plays a fundamental role with reference to the model's governance. Indeed, the Board is responsible for supervising the risk management process so that the risks assumed in the business are consistent with the strategies (so-called monitoring action). Furthermore, the Board defines the attitude to risk (so-called identification of the "acceptable risk threshold") and establishes the guidelines to manage the risks which may "interfere with" or prejudice achieving the business objectives or erode critical corporate assets, in line with its top management and strategic policy-making mission. The CICRCG supports the Board (i) in the periodic identification and assessment of the principal risks relating to the Company and its subsidiaries, at least once a year, to ensure
66 these risks are monitored correctly (Annual Risk Assessment) (ii) in defining the mitigation plans, and in general, the “risk governance” and updating them periodically, at least once a year (Annual Risk Management Plan) in order to maintain the overall levels of exposure to risk within the risk threshold assessed by the Board of Directors as “acceptable” (risk appetite), based on the proposal made by the Committee concerned). In particular, the CICRCG supported the Board in defining the policy guidelines for the risk management system so that the main risks concerning Pirelli were identified correctly, as well as measured, managed and monitored adequately53. The Board of Directors is supported by two Risk Management Committees in relation to the various risk macro families, (each Management Committee has specific areas of responsibility): the Strategic Risks Committee, with expertise and responsibility for the risks related to the strategic business choices, or due to the external environment in which the Group operates and the Operating Risks Committee that focuses on preventing and managing the risks specifically related to the organisational structure, the processes and the Group’s systems. The two Risk Management Committees have the following responsibilities (i) to adopt and promote a systematic and structured process to identify and measure the risks; (ii) to examine the information concerning internal and external, existing and future risks to which the Group is exposed; (iii) to propose strategies to respond to the risk in relation to the overall and detailed exposure to the various categories of risks; (iv) to propose the implementation of a risk policy in order to guarantee that the risk is reduced to “acceptable” levels; (v) to monitor the implementation of the strategies adopted in response to the risk defined and compliance with the risk policies adopted. The Management Committees avail of the Sustainability and Risk Governance function (managed by Filippo Bettini) that includes the Risk Officer (Ms. Alessia Carnevale) who coordinates the assessment process and guarantees the on-going monitoring of the Company's and the Group's exposure to the principal risks, while monitoring the effective implementation of the mitigation plans in the individual company departments and organisational units. Pirelli's Enterprise Risk Management model forms part of three key phases in the decision- making process: 1. strategic planning (medium/long term); 2. operational planning (annual and quarterly);
53 Self-regulatory code: Application criterion 7.C.1., sub-section a).
67 3. new investment projects becoming an integral part of the decision-making process.
14.3.1 “Risk Management and internal control system in relation to the financial reporting process”. The Company has implemented a specific and structured risk management and internal control system supported by a dedicated IT application, in relation to the process to prepare the separate and consolidated half-yearly and annual financial reports. In general, the internal control system implemented by the Company is designed to assure the protection of the Company's assets, compliance with the laws and regulations, the efficiency and effectiveness of the Company's operations, in addition to the dependability, accuracy and timeliness of the financial reporting. In particular, the process to prepare the financial reports is based on adequate administrative and accounting procedures, performed in compliance with the criteria established by the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organisations of Tradeway Commission. The administrative and accounting procedures involved to prepare the Financial Statements and every other financial communication are prepared under the responsibility of the Responsible Officer assigned to prepare the corporate and accounting documents (Francesco Tanzi), who, together with the Chairman of the Board of Directors certifies their adequacy and effective application at the time of the annual and consolidated Financial Statements and the half-yearly financial report. The significant Companies and Processes which supply and generate economic, equity or financial information have been mapped out to permit certification by the Responsible Officer. The significant Group Companies and Processes are identified annually on the basis of quantitative and qualitative criteria. The quantitative criteria consist in identifying the Group Companies which represent a higher aggregate value at a given materiality threshold in relation to the selected processes. The qualitative criteria consist in an examination of the processes and companies which may present potential areas of risk, even though they do not meet the quantitative parameters described above, based on the assessment performed by the Chief Executive Officers and by the Chief Financial Officers of the business sectors involved. The control risks and targets associated with preparing the Financial Statements and the respective information and the effectiveness and efficiency of the internal control system, in general, were identified for each process selected.
68 Precise audit activities were identified and specific responsibilities were assigned for each control target. A system to supervise the controls performed was implemented based on a mechanism involving a chain of certifications; any critical situations which may emerge in the evaluation process become the subject of plans of action for which implementation is verified in the subsequent year-end activities. Lastly, a procedure has been envisaged in which, once every quarter, the Chief Executive Officers and the Chief Financial Officers of the subsidiary companies issue a declaration of reliability and accuracy of the data transmitted for the purposes of preparing the Group's consolidated Financial Statements. The results of the audit activities are discussed by the Chief Financial Officers of the respective Sectors with the Responsible Officer prior to the date of the Board of Directors' meetings which approve the consolidated data as of 30 June and 31 December. In essence, a system of on-going and systematic controls has been adopted that provides a reasonable degree of certainty regarding the dependability of the information and the economic and financial reporting. The Internal Audit Department performs periodic audits to determine the adequacy of the design and operation of the controls on companies and processes chosen randomly, selected on the basis of materiality criteria. On the basis of the periodic reports the Responsible Officer reported on the System's efficiency to the Board of Directors through the CICRCG. Moreover, the same Officer, together with the Chairman of the Board of Directors provided the certification envisaged under Article 154-bis, paragraph 5 of the Unified Finance Law (TUF).
14.4 Code of Ethics – Policies and Organisational Model 231. The internal control system described above is completed by: - the Group's Code of Ethics; - the Group's Policies; - Organisational Model 231. The Code of Ethics sets out the general principles which form the reference framework to perform and conduct business within Pirelli; the Code of Ethics indicates the targets and the values underlying the Company's business activities. Indeed, Pirelli performs its internal and external business activities based on compliance with the Code of Ethics in the belief that business success cannot be separated from business ethics. In particular, the Policies contain the “operative” statement of the principles contained in the
69 Code of Ethics and establish rules for the entire Group designed to prevent the creation of an environment that is favourable to committing offences in general. The Code of Ethics and the Policies have been translated in all the languages in use within the Pirelli Group (22 different languages). The Organisational Model 231 was revised and updated constantly following changes in the laws and regulations and endeavours to assure the fine tuning of a system that is based on the specific requirements arising from the coming into force of Legislative Decree No. 231/2001 concerning companies' administrative liability for the offences committed by their employees and is based on a structured pyramidal system of principles and procedures which can be outlined as follows, starting from the base: the Group's Code of Ethics, which have already been described; the general internal control principles, which characterise the Internal Control System and of which the field of application extends continuously throughout the different organisational levels; the Policies, which have already been described; Internal Control schemes, which list the principal phases of each high and medium risk operative process and the specific control activities referred to the instrumental processes, aimed at achieving a reasonable prevention of the risk of committing offences, as well as special information flows to the Supervisory Body to highlight situations of possible non-compliance with the procedures established in the organisational model. A summary of the organisational model's guidelines is available on the Pirelli Internet website.
14.4.1 The Supervisory Body. A special Supervisory Body oversees the operation and compliance with Organisational Model 231, the Supervisory Body is economically independent and is composed of the Board Member Carlo Secchi, the Lead Independent Director and the Chairman of the CICRCG, the Statutory Auditor Antonella Carù and the Internal Audit Manager Maurizio Bonzi. This structure assures that the Supervisory Body is completely autonomous and independent, as well as having the presence of the various professional skills which contribute to controlling the Company's management. The Supervisory Body is also responsible for ensuring that the Board of Directors implements all the necessary changes to the Organisational Model to incorporate the changes
70 in legislation, the methods of performance and the type of business activities. On the other hand, the Supervisory Body reports to the Board of Directors, to the CICRCG and to the Board of Statutory Auditors in relation to the verification activities performed and their outcome. Each member of the Supervisory Body is paid an annual fee of 25 thousand euro. The Supervisory Body was appointed by the Board of Directors on April 21, 2011, and falls from office at the same time as the Board of Directors that appointed it. The Supervisory Body was identified with reference to the other Italian Group companies, by searching for the technical and operative solution that was suited to the size and organisational context of each company.
14.5 Auditing Company. The statutory audit is performed by a company appointed by the Shareholders' Meeting based on a proposal by the Board of Statutory Auditors and selected from among the companies registered in the special register. Reconta Ernst &Young S.p.A.54, the Italian organisation of the Ernst&Young network was appointed to audit the annual Financial Statements, the consolidated Financial Statements and the abridged interim Financial Statements referred to the 2008 – 2016 financial years; Reconta Ernst &Young S.p.A. was also appointed to audit the financial statements of the principal member companies of the Pirelli Group, via the organisations present in the various companies in which Pirelli operates. Mr. Pietro Carena is the person responsible for auditing the accounts in Pirelli & C. S.p.A. The auditing company is required to verify the preparation of the report on corporate governance and the structure of share ownership, and to express the so-called “opinion on consistency” referred to some information disclosed in this Report. Once a year the auditing company defines a plan of activities that is notified to the CICRCG. The fees paid to Reconta Ernst&Young (and to the companies in its network) are reported in detail in the notes to the annual and consolidated Financial Statements of Pirelli & C. as of December 31, 2013. The statement of the hours worked and the fees paid to the Auditing Company during the reference financial year are also provided during the Shareholders' Meetings convened to approve the annual financial reports. During 2011 the CICRCG and the Board of Statutory Auditors also defined a structured procedure for Pirelli to confer appointments (in particular, “non-audit” appointments) to
54 Refer to the Minutes of the Shareholders’ Meeting held on April 29, 2008 available on the Company’s Internet website.
71 member companies of the Ernst&Young network establishing the required prior and express authorisation by the Finance Director who, with the support of the Internal Audit Director, is responsible for verifying that the appointment to be conferred is not included among the appointments which are prohibited by the Unified Statutory Audit Law and that, in any event, its characteristics do not influence the auditor's independence. The Board of Directors verified and approved the appointments report (in particular, the “non-audit” appointments) made during the financial year, subject to examination by the CICRCG. Moreover, all the appointments which envisage a fee that exceeds 50 thousand euro, however, are required to be submitted to the prior examination by the Board of Statutory Auditors and the CICRCG, except in the case of motivated and specific reasons (for example: appointments not included in the auditing services, which the laws and regulations, also regulatory provisions, expressly establish are to be performed by the Auditor). The Internal Audit Director provides the Committee and the Board of Statutory Auditors with a list of non-audit services assigned to the auditor at least every quarter.
14.6. Officer responsible for preparing the Company's accounting documents. The Company Bylaws55 give the Board of Directors the authority to appoint the Responsible Officer, subject to the opinion expressed by the Board of Statutory Auditors, and to establish that the appointment expires together with the Board of Directors that appointed the Officer, unless revoked for just cause. The Responsible Officer must be an expert in administration and control and possess the integrity requirements established for Directors. In the meeting held on April 21, 2011 the Board of Directors confirmed the Chief Financial Officer Francesco Tanzi, as the Responsible Officer with the approval of the Board of Statutory Auditors. The Board of Directors confirmed the assignment of the following principal duties to the Responsible Officer, pursuant to the laws and regulations currently applicable: a) to prepare adequate administrative and accounting procedures to draw up the annual and consolidated Financial Statements, as well as every other financial communication; b) to issue a written declaration attesting that the Company's documents and communications disclosed to the market and related to the accounting information, also the Company's interim communications and information, correspond to the documentary evidence, books and accounting records; c) to attest the following details in a special report prepared in accordance with the model
55 Article 11 of the Company Bylaws.
72 established in the Consob Regulations, annexed to the annual Financial Statements, to the abridged interim Financial Statements and to the consolidated Financial Statements: the adequacy and the actual implementation of the procedures set out in sub-section a) above, during the period to which the documents refer; that the documents are drawn up in compliance with the applicable International accounting standards recognised in the European Union, pursuant to (EC) Regulation No. 1606/2002 of the European Parliament and Council dated July 19, 2002; that the documents correspond to the entries in the books and accounting records; that the documents are able to provide a true and fair representation of the Company’s equity, economic and cash flow position and of the set of businesses included in the consolidation; that the report on operations referred to the annual and consolidated Financial Statements, includes a reliable analysis of the trend and the operating results, as well as the situation relating to the Company and the set of businesses included in the consolidation, together with a description of the principal risks and uncertainties to which they are exposed; that the interim report on operations referred to the abridged half-yearly Financial Statements includes a reliable analysis of the information set out in Article 154-ter, paragraph 4 of the Unified Finance Law (TUF).
The Board of Directors has also conferred on the Responsible Officer all organisational and management powers required to exercise the duties attributed by current laws and regulations, by the Company Bylaws and by the Board of Directors. The Responsible Officer is granted full economic autonomy in order to exercise the powers conferred on him. The Board of Directors supervises to ensure that the Responsible Officer has adequate means and powers to perform the duties assigned to him, as well as actual compliance with the administrative and accounting procedures. For this purpose the Responsible Officer reports directly to the Board of Directors, at least once a year, or through the CICRCG and to the Board of Statutory Auditors concerning the aspects within their area of jurisdiction. The Responsible Officer reports promptly to the delegated administrative body and to the Board of Directors concerning any aspects of significance which the Officer deems need to be declared in the certificate envisaged under Article 154-bis of the Unified Finance Law (TUF), if they are not corrected. The Responsible Officer attends the Board of Directors' meetings which include, on the
73 Agenda, an examination of the economic and financial data, and has direct access to all the information necessary to prepare the accounting data, without requiring any authorisation; the Responsible Officer shares the internal flows for accounting purposes and approves all the company procedures which have an impact on the Company's economic, equity and cash flow position. The Responsible Officer reported to the CICRCG and to Board of Directors concerning the adequacy and suitability of the powers and means conferred by the Company's Board of Directors, confirming that he had had direct access to all the information necessary to prepare the accounting data without needing any authorisation, had shared the internal flows for accounting purposes and had approved all the Company procedures which had an impact on the Company's economic, equity and cash flow position. During the financial year the Responsible Officer had issued the declarations and attestations envisaged under Article 154- bis of the Unified Finance Law (TUF).
15. DIRECTORS’ INTERESTS AND TRANSACTIONS WITH RELATED PARTIES The Company had established the principles of conduct, applicable since 2002, in order to execute transactions with related parties which were designed to assure a substantial and procedural correctness and transparency in the transactions executed by the Company, directly or through subsidiaries with parties related to it. The Company subsequently approved a specific and structured procedure for transactions with related parties (“TRP Procedure”) on November 3, 2010 following Consob's adoption of special regulations governing transactions with related parties in March 2010 (“TRP Regulations”). In particular, the Procedure adopted by the Company establishes procedural rules designed to enhance further the substantial and procedural transparency of the transactions executed by Pirelli with related parties. The procedural policies adopted by the Company are more rigorous compared to the requirements envisaged by the TRP Regulations; in fact: Pirelli adopted very restrictive low thresholds and established higher qualitative thresholds not prescribed by the Consob Regulations. In particular, Pirelli defined a very low threshold (150 thousand euro) (that has the consequence of exempting the transaction from the application of the procedure) and a “qualitative” threshold that qualifies a transaction as being of “greater significance” (for which prior approval by the Board of Directors is required, in addition to approval by the Independent Directors), regardless of the corresponding value (even if lower than the thresholds established by the Procedure) when the transaction concerned has a significant impact on Pirelli's business activities or may impact its
74 managerial autonomy due to its nature, strategic importance, extent or commitments. Furthermore, the TRP Procedure established that the opinion of the Committee for Transactions with Related Parties is also binding in the case of less significant transactions and has decided not to avail itself of the so-called whitewash mechanism in the event of an unfavourable opinion when concerning transactions with related parties of greater significance. Pirelli has envisaged that the Committee invited to express its opinion on the transactions with related parties is always to be composed exclusively of Independent Directors, thereby, confirming the importance acknowledged to the role of the Independent Directors (and not only in the case of transactions with related parties of greater significance, as envisaged by the TRP Regulations). Therefore, the mandatory approval by the competent Committee is also envisaged in this case, by adopting a more rigorous approach for all transactions with related parties compared to the requirements established in the Consob Regulations, (therefore, also for transactions of “lesser significance” and not only transactions of “greater significance” as prescribed by Consob. The Board has deemed that the advisory committees set up within the Board of Directors shall comply with the characteristics and requirements envisaged by the Consob Regulations and those established by the TRP Procedure, and accordingly, has conferred the powers of the Committee for Transactions with Related Parties on the CICRCG, with the sole exception of the responsibilities concerning the remuneration of Directors and Executives with strategic business responsibilities, which are assigned to the Remuneration Committee. Taking into account that the Company has endorsed the Consob recommendation that envisages reviewing the TRP Procedure at least every three years, the Board of Directors duly approved some marginal amendments to the TRP Procedure, in the meeting held on November 5, 2013 (therefore, after three years have elapsed from the adoption of the TRP Procedure), confirming the solution adopted during 2010, taking into account the opinion expressed by the Committee for Transactions with Related Parties and the evaluation expressed by the Board of Statutory Auditors with the unanimous vote of the respective members. The reader is referred to the TRP Procedure published on the Pirelli Internet website for further information.
16. BOARD OF STATUTORY AUDITORS The Board of Statutory Auditors is entrusted with monitoring the following aspects, in accordance with the law and the Company Bylaws:
75 - compliance with the law and the Company Bylaws; - compliance with the principles of sound administration; - the adequacy of the organisational structure concerning the aspects within its area of jurisdiction, the internal control system and the administrative and accounting system, as well as the dependability of the latter to represent correctly the operating results; - the procedures to implement effectively the corporate governance rules envisaged by the code of conduct that Pirelli has declared to comply with; - the adequacy of the instructions issued by the Company to the subsidiaries in relation to the obligations to report price sensitive information56. The Board of Statutory Auditors monitors the following aspects, following the coming into force of Legislative Decree No. 39/2010: a) the financial reporting process; b) the efficiency of the internal control, internal audit and risk management systems; c) the statutory audit of the annual accounts and the consolidated accounts; d) the independence of the statutory auditor or the statutory auditing company, in particular, concerning services other than auditing services rendered to the company whose accounts are to be audited. The Board of Statutory Auditors carries out its duties by exercising all the powers conferred on it by law and by being able to rely on a constant and detailed information flow from the Company, also outside the periodic meetings of the Board of Directors and the Committees. The Board of Statutory Auditors takes part in the work performed by the Remuneration Committee and the Committee for Internal Control, Risks and Corporate Governance, when performing its functions, besides attending all the meetings of the Board of Directors and the Shareholders' Meetings and the Chairman of the Board of Statutory Auditors is invited to attend the meetings of the Appointments and Succession Committee and of the Strategies Committee. Moreover, the Auditor, Antonella Carù was invited to become a member of the Supervisory Body, in accordance with Legislative Decree No. 231/2001.
16.1 Appointment of Auditors. At the Date of the Report the Board of Statutory Auditors is composed of three Statutory Auditors and two Alternate Auditors. The Shareholders' Meeting convened to approve the Financial Statements referred to 2012 resolved to amend the Company Bylaws by increasing the number of Alternate Auditors
56 Now referred to as “privileged information” (Article 114 of the Unified Finance Law (TUF).
76 from two to three, in order to enable compliance with the applicable legislation governing the balance between genders when Auditors are appointed and when they are substituted during the mandate, and so as to structure suitable succession mechanisms able to guarantee compliance with the balance between genders. This amendment will become applicable from the first renewal of the control body after Law No. 120 dated July 12, 2011 enters into force, and therefore, from the forthcoming renewal of the Board of Statutory Auditors. In order to permit the minority shareholders to elect one Statutory Auditor and one Alternate Auditor the appointment is envisaged to be based on the so-called “voting slate”, according to which one Statutory Auditor (who will be Chairman of the Board) and one Alternate Auditor are taken from the list that obtained the second highest number of votes (so-called minority slate). If several slates obtained the same number of votes, then a new ballot vote will be conducted among these slates by all the persons entitled to vote and in attendance at the Shareholders' Meeting and the candidates on the slate that obtains a simple majority of the votes will be elected. The remaining members of the Board are taken instead from the slate that obtained the highest number of votes (so-called majority slate). Again with the aim of foreseeing suitable supplementary criteria which make it possible to ensure compliance with the balance between genders within the Board of Statutory Auditors, the Company Bylaws also envisage (i) that the slates which indicate a number of candidates equal to or greater than three, considering both sections, must include candidates of different gender in the section of the slate that refers to Statutory Auditors and in the section of the slate that refers to Alternate Auditors and (ii) an automatic progressive substitution mechanism if the application of the voting slate mechanism does not assure the required minimum number of Statutory Auditors, or the required Alternate Auditors referred to the gender less represented. Shareholders which, alone or together with other shareholders, represent at least 1 percent of shares with voting rights in the ordinary Shareholders' Meeting or the smaller percentage required by the regulatory discipline issued by Consob57 are entitled to present slates. The slates are to be registered at the Company's registered office at least 25 days prior to the date foreseen for the Shareholders' Meeting convened to resolve this point, unless extended, as envisaged by the applicable legislation. The Reader is referred to the current legislation,
57 Refer to Consob Resolution No. 18775 dated January 29, 2014 that established that the percentage shareholding required for shareholders to present the lists of candidates to be elected to the administrative and control bodies of Pirelli & C. corresponds to 1% of the share capital with voting rights in the ordinary Shareholders' Meeting referred to the 2014 financial year.
77 with regard to the latter point58, however, it is important to remember that if only one slate is presented, or if multiple slates are presented by shareholders who are related, then the slates may be presented up to the third day after the deadline for the presentation of the slates (25 days prior to the Shareholders' Meeting), and the thresholds required for their presentation are reduced by half. Each shareholder may present or participate in the presentation of only one slate. The following are to be annexed to the slates, also in accordance with the current legislation: - information concerning the identity of the shareholders who presented the slates, with details of the percentage shareholding owned and a certificate that attests the ownership of the foregoing shareholding; - a declaration by shareholders other than the shareholders who hold a controlling, or relative majority shareholding, alone or jointly, to attest that they are unrelated; - the description of the professional curriculum of the designated persons and the declarations in which the individual candidates accept the candidacy and attest under their own responsibility that there are no grounds for their ineligibility or incompatibility and that they satisfy the requirements for the office, as prescribed by law or by the Company Bylaws. Slates presented which fail to comply with the foregoing requirements are deemed not to have been presented. Each candidate may appear on only one slate, under penalty of ineligibility. The slates are organised in two sections: one section for candidates to the position of Statutory Auditor and the other for candidates to the position of Alternate Auditor. The first candidate of each section must be identified from among the persons enrolled in the Register of Statutory Auditors who have worked as statutory auditors for a period of no less than three years. Each person entitled to vote may vote for only one slate. In the case of death, waiver or forfeiture of a Statutory Auditor, then the position shall be filled by the Alternate Auditor chosen from the same slate as the former auditor no longer in office. If the succession does not enable a Board of Statutory Auditors to be reconstituted in compliance with the applicable legislation, also in relation to the balance between genders, then the position shall be filled by the second Alternate Auditor drawn from the same slate. If it is subsequently necessary to substitute another Auditor drawn from the slate that
58 Issuers' Regulation: Article 144-quinquies and following articles. Moreover, CONSOB disseminated “Communication No. DEM/9017893 dated 26-2-2009” containing the recommendations regarding the “Appointment of members of administration and control bodies”.
78 obtained the highest number of votes, then in any event the position shall be filled by the additional Alternate Auditor drawn from the same slate. If the Chairman of the Board of Statutory Auditors is to be substituted, then the position as Chairman is assumed by the Auditor included in the same slate as the former Chairman, in accordance with the order of the slate concerned, in any event, without prejudice to satisfying the requirements for the office, as prescribed by law or by the Company Bylaws and complying with the balance between genders envisaged by the applicable pro tempore legal and/or regulatory provisions; if it is not possible to proceed with the substitutions in accordance with above-mentioned criteria, a Shareholders' Meeting will be convened to supplement the Board of Statutory Auditors and the Meeting shall resolve by relative majority vote. When the Shareholders' Meeting is required to appoint the Statutory Auditors and/or Alternate Auditors necessary to supplement the Board of Statutory Auditors then the Meeting shall proceed as follows: if auditors elected from the majority slate are to be substituted, the appointment shall be made by relative majority, without slate constraints, in any event, without prejudice to complying with the balance between genders envisaged by the applicable pro tempore legal and/or regulatory provisions; whereas, if auditors elected from the minority slate are to be substituted, the Shareholders' Meeting shall substitute them by relative majority vote, selecting them, where possible, from among the candidates on the slate that included the Auditor to be substituted, and however, complying with the principle of the necessary representation of minorities for which the Company Bylaws assure the right to participate in the appointment of the Board of Statutory Auditors, in any event, without prejudice to complying with the balance between genders envisaged by the applicable pro tempore legal and/or regulatory provisions. The principle of necessary representation of minorities shall be deemed to be complied with in the event of appointing Statutory Auditors who were candidates in the minority slate, at the time, or on other slates differing from the slate that had obtained the highest number of votes when the Board of Statutory Auditors was duly appointed. If only one slate has been presented, the Shareholders' Meeting shall vote on that slate; if the slate obtains the relative majority then the candidates indicated in the respective section of the slate shall be appointed as the Statutory Auditors and Alternate Auditors; the person indicated in first place in the cited slate shall be appointed as the Chairman of the Board of Statutory Auditors. The Shareholders' Meeting shall resolve with the majorities required by law when appointing the Auditors, who, for whatever reason, were not appointed in accordance with the procedure described, in any event, without prejudice to complying with the balance between genders
79 envisaged by the applicable pro tempore legal and/or regulatory provisions. Outgoing Auditors may be re-elected. The meetings of the Board of Statutory Auditors may be attended – if the Chairman or whoever acts on his/her behalf establishes the need – by means of telecommunications media, which permit all the persons in attendance to participate in the discussion and obtain information on an equal basis.
16.2 Auditors. The Shareholders' Meeting held on May 10, 2012 appointed the Board of Statutory Auditors for the 2012 - 2014 financial years, by appointing Francesco Fallacara (appointed Chairman since drawn from the slate presented by the minorities): Antonella Carù and Enrico Laghi as Statutory Auditors and by appointing Umile Sebastiano Iacovino and Andrea Lorenzatti (drawn from the minority slate) as Alternate Auditors. The appointment was based on the voting slate system. The slate presented by the members of the Pirelli & C. Shareholders' Agreement (“Sindacato di Blocco Azioni Pirelli & C.”) obtained about 78% of the votes of the share capital with voting rights represented in the Shareholders' Meeting, while the minority slate presented by a group of asset management companies and financial intermediaries59 obtained approximately 22% of the votes of the share capital with voting rights represented in the Shareholders' Meeting. The Shareholders' Meeting also established the annual gross fee to be paid to each Statutory Auditor at euro 50,000 and the annual gross fee to be paid to the Chairman of the Board of Statutory Auditors at euro 75,000. Furthermore, the Statutory Auditor invited to take part in the Supervisory Body, pursuant to Legislative Decree No. 231/2001 (Antonella Carù) is to be paid an additional annual gross fee of euro 25,000. Table No. 5 illustrates the composition of the Board of Statutory Auditors at the Date of the
59 Anima SGR S.p.A., manager of the Prima Geo Italia and Anima Italia funds; APG Algemene Pensioen Groep N.V. manager of the Strichting Depositary APG Developed Markets Equity Pool fund; Arca SGR S.p.A. manager of the Arca Azioni Italia and Arca BB funds; AZ Fund Management S.A. manager of the AZ Fund 1 Italian Trend fund; Credit Suisse Fund Management SA manager of the Credit Suisse Portfolio Fund (LUX) Reddito (Euro) and CS Equity Fund (LUX) Italy funds; Eurizon Capital SGR S.p.A. manager of the Eurizon Azioni Italia fund; Eurizon Capital SA manager of the following funds: Eurizon Stars Fund European Small Cap Equity, Eurizon Eurizon Stars Fund – Italian Equity, Eurizon Easy Fund Equity Consumer Discretionary LTE, Eurizon Easy Fund Equity Small Cap Europe; Fideuram Investimenti SGR S.p.A. Manager of the Fideuram Italia fund; Fideuram Gestions SA manager of the following funds: Fonditalia Equity Italy, Fonditalia Euro Cyclical, Fideuram Fund Equity Italy, Fideuram Fund Equity Europe Growth and Fideuram Fund Equity Europe; Interfund Sicav manager of the Interfund Equity Italy funds; JP Morgan Asset Management (UK) Limited manager of the following funds: JPMorgan Funds, Commingled Pension Trust Fund (International Equity Index) of JPMorgan Chase Bank N.A., Commingled Pension Trust Fund (Intrepid International) of JP Morgan Chase Bank N.A., JP Morgan European Investment Trust Plc, JP Morgan Fund Icvc-JPM Europe Dynamic (formerly UK) Fund, JPM Fund Icvc – JPM Europe Fund, JP Morgan International Equity Index Fund, JP Morgan Intrepid European Fund and JP Morgan Intrepid International Fund; Mediolanum International Funds Limited – Challenge Funds; Mediolanum Gestione Fondi SGR S.p.A. manager of the Mediolanum Flessibile Italia fund; Pioneer Investment Management SGR S.p.A. manager of the Pioneer Italia Azionario Crescita fund and Pioneer Asset Management S.A.
80 Report. The slate of positions held by Statutory Auditors in joint-stock companies, limited liability companies and companies with unlimited responsibility is published by Consob on its Internet website. It is important to note that, at the Date of the Report, no Statutory Auditor in office notified that he had exceeded the aggregate number of positions of administration and control envisaged under Article 144-terdecies of the Issuers' Regulations. All the Statutory Auditors can be qualified as independent on the basis of the criteria envisaged by the same Self-Regulatory Code referred to Directors, in line with the provisions contained in the Self-Regulatory Code 60 and as expressly ascertainment by the Board of Statutory Auditors, based on the information provided by the Statutory Auditors and the information available to the Board of Statutory Auditors, as well as in relation to Consob Communication No. 8067632 dated July 17, 200861. The Procedure for Transactions with Related Parties qualifies Statutory Auditors as parties related to the Company, in compliance with the regulatory provisions. Accordingly, if the Statutory Auditor has an interest in a given Company transaction, the cited procedure shall apply, as described in greater detail in the preceding section “Directors' interests and transactions with related parties”. It follows that the Board of Directors receives adequate information concerning the nature of the relationship and how the transaction is to be executed, in line with the provisions set out in the Self-Regulatory Code62.
16.3 Activities of the Board of Statutory Auditors. The Board of Statutory Auditors held 8 meetings during the financial year and the percentage attendance of the Auditors was 100%. The reader is referred to table 5 for a detailed representation of the attendance of the individual members of the Board of Statutory Auditors in the meetings held during the 2013 financial year. Moreover, it is important to note that besides attending the Shareholders' Meetings and the meetings of the Board of Directors, the members of the Board of Statutory Auditors also attended the meetings held during the financial year by the CICRCG and the Remuneration Committee, a circumstance that characterises the rules of corporate governance adopted by the Company and offers the entire Board the possibility of overseeing directly the activities of the Committees and to perform the control functions assigned to it more effectively.
60 Self-Regulatory Code Application Criterion 10.C.1. 61 CONSOB Communication No. DEM/DCL/DSG/8067632 dated 17-7-2008 concerning “Situations of incompatibility of the members of control bodies, pursuant to Article 148, paragraph 3, sub-section c) of the Unified Finance Law (TUF)”. 62 Self-Regulatory Code Application Criterion 8.C.4.
81 The Chairman of the Board of Statutory Auditors also attended the meetings of the Appointments and Succession Committee and of the Strategies Committee. During the 2013 financial year, the Board of Statutory Auditors monitored compliance with the law and the Company Bylaws, compliance with the principles of sound administration and the adequacy of the Company's organisational structure, the internal control system and the administrative and accounting system, as well as the dependability of the latter to represent correctly the operating events. The Board also monitored the correct implementation of the corporate governance rules envisaged by the codes of conduct prepared by the companies that manage the regulated markets or by trade associations, which the company declares it abides by and the adequacy of the instructions the Company issues to the subsidiaries in relation to the obligations to disclose price sensitive information63. The Board of Statutory Auditors reported on the activities performed to the Shareholders' Meeting held in May 2013 and expressed its opinion on the aspects within its area of jurisdiction concerning the Directors' proposal regarding the allocation of profits and the size of the dividend to be distributed. The Board of Statutory Auditors monitored64 the independence of the auditing company checking compliance with the provisions applicable to this aspect and the nature and extent of the services other than auditing the accounts which are rendered to Pirelli & C. and to its subsidiaries by the same auditing company and by other companies in the same network as the auditing company. Moreover, the Board of Statutory Auditors, in addition to having verified the correct application of the evaluation criteria and procedures adopted by the Board of Directors to assess the independence of its members, monitored compliance with the TRP Procedure adopted by Pirelli (also considering the amendments introduced during the 2013 financial year), with the principles indicated in the TRP Regulations, as well as the Company's compliance with such TRP Regulations. The Board of Statutory Auditors65 coordinated its activities with the Internal Audit Department, and as has been stated, the respective members attended all the meetings of the CICRCG. The Board held periodic meetings with the representatives of the Auditing Company, pursuant to Article 150, paragraph 3 of Legislative Decree No. 58/1998 which did not reveal significant data and information worthy of being reported.
63 Now referred to as “privileged information” (Article 114 of the Unified Finance Law (TUF)). 64 Also in line with the Self-Regulatory Code: Application Criterion 8. 65 Self-Regulatory Code Application Criteria 8.C.6. and 8.C.7.
82 Moreover, the Board of Statutory Auditors expressed opinions during the financial year, pursuant to Article 2386 and Article 2389 of the Italian Civil Code. With regard to the surveillance activity to monitor the effectiveness of the internal control systems, as stated previously, the Board of Statutory Auditors has the tools required for the new duties through its attendance in the meetings of the Committee for Internal Control, in particular, considering that the Board has received: (i) reports from the Internal Audit Management, at least every quarter; (ii) the audit plan once a year; (iii) the risk assessment and risk management plan once a year. Lastly, the Board of Statutory Auditors examined in advance the results of the impairment test procedure which Pirelli decided to implement in compliance with the provisions of international accounting standard IAS 36.
17. RELATIONS WITH SHAREHOLDERS Pursuing its tradition of transparency, the Company manages with special attention the relations with Shareholders, with Investors (institutional and private investors), with financial analysts, with other market players and with the financial community, in general, in compliance with their reciprocal roles and by promoting periodic meetings in Italy and abroad. Moreover, the Investor Relations Department was set up from March 1999 in order to favour an on-going dialogue with the financial market and was entrusted to Ms. Valeria Leone from October 2008. The Pirelli Internet website dedicates a section called Investors designed to establish an open, immediate and transparent dialogue with all parties requiring financial information concerning Pirelli; the Investors section includes the details required for an initial contact with Pirelli for evaluation purposes: the details provided include the characteristics which identify the Company, economic and financial data, the drivers of the various businesses in which the Pirelli Group is involved, the opinions expressed by the financial analysts, all the documentation made available in the institutional meetings with the financial community, including the accounting and corporate documentation. Furthermore, Pirelli has prepared a section on the website dedicated to Retail investors in the case of individual investors: (http://www.pirelli.com/corporate/en/investors/individual_investors/), this section focuses on the main events involving the Company, the performance of the Company's share, the implementation of strategies, business development, economic and financial results, Pirelli and Pzero innovation/products. The services offered include the following: the weekly Stock
83 Exchange report, the share performance calculation, the quarterly Newsletter IN, the Blog (Investor Channel) and E-mail/SMS Alert. In addition, a section of the website is dedicated to the Common Representative of the Company's savings shareholders and to information of interest for that category of shareholders. The Investor Relations has an e-mail address ([email protected]) to facilitate the dialogue with the Company; answers are normally provided in 24 hours to the requests received via this e- mail address, while the Investors-Contacts section includes contact information for the individual members of the IR team for specific requests from individual and institutional analysts and investors. The Pirelli & C. top management and Investor Relations also use other typical financial communication tools in order to facilitate the knowledge of the Company's strategy, business development and the results achieved, for example: road shows, conference calls, one to one meetings and the participation in trade conferences for the businesses in which the Group is involved. Furthermore, the Company's culture includes combining profitability and sustainability in business and has received awards since it has been included in numerous world-wide assessment indexes relating to corporate social responsibility, an area in which the Company holds an acknowledged leadership position. The Company also intensified the dialogue with “Ethical investors” by participating in international conferences concerning governance and sustainability and by organising road shows dedicated to SRI funds in the principal financial centres.
18. SHAREHOLDERS' MEETINGS The Shareholders' Meeting is convened as required by law and by the Company Bylaws by means of a Notice of Call published on the Pirelli Internet website. The Notice of Call is generally published at least thirty days prior to the date fixed for the first call of the meeting, and if Shareholders' Meetings are convened to elect members of the administration and control bodies, then the publication is made at least forty days prior to the date of the meeting. The Notice of Call is published (in full or as an abstract) in at least one national daily newspaper and is also sent to the stock exchange operator. The Notice of Call must include the details of the date, time and place of the meeting and the list of topics to be discussed. The Notice of Call must include, inter alia, a description of the procedures which the shareholders are required to comply with to attend the meetings and to exercise their voting rights in the meeting, as well as information concerning the following aspects (i) the right to
84 ask questions prior to the meeting; (ii) the time limits and procedures to exercise the right to supplement the Agenda; (iii) the proxy voting procedure; (iv) the identity of the party (that the Company may have designated to confer proxy voting, as well as the procedures and time limits to confer the proxies). The Shareholders' Meeting cannot resolve on matters which have not been included on the Agenda. Shareholders who, alone or together, represent at least one fortieth of the share capital may request to supplement the list of topics to be discussed, or present additional proposals to be resolved on the topics already included in the Agenda within ten days from the date of publication of the Notice to convene the Shareholders' Meeting (unless otherwise provided by law), indicating the respective motivations. The Shareholders' Meeting is empowered to resolve, inter alia, the following matters in ordinary or extraordinary sessions: (i) the appointment and revocation of the members of the Board of Directors and the Board of Statutory Auditors and concerning their fees and responsibilities, (ii) approval of the Financial Statements and the allocation of profits, (iii) purchase and sale of treasury shares, (iv) amendments to the Company Bylaws, (v) approval and amendment of the regulations governing the proceedings of the shareholders' meeting (vi) the issuance of convertible bonds. The Shareholders' Meeting may be held in Italy, and also outside the Company's registered office, and the ordinary session must be convened within 180 days from the end of the financial year, pursuant to Article 7.4 of the Company Bylaws. The Shareholders' Meeting is convened in single call and the majorities envisaged for the second call of the ordinary Shareholders' Meeting or for the third call of the extraordinary Shareholders' Meetings shall apply. In this latter case, the Shareholders' Meeting is convened in single call, with the exception of specific matters for which the laws and regulations envisage a different majority: in the ordinary session: o the Shareholders' Meeting shall be deemed validly constituted whatever portion of the share capital is represented by the shareholders in attendance and resolves with the absolute majority of the share capital represented; in the extraordinary session: o the Shareholders' Meeting shall be deemed validly constituted with the presence of shareholders representing at least one fifth of the share capital and resolves with the favourable vote of at least two thirds of the share capital represented. Shareholders are entitled to view all the documents filed at the Company's registered office
85 in the case of Shareholders' Meetings already called and to obtain a copy thereof at their own expense. The proceedings of the Shareholders' Meetings are regulated by the law, by the Company Bylaws and by the Regulations for Shareholders' Meetings, duly approved by the Shareholders' Meeting held on May 11, 2004 and as subsequently amended by the Shareholders' Meeting held on April 23, 200766. Following the changes introduced by Legislative Degree No. 27/2010 - which introduced to Italian legislation the so-called record date mechanism - the shareholders entitled to attend Shareholders' Meetings and entitled to cast their vote are those shareholders who, based on a communication from the intermediary to the Company, are entitled to attend the meeting and cast their vote at the close of the accounting day on the seventh trading day prior to the date set for the meeting in only call. The credit and debit records performed on accounts after this deadline will not influence the entitlement to vote at the Shareholders' Meeting. Shareholders with voting rights may be represented by means of a proxy issued in accordance with the procedures envisaged by the applicable law and regulations.
2013 Shareholders' Meetings. One Shareholders' Meeting was held during the 2013 financial year, on May 13, 2013, in single call with the participation of approximately 68.95% of the ordinary share capital to discuss (i) the approval of the Financial Statements as of December 31, 2012 (approved by the favourable votes of 99.89% of the share capital represented at the meeting); (ii) the appointment of three Directors and/or the reduction of the number of members of the Board of Directors (approved by the favourable votes of approximately 99,95% of the share capital represented at the meeting); (iii) a Consultation on the Remuneration Policy (approved by the favourable votes of 98.59% of the share capital represented at the meeting); (iv) the acquisition and disposal of treasury shares (approved by 95.18% of the share capital represented at the meeting); (iv) an amendment of the Company Bylaws (approved by 68.9% of the share capital represented at the meeting). The following documents are available on the Internet website: (i) Notice of Call; (ii) a copy of the Minutes of the Shareholders' Meeting; (iii) a summary report on the votes cast; (iv) documents, reports and resolution proposals to be examined by the Shareholders' Meeting (v) the press release distributed by the Company outlining the proceedings of the Shareholders'
66 The Regulations for Shareholders’ Meetings are detailed at the end of the Report and are available on the Internet website.
86 Meeting.
Shareholders' Meeting of savings shareholders. As far as the Shareholders' Meeting of savings shareholders is concerned this Meeting is convened by the Common Representative of the Company's savings shareholders, or by the Company's Board of Directors, whenever they deem it appropriate or when the Meeting is to be convened, as provided for by law. The special Shareholders' Meeting of savings shareholders is chaired by the Common Representative of the Company's savings shareholders or, in his absence, by the person elected with the favourable vote of the majority of the share capital represented at the Shareholders' Meeting. Pursuant to the Company Bylaws67 the expenses relating to the organisation of the special category Shareholders' Meeting and the remuneration of the Common Representative are to be borne by the Company. The Shareholders' Meeting of savings shareholders was held on January 31, 2012 and appointed prof. Giuseppe Niccolini (substituting Mr. Giovanni Pecorella) as the Common Representative for savings shareholders referred to the 2012-2014 financial years (with the favourable vote of 99.941% of the category share capital in attendance at the Shareholders' Meeting). The Meeting also established the respective fee of 15 thousand euro. In addition, the meeting of the savings shareholders' unanimously approved to establish the fund for the expenses necessary to protect the common interests of the category, anticipated by the Company.
19. CHANGES OCCURRING AFTER YEAR-END The Report takes into account the changes which occurred from the end of the 2013 financial year up to the Date of the Report.
67 Article 6 of the Company Bylaws.
87 Tables
Table 1: Share capital structure The exact composition of the share capital is shown below. No. of shares % of share capital Listing Ordinary shares* 475,740,182 97.49% Listed on the Italian Electronic Stock Exchange (MTA) organised and managed by Borsa Italiana S.p.A. – Blue Chip Segment. Savings shares** 12,251,311 2.51% Listed on the Italian Electronic Stock Exchange (MTA) organised and managed by Borsa Italiana S.p.A. – Blue Chip Segment. *Code reference ISIN IT0000072725 **Code reference ISIN IT0000072733
The shares have a nominalvalue of zero
88 Table 2: Main Shareholdings
Listed below are the entities which, according to the information published by Consob at the Date this Report was published, hold voting shares in the Ordinary Shareholders' Meeting amounting to more than 2% of the ordinary capital
Direct Shareholder % quota of Voting Capital % quota of Ordinary Capital Registered owner or of which Without Voting of which Without Voting Rights entity at the top of the Type of % Name Voting Rights % Quota Voting Rights shareholder chain ownership Quota % Quota Quota % Entity % Quota Entity % Quota HARBOUR Owner 3,944 0.000 3,944 0.000 HARBOUR INTERNATIONAL FUND INTERNATIONAL FUND Total 3,944 0.000 3,944 0.000 Total 3,944 0.000 3,944 0.000 EDIZIONE SRL Owner 3,034 0.000 3,034 0.000 SCHEMATTRENTAQUA TTRO SPA Total 3,034 0.000 3,034 0.000
EDIZIONE SRL Owner 1,574 0.000 1,574 0.000 Total 1,574 0.000 1,574 0.000 Total 4,608 0.000 4.608 0.000 MALACALZA Owner 6,980 0.000 6,980 0.000 MALACALZA INVESTIMENTI SRL INVESTIMENTI SRL Total 6,980 0.000 6,980 0.000 Total 6,980 0.000 6.980 0.000 LAURO SESSANTUNO SPA Owner 5,850 0.000 5,850 0.000 CAM 2012 SPA Total 5,850 0.000 5,850 0.000 Owner 0,023 0.000 0,023 0.000 CAM PARTECIPAZIONI SPA Total 0,023 0.000 0,023 0.000 Owner 20,320 0.000 20,320 0.000 CAMFIN SPA Total 20,320 0.000 20,320 0.000 Total 26,193 0.000 26.193 0.000 MEDIOBANCA SPA* Owner 3,954 0.000 3,954 0.000 MEDIOBANCA SPA Total 3,954 0.000 3,954 0.000 Total 3,954 0.000 3,954 0.000 The information are relating to shareholders which, directly or indirectly, own more than 2% of the voting capital in the Company's Ordinary Shareholders' Meeting is taken from the Consob Internet website. In this regard, it is important to note that the information published by Consob on its website is based on the disclosures made by the entities required to comply with the obligations set out in Article 120 of the Unified Finance Law (TUF) and the Issuer Regulations. Such information may differ significantly from the actual situation, this is due to the fact that the obligation to disclose changes to ownership does not arise as a result of the mere change in the percentage owned, but only when “exceeding” or “falling below” predetermined thresholds (2%, 5%, and successive multiples of 5% up to the threshold of 30% and above this threshold, 50, 66.6%, 90% and 95%). For example, it follows that a shareholder (i.e. registered owner) that has declared to own 2.6% of the voting capital may increase its shareholding up to 4.9% without being under any obligation to notify Consob, in accordance with Article 120 of Unified Finance Law (TUF).
* It is important to note that Mediobanca S.p.A. attended the Shareholders' Meeting to approve the 2012 Financial Statements with a percentage of the share capital equal to 4.61%. This shareholding is still reported in the Company's shareholders register.
89 Table 3: Composition of the Board of Directors
The composition of the Board of Directors at the Date of the Report is shown below. Name Position In office from List Exec. Non- Indep. Indep. % BoD Date of first exec. TUF appointment in Pirelli & C. S.p.A. Marco Tronchetti Provera Chairman 21/04/2011 Maj. X 100% 07/05/2003 and CEO Alberto Pirelli Deputy 21/04/2011 Maj. X 86% 07/05/2003 Chairman CarloAcutis Director 21/04/2011 Maj. X 43% 07/05/2003
AnnaMariaArtoni Director 21/04/2011 Maj. X X X 100% 21/04/2011
GilbertoBenetton Director 21/04/2011 Maj. X 71% 07/05/2003
AlbertoBombassei Director 21/04/2011 Maj. X X X 71% 12/09/2006
FrancoBruni Director 21/04/2011 Min. X X X 100% 28/04/2005
LuigiCampiglio Director 21/04/2011 Maj. X X X 100% 29/04/2008
PaoloFiorentino* Director 21/10/2013 - X 100% 21/10/2013
JeanPaulFitoussi** Director 10/05/2013 - X X X 100% 10/05/2013
PietroGuindani Director 21/04/2011 Min. X X X 86% 21/04/2011
ElisabettaMagistretti Director 21/04/2011 Min. X X X 100% 21/04/2011
GaetanoMicciché*** Director 05/11/2013 - X - 05/11/2013
MassimoMoratti Director 21/04/2011 Maj. X 43% 07/05/2003
RenatoPagliaro Director 21/04/2011 Maj. X 100% 29/04/2008
LuigiRoth Director 21/04/2011 Maj. X X X 100% 23/04/2007
LucaRovati** Director 10/05/2013 - X 75% 10/05/2013
Carlo Secchi Director - 21/04/2011 Maj. X X X 100% 19/02/2004 LID ManuelaSoffientini**** Director 01/03/2012 - X X X 100% 01/03/2012
ClaudioSposito* Director 21/10/2013 - X 100% 21/10/2013
Number of Board of Directors' meetings in the 2013 financial year: 7
Legend List: Maj./Min. depending on whether theDirector was elected froma listvoted by themajority or by a minority Exec.: if checked this indicates theDirector can bequalified as an ExecutiveDirector IndepNon-exec.: if checked.:if checked this this indicates indicates the Director theDirector can can be qualified bequalified as an as Independent a Non-ExecutiveDirector Director, in accordance with the criteria established by the Self-Regulatory Code. Indep. TUF: if checked this indicates that the Director meets the independence requirements established under Article 148, paragraph 3 of the Unified Finance Law (TUF).
% BoD: indicates the Director's presence, in percentage terms, at Board meetings. (The percentage is calculated by taking into account the number of meetings attended out of the number of meetings held during the Director's effective period in office) *TheDirector was appointed on 21/10/2013, in accordancewith Article2386 of theItalian Civil Codeand themandateexpires with theShareholders' Meeting to approve the 2013 financial statements. ** The Director was appointed by the Shareholders' Meeting on 10/05/2013 and the mandateexpires with the Shareholders' Meeting to approvethe 2013 Financial Statements. ***TheDirector was appointed on 05/11/2013, in accordancewith Article2386 of theItalian Civil Codeand themandateexpires with theShareholders' Meeting to approve the 2013 Financial Statements.
****TheDirector was appointed on 01/03/2012 in accordancewith Article2386 of theItalian Civil Codeand subsequently confirmed by theShareholders' Meeting on 10/05/2012 and themandate expires with the Shareholders' Meeting to approve the 2013 Financial Statements.
90 Directors who ceased to hold office during the financial year are indicated below:
In office from/to List Exec. Non- Indep. Indep. % BoDName Office exec. TUF
VittorioMalacalza Deputy from 21/04/2011 Maj. X 100% Chairman to 10/05/2013
Giulia Maria Ligresti Director from 21/04/2011 Maj. X 67% to 24/07/2013
Mario Greco* Director from 12/11/2012 - X 0% to 04/03/2013
Carlo Salvatori** Director from 26/07/2012 - X 100% to 16/10/2013
Legend
*The Director was appointed on 12/11/2012, in accordancewith Article2386 of theItalian Civil Codeand resigned on 04/03/2013. **The Director was appointed on 26/07/2012 in accordancewith Article2386 of theItalian Civil Codeand subsequently confirmed by the Shareholders' Meeting on 10/05/2013. The Director later resigned on 16/10/2013.
91 Table 4: Composition of Board of Directors' Committees. The composition of the Committees formed within the Board of Directors at the Date of the Report are shown below:
Committee for Internal Control, Risks and Corporate Governance Name Position Committee List Exec. Non-exec. Indep. % Committee member since CarloSecchi Chairman 21/04/2011 Maj. X X 100% FrancoBruni Member 21/04/2011 Min. X X 100% ElisabettaMagistretti Member 21/04/2011 Min. X X 100% LuigiRoth Member 21/04/2011 Maj. X X 94% Number of Committee meetings in the 2013 financial year: 17
Remuneration Committee Name Position Committee List Exec. Non-exec. Indep. % Committee member since
LuigiRoth* Chairman 21/04/2011 Maj. X X 100% AnnaMariaArtoni Member 21/04/2011 Maj. X X 100% LuigiCampiglio* Member 21/04/2011 Maj. X X 100% PietroGuindani Member 21/04/2011 Min. X X 80% Number of Committee meetings in the 2013 financial year: 5
Strategies Committee Name Position Committee List Exec. Non-exec. Indep. % Committee member since MarcoTronchettiProvera Chairman 21/04/2011 Maj. X 100% AlbertoBombassei Member 26/07/2012 Maj. X X 67% FrancoBruni Member 21/04/2011 Min. X X 100% PaoloFiorentino** Member 21/10/2013 - X - GaetanoMicciché** Member 05/11/2013 - X - RenatoPagliaro Member 21/04/2011 Maj. X 100% CarloSecchi Member 21/04/2011 Maj. X X 100% ManuelaSoffientini Member 25/07/2012 - X X 100% ClaudioSposito Member 21/10/2013 - X 100% Number of Committee meetings in the 2013 financial year: 3
Appointments and Succession Committee Name Position Committee List Exec. Non-exec. Indep. % Committee member since MarcoTronchettiProveraChairman 21/04/2011 Maj. X 100% LuigiCampiglio Member 21/04/2011 Maj. X X 100% LuigiRoth Member 21/04/2011 Maj. X X 100% Number of Committee meetings in the 2013 financial year: 2
Legend *: During the 2013 financial year the Board of Directors appointed the Director Roth – who was already a member of the Committee, - as Chairman of the Committee and appointed the Director Luigi Campiglio as a “new” member of the Committee following the resignation on August 5, 2013 of the Director Carlo Acutis as a member and Chairman of the Committee. **: No meetings of the Strategies Committee were held during the 2013 financial year subsequent to the appointment of the Directors Fiorentino, Micciché and Sposito as members of the Strategies Committee. List: Maj./Min. depending on whetherthe Auditorwas elected from the list voted by the majority orby a minority (Article 144-decies, of the Issuer Regulations). Exec.: if checked this indicates that the Director can be qualified as an Executive Director. Non-exec.: if checked this indicates that the Director can be qualified as a Non-executive Director.
Indep.: if checked this indicates that the Director can be qualified as an Independent Director, in accordance with the criteria established by the Self-Regulatory Code, specifying at the foot of the table whetherthese criteria have been supplemented oramended.
%. Committee: indicates the Director's presence, in percentage terms, at Committee meetings. (The percentage is calculated taking into account the number of meetings attended out of the number of meetings held during the Directors' effective period in office).
92 Committee Members who ceased to hold office during the financial year are indicated below: Name Office In office R.C. CICRCG Str. C. Appoint. % Committee from/to and Succ. C. Vittorio Malacalza Deputy from X X 0% Str. C. and 0% Chairman 21/04/2011 to Appoint. And Succ. 10/05/2013 C. Carlo Acutis* Director from X 100% 21/04/2011 to 17/07/2013 Francesco Chiappetta Executive with from X 100% strategic 21/04/2011 to responsibilities 31/01/2014 Legend Refer to the legend of the two previous tables.
93 Table 5: Composition of the Board of Statutory Auditors.
Name Position In office List Indep. - Self- % BoD % %CICRCG% %R.C. % since Regulatory B.S.A. Strategies Appoint. Code
Francesco Chairman 10/05/2012 Min. X 100% 100% 100% 100% 100% 100% Fallacara Enrico Laghi Statutory 10/05/2012Maj. X 100% 100% 88% - 80% - auditor Antonella Carù Statutory 10/05/2012Maj. X 100% 100% 100% - 80% - auditor Umile Alternate 10/05/2012Maj. ------Sebastiano auditor Iacovino Andrea Alternate 10/05/2012Min. ------Lorenzatti auditor
Position: indicates whether Chairman, Statutory Auditor or Alternate Auditor.
List: Maj./Min. depending on whether the Auditor was elected fromthelist voted by themajority or by a minority (Article144-decies of the Issuer Regulations). Indep.: if checked this indicates thattheAuditor can bequalified as an IndependentAuditor in accordancewith thecriteria established by theCode, specifying at the foot of the table whether the criteria have been supplemented or amended.
% B.S.A.: indicates the Auditor's presence, in percentage terms, at the Board of Statutory Auditors' meetings. % BoD: indicates the Auditor's presence, in percentage terms, at the Board of Directors' meetings.
% CICRCG: indicates the Auditor's presence, in percentage terms, at themeetings of theCommitteefor Internal Control, Risks and Corporate Governance. % Appoint. C.: indicates the Auditor's presence, in percentage terms, at the Appointments and Succession Committee's meetings. % R.C.: indicates the Auditor's presence, in percentage terms, at the Remuneration Committee's meetings. % Strategies.: indicates the Auditor's presence, in percentage terms, at the Strategies Committee's meetings.
It is importantto remember that the Chairman of the Board of Statutory Auditors is invited to take partin the Appointments and Succession Committee, and may also be invited to take part in the Strategies Committee. Regarding this point it must be observed that the Chairman of the Board of Statutory Auditors also attended all the meetings of the Strategies Committee to which he was invited.
No member of the Board of Statutory Auditors ceased to hold office during the 2013 financial year.
94 ANNEX A - List of main offices held by the Directors in other companies not belonging to the Pirelli Group
Marco Tronchetti Provera Marco Tronchetti Provera & C. S.p.A. Chairman Nuove Partecipazioni S.p.A. Chairman Mediobanca S.p.A. Deputy Chairman
Alberto Pirelli Canfin S.p.A. Director Lauro Sessantuno S.p.A. Director Nuove Partecipazioni S.p.A. Director FIN. AP di Alberto Pirelli & C. Sapa General Partner Intek Group S.p.A. Director
Carlo Acutis Vittoria Assicurazioni S.p.A. Deputy Chairman Banca Passadore S.p.A. Deputy Chairman YAFA S.p.A. Director YAM INVEST N. V. Surveillance Director Lauro Sessantuno S.p.A. Director
Anna Maria Artoni Artoni Group S.p.A. Sole Director Artoni Trasporti S.p.A. Managing Director CDA Linkiesta Director
Gilberto Benetton Edizione S.r.l. Chairman Atlantia S.p.A. Director Autogrill S.p.A. Chairman World Duty Free S.p.A. Director Mediobanca S.p.A. Director Sintonia S.p.A. Director
Alberto Bombassei Brembo S.p.A. Chairman NTV S.p.A. Director
Franco Bruni Unicredit Audit S.p.A. Director Pioneer Investment Management S.p.A Director
Luigi Campiglio Allianz Bank Financial Advisor Director
Paolo Fiorentino Unicredit Business Integrated Solutions Scpa Chairman NEEP Roma holding S.p.A. Chairman Officinae Verdi S.p.A. Deputy Chairman Unicredit Credit Managenet Bank S.p.A. Director and member of the Executive Committee A.S. Roma Director and member of the Executive Committee Unicredit Bank Austria AG Deputy Chairman
Jean Paul Fitoussi Intesa Sanpaolo S.p.A. Director Telecom Italia S.p.A. Director
Pietro Guindani Vodafone Omnitel N.V. Chairman Salini-Impregilo S.p.A. Director Assonime Director
95 Elisabetta Magistretti Mediobanca S.p.A. Director Luxottica Group S.p.A. Director
Gaetano Micciché Intesa Sanpaolo S.p.A. Director Banca IMI S.p.A. Managing Director Telecom Italia S.p.A. Director Prada S.p.A. Director
Massimo Moratti SARINT S.A Chairman SARAS S.p.A. Raffinerie Sarde Managing Director GUT Edizioni S.p.A. Director MASSIMO MORATTI & C. S.a.p.A. di Sole Director Massimo Moratti
Renato Pagliaro Mediobanca S.p.A. Chairman Telecom Italia S.p.A. Director Istituto Europeo di Oncologia s.r.l. Statutory Auditor
Luigi Roth Terna S.p.A. Chairman Terna Rete Italia S.r.l. Chairman Melior Valorizzazioni Immobili S.r.l. Chairman Alba Leasing S.p.A. Chairman Autostrada Torino – Milano S.p.A. Director
Luca Rovati Rottapharm S.p.A. Deputy Chairman Camfin S.p.A. Director Lauro Sessantuno S.p.A. Director Nuove Partecipazioni S.p.A. Director GWM Holding Director Greentech Energy System A/S Deputy Chairman
Carlo Secchi Mediolanum S.p.A. Chairman
Italcementi S.p.A. Director Mediaset S.p.A. Director
Manuela Soffientini Electrolux Appliances S.p.A. Chairman and Managing Director
Claudio Sposito Clessidra Sgr Chairman and Managing Director Buccellati holding Italia S.p.A. Deputy Chairman Jakal Group S.p.A. Director Beni Stabili Gestioni Sgr S.p.A. Director
96 Sustainability Report 2013 – Pirelli & C. S.p.A.
1 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
SUSTAINABILITY REPORT 2013 VOLUME 3 of ANNUAL FINANCIAL REPORT AT DECEMBER 31, 2013
Pirelli & C. S.p.A. – Milan
2 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
CONTENTS A Note on Methodology Chapter 1: Creation of Sustainable Value Chapter 2: Economic Dimension Chapter 3: Environmental Dimension Chapter 4: Social Dimension
Summary Tables Assurance Statement
3 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
A NOTE ON METHODOLOGY
The Pirelli Group Sustainability Report, in 2013 at the ninth edition, is the expression of a corporate culture based on the integration of economic, environmental and social choices, in line with the triple bottom line approach. For this reason, instead of being published separately, the description of Pirelli sustainable performance is included as an integral part of the Pirelli Annual Financial Report at December 31, 2013, of which it is the third volume:
Volume 1: Annual Financial Report at December 31, 2013; Volume 2: Annual Report on Corporate Governance and the Structure of Share Ownership 2013; Volume 3: Sustainability Report 2013.
In light of this integration, note that:
the Chairman’s Letter at the beginning of Volume 1 of the Pirelli Annual Financial Report addresses Group sustainability issues; the scope and reporting period of this annual report is the same as the Group’s Annual Financial Report at December 31, 2013 – Volume 1; this report gives a summary of the corporate identity, Group structure and operating performance in 2013, insofar as these topics are discussed in detail in Volume 1, to which reference is made for further information; the Summary Tables, found at the end of the report, link the specific GRI-G4 indicators with the principles of the Global Compact and the topics discussed both in this Volume and in Volumes 1 and 2.
The Sustainability Report has been drawn up according to theSustainability Reporting Guidelines issued by the Global Reporting Initiative – according to the Comprehensive option of the GRI-G4 version. It has also been prepared in accordance with the principles of completeness, materiality and responsiveness set out in Standard AA1000.
The analysis of sustainable performance is based on a set of Key Performance Indicators (KPIs), developed in accordance with the GRI-G4 indicators, the ten principles of the Global Compact (to which Pirelli adhered in 2004) while also taking account of data periodically monitored by the leading rating agencies of sustainable finance. The sections on economic and social dimensions have also drawn on the Reporting Standards issued by the Italian Sustainability Report Study Group (GBS – Gruppo di Studio per il Bilancio Sociale).
The contents of the report were determined according to their materiality, including the most important themes for the Company and of greatest interest to Group stakeholders. They highlight and explain the progress made in 2013 in relation to the contents of the 2012 report, with an overview of trends during the past three years as well as the new 2014 and/or multi-year targets. The management systems used to consolidate the data are CSR-DM (Corporate Social Responsibility Data Management), HSE-DM (Health, Safety and Environment Data Management), SAP-HR (SAP Human Resources) and HFM (Hyperion Financial Management).
The Sustainability Report was approved by the Board of Directors of the parent company Pirelli & C. on March 27, 2014 and was submitted for an Assurance Statement issued by an independent third party, SGS Italia S.p.A.
Finally, it is published – in Italian and English – in the Sustainability section of the Pirelli website.
To submit comments and ask for clarifications or further details, please refer to the Contacts published in the Sustainability section of the website. The Section also hosts the Sustainability Channel, , an interactive communication channel between Pirelli and the web community interested in sustainability news and events regarding the Group.
4 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
1. CREATION OF SUSTAINABLE VALUE
Founded in 1872 and listed on the Milan Stock Exchange in 1922, Pirelli makes tyres, which has been the core business of this Milan-based group for over a century.
Pirelli designs, develops, produces and sells tyres for automobiles, industrial vehicles and motorcycles. It manufactures tyres in 13 countries around the world – Argentina, Brazil, China, Egypt, Germany, England, Italy, Mexico, Romania, Russia, Turkey, United States and Venezuela – and operates a far-flung sales network serving over 160 countries.
Pirelli business operations are represented by two main segments. The Consumer business (accounting for about 70% of total net sales), which makes tyres for automobiles, Sport Utility Vehicles (SUV), light commercial vehicles and motorcycles. The Industrial business (accounting for about 30% of net sales) makes tyres for buses, trucks and agricultural equipment.
These businesses are focused in turn on two different sales segments: the original equipment segment, which directly targets automotive makers, and the replacement segment, represented by the replacement of tyres for vehicles already on the road.
Its technological know-how and innovative prowess have allowed Pirelli to strike agreements with the most prestigious car and motorcycle makers in the world.
Participating in sports competitions since 1907, Pirelli is the exclusive supplier to the Formula 1TM Championship for the three-year period 2014-2016 and the world Superbike Championship.
The excellence of its products, the fame of the Pirelli Calendar, the prestige of its participation in Formula 1™ and presence in the fashion industry contribute to the global success of the Pirelli brand that, according to the latest estimates by Interbrand, is worth euro 2.27 billion.
In line with its Premium and Green Performance strategy, Pirelli focuses constantly on quality, technology and low environmental impact products. In pursuing its objectives, Pirelli aims to combine economic profitability and social responsibility. In keeping with its century-plus industrial tradition, it continues to invest in international projects while maintaining strong roots in the local communities where it operates.
1.1 OWNERSHIP STRUCTURE OF PIRELLI & C.
On October 31, 2013, at the conclusion of consultations promoted by the Management of the Pirelli & C. S.p.A. Shareholders Agreement (Assicurazioni Generali S.p.A., Camfin S.p.A., Edizione S.r.l., Fondiaria-SAI S.p.A., Intesa Sanpaolo S.p.A., Mediobanca S.p.A., Massimo Moratti and Sinpar S.p.A.) agreed to dissolve the agreement “effective from today”, and thus prematurely in relation to its scheduled expiry on April 15, 2014. Therefore, since October 31, 2013 the participants have been definitively and irrevocably released from all the commitments and obligations resulting from the agreement.
The following graphic illustrates the Pirelli ownership structure at December 31, 2013 and a focus on the significant number of shares owned by foreign shareholders.
5 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
There were no significant changes in the scope of the Group during 2013. More details are provided in the “Consolidated Financial Statements” section of the Annual Financial Report 2013.
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1.2 SALES BY GEOGRAPHICAL AREA
In 2013 net sales totalled euro 6,146.160 million, up 1.2% from the previous year (euro 6,071.535 million), with 99.5% of net sales being generated by the Tyre Business, which is the core business of the Group. Excluding the exchange rate negative impact (-7.2%), the like-for-like figure was up 8.4%. A table illustrating the breakdown of Group sales by geographic area follows below:
(in migliaia di euro) 2013 2012 2011 2010
Europa: - Italia 379.451 6,17% 425.260 7,00% 479.838 8,49% 485.450 10,01% - Resto Europa 1.679.367 27,32% 1.688.549 27,81% 1.803.475 31,89% 1.503.531 31,01% - Russia 254.122 4,13% 255.160 4,20% 40.605 0,72% - - Nafta 682.053 11,10% 692.618 11,41% 561.320 9,93% 477.394 9,85% Centro e Sud America 2.174.235 35,38% 2.067.525 34,05% 1.915.467 33,87% 1.632.044 33,66% Asia/Pacifico 481.493 7,83% 420.400 6,92% 352.815 6,24% 286.922 5,92% Middle Est/Africa 495.439 8,06% 522.023 8,60% 501.273 8,86% 463.077 9,55% 6.146.160 100,00% 6.071.535 100,00% 5.654.793 100,00% 4.848.418 100,00% Green Performance revenues
Pirelli Green Performance tyres are simultaneously able to maximise respect for the environment and safety performance. To calculate Green Performance net sales, the Company refers to the currently most restrictive tyre labelling regulation, issued by the European Union, with the classification including those products whose environmental impact (rolling resistance) and safety performance (wet grip) falls in classes A, B and C of the European scale, considering the Group world- wide products.
The impact of Green Performance net sales as a percentage of total net sales of tyres at December 31, 2013 was about 42.4%, up from 39.6% in 2012. This figure is on the way to achieving the impact target, which is equal to about half of net sales by 2017.
1.3 BREAKDOWN OF EMPLOYEES BY GEOGRAPHICAL AREA AND GENDER
The Pirelli headcount at December 31, 2013 was 37,979 employees (37,338 in 2012 and 34,259 in 2011), for a net increase of 641 employees yoy, including 60 executives and staff employees and 581 blue collar employees.
For a complete snapshot of employees during the three-year period 2013-2012-2011, with a breakdown by gender, category, average age, incoming and outgoing flows, reference is made to the sections “Pirelli employees around the World” and “Diversity Management” in the “Social Dimension” chapter of this report.
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1.4 SUSTAINABILITY GOVERNANCE
“Sustainability Governance” at Pirelli means full integration of sustainability with the various aspects and ambits of business management. Sustainability represents the management system adopted by the Company and translates in the mapping, control and sustainable management of the economic, social and environmental impacts and opportunities connected with its own processes, products and services, in view of innovation and with the awareness of its role as a multinational group in a global context.
The Underlying Principles of Pirelli, the Corporate Policies which implement them and the business development plans combine a precautionary approach with the creation of value.
THE PRINCIPLES UNDERLYING THE PIRELLI SUSTAINABILITY MODEL
The Pirelli sustainability model is inspired by the United Nations Global Compact, the Stakeholder Engagement principles set out in AA1000 and the ISO 26000 Guidelines, embracing the entire value chain to preserve and develop group assets.
In October 2004, in a letter addressed to the Secretary General, Kofi Annan, Pirelli Group formally declared its adherence to the United Nations Global Compact and its commitment to observe and support its Ten Principles in the areas of human rights, labour standards, the environment and the fight against corruption. This letter is published in the Sustainability section of the Pirelli website.
Compliance of the Pirelli Sustainability Model with the AA1000 Principles and ISO26000 Guidelines was audited by a third party once again in 2013, as certified by the Assurance Statement at the end of this report.
UN Global Compact Lead
Pirelli belongs to the Global Compact Lead Companies, and since 2013 it has been a member of the Steering Committee of the Global Compact Lead. This initiative was officially launched in 2011 at the World Economic Forum in Davos by United Nations Secretary General Ban Ki-moon and the Director of Global Compact, Georg Kell.
The initiative is reserved to the global companies deemed capable by Global Compact to play an international leadership role on account of their own commitment to sustainable development, not only by complying with the ten principles of the Global Compact, but also by actively promoting the United Nations Millennium Development Goals.
Pirelli adheres to the "Blueprint for Corporate Sustainability Leadership", which offers leadership guidelines envisaged in the Global Compact that has been designed to inspire advanced sustainable and, above all, innovative performance in terms of management capacity for the creation of sustainable value. The Blueprint identifies three principal areas of interrelated and interdependent leadership criteria: (i) integration of the ten principles of the Global Compact in business activities and strategies; (ii) active participation in supporting the goals of the United Nations; (iii) establishing relationships, partnerships and activities with the other firms of the Lead, as well as with relevant bodies of the United Nations, in view of benefiting everyone.
As part of the Lead activities, Pirelli actively participated in the following activities in 2013:
Post-2015 Development Agenda, in which the participating Lead Companies contribute to identification of the United Nations goals with a post-2015 vision, given that the Millennium Development Goals will be revised in 2015. Shaping the Future of Reporting, in which the participating Lead Companies work on identifying the best practices for complete and transparent reporting. Creating Long-term Value for Companies and Investors, a joint effort by the UN Global Compact and the United Nations Principles for Responsible Investment (UNPRI) – in which Pirelli acts as co-chair – aimed at improving communication between companies and investors on environmental, social and governance issues.
On March 13, 2013, the Chairman and CEO, the CFO and the Sustainability Manager of Pirelli gave a briefing for investors. To do so, they used the dedicated Global Compact platform, explaining the ESG strategy of Pirelli based on the Value Driver Model, which guides the activities of the initiative Creating Long-term Value for Companies and Investors.
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The Sustainability Plan 2014-2017 with Vision to 2020 of Pirelli has been constructed according to the Value Driver Model, as will be described in more detail in the section of this report specifically dedicated to that topic.
The Values and the Ethical Code
The document outlines Pirelli’s sustainable approach to business, by imposing strict, uniform guidelines for professional practices that everyone working in, for and with the Company must obey. Approved by the Board of Directors of Pirelli & C. S.p.A. in 2003, the Ethical Code was amended in 2009 to bring it in line with the evolution of the Group’s sustainability strategy and to satisfy new market and corporate governance requirements. The updated version was approved by the Board of Directors of Pirelli & C.
Within the ambit of their own functions and responsibilities, the directors, statutory auditors, executives and employees of the Pirelli Group, as well as everyone else who works on behalf or in favour of the Pirelli Group inside and outside Italy, or who have business relationships with it (the “Addressees of the Code”) must comply with the principles and obligations set out in the Code. More specifically, the Code:
illustrates the values on which Pirelli ’s own business activities are based, i.e. fidelity, fairness, transparency, sustainable growth, customer focus, responsibility and results-oriented effort, professional excellence, innovation, quality and performance, integration and promptness; indicates the principles of conduct on which Pirelli bases its own business activity in internal and external relations; identifies the stakeholders with which Pirelli interacts, describing the sustainable approach that characterises their relationship with each one of them; imposes appropriate penalties for violation of the Code.
The Group’s Whistleblowing procedure is a key tool for enforcing compliance with the Code, and is the subject of a special section of this chapter, “Group Whistleblowing Procedure.”
The Values and Ethical Code and the Whistleblowing Procedure have been distributed to all Pirelli employees in local language versions. Suppliers are also formally required to comply with the values and business approach set out in the Code. For this reason, the document is published in the Sustainability section of the Pirelli website, and not only in the languages spoken by employees but also in those that are most representative of the panel of suppliers.
Code of Conduct
The Pirelli Group Code of Conduct was approved in its amended version in 2010 by the Board of Directors of Pirelli & C. S.p.A. and represents a guide to good practice in corporate conduct, compliance with the applicable law and regulations in the countries where Pirelli operates, to avoid creating environmental situations that are favourable to the commission of criminal offences. The Code of Conduct sets out the operating application of the Group Ethical Code, specifically in regard to three ambits:
in relations with the public administration; in corporate and market disclosures; in relations with internal parties and parties outside the Group.
The Code of Conduct outlines – extesively but not exhaustively - a list of permitted and prohibited conduct. The permitted conduct enjoins compliance with applicable laws and regulations in all countries where Pirelli operates, as well as the rules of conduct to be followed, while the prohibited conduct identifies forbidden activities. The principles and commitments described in the Code of Conduct also apply to relations with suppliers. Therefore, the Code of Conduct is available in the languages spoken by Pirelli Group employees and in those that are most representative of the panel of suppliers. The document is published in the Sustainability section of the Pirelli website.
Anti-corruption programme
On August 5, 2013 the Board of Directors of Pirelli & C. S.p.A. approved the anti-corruption programme, called the Premium Integrity Programme. This is the set of benchmark guidelines concerning prohibited practices of corruption. These
9 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A. represent a systematic set of principles and rules that have already been adopted at Pirelli, complemented by “new” and specific measures, to prevent or reduce the risk of corruption, while further reinforcing the anti-corruption policy of the Group. In Italy, this programme also complements the Legislative Decree 231 Compliance Programme.
The Premium Integrity Programme defines the values, principles and responsibilities that Pirelli, all of its employees and everyone who has business or other collaborative relationships with the Company apply in the battle against corruption. It was developed after a specific audit of Group exposure to corruption risks in the countries where it operates.
This audit will be repeatedly periodically to guarantee constant monitoring of this risk. Adequate training and awareness programmes will also be defined as appropriate.
The Document was communicated to Group Employees in local language and is published in a number of different languages in the Sustainability section of the Pirelli website.
For more information, reference is made to the “Compliance” section elsewhere in this chapter.
Social Responsibility Policy for Occupational Health, Safety, Rights, and Environment
The Policy formally affirms Pirelli’s adhesion to the Universal Declaration of Human Rights, to the International Labour Organisation Declaration on Fundamental Principles and Rights at Work, to the Rio Declaration on Environment and Development and to the United Nations Convention against Corruption, from which the principles of the Global Compact are derived.
The commitments set out in the Policy are based on the cited regulations, declarations and convention, and thus the United Nations Global Compact and the contents of the International Standard SA8000R,. The latter officially adopted by the Company in 2004 as the principal benchmark for management of its own Social Responsibility.
Suppliers are also formally required to comply with the principles and commitments stated in the Policy, just as they must comply with the Code of Conduct and the Ethical Code.
The Policy, issued in 2004 and updated and signed by the Chairman in 2009, has been distributed to all employees in their local language and published in the Sustainability section of the Pirelli website, not only in the languages spoken by employees but also in those that are most representative of the panel of suppliers. Equal Opportunities Statement
The Equal Opportunities Statement sets out the proactive approach taken by Pirelli to equal opportunities in the workplace and career development, while also clearly illustrating the Group’s approach to the development of diversity. It lists the commitments made by Pirelli in this area, as also set out in The Values and Ethical Code, in the Pirelli Group Social Responsibility Policy for Occupational Health, Safety, Rights, Environment and – a priori – the United Nations Global Compact and the SA8000® Standard.
Suppliers are also formally required to comply with the principles and commitments stated in the Declaration, just as they must comply with the Code of Conduct, the Ethical Code and the Group policy on Social Responsibility for Occupational Health, Safety, Rights, Environment. The Statement, which was issued by the Chairman in 2006, has been distributed to all employees in their local language and published in the Sustainability section of the Pirelli institutional website, available to the External Community.
For more details on the management of diversity and equal opportunities at the Company, please see the section dedicated to these topics in Chapter 4 – Social Dimension of this report.
Quality Policy
The Quality Policy sets out the full integration of sustainability in the Group management strategy. Quality is at the centre of Pirelli activities, comprehensively extends to all functions and processes, from continuous innovation of products, services, processes and systems to protection of the safety, health and wellness of its employees, from environmental protection throughout the entire product life cycle to strategic collaboration with suppliers. The focus on the demands and
10 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A. interests of stakeholders, ethics, innovation, excellence and safety for sustainable competitiveness essentially correspond to “Corporate quality”. Specific emphasis is given to personal involvement and the key role that individuals play in promoting the cultivation of a sustainable quality culture.
The Policy, updated and signed by the Chairman in 2009, has been distributed to all employees in their local language and published in the Sustainability section of the Pirelli website, not only in the languages spoken by employees but also in those that are most representative of the panel of suppliers.
Green Sourcing Policy
Pirelli issued its Green Sourcing Policy in December 2012. This document, which was signed by the Chairman, aims to stimulate and promote environmental awareness throughout the supply chain, and promote choices that can reduce the environmental impact of the sourcing of goods and services by Pirelli. The targets of this document are not only Group buyers but also the entire corporate population that can participate in the sourcing chain of a good or service.
The document strongly urges everyone to broaden their perspective as much as possible on the basis of a method that is summed up by "Reduction, Reuse and Recover", and analysis of all the possibilities for reducing their associated environmental impact throughout the entire supply chain. This is why the term "sourcing" is preferred to "purchasing."
This Policy highlights the active role taken by Pirelli in the supply chain, and thus by including what is conceived and conceived in-house but outsourced for manufacturing.
The Green Sourcing Policy was defined in highly pragmatic and deliberately specific terms. It cites key words such as:
“life cycle” – which is the only approach taken by the Group so that it may decide on the basis of complete and inclusive analyses; “Reduction, Reuse and Recovery” – these are the macro-categories that determine how the impact of a good or service is reduced.
The Policy explicitly requires that guidelines for implementation of the imposed principles be drafted.
Therefore, interdepartmental working groups were created in 2013, headed by the Quality, Sustainability and Purchasing Departments, which produced:
the“Pirelli Green Sourcing Manual”, an internal document containing operating Guidelines, intended to guide the activities of the Pirelli functions involved in the Green Sourcing process; the “Pirelli Green Purchasing Guidelines”, a document targeting Pirelli suppliers, to be part of the Supply Agreement, based on the Green Sourcing Manual, which contains the KPI (Key Performance Indicators) to assess Suppliers’ Green Performance.
For more information about the sustainable management of the supply chain, reference is made to the section “Our suppliers” in this report.
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1.5 SUSTAINABILITY IN THE ORGANISATIONAL STRUCTURE
The organisational basis of sustainability governance is represented by the Sustainability Steering Committee, which is also responsible for equal opportunity issues and policy. This body, which was formed by the Chairman at the beginning of 2004 and is chaired personally by him, is responsible for setting policy and guiding the advancement of sustainability throughout the Group.
Then, the organisational structure is made up of a Group Sustainability and Risk Governance Department, and comprises the Group Sustainability and Equal Opportunities Office, and the Sustainability & Equal Opportunities Country Managers, covering all Group affiliates.
The Board of Directors of the parent company Pirelli & C. approves the Sustainability Report, as well as the sustainability strategies and plans that are presented to the market together with the Group Industrial Plan.
The Sustainability Report is approved by the Italian listed Parent Company on a voluntary basis, since it is presently not mandated by any statutory or regulatory obligations.
In regard to risks and opportunities, including environmental, social and governance (ESG) strategic and governance risks, the Board of Directors of the parent company Pirelli & C. examines and approves the Annual Risk Assessment and periodically monitors its implementation.
1.6 OPERATING APPROACH TO THE GENERATION OF SUSTAINABLE VALUE
As shown in the following infographic, responsible management at Pirelli flows through the entire value chain.
Every operating unit integrates economic, social and environmental responsibility for its own activity, while cooperating constantly with the other units, implementing the Group strategic guidelines.
The adopted approach makes it possible to create sustainable value over time, from which the company benefits from a tangible and intangible return of value.
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1.7 STAKEHOLDER ENGAGEMENT
Pirelli’s role in the economic and social context is inseparably tied to its capacity to create value with a multi-stakeholder approach, which means it pursues sustainable and lasting growth based as far as possible on the fair reconciliation of the interests and expectations of all those who interact with the Company, and in particular:
shareholders, investors and the financial community; customers, since the Pirelli way of doing business is based on customer satisfaction; employees, who are the repository of Group know-how and drive its development; suppliers, with which it shares a responsible approach to business; competitors, because improved customer service and market position depend on fair competition; the surrounding environment, institutions, governmental and non-governmental bodies and the communities around the world where the Group operates but also with an awareness of its own global responsibilities as a Corporate Global Citizen.
The existing interrelationships between stakeholders are based on the AA1000 Model adopted by the Company, and are analysed in detail for effective management of relations with them and creation of sustainable and shared value.
The following graphic illustrates the principal areas and manners of value creation and value return linked to the different stakeholders.
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Dialogue, interaction and engagement are calibrated according to the consultation needs of different groups of stakeholders, and include meetings, interviews, surveys, joint analyses, roadshows and focus groups. The received feedback substantiates the corporate assessment of the action priorities, influencing the development strategy outlined in the Sustainability Plan, which in turn is fully integrated in the Industrial Plan. The frequency of consultation is very high, several times a year on average for each group of stakeholders.
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The results of dialogue with the stakeholders and their forms are illustrated in detail in the sections of this report that are dedicated to documenting activities related to each of one of the different groups of stakeholders.
Pirelli provides all of its stakeholders with a whistleblowing channel – published in a number of different languages both internally and on the Pirelli website – through which they can communicate with the company openly or anonymously.
The purpose of this specific channel is to report any act or omission committed by parties inside Pirelli, related to Pirelli or on behalf of Pirelli, where that act or omission might constitute a violation or inducement to violate laws and/or regulations, the principles set out in “The Values and Ethical Code” of Pirelli, the principles of internal control, corporate policies, rules and procedures, and/or that might directly or indirectly cause economic or financial damage or harm the reputation of Pirelli companies.
For more information about the Procedure and the complaints received in 2013, reference is made to the specific section located elsewhere in this chapter.
1.8 SUSTAINABLE PLANNING AND MANAGEMENT
The infographic illustrates the operating steps focused on continuous improvement of sustainable performance.
1.9 MATERIALITY ANALYSIS OF SUSTAINABLE GROWTH ELEMENTS
To optimise calibration of the commitment that Pirelli dedicates to sustainable growth issues, the Company has conducted a sophisticated stakeholder engagement activity. This involved comparing the expectations of the principal stakeholders of Pirelli on these issues with the relevant importance to business success..
Considering the complexity of Company stakeholders, their dispersal around the world and thus the variety of their expectations, this report has been prepared according to the “comprehensive” approach set out in the GRI-G4 Reporting Guidelines. This is to guarantee all stakeholders complete information about the sustainability elements that each of the categories has found in different ways to be more or less significant.
The materiality analysis of the strategic issues of sustainable growth have resulted in Pirelli asking for the opinion of its own stakeholders at the international level, considering their level of interest in the Company and vice-versa, and identifying
15 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A. them with the support of the Group departments with which the Pirelli Sustainability and Governance Department interfaces every day. The panel of Company stakeholders who have been asked to give feedback have included:
- the biggest original equipment customers; - hundreds of end customers for each representative market; - the most important dealers worldwide; - numerous employees who work in the various nations where the Group has a presence; - the biggest suppliers (in terms of sales to Pirelli) in each procurement category; - the principal shareholders, investors and financial analysts of Pirelli; - national and supranational institutions and public administrations; - Journalists from domestic and international newspapers; - NGO present in each of the countries where Pirelli has productive activities; - Universities located in each of the countries where Pirelli has productive activities.
The stakeholders were engaged through a request – made in their local language – to assign an action priority to the following ESG themes, according to their expectations on Pirelli :
product energy efficiency: commitment to reduce the tyre rolling resistance during use; this allows fuel savings
and reduction of CO2 emissions in the environment; process energy efficiency: commitment to reduce the energy consumption of the tyre manufacturing process; this
makes it possible to reduce CO2 emissions into the environment; renewable energy: commitment to introduce the use of renewable energy in the tyre manufacturing process; this
makes it possible to reduce CO2 emissions into the environment; water management: commitment to reduce water consumption in the tyre production process, so as to minimise the impact on water resources; waste management: commitment to reduce the production of waste in the tyre production process, while simultaneously reusing and recycling waste products; product safety: commitment to improve tyre safety performance, particularly in the most critical use situations, such as cold, wet, snow and other conditions; responsible management of the supply chain: application of procedures that require suppliers to comply with social responsibility, environmental and business ethics rules and policies; monitoring of supplier performance in this regard; compliance: company commitment to full compliance with local and international laws, regulations, procedures and guidelines; evolution of sustainable mobility: capacity of the Company to have a long-term vision (2030-2050), to anticipate market expectations and swiftly adapt its own business to the evolution of sustainable mobility; biodiversity: collaboration with the local communities in what are considered "protected" areas to preserve and improve local biodiversity; sustainable human resources management: the Company's commitment to constantly improving job conditions, such as health and safety, training and development, and remuneration; human rights governance: commitment by the Company to respect and support human rights, to prevent and manage the risk of negatively impacting human rights that might result from its own activities; business citizenship: commitment by the Company to support local communities through social support projects and the commitment to build and maintain positive relationships with institutions and non-governmental organisations; management of diversity and equal opportunities: commitment by the Company to guarantee equal opportunity at the workplace and to develop diversity as a business tool; customer satisfaction: commitment by the Company to assure maximum customer satisfaction, through the excellence of its products, customer relations and offered services; research, development and product innovation: commitment by the Company to invest in research, development and innovation as key to long-term success; completeand transparent reporting: transparency of the Company in giving clear and complete reports on its own financial, social and environmental performance and the related targets.
The priorities expressed by Pirelli and its stakeholders were then consolidated and and visualized in a mapg, on a matrix whose vertical axis indicates the expectations of external stakeholders, while the horizontal axis indicates the importance assigned by the Company to the analysed elements for the success of this business.
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Finally, the draft map was submitted for assessment by an independent third party that is a leading ESG (Environmental, Social and Governance) analysis firm. The ESG Independent Analysts have compared the Pirelli draft map results with the contents of the ten international studies they considered as the most significant and trustworthy ones among those focused on Auto Components sector materiality, evaluating the prioritization level attributed to the different ESG themes. The results of this analysis, together with their own International ESG experience, allowed Analysts to suggest little changes to the position of some issues in the Pirelli draft map.
The result of the whole process above described is the following Pirelli Materiality map:
The map shows an high concentration of sustainability elements in the upper right quadrant that indicate those issues deemed fundamental by the parties involved.A low degree of materiality then concerns the themes in the lower left quadrant.
The “diagonal line” that results from the mapping of the sustainability factors is extremely important, insofar as it indicates the level of consistency between the vision of Pirelli and its stakeholders. Finally, the the substantial alignment with stakeholder expectations results in the targets of the Sustainability Plan 2014-2017 with Vision 2020 that the Company has adopted.
1.10 SUSTAINABLE GROWTH STRATEGY: INDUSTRIAL PLAN 2013- 2017 WITH SUSTAINABILITY TARGETS 2020
The top management of the Group presented the Industrial Plan 2013-2017 to the financial community in London on November 6 2013. This plan includes the Sustainability Plan with Vision to 2020.
ECONOMIC AND FINANCIAL TARGETS The Industrial Plan forecasts revenues to grow by an average growth rate of approximately 7.5% between 2013 and 2016, enabling Pirelli to reach 7.5 billion euro by the end of the period.
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Growth in value-added segments and an incisive efficiency plan underpin the expected improvement in profitability: ~15% Ebit margin before restructuring costs expected in 2016, +2pp growth with respect to 2013.
The expected strong cash flow generation will be used to fund investments, distribute dividends and reduce indebtedness to reach a target ratio between net debt and Ebitda of 0.3x in 2017 as compared with 1.2x in 2013.
ESEARCH AND DEVELOPMENT To Pirelli, “Premium” means cutting edge technology coupled with product excellence.
Pirelli R&D can count on:
More than 40 years of experience in the Premium segment; HQ in Milan and 10 Regional centres, 1400 engineers and numerous ‘open innovation’ projects with University research centres and car makers; R&D budget totally dedicated to Premium equals 7% of Premium sales; Global partnerships with the most prestigious car makers to meet the more demanding requirements in terms of performance, safety and product customization, which are key for the Replacement market development. Meeting the 2013-2017 targets calls for an additional push in innovation, as follows: CAR: Development of 14 new product lines, of which 6 for the Winter season, designed for the global market and taking into consideration the specific Regional peculiarities. Focus on niche products, like Runflat, Seal Inside and Noise Reduction. MOTO: Launch of 10 new Pirelli and 11 Metzeler products, including a new Radial line for the South American market and Metzeler Custom Touring line for North America TRUCK: 11 new Tyres, including the new Regional with a greater mileage and tread reconstruction technology, Highway and City with top rolling resistance and completion of the Winter range. A further development of Cyber Fleet service range is also envisaged. AGRO: Renewal of the product range and co-operation with major brands - John Deer, CNH and AGCO – in OE, with the further aim of developing products meeting local requirements.
EFFICIENCY PROGRAMMEA continuous search for efficiencies is one of the elements making Pirelli an increasingly profitable company. Between 2010 and 2013, Pirelli profitability almost doubled, also due to a cost reduction amounting to 322 €/mln.
According to the Plan, further efficiencies of approximately 350 €/mln are to be achieved by 2017, equal to approximately one percentage point of revenues every year.
Of these: approximately 320 €/mln will come from efficiencies in industrial and product activities (materials, labour cost, cost control and production picking up in countries with low industrial costs); 30 €/mln will come from SG&A, including projects for the optimisation of the sales structure and for central and regional overhead cost reduction
INVESTMENTS AND PRODUCTION CAPACITY The investments made until 2013 allowed Pirelli to achieve the adequate plant size. Plants are: Characterised by a progressive technological upgrade, consistent with our focus on Premium, and Mainly located in countries with low industrial costs (100% of Industrial and 78% of Consumer production capacity)
Having reached the investment peak in 2011, Pirelli is embracing a whole new phase of value generationand benefits from past investments and from the reorganization of the production setup, including the opening of high-mix plants in Mexico, China and Romania.
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The new Plan provides for investments up to 1.6 €/bln over the next four years, accounting for 5% of revenues in 2017 as against 7% in 2013.
Through these investments, the overall capacity of the Consumer Business will grow from the current 69 mln pcs per year to 81 mln in 2017, with the Premium segment forecast to increase to 63% of the total production compared with the current 48%. In the Industrial Business, capacity will grow from the current 6.2 mln to 6.8 mln in 2017. GENERATION OF CASH FLOWStrong cash generation to be used for investments, dividend distribution and to reduce indebtedness
Between 2014 and 2017, Pirelli envisages a gross cash generation, before investments and dividend distribution, equal to 3 billion euro, in addition to the sale of financial assets for 150 million euro. These resources will be used to:
Fund 1.6 billion euro to be invested over the four years of the Plan; Distribute more than 700 million euro in dividends, with a payout confirmed at 40% of consolidated net profits; Reduce our net financial position, with what is left, i.e. 850 million euro of net cash flow
The strong cash generation will improve our net financial position from the estimated <-1.4 billion euro at the end of 2013 to approximately -500 million euro in 2017, with the resulting improvement of the net debt/EBITDA ratio going from 1.2x to 0.3x.
SUSTAINABILITY TARGETS
The Sustainability Plan 2013-2017 includes selected targets for 2020.
It integrates, supports, accompanies and protects the Group Industrial Plan and was developed according to the “Value Driver” model developed by UN PRI (United Nations Principles for Responsible Investment) and the UN Global Compact to promote dialogue between investors and companies on Sustainability issues. G growth, productivity, governance and risk management are the development guidelines used in defining the targets for 2020.
Inter alia, the Plan forecasts:
Green Performance product net sales to be 48% of Tyre net sales in 2017; a rolling resistance reduction that in the Car segment will reach -40% in 2020 as compared with 2007; further expansion of Pirelli technology to produce silica from risk husks, which will also be applied to premium tyres by 2017; the results of research on alternative sources of natural rubber from Hevea are expected by 2016, with possible use of rubber from guayule (project conducted with Versalis – ENI Group); the use of innovative, function-enhancing polymers is expected by 2015, guaranteeing reduced environmental impact, improved driving safety and process efficiency; a reduction by 90% in the workplace accident frequency rate by 2020 compared to 2009 figure. This target will be achieved by investing in increasingly safe machinery and programmes to reinforce the safety culture among Group employees;
reduction of 15% in CO2 specific emissions and of 18% in energy specific consumption by 2020 compared to 2009
level, with an expected saving of about euro 25 million and 400,000 tons of CO2 during the 2014-2017 period; reduction of 58% in the specific water withdrawal by 2020, with an expected saving of 2,700,000 water cubic metre during 2014-2017; Towards zero waste to landfill: 95% waste recovery rate by 2020, with an expected savings of about euro 60 million by 2017 due to the reuse of industrial wastes; keeping research and development spending for premium products at 7% of net premium products sales, with the aim to further develop and increase premium products safety while lowering the environmental impact; growing investment in risk mitigation and prevention of business interruption: CAGR -8.3% by 2017 as compared with 2013;new proxy to monitor gender equal remuneration, including performance, rank and labour market seniority parameters; investment in employee training equivalent to average of seven man days by 2015 and ≥ 7 in the following years;
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adoption of increasingly advanced models for management of economic, social and environmental responsibility in the supply chain, in view of shared development.
1.11 LONG-TERM GOVERNANCE TOOLS CORPORATE GOVERNANCE
The Pirelli Corporate Governance system is based on:
the central role played by the Board of Directors, in its capacity as the supreme body in charge of strategic policy and overall company management , with authority to set general management policy and to take direct action on a series of significant decisions that are necessary or useful to pursuing the corporate purpose; the central role of independent directors who account for the large number of the members of the Board of Directors; an effective internal control system; an innovative and proactive risk management system; a remuneration system, in general, and an incentive system, in particular, of managers tied to medium and long- term economic goals, by creating a strong link between remuneration, on the one hand, and individual and Pirelli performance, on the other; a rigorous set of rules governing potential conflicts of interest and a robust code of conduct for executing related party transactions.
For the fourth year in a row, Pirelli was recognised as having the “Best Corporate Governance in Italy” by the World Finance Corporate Governance Award.
Pirelli & C. has adhered to the Corporate Governance Code of listed companies ever since it was first published by Borsa Italiana (in October 1999; Pirelli subsequently adopted the new July 2002 version, and then the March 2006 version). At the Board of Directors meeting held on March 12, 2012, Pirelli declared its acceptance of the new Corporate Governance Code (December 2011) published on the Borsa Italiana website. In accordance with the provisions of the traditional management and control model, management of the Company is delegated to the Board of Directors, which plays a key role in its strategic guidance, and in supervision of the overall business activity, with authority to set policy for overall management and to act directly in a series of significant decisions that are necessary or useful to pursue the corporate purpose.
The Board of Directors relies on the support of its own internal committees to perform its duties. These standing committees have investigative, policy making and/or consultative duties. The Board is also supported by managerial committees whose members are drawn from Group senior management to implement the directives and policies issued by the Board and delegated bodies, with which they collaborate on the definition of proposals to be made to the Board of Directors as a whole.
After its renewal on April 21, 2011, the current Board of Directors established four committees: the Internal Control, Risks and Corporate Governance Committee, the Remuneration Committee, the Nominations and Succession Committee and the Strategies Committee, designating their members and the Chairman of each one.
At the first meeting that can be held after the committee meetings, the Chairmen of these committees report to the Board of Directors on the activities that they perform, possibly submitting proposals for resolutions. Moreover, at least once every six months, the Internal Control, Risks and Corporate Governance Committee and the Remuneration Committee send a report to the Board of Directors on the activities performed during the six-month period (see the functions of the committees as illustrated in the Corporate Governance Report).
Since 2004 the “slate voting” system assures non-controlling interests the right to designate one fifth of all Directors, if at least two slates of nominees are submitted.
At December 31, 2013 the Pirelli Board of Directors had 20 Directors, who were elected by the Shareholders’ Meeting on April 21, 2011. Non-controlling interests were able to designate four directors, or one fifth of the total number.
After it was renewed, the Board of Directors elected Mr Marco Tronchetti Provera as Chairman and Chief Executive Officer. Since 2006, a large number of of seats on the Board of Directors has been held by independent directors.
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Since November 2005, in view of further reinforcing the role of independent directors, the Board of Directors decided to introduce the position of Lead Independent Director as the contact person for coordination of motions and contributions made by the independent directors.
During 2013 members of senior management attended the Board of Directors and Board committee meetings. Their participation aims at providing the Directors with detailed information about financial, social and environmental issues, among others.
In particular, aside from the detailed analysis of the period results, when the Board of Directors approved the Sustainability Report 2012 (which is an integral part of the Annual Financial Report), it also verified the integration of the financial choices made by Pirelli with those adopted in the social and environmental areas.
Moreover, consistently with the the recommendations made by the Corporate Governance Code of Borsa Italiana and consolidated Company practice, in view of improving the knowledge of Company affairs and dynamics by all Directors and Statutory Auditors, several working lunches were also held in 2013 to examine specific business and corporate governance issues in closer detail.
Since 2004 the Pirelli by-laws have required that the Board of Directors be elected by using the slate voting system.
To comply with the modifications introduced by Law 120 of July 12, 2011 in regard to gender quotas for the composition of listed companies and, therefore, to assure gender balance, the by-laws require that the slates submitted for election of the Board of Directors which contain three or more candidates must include a number of candidates of the least represented gender that is at least equal to the minimum number required by current law and/or regulations, as specified in the notice of call for the Shareholders' Meeting.
For more information about the mechanisms established to guarantee gender balance on the Board of Directors, reference is made to the Company By-laws available on the Pirelli website, Governance section.
When the shareholders prepared the slates for election of the Board of Directors, they considered the individual candidates' experience in handling economic, social and environmental issues. This was stemmed partly from the fact that the Corporate Governance Code of Borsa Italiana requires that at least one member of the Internal Control, Risks and Corporate Governance Committee and the Remuneration Committee have adequate experience have adequate experience in accounting, finance or risk management and in finance or remuneration policies. In the Directors' Report to the Shareholders' Meeting for renewal of the Board of Directors, the Board of Directors recommended that shareholders consider the slate preparation recommendations of the Corporate Governance Code when they submit their slates.
Similar attention was also dedicated by the Board of Directors when they co-opted directors when Board seats were vacated.
In regard to “conflicts of interest”, the Director must notify the Board of each interest (even if not in conflict) that he has on his own behalf or on behalf of third parties in a specific transaction of the Company, by specifying its nature, terms, origin and scope. If this involves the Chief Executive Officer, he must abstain from executing the transaction, deferring the decision to the Board of Directors.In these cases, the Board of Directors must adequately justify the reasons and advantages of the transaction for the Company.
It is also noted that:
in the Annual Report on Corporate Governance and the Structure of Share Ownership 2013 prepared by the Board of Directors pursuant to Art. 123-bis of the Consolidated Law on Finance (“TUF”, available on the Pirelli website, Governance section), information is provided about the principal positions held by the Directors in other companies not belonging to the Pirelli Group.. Moreover, the Board of Directors has also adopted a specific policy consistent with the recommendations of the Corporate Governance Code that limit the number of positions that each Director may hold in other companies; in the Annual Report on Corporate Governance and the Structure of Share Ownership 2013 prepared by the Board of Directors pursuant to Art. 123-bis of the Consolidated Law on Finance information is provided about the principal positions held by the Directors in other companies not belonging to the Pirelli Group, with those positions being construed as holdings that exceed 2% of the Pirelli share capital. Moreover, the Investors section on the Pirelli website provides a detailed view of the ownership structure; no shareholder presently exercises control or dominant influence over the Company pursuant to Art. 2359 Italian Civil Code;
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in the Annual Financial Report, the Half-yearly Financial Report, the quarterly reports and the Annual Report on Corporate Governance and the Structure of Share Ownership the relationships between Pirelli and its related parties is documented.
For more information on the experience of the individual Directors in regard to economic, social and environmental matters, reference is made to their curricula vitae, which are available on the Pirelli website, Governance section.
The Board of Directors approves the Sustainability Report, as well as the sustainability strategies and plans that are presented to the market together with the Group Industrial Plan.
The Sustainability Report is approved on a voluntary basis, since for the Company this is presently not mandated by any statutory or regulatory obligations.
In regard to risks and opportunities, including environmental, social and governance (ESG) strategic and governance risks, the Board of Directors of the parent company Pirelli & C. examines and approves the Annual Risk Assessment by periodically monitoring its implementation.
For more details on the Corporate Governance System, please refer to the “Annual Report on Governance and Share Ownership” – Volume 2 of the Annual Financial Report at December 31, 2013.
HUMAN RIGHTS GOVERNANCE
The Pirelli Group pursues and supports the respect of human rights affirmed in international venues.These values have always been firmly anchored in corporate management.
Human Rights Governance is fully integrated in the Sustainable Management System adopted by Pirelli, which is based on the United Nations Global Compact of the, of which the Company has been an active member since 2004 – as well as a member of the Steering Committee of Global Compact Lead – the ISO26000 guidelines and the provisions of SA8000 Standard.
The commitment of Pirelli to Human Rights is specifically addressed in “The Pirelli Group Values and Ethical Code”, approved by the Board of Directors, and in detail, in the Social Responsibility Policy for Occupational Health, Safety, Rights, and Environment”, signed by the Chairman and which provides that “The sustainable development strategies of the Group presume, inter alia, a commitment to continuous improvement of the environmental, occupational health and safety aspects related to its own activities, in firm compliance and support of the contents of the “Universal Declaration of the Rights of Man”, the “International Labour Organisation Declaration on Fundamental Principles and Rights at Work”, the “Rio Declaration on Environment and Development” and the “United Nations Convention against Corruption”, before listing all the commitments made by Pirelli in this regard, including reference to each of the ILO Core Labour Standards and its extension to the supply chain.
The “Equal Opportunities Statement”, also signed by the Chairman, is dedicated to the Group commitment to equal opportunities and non-discrimination.
Any human rights violation may be reported to the Company by using the Whistleblowing Procedure. A section is dedicated to the Procedure elsewhere in this chapter, to which reference is made for more detailed information on the received reports. However, none of the Reports received in 2013 concerned alleged violations of human rights or ILO Core Labour Standards, with specific reference to forced labour, child labour, freedom of association and bargaining, and non- discrimination, as also stated in the Independent Assurance Statement published at the end of this report, and to which rteference is made.
All of the aforementioned documents have been distributed to employees in their local language. They are also an integral part of the sustainability clauses of contract applied to Group suppliers, as well as being published on the Pirelli website in the languages spoken by Pirelli employees and its principal suppliers.
In regard to human rights governance, Pirelli acts on the basis of the recommendations set out in the “Guiding Principles for Business and Human Rights: implementing the United Nations Protect, Respect and Remedy Framework” of 2011, which translate into actual company practise the three pillars "Protect, Respect and Remedy” identified in 2008 in the “Framework for business and Human Rights” by Professor John Ruggie, Special Representative for companies and human rights at the United Nations.
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Moreover, human rights are included in the mapping of materiality of sustainability factors for Group strategies. The mapping, which consolidates the opinion of all categories of Company stakeholders, including employees, suppliers, institutions and dozens of NGOs present in the countries where the Company operates, is published in this chapter.
The human rights management processes are handled by the Pirelli Sustainability & Risk Governance Department, which acts in concert with the affected and responsible functions, and in reference to the internal and external community.
Before investing in a specific market, ad hoc assessments are conducted of any political, financial, environmental and social risks, including those related to the respect of human and labour rights. The context inside and outside the company is monitored in those countries where Pirelli does operate, in view of preventing negative impacts on human rights in the ambit of the sphere of corporate influence, and if so, remedying them.
In terms of materiality in the corporate value chain, the respect of human rights assumes particular importance in the human resources and the supply chain areas..
The management of human rights in the supply chain is reported in the section dedicated to Pirelli suppliers, Chapter 2 of this report, to which reference is made for more details.
The management of human and labour rights in the Pirelli internal community is reported in the section dedicated to “Compliance with statutory and contractual obligations governing overtime, time off, freedom of association, equal opportunities and non-discrimination”, in Chapter 4 of this Report and to which reference is made for more details.
Both management areas – Employees and Suppliers – are managed by using training and monitoring tools that have been consolidated over the years.
The Pirelli Training Model also draws newly hired employees’ attention to the Group’s sustainability policies and the commitments they involve, as detailed in the Ethical Code, the Code of Conduct, the Equal Opportunities Policy, and the Social Responsibility Policy for Occupational Health, Safety, Rights, and Environment, thus including Pirelli upholding the contents of the “Universal Declaration of Human Rights”, the International Labour Organisation’s “Declaration on Fundamental Principles and Rights at Work”, the “Rio Declaration on Environment and Development” and the United Nations “Convention against Corruption”, as well as the indications of Standard SA8000®., beginning with the ban on forced labour and child labour, and then free bargaining, equal opportunities and non-discrimination. All of these issues are also the subject of training courses for all Sustainability and Purchasing Group managers..
Specifically in regard to Suppliers training, following the training project targeting strategic suppliers provided by e-learning format in 2012, Pirelli extended the same sessions to all Group security service providers worldwide during 2013. This training course addressed aspects of labour rights, human rights, respect for the environment and business ethics..
Together with constant co-ordination and monitoring at the corporate level, compliance with Pirelli human rights and labour rights requirements and environmental sustainability and business ethics rules is assessed in periodic audits commissioned by Pirelli to specialised independent firms, as well as through Audits performed by the Pirelli Internal Audit Department. The audit activities carried out in 2013, both at Pirelli sites and supplier sites, are extensively discussed in the Risk Governance section of this chapter, as well as in the section “Industrial Relations” of the third chapter, to which reference is made for more details. It should be noted that none of the audits revealed any breach of the ILO Core Labour Standards, with specific reference to forced labour or child labour, free association and bargaining, and non-discrimination, as also stated in the Independent Assurance Statement published at the end of this report, and to which rteference is made.
In regard to the context outside the Company, beginning with the local communities where the Company operates, Pirelli pursues dialogue, especially with representatives of local and national institutions and non-governmental organisations. This allows the Company to define its own activities in support of local development. The Company dedicates special attention to initiatives in support of children, training, sport and health. The initiatives in favour of the external community are described in Chapter 4 of this report, to which reference is made for more details.
The Human Rights Management System was audited once again this year by independent party, in the terms and with the results described in the Assurance Statement at the end of this report.
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Conflict Minerals
The concept of “conflict minerals” was introduced in Section 1502 of the Dodd-Frank Act, the 2010 United States federal statute. “Conflict minerals” means gold, columbite-tantalite (coltan), cassiterite, wolframite and their derivatives, such as tantalum, tin and tungsten that originate (or are extracted) in the Democratic Republic of Congo (DRC) and/or bordering countries.
The objective of the Conflict Minerals Rules is to discourage the use of minerals whose trade might finance violent conflicts in Central Africa, where serious human rights violations have been reported for years.
In accordance with the Conflict Minerals Rules, listed United States companies are asked to conduct reasonable due diligence to trace the origin of these materials, reporting the results to the SEC and publicly on its own website. The first report must be published by May 31, 2014 (for 2013), and subsequently updated every year.
The European Commission on March 5th 2014 proposed a draft Regulation setting up an EU system of self-certification for importers of tin, tantalum, tungsten and gold who choose to import responsibly into the Union. The proposed Regulation is accompanied by a "Communication" (a proposal), a paper that presents the overall comprehensive foreign policy approach on how to tackle the link between conflict and the trade of minerals extracted in affected areas.
The focus devoted by Pirelli to human rights issues and, at the same time, its own position as a supplier in the supply chain of customers that actively perform due diligence, have led the Company to conduct a thorough investigation of its own supply chain during 2013, to identify the existence of any conflict minerals.
It is worth indicating, however, the substantially very limited impact of the issue within Pirelli: the volume of minerals (3T+G) used by Pirelli Tyre on a yearly basis is less than 1 ton. This quantity corresponds approximately to one millionth of the raw material volume used annually by the Company and is equally distributed among the large majority of the tyres produced; as an example, a 10 kg passenger tire contains 10 mg (milligram) of tin equivalent, in the very low concentration of 1 ppm (one part per million).
With the ambition to source only conflict-free minerals, Pirelli has asked its own suppliers to fill out form EICC GeSI (EICC/GeSI Conflict Minerals Reporting Template), developed by EICC (Electronic Industry Citizenship Coalition) and GeSI (Global e-Sustainability Initiative), in an attempt to obtain full visibility of the supply chain, all the way to the mines. This process of reasonable due diligence will be completed in 2014 and then will continue with continuous monitoring. The results as of December 31, 2013 were positive, with a significant portion of due diligence already completed and no suspicion of conflict minerals in the supply chain.
RISK GOVERNANCE
The current macroeconomic situation, financial market instability, management processes complexity and continuous legislative and regulatory evolution entail a renewed capacity to protect and maximise tangible and intangible sources of value and the strategic objectives that characterise the corporate business model. Pirelli adopts a pro-active risk management system. It uses a systematic process of identifying, analysing and assessing risk-prone areas to provide the Board of Directors and management with decision-making tools so that they can anticipate and manage the effects of these risks, guided by the awareness that the assumption of risk is a fundamental part of business management.
Strategic objectives are not only economic but also social and environmental, reflecting full integration of the sustainability model in corporate development plans. In accordance with this philosophy, Pirelli has implemented an integrated risk management system (Enterprise Risk Management) aimed at:
managing risks in terms of prevention and mitigation; pro-actively seizing opportunities; disseminating inside the Company the “culture” of the value at risk, particularly in strategic and operating forecast and planning processes and in the most important corporate choices ; assuring transparent disclosure of the assumed risk profile and implemented management strategies, through periodic and structured reporting to the Board of Directors and top management, and adequate disclosure to shareholders, as well as to all stakeholders in general.
Consistently with these aims, the Pirelli Enterprise Risk Management is characterized by being:
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enterprise-wide, i.e. extended to all potentially significant types of risk/opportunities; value-driven, i.e. focused on the most significant risks or opportunities according to their capacity to prejudice attainment of the strategic objectives of Pirelli or to impair critical corporate assets (“Key Value Drivers”). top-down, insofar as top management establishes the guidelines for identifying the priority risk areas and events having the greatest impact on business; quantitative, insofar as it is based, wherever possible, on exact measurement of the impact of risks on expected financial results according to the likelihood of their occurring; integrated in decision-making and business processes and, in particular, in the strategic and operating planning process.
The Pirelli Risk Model systematically assesses three categories of risks: external risks, strategic risks and operating risks. These risk families guide the objectives of risk management, the control system and governance bodies (see the next section).
The Board of Directors Internal Control, Risks and Corporate Governance Committee is supported by two Managerial Risk Committees in managing the various risk macro-families, with each committee monitoring specifically assigned areas of risk.
The Internal Control, Risks and Corporate Governance Committee analysed the results of risk assessment during four meetings held in 2013.
Risks and Uncertainties
The principal areas of risk to which the Company may be exposed are also illustrated in detail in the section “Principal Risks and Uncertainties” included in the Directors' Report on Operations – Volume 1: Annual Financial Report at December 31, 2013, to which reference is made for an extended discussion of these risks. The three risk macro-families, the risk management objectives, and the dedicated Control Model are described as follows.
Risks related to the external context in which the company operates, whose occurrence is beyond the Company’s control.
This category includes the risks related to macroeconomic trends, changes in demand, the strategy of competitors, technological innovation, new regulations, and country risk (and specifically economic, security, political and environmental risks).
The aim of risk management is to monitor risks and mitigate their impact if they materialise. The Control Model is based on the adoption of internal and external tools to identify and monitor risks, stress tests to assess the robustness of plans, identification of alternative scenarios, business case studies to assess the impact of material changes in context, etc.
After a year, 2013, dominated by a high degree of uncertainty, Pirelli expects – consistently with forecasts by leading analysts – that the global economy will gradually accelerate in 2014.
In mature economies, a partial relaxation of austerity measures in the public sector and a lower level of indebtedness in the private sector (especially in the United States) should sustain growth on both sides of the Atlantic. Improvement in the economic fundamentals of the United States and, to a lesser extent, in Europe, should also permeate emerging economies in terms of greater exports and further improvement in financial market confidence.
Elements of uncertainty will remain and might derive, inter alia, from the tapering of quantitative easing in the United States, possible political tensions in the more economically fragile emerging countries and, last but not least, geopolitical tensions in the Middle East.
Although subject to impact by the exogenous factors indicated above, the automotive market is forecast to expand at an average annual rate of 3.7% until 2017, with a steady increase in the impact of the premium segment. Even during economic crisis, the performance of the tyre market confirms the wisdom of the choice made by Pirelli to focus its activities on the premium segment. Even in the face of a situation caused by the difficult international business cycle, the premium segment will continue to grow at a rate three times faster than the non-premium segment, with a forecast annual average global increase of 7.3% between 2013 and 2017, as compared with a 2.4% rate in the non-premium segment (+3.6% overall growth).
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In regard to the evolution of demand over the long-term, some social and technological trends might have a material impact on the automotive sector and indirectly on the tyre market. On the one hand, these are represented by growing urbanisation (according to United Nations estimates, about 70% of the global population will live in urban areas in 2050) and, on the other hand, by changes in the values and behaviour of younger generations (increase in the average age when a driver's license is obtained, loss of importance of owning a car, increased recourse to various types of car sharing).
These factors will be complemented by the spread of information technologies, with a concurrent expansion of e- commerce and/or telecommuting, and frequent regulatory changes in both mature and emerging economies to limit the presence of polluting vehicles within and near metropolitan areas. These dynamics might be followed by an evolution in automotive sector demand (from changes to vehicle dimensions or type of propulsion system to possible resizing of cars to satisfy the transportation preferences of citizens), with contingent impact on tyre sector dynamics.
Pirelli constantly monitors the evolutionary changes in automotive sector demand by actively participating in international working groups, such as the one engaged in the Sustainable Mobility 2.0 (SMP 2.0) project sponsored by the World Business Council for Sustainable Development (WBCSD). The principal aim of SMP 2.0 is to study the possible long-term evolution in urban mobility and promote solutions that might improve the social, environmental and economic well-being of the urban population.
Strategic risks, that are typical for a specific business sector. Proper management of these risks is a source of competitive advantage or, on the contrary, a cause for failure to achieve plan targets (annual and multi-year targets).
This category includes market risk, product innovation and process risk, raw material price risk, production process risk, financial risk, organisational risk, and M&A risk.
Risk management aims to manage risk by means of specific tools and protections designed to reduce its likelihood or limit its impact should it materialise in a risk – yield perspective.
The Control Model is based on identifying and measuring PBIT/Cash Flow@Risk when strategic management plans are prepared, defining risk appetite and risk tolerance for principle risk events, introducing Key Risk Indicators in Group reporting, monitoring of mitigation plans associated with material risks in the absence of specific, previously implemented and operational business protection measures. Specific analysis, as reported in Volume 1: Annual Financial Report at December 31, 2013, to which reference is made made for an extended discussion of these risks, has been performed on:
transaction exchange rate risk; currency translation risk; liquidity risk; interest rate risk; price risk associated with financial assets; credit risk.
The identification of priority risk areas and their measurement in terms of their contingent impact and likelihood of occurrence is guided by the business regions on the basis of the objectives and strategic policies outlined in the industrial plan (key value drivers). Central corporate functions coordinate the analysis of centrally monitored risks, such as raw materials and currency rates.
The use of quantitative metrics of impact permits the aggregation of risks and representation of the Group’s comprehensive risk exposure (“Profit@Risk”), which the Board of Directors assesses before approving plan targets.
In regard to strategic risks, commodities (natural rubber, synthetic rubber and petroleum based raw materials – especially chemicals and carbon black) and exchange rates (especially South American currencies) will continue to represent a factor of uncertainty in the structure of Group costs.
Operational Risks, that are the risks generated by the organisational structure, processes and systems of the Group and do not attribute any competitive advantage if they are assumed.
The principal areas of risk in this category are information technology, security, business interruption, legal & compliance, and health, safety & environment risk.
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The aim of risk management is to manage these risks through prevention measures and internal control systems integrated in corporate processes. The Control Model is based on the development of ad hoc methods for measuring risk, defining mitigation and prevention plans, and continuous monitoring of their implementation. Specific analysis, as reported in Volume 1: Annual Financial Report at December 31, 2013, to which reference is made made for an extended discussion of these risks, has been performed on:
environmental risks; employee health and safety risks; product defect risk; litigation risks; risks associated with human resources; business interruption risks; risks associated with information systems; corporate criminal liability risks.
The analysis of operational risks is an integral part of the Group internal control system. Ad hoc methods are developed for each area of riskto measure the vulnerability of control systems and their possible impact on the Group. The vulnerable areas revealed by this analysis are the object of continuous follow-up activity by the Operational Risk Committee.
In 2013 the Group to undertook a series of mitigation actions to reduce the vulnerability of the supply chain. In particular, this involved extending the portfolio of approved plants by individual supplier, approval of alternative materials/suppliers, increase in the levels of safety stocks of critical materials, supplier audits, etc.
A joint effort was launched in 2013 with certain of the Group's principal suppliers to agree on areas for improvement of the principal business interruption risks at their production sites, including the sharing of Pirelli best practices applicable to loss prevention.
In regard to the impacts from climate change, no significant risks have been found in relation to production processes. Instead, in terms of opportunities, Pirelli Green Performance tyres exhibit growth potential, given the relevant lower environmental impact and the possible regulatory evolution in many countries as it was in Europe with European labelling standards.
In 2013 the ESG (Environmental, Social, Governance) risk assessment and monitoring system was refined and reinforced in terms of the number of monitored Key Risk Indicators.
In 2014 a new control panel will be used for constant monitoring of the evolution in the environmental, social and governance Key Performance Indicators linked to the targets defined during strategic planning and for prompt identification of possible risk factors that might slow down achieving them.
Moreover, since 2013 Pirelli has decided to develop an ad hoc method to identify and measure reputational risks, construed as the present or prospective risk of lost profits or lower share price resulting from negative perception of the Company by one or more stakeholders. While on the one hand reputational risk has to be construed as the contingent occurrence of a negative event tied to one of the three macro-families of risks mentioned above, on the other hand it must be managed as an independent event precisely because its scope depends on the expectations of stakeholders and the impact of the negative event.
The method that will lead to identification of reputation risks in 2014 will consider a series of internal and external drivers, such as: negative events with an impact on reputation that occurred in the industry worldwide over the last ten years; interviews with external Key Opinion Leaders on sector trends, particularly mobility and sustainability; interviews with internal Key Opinion Leaders. The identified risk events will be measured by the stakeholders general public in the key countries for the Group and will lead to definition of the governance and management structures, as well as the preparation of any mitigation and/or crisis management plans.
For more details on risk governance, reference is made to Volume 2: Annual Report on Corporate Governance and the Structure of Share Ownership 2013.
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Independent audits of social and environmental responsibility and business ethics
As previously mentioned, risk management at Pirelli is enterprise-wide and includes the identification, analysis and monitoring of environmental, social, financial and business ethics risks that are directly or indirectly associated with the Company, at Pirelli affiliates or in relations with them, such as sustainability of the supply chain.
Ad hoc assessments are also carried out before entering a specific market, in order to assess any political, financial, environmental and social risks, including those connected with respect of human and labour rights.
Together with constant co-ordination and monitoring at the corporate level, compliance with Pirelli economic, social (especially human rights and labour rights) and environmental sustainability rules is assessed in periodic audits commissioned by Pirelli to specialised independent firms, and by the Pirelli Internal Department
Particular attention is devoted to the sustainability of Pirelli’s sites and the company’s suppliers’sites operating in emerging countries.
The Internal Audit function has been directly involved in the sustainability audit process at Pirelli affiliates and monitoring of supplier compliance recovery plans since 2012. This function stands out for its independence at Pirelli insofar as, aside from the Board of Statutory Auditors, it reports to the Internal Control, Risks and Corporate Governance Committee of Pirelli & C. S.p.A., which is composed only of Independent Directors.
The three-year internal auditing plan covers all Pirelli sites. Normally every audit is carried out by two auditors and takes three weeks on site. The Internal Audit Team received training on the environmental, social and ethical elements of an audit to enable them to carry out an effective, clear and structured audit, grantingPirelli an effective control over all aspects of sustainability.
Both the external and internal auditors conduct their audits on the basis of a check-list of sustainability parameters derived from the SA8000® standard (the reference tool officially adopted by the Group for the management of social responsibility since 2004), from the Pirelli Social Responsibility Policy for Occupational Health, Safety, Rights, and Environment and from the Group Ethical Code.
Third party audits, each lasting an average of two-three days on site, include extensive interviews with workers, management and trade union representatives. The Purchasing Managers and the Sustainability Managers that coordinated local audits of suppliers performed by third party were adequately trained and informed about the audit aims and procedures by the delegated headquarters functions: in this case, Sustainability and the Procurement Department. All managers of the audited affiliates were alsoadequately trained and informed about the audit aims and procedures by the central Sustainability and Industrial Relations functions.
In regard to Pirelli sites, audits were conducted in 2008 at Company facilities in Turkey, Brazil, Venezuela, Argentina, Egypt, China, Romania, Colombia, Mexico and Chile. In 2011 Pirelli commissioned third party audits that covered the production sites in Argentina, Venezuela, Brazil, China, Egypt, Turkey and Romania. In 2012 the Internal Audit function conducted sustainability audits at Company facilities in Italy, Brazil, Argentina, Venezuela and Turkey and, in 2013, in Argentina, the United States, Romania and Brazil. The audits will continue in Italy, United Kingdom, Egypt and China in 2014.
Although the compliance violations uncovered by the audits were not serious, they were addressed in action plans agreed by the local managers and central management The Internal Audit Department is monitoring the status of implementation of agreed action plans, through specific follow-up measures.
It should be noted that none of the audits revealed any breach of the ILO’s Core Labour Standards, with specific reference to forced labour or child labour, freedom of association and bargaining, and non-discrimination.
With reference to Suppliers’ sites, seventy-two audits were carried out between the end of 2009 and the beginning of 2010, a further 56 were conducted between the end of 2010 and the beginning of 2011, and in the second half of 2012 some 62 new audits on suppliers of raw materials, machinery, logistics and services were started, concluding in 2013. In the majority of cases the audits involved suppliers of Pirelli Tyre operating in ESG risk countries, namely Brazil, Argentina, Egypt, China, Romania, Turkey, and Venezuela, or countries from which Pirelli purchases raw materials, such as Indonesia, India, Malaysia, Thailand, Japan, Russia and Korea. Among the Western countries in which Pirelli conducts its business, audits were carried out on Pirelli Tyre suppliers in Italy, UK, Germany, the Netherlands and the United States.
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On the basis of the audit results, Pirelli required a recovery plan to Supplier, designed to prevent, mitigate or remedy any non-compliancefound..The Plan typically envisages specific actions to be implemented by precise deadlines agreed by the parties, in addition to clear identification of the person in charge of the action at the supplier company. Since 2012, the Internal Audit function has also been directly involved in the process of monitoring the implementation status of the suppliers' compliance plans.
Critically observing the results of the supply-chain audits performed between 2009 and 2013, the observed non- compliances continued to be related to the health and safety management processes, use of overtime and proper implementation of the Environmental Management Systems. However, from one audit cycle to another, their number is steadily decreasing, just as their seriousness has steadily decreased. No violations of human rights or fundamental work rights have been found. There has been no contract termination due to the results of the audits. The recovery plans following the 2013 Audits have been completed.
The achieved results are attributable to the Sustainable Management System adopted by Pirelli, which is extensive and covers all phases of the relationship with the supplier. Over the years, it has allowed constant improvements in the panel of suppliers.
Then, it must be considered that the Pirelli suppliers perceive the importance of compliance with the sustainable management factors, partly in consequence of the engagement of their other customers. This certainly contributes to a virtuous circle of continuous improvement.
REPUTATION GOVERNANCE
In an ever-more competitive macroeconomic environment, the new behaviour of stakeholders dictates the evolution of the dynamics of how businesses must relate to them.
We have transformed from a consumer economy to a reputation-based economy, where stakeholders' expectations go beyond the quality of the product and financial performance. The performance of the Company is measured in terms of produced and shared value, ethics and transparency, and care for sustainable environmental and social management.
It suffices to note that 5 points of improvement in the perceived environmental, social and governance performance of a firm corresponds to a 9% increase in consumer support – according to the result of the Reputation Institute’s 2013 Global CSR RepTrak® 100 Study, a survey of more than 55,000 consumers in 15 countries.
This is why environmental, social and governance issues, in the Italian example according the Reputation Institute, the wish to trust determines the desire of 42% of people to admire and support a business.
In this sort of context, traditional communication no longer has the expected effectiveness. What the stakeholders say about the Company is more important that what the Company says about itself. This new way of critically evaluating the performance of a Company influences the purchasing process, its stock performance, its appeal to new talent and the acceptance of industrial sites in local communities, just to mention a few.
High reputation and good performance are (and will increasingly be) inextricably interrelated.
Pirelli, aware that its own success as a company will also depend not only on its own work, but also on the support that the Company will receive from stakeholders, has been able to intercept these dynamics and equip itself for this new phase, among the first multinational companies to set up its own organisation dedicated specifically to reputation governance.
Pirelli has established and is introducing specific procedures to improve its own reputation, using a precise measurement system and working on alignment of the intangible activities with the strategic drivers set out in the Industrial Plan, with the drivers that have the greatest impact on its reputation and considering the diversity between geographical areas and markets. The Company is also working on the construction of a system for protection and mitigation of reputational risks, as mentioned in the previous section.
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COMPLIANCE
Compliance management activities are performed by the Group Compliance Function, a unit of the Corporate Affairs and Compliance Department, through cross-disciplinary interaction with all corporate functions to guarantee that internal regulations, process and corporate activities are always consistent with the applicable statutory and regulatory framework. The Compliance Function discharges its duties by actively participating in the identification of risks of compliance violation with the internal and external regulations that might result in legal and administrative penalties and consequent harm to the Company's reputation. During 2013, revision of the Legislative Decree 231 Compliance Programmes adopted by Group companies continued, resulting in the updates and modifications deemed necessary in the light of the new “presumed offences” added to the list of offences given in Legislative Decree 231/2001. This includes the offence of “bribery between private parties”.
Methodological support activities on Law 262/05 also continued for the “Corporate Financial Reporting Manager” and Group companies to guarantee that corporate activities are performed in compliance with Law 262/05.
The activity begun at the end of 2011 in connection with the anti-corruption programme was completed in 2013. The aim of this programme is to evaluate several areas deemed potentially at risk of bribery (intermediaries; relations with the Public Administration; business transactions for purchase or sale; gifts, trips and entertainment expenses; sponsorships and promotional activities; charitable activities; financing of parties or politicians; human resources; facilitation payments), in the 15 countries of material interest to the Group, the issue of business liability for corruption offences to determine specific safeguards, if appropriate.
On August 5, 2013 the Board of Directors of Pirelli & C. S.p.A. approved the anti-corruption programme, called the Premium Integrity Programme. This is the set of benchmark guidelines concerning prohibited practices of corruption. These represent a systematic set of principles and rules that have already been adopted at Pirelli, complemented by “new” and specific measures, to prevent or reduce the risk of corruption, while further reinforcing the anti-corruption policy of the Group. In Italy, this programme also complements the Legislative Decree 231 Compliance Programme.
The anti-corruption programme was agreed with the Internal Control and Corporate Governance Committee and then approved directly by the Company Board of Directors. Formal notice thereof was given to all Group employees in their local language. The document has also been published on the Company website in 22 different languages for the benefit of all stakeholders.
The programme is fully consistent with the approach taken by the Company which, as set out in the Group Values and Ethical Code and Code of Conduct, has a clearly stated position of not tolerating “corruption in any guise or form, or in any jurisdiction, or even in places where such activity is admissible in practice, tolerated, or not challenged in the courts. “For this reason,” the Code continues, “addressees of the Code are prohibited from offering complimentary gifts or other benefits that could constitute a breach of rules, or are in conflict with the Code, or might, if brought to public notice, damage the Pirelli Group or just its reputation.” The Code also states that Pirelli “defends and protects its corporate assets, and shall procure the means for preventing acts of embezzlement, theft, and fraud against the Group”; and that it “condemns the pursuit of personal interest and/or that of third parties to the detriment of social interests.”
Premium Integrity has been developed out in the following steps:
- Mapping of National and International Regulatory Framework applicable to corporate liability for acts of corruption; - Risk Profile Analysis on the basis of two scenarios: o perceived risk stemming from combination of the level of perceived corruption (associated with the Corruption Perception Index 2011 benchmark calculated by Transparency International) with management’s perception of the level of risk in each country; o adequacy of safeguards against vulnerability derived from combination of the guaranteed protection in areas deemed to be exposed to contingent corruption risks associated with the benchmark provided by the Internal Audit Function on the Internal Control System.
The risk profile analysis made it possible to rank the vulnerability risks of analysed countries in ascending order, as illustrated in the following figure.
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Pirelli monitors the risk of corruption, and if appropriate updates its risk analysis if its scope changes following “the admission” of “high-risk” countries (as defined in the Transparency International index), and defining education and awareness programs as appropriate.
In 2013 training and communication of the administrative liability of companies continued, pursuant to Legislative Decree 231/2001. This activity has been substantially completed and affected 98% of 1,649 employees at 12 Italian companies. A project to implement a Segregation of Duties (“SoD”) program was launched in 2013, aimed at further reinforcing the internal control system and preventing fraud.
In regard to the contributions made in favour of the External Community, for years Pirelli has adopted an internal procedure to regulate the distribution of gifts, contributions and payments to the External Community by Group companies and in regard to the roles and responsibilities of the functions involved, the operating process of planning, realisation and monitoring of the initiatives and disclosures related to these projects.
A key contribution to the initiatives satisfying local requirements is given by the dialogue with the locally operating NGOs. Priority is given to the initiatives whose positive effects on the External Community are tangible and measurable according to objective criteria.
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The internal procedure also specifies that no initiatives may be taken in favour of beneficiaries for whom there is direct or indirect evidence of violation of human rights, worker rights, environmental protection or business ethics.
As envisaged in the “Pirelli Values and Ethical Code”, the Pirelli Group, “does not provide contributions, advantages, or other benefits to political parties or trade union organizations, or to their representatives or candidates, this without prejudice to its compliance with any relevant legislation.”
In regard to sponsorship activities, in 2013 Pirelli updated its own operating procedure regulating the conception, planning, approval, management and control process of sponsorship activities by defining the roles and responsibilities of the functions involved, while guaranteeing the functional segregation of the activities.
The projects to be sponsored must always satisfy specific Guidelines in order to be approved by the Brand and Advertising Committee. The responsible function may grant formal and traced authorisation of the sponsorship only upon complete and total compliance with the Guidelines and necessary requirements.
The Guidelines define the following as prerequisites for obtaining approval of sponsorship projects:
- synergy with Group strategy and consistency with brand strategies and corporate communication; - high visibility and impact of sponsored project; - measurable return in terms of business or measured on the basis of media equivalent measurement standards for brand and communication projects; - morality, fairness and integrity of the sponsored party, the parties controlled by, controlling or otherwise related to the sponsored party; - expected use of Pirelli brands in accordance with Group policy.
As in the case of the procedure that governs charitable donations, the rules governing sponsorships specifies that no initiatives may be taken in favour of political parties, labour unions or their representatives or candidates, or in favour of beneficiaries for whom there is direct or indirect evidence of violation of human or worker rights, environmental protection, or business ethics.
Finally, the Pirelli Compliance Programme envisages two specific internal control systems concerning sponsorships and charitable donations, respectively based on the definition of criteria for:
identification of the sponsorship projects and adequate contractual organisation; identification of the initiatives and adequate assessment of how the donations or payments are used or the outcome of the initiatives.
For control and prevention purposes, all internal audits are also designed to monitor the risk of criminal offences, including corruption and fraud risk.
Once again, in 2013 there was no case of corruption or any public prosecution involving corrupt practises.
Finally, in 2013 support of the activities of Transparency International continued to be provided. Pirelli has joined this organisation as a supporter of educational projects, aimed at promoting the active role of civic and moral education in strengthening civil society against crime and corruption, holding that only pro-active and concrete measures to promote values can lead to general improvement in the quality of life.
GROUP WHISTLEBLOWING PROCEDURE
The Group Whistleblowing Procedure is a tool that supports compliance and internal control activities, as well as risk prevention. Pirelli provides its shareholders, employees, suppliers, customers, all its stakeholders, and the general public with this channel to report any acts or omissions adopted by any party within Pirelli, in its relations with Pirelli or on its behalf such that constitute or may constitute a violation or inducement to violate laws and/or regulations, the principles enshrined in the Pirelli Values and Ethical Code – obviously including equal opportunities –, principles of internal control, company policies, rules and procedures and/or that can either directly or indirectly give rise to economic, financial or reputational damage for Pirelli Group companies.
The Procedure explicitly encourages employees who are aware of potential or real situations of violation to report them immediately – even anonymously – to the Company, with the guarantee that their identity will be kept absolutely confidential and that they will not suffer reprisals of any kind.
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These reports may involve Company directors, statutory auditors, management and employees, as well as anyone else who operates inside or outside Italy on behalf of the Pirelli Group or has business relationships with the Group. This includes partners, customers, suppliers, consultants, independent contractors, accounting firms, and public institutions and entities.
An e-mail address ([email protected]) is provided to anyone who wishes to file a report. That e-mail address is managed at the corporate level by the independent Internal Audit Function and is to be used by all Group affiliates and the External Community. The Group Internal Audit Department is responsible for:
preparing, managing and updating the guidelines for transmitting notices; receiving, recording and analysis the reports received; engaging the participation of other corporate departments and offices for investigation as necessary and forwarding any reports to the supervisory bodies with jurisdiction according to the situations were a specific supervisory body exists (for Italian companies: the Board of Statutory Auditors, the Supervisory Bodies for offences pursuant to Legislative Decree 231/01); planning specific action plans; ensuring the retrieval and storage of documentation for five years after the conclusion of the investigation; filing a quarterly report with the Internal Control Committee of Pirelli & C S.p.A. on reports received and actions underway.
If it is ascertained that the report is valid, the Company must take appropriate disciplinary measures and legal action to protect itself and the Group, if necessary.
An updated version of the Whistleblowing Policy was approved during a meeting of the Board of Directors in March 2013. The updated procedure has been distributed internally in local language versions and is also published on the Pirelli website.
Group suppliers also have the Whistleblowing Reporting Channel ([email protected]) specifically indicated in the Sustainability Clauses included in every supply contract.
The following table summarises the content and the number of reports received in 2012 and 2013.
2012 2013
Total Reports 8 11
Anonymous reports 3 6
Archived due to absolute 2 3 vagueness
Investigated 6 8
Countries of origin of report Italy, Brazil, Egypt, Poland, Mexico Italy, Brazil, Argentina, Venezuela
Allegation made in report employee misconduct, trade union employee misconduct, one case of claims, a case of discrimination post-sales disservice
Outcome of investigated cases revision and modification of processes if revision and modification of processes deemed appropriate, a measure by the if deemed appropriate, measures by
Human Resources Department the competent functions and Human Resources Department, action in satisfaction of customer
With reference to the above table, you may find here some comments.
Eight reports were received during 2012 from Italy, Brazil, Egypt, Poland and Mexico. Four of these reports were received at the e-mail address given in the Group Whistleblowing Procedure ([email protected]); three reports were received directly by management, which in turn alerted the Internal Audit Department. One report was received by the Legislative Decree
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231/01 Compliance Program Supervisoroy Body at a Group company, which in turn alerted the Internal Audit Department to conduct an investigation. Three of the eight whistleblowing reports were received in anonymous form, while the remaining five were signed by the whistle-blower.
It was impossible to conduct any investigation into two of the anonymous reports, given the absolutely vague details provided. Instead, for the other six reports, the Internal Audit Department was able to conduct specific audits on what had been reported.
The examined reports concerned alleged misconduct by management, union claims, and discriminatory conduct against an employee. The results of the audits conducted on the basis of these six reports did not find any violations of laws, regulations, ethical principles or corporate procedures. In one case, it was decided to inform the Human Resources Department, which took the appropriate measures.
Eleven whistleblowing reports were received instead in 2013, from four different countries (Italy, Brazil, Argentina and Venezuela). Of these, eight reports were received at the e-mail address provided in the Group Whistleblowing Procedure ([email protected]) and/or directly at the Internal Audit Department. Three reports were received directly by management, which in turn alerted the Internal Audit Department to conduct an investigation.
Six of the eleven whistleblowing reports were received in anonymous form, while the remaining five were signed by the whistle-blower.
It was impossible to conduct any investigation into three of the anonymous reports, given the absolutely vague details provided. Instead, for the other eight reports, the Internal Audit Department was able to conduct specific audits on what had been reported.
The examined reports mainly concerned alleged misconduct by employees. Upon conclusion of the audits carried out in response to these eight reports, no violations of laws, regulations, ethical principles or corporate procedures were found in four of the reported cases. However, the other four reports triggered the involvement of delegated corporate functions, and particular the Human Resources Department which, after reviewing the evidence, took action as provided by internal procedures and the applicable employment agreements.
Upon conclusion of the investigations, the Internal Audit Department conducted specific audits of the corporate processes involved in the whistleblowing incidents, and revised or modified them as necessary.
The Internal Audit Department has systematically informed the Pirelli Internal Control, Risks and Corporate Governance Committee and the Board of Statutory Auditors of Pirelli & C. S.p.A. about all whistleblowing reports it has received and the progress of this analyses.
In regard to reports by the External Community, it is confirmed that no whistleblowing reports signed by suppliers or other categories of stakeholders were received at the whistleblowing e-mail address, with the exception of one received in 2013 from a customer involving an alleged case of post-sale disservice, where the Company took action in satisfaction of the customer's requests.
However, it is objectively impossible to confirm that absolutely no such reports have been received from suppliers, insofar as certain reports were made anonymously, as mentioned above.
The slight increase in reports in 2013 from 2012 may be attributed to repetition of the communication campaign to employees in their local language, advising them about the procedure and how to use it.
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1.12 STOCK MARKET INDICES AND ETHICAL FINANCE
The commitment to create long-term value that characterises the company’s responsible management and economic, social and environmental performance, has led to Pirelli being ranked on some of the world’s most prestigious stock market sustainability indices for years. Pirelli is also substantially held in the portfolios of socially responsible investors, both inside and outside Europe. Specific road shows are dedicated to socially responsible investors, as illustrated in more detail in the section on relations with investors and the financial community presented in Chapter 2 of this report.
The major ethical finance indices on which Pirelli appears in 2013 are illustrated as follows.
DOW JONES SUSTAINABILITY
Pirelli has been included in the Dow Jones Sustainability indices since 2002. For the seventh year in a row, Pirelli was confirmed as global sustainability leader in the ATX Auto Components segment in September 2013, as part of the Dow Jones Sustainability World and Europe indices. Pirelli’s overall rating for 2013-2014 was 85 points, compared with an industry average of 51.
The Dow Jones indices are revised every year by RobecoSAM, a Swiss asset manager responsible for assessment, admission or exclusion of companies from the Dow Jones sustainability equity indices.
In January 2014 Pirelli was named World Sustainability Leader in the ATX Auto Components” Sector and Gold Class Company for the seventh year in a row in the prestigious Sustainability Yearbook 2014, published by RobecoSAM. The Yearbook is one of the most complete and authoritative global reference tools for sustainable finance specialists. It includes only the top sustainability scoring companies, ranked as such by RobecoSAM in the Dow Jones Sustainability Assessment, or 15% of firms in 58 business sectors.
FTSE4GOOD
Pirelli has been included in the FTSE Global and European STOXX indices since 2002. Pirelli’s 2012 rating in the Automobiles & Parts sector was 100 out of 100, up from 99 in March 2012 and 98 in September 2011. The analysed universe is the one of the FTSE All-Share Index and the FTSE Developed Europe Index..
CARBON DISCLOSURE LEADERSHIP
Also in 2013 Pirelli has been included in the Carbon Disclosure Leadership Index (CDLI), with a rating of 96 (compared with 89 in 2012), which is the top ranking among leading global tyre makers.
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Carbon Disclosure Project (CDP) is an independent, non-profit organisation that offers companies and countries a system for measuring, recording, managing and sharing global information on climate and water resource change. Today more than 3,700 organisations present in the most economically developed countries measure their own greenhouse gas emissions and analyse the risks and opportunities related to climate change through the CDP, with the aim of establishing emission reduction objectives and improving results. The CDP is supported by 655 institutional investors that manage over USD 78 billion and control the largest international database containing information about the climate change management policies implemented by the most important global organisations.
GLOBAL COMPACT 100
Pirelli is the only tyre manufacturer among the 100 companies that comprise the global index.
The Global Compact 100 is composed of 100 companies chosen on the basis of their compliance with the ten guiding principles of the UN Global Compact, which expresses the commitment by management to issues related to sustainability and income level.
These companies, whose stock market performance was monitored by UN Global Compact over the last three years, have outperformed the FTSE® All World stock index over the past two years, generating a 26.4% return over the last 12 months. Inclusion in the Global Compact 100 is one of the most important forms of recognition in the sustainability sector for companies that are committed to aligning their activities and strategies with the ten universal principles in the areas of human rights, work, and environment in view of responsible globalisation.
OEKOM RESEARCH AG RANKING
Pirelli is the global sustainability leader among automotive sector suppliers, according to the Oekom Research AG ranking in 2013.
Oekom Research AG is one of the top rating agencies for responsible investments (i.e. Socially Responsible Investments, or SRI), partner of institutional investors and provider of financial services. Analysts have assessed the sustainability performance of the 40 top suppliers in the global automotive sector.
ETHIBEL EXCELLENCE INVESTMENT REGISTER
Pirelli & C has been included in the Ethibel EXCELLENCE Investment Register since December 19, 2013. Forum ETHIBEL (www.forumethibel.org) only considers shares of firms that receive a high CSR rating on all related issues. The selection of Pirelli by ETHIBEL confirms the superiority of the Company’s CSR performance compared to the industry average.
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STOXX GLOBAL ESG LEADERS
For the third year in a row, Pirelli is part of the STOXX® Global ESG Leaders Indices 2013-2014.
The indices were compiled in 2011 by STOXX Limited which, on the basis of sustainability performance, selects 313 companies from among the 1,800 stocks included in an initial basket of international equities, the STOXX Global 1800 Index.
These indices base their own selection criteria on indicators suggested by EFFAS (European Federation of Financial Analysts Societies) and DVFA (Society of Investment Professionals in Germany), awarding scores to the examined firms on the basis of ESG assessment principles given by the rating agency Sustainalytics.
EURONEXT-VIGEO EUROZONE 120
In 2013 Pirelli entered the Euronext-Vigeo Eurozone 120 index, which is comprised by the 120 listed companies with the highest sustainability rating in the eurozone.
ECPI
Pirelli has been included in ECPI sustainable finance indices since 2008, and in particular:
in the ECPI Ethical EMU Index, which ranks the 150 largest companies by capitalisation in the EMU (Economic and Monetary Union) market; in the FTSE ECPI Italia SRI Benchmark, whose components, selected from the FTSE MIB and FTSE Italia Mid-Cap baskets, are distinguished by their good rating in environmental, social and governance (ESG) terms; in the FTSE ECPI Italia SRI Leaders index, whose members, selected from the FTSE MIB and FTSE Italia Mid-Cap baskets, are qualified as excellent in terms of environmental, social and governance (ESG) sustainability.
The ECPI Italia SRI Benchmark and FTSE ECP Italia SRI Leaders indices were launched on September 19, 2010 by ECPI and FTSE Group. They represent the first series of indices on the Italian market for responsible investment.
According to the ECPI assessment, Pirelli is one of the firms that have a transparent long-term strategic outlook, good operating management and make a positive contribution to society and the environment.
37 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
1.13 PRINCIPAL AWARDS AND RECOGNITION
Pirelli received numerous awards and recognition during 2013 for its sustainable performance accomplishments, the diversity of which reflects the sustainable approach throughout the entire value chain and towards all stakeholders. The principal awards it has received are listed below in reverse chronological order, from 2013. To give an overview on the last three-year period, the principal awards and recognition received by Pirelli in 2012 and 2011 are also mentioned.
NOVEMBER 2013
Pirelli enters the Euronext-Vigeo Eurozone 120 index, which is comprised by the 120 companies with the highest sustainability rating of listed companies in the eurozone. Among the companies certified in information communication technology by SAP as a Skills Centre, Pirelli was a bronze winner in the innovation category.
OCTOBER 2013
For the third year in a row, Pirelli is part of the STOXX® Global ESG Leaders Indices 2013-2014. The indices were compiled in 2011 by STOXX Limited which, on the basis of sustainability performance, selects 313 companies from among the 1,800 stocks included in an initial basket of international equities, the STOXX Global 1800 Index. “Pirelli Corporate App” was awarded as the best solution in the annual report category during the Digital Communication Awards 2013 ceremony. This is a prestigious European award given to digital communication campaigns and projects.
SEPTEMBER 2013
Pirelli was added to the new sustainability index “Global Company 100" launched by UN Global Compact in collaboration with Sustainaltyics. Pirelli is the only tyre manufacturer in the world to be included on the index. For the seven year in a row, Pirelli was confirmed the world leader in the ATX Auto Components sector in the Dow Jones Sustainability World and Dow Sustainability Europe sustainability indices, with 85 points compared with a sector average of 51 points. According to the ranking prepared by Oekom Research AG, Pirelli is number one in terms of sustainability among automotive sector suppliers. Oekom Research AG is one of the top rating agencies for responsible investments (i.e. Socially Responsible Investments, or SRI), partner of institutional investors and provider of financial services. Analysts have assessed the sustainability performance of the 40 top suppliers in the global automotive sector.
JULY 2013
For its “commitment, competitiveness and capacity to innovate, with development of the Self Sealing technology that exhibits technological know-how and corporate capacity to meet future challenges”, Pirelli was given the “Global Champion” award as part of the Volkswagen Group Award, the prize that the car maker awards every year to its best suppliers. This award recognises the excellence of Pirelli in global partnership, product quality, competitiveness, project management and flexibility.
JUNE 2013
Foreign Policy Association (FPA) awards the Chairman & C.E.O. of Pirelli, Marco Tronchetti Provera, with the Social Responsibility Award 2013 for his proven commitment to sustainability.
MAY 2013
Pirelli Metzeler Tourance™ is ranked the best enduro street tyre by the German magazine Motorrad Motorrad. The new Metzeler Tourance™ tyre won because it offered the most balanced performance under all test conditions, performing outstandingly under dry conditions, while exhibiting excellent handling under wet conditions, combined with its high mileage.
APRIL 2013
Pirelli was granted the Quality Award by the Fiat Chrysler Group, which is given annually to the best suppliers of the Fiat Chrysler Group in Latin America in different categories. Pirelli won the prize in the chemical materials category. Pirelli received a Certificate of Merit from Honda. This award was given to Pirelli for the excellence of its car tyre products supplied to the Honda plant in Sumaré.
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Pirelli Latam was rewarded by Peugeot-Citroën for its manufacturing excellence. Pirelli received the top score from J.D. Power for having offered “the best original equipment tyre in the opinion of consumers in the SUV and Truck segment” (out of about 27,000 persons interviewed). Pirelli was awarded by the J.D. Power and Associates Institute (United States) for the seventh time for the results it achieved in the Original Equipment (OE) category. MARCH 2013
Versalis (Eni) and Pirelli signed an important Memorandum of Understanding to undertake a joint research project on the use of natural rubber from guayule in tyre production. The agreement with Versalis will complement and expand the commitment made by Pirelli to research on innovative materials from renewable sources, and particularly from biomasses. Pirelli, which already makes tyres using raw materials derived from rice husks (the non-edible part of the rice grain and normally used for combustion), aims at steadily reducing petroleum-derived components by replacing them with new raw materials that simultaneously guarantee constant improvement in the performance and environmental sustainability of processes and products.
FEBRUARY 2013
For the third year in a row, Pirelli was recognised as having the “Best Corporate Governance in Italy” in the World Finance Corporate Governance Award 2013.
JANUARY 2013
Mv Agusta, the prestigious Italian motorcycle maker, chose the Pirelli Diablo Supercorsa™ SP as original equipment on the base versions of the R and RR models of the F4 2013 line. Pirelli was awarded by Jaguar Land Rover. Since 2011 Pirelli UK has always satisfied the requirements of JLRQ, the system used to monitor the performance of Jaguar Land Rover suppliers. Pirelli is the only tyre maker in Great Britain to have received this award..
NOVEMBER 2012
Pirelli was awarded the international SAP Innovation award in Madrid for its skill in combining technology with particularly innovative projects.
OTTOBER 2012
Pirelli China received the “Sustainability Development in China 2011-2012” award, organised by the Chinese magazine Economic Observer, considered to be one of the three most important economic newspapers in China. The assessment criteria included economic performance, environmental protection and social responsibility. Pirelli was confirmed as the most famous tyre brand in Brazil for the tenth year in a row. This recognition comes in addition to the Top of Mind award. Pirelli was also the most famous company brand in the “Top Male” category of companies in all segments. The survey was conducted nationwide by the Istituto DataFolha. The award was given on October 24 in São Paulo, by the Folha de São Paulo Group. In the United States, the website of Pirelli & C. won the top spot in the prestigious WMA (Web Marketing Association – WebAward) ranking, being defined as an “Excellent Site” according to the standards of the New Media Awards, as part of a research project conducted by Columbia University. In Europe, the website of Pirelli & C. was ranked third in the Digital Communication Award 2012, the top European public relations and communication award hosted by the Berlin University of Applied Sciences. Here again, Pirelli competed against the top European contenders before a jury composed of 30 experts. For the third year in a row, Metzeler was the Italian Champion in the 600cc Supersport class of CIV. On the occasion of the 140th anniversary of the foundation of Pirelli in 1872, Chairman Marco Tronchetti Provera and the entire Pirelli top management were received by Italian President Giorgio Napolitano. “It is a great honour for me and all of us to have been received by President Napolitano on the occasion of the 140th anniversary of Pirelli,” said Marco Tronchetti Provera. “We are celebrating this birthday,” he continued, “together with the 36,000 persons around the world who share the pride of belonging to a Group that has been a standard bearer for the excellence of Italian industry worldwide.” The semi-annual audit conducted by the independent agency EIRIS reconfirms Pirelli on the ethical finance stock indices of the London Stock Exchange FTSE4Good (FTSE Global and FTSE4Good Europe), with a score of 100 points out of 100, up from 99 in March 2012 and 98 in September 2011. Pirelli, which has been on the FTSE4Good
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indices since 2002, has also been reconfirmed as the only Italian company in the automotive and parts sector to be listed on the index. On the basis of the Dealer Satisfaction Survey 2012, Pirelli Spain was recognised for the second year in a row as having the best customer service in that country. The analysis was carried out by Pirelli Marketing together with the statistical analysis company CREA.
SETTEMBER 2012
The Metzeler Roadtec Z8 Interact tyre won the “Tyre of the Year Award” given by Motorcycle News, one of the most prestigious awards in the motorcycle business. The Metzeler Roadtec Z8 Interact tyre was recognised as the Best Touring Tyre by the prestigious German Motorrad Magazine. Pirelli won the Marcas Confiables 2012 Award in Argentina for the fourth year in a row, proving to be one of the favourite tyres in Argentina according to the survey conducted by Selecciones (Reader’s Digest), a leading magazine worldwide with more than 100 million readers. For the sixth year in a row, Pirelli was confirmed the world leader in the Autoparts and Tyres sector in the Dow Jones Sustainability World and Dow Sustainability Europe sustainability indices, with 86 points compared with a sector average of 53 points. The results of the 2012 revision of the Dow Jones Sustainability Indices were announced on September 13, 2012 by Robeco SAM, the Swiss asset manager focused on sustainable investments, and by S&P Dow Jones Indices.
AUGUST 2012
In China the Pirelli P1 won the most highly sought recognition in the tyre business. On August 2, 2012 the magazine Motor Trend recognised the Pirelli Cinturato P1 as the “Environmentally Friendly Tyre of China 2012,” by affirming that it has absolutely unique characteristics in terms of efficiency and sustainability. The judges examined how the tyre can play an important role in reducing harmful emissions and how firms can improve their ethical and social responsibility practices to promote sustainable vehicle use.
JULY 2012
Porsche gave Pirelli its Supplier Award 2011 for the great results it achieved as supplier. Pirelli was recognised in the “Material for Production” category in Munich for its commitment and reliability in managing new projects. The crowning achievement in development of the latest versions of the Porsche Carrera and Boxster, Pirelli was recognised for its extraordinary flexibility in satisfying requests.
JUNE 2012
Pirelli received the “Best Enterprise Brand Image Award” for 2012 in China, at a finance summit that is one of the most important business events of the year. “The growing economic power of China” was the principal theme of the event, which was focused on four key aspects: green, innovation, reputation and development. Summit participants discussed the results and great improvements made by China, with a focus on the progress made in the green economy, business innovation and sustainable development.
MARCH 2012
The March 2012 revision conducted by the independent agency EIRIS reconfirmed Pirelli on the ethical finance indices of the Financial Times “FTSE4Good,” with a score of 99 points out of 100, up from 97 in March 2011. The Pirelli Water Project was rewarded in Brazil. The Pirelli factory at Campinas, Brazil won the prestigious prize awarded by FIESP (Federation of Industries São Paulo). This recognition highlighted the commitment of our Brazilian colleagues in treating water after it is used in production. This award marked a first for Pirelli Brazil, which beat the tough competition fielded by several respected companies. The awarded project was the result of a gradual investment made over the last year, which allowed the reuse of 100% of the water treated in-house, plus a reduction of 35% in the volume of water drawn from the Capivari River. This important prize is the result of a series of analyses and tests conducted by public companies responsible for managing water resources.
JANUARY 2012
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The survey by Encircle Marketing, a firm specialised in post-sale automotive market research, Sell Out and Selling Way prices, declared Pirelli to be the most highly recommended tyre brand of the year, for the second year in a row, receiving 6.7% of all recommendations in the sector. Pirelli was named world sustainability leader in the “Autoparts and Tyres” Sector and Gold Class Company for the fifth year in a row in the prestigious Sustainability Yearbook 2012, published by SAM Group in collaboration with KPMG. The biennial study presented by the international rating agency Vigeo entitled Non-discrimination and Equal Opportunities in the workplace ranked Pirelli among the 20 most advanced European companies in terms of equal opportunity and workplace non-discrimination management. The survey covered 539 companies, 34 sectors and 18 countries, or 80% of European market capitalisation.
OCTOBER 2011
Pirelli received the 82nd Tyre and Fast Fit Awards (TAFF) from the National Tyre Distributors Association (NTDA), an association that promotes the interests of tyre resellers in the United Kingdom. The various candidates that were selected by resellers, until they were narrowed down to the five most voted brands in 2011, were Continental, Michelin, Yokohama, Hankook and Pirelli. Product safety and reliability standards were the items that led to Pirelli being awarded. Pirelli was named the most famous tyre brand in Brazil for the ninth year in a row. This recognition was flanked by the Top of Mind award, in the Top Male category. Pirelli was also the most famous brand among companies in all segments. The survey was conducted nationwide by the Istituto DataFolha. The award was given on October 25 in São Paulo, by the Folha de São Paulo Group.
SEPTEMBER 2011
Following the 2011 revision of the Dow Jones indices – carried out by SAM Group, the Swiss asset manager responsible for assessment, admission or exclusion of the companies from the Dow Jones sustainability equity indices – Pirelli was confirmed global Sustainability Leader in the Auto parts & Tires sector for the fifth year in a row, as part of the Dow Jones Sustainability World and Europe indices.
JUNE 2011
Pirelli is one of the 100 companies with the best reputation in the world, being ranked 31 in the 2011 Global RepTrakTM100, the most authoritative annual reputational survey of the world’s biggest companies conducted by the Reputation Institute. The ranking is the result of a survey conducted in April 2011 of 48,000 consumers in 15 countries who gave their opinion on a panel composed of the 100 top companies in the world.
MAY 2011
The new Pirelli Diablo Rosso II tyres finished first in the annual comparative test of sports tyres conducted by two prestigious, specialised German publications: Motorrad and PS. The series of innovations developed over seven years as official supplier of WSBK enabled the Diablo Rosso II to beat the competition, with awesome track performance using highway tyres. It got the highest score for road hold and grip in dry conditions In China Pirelli won the “best marketing award” during the China Auto Aftersales Summit Forum Awards.
APRIL 2011
Pirelli was rewarded at the London Stock Exchange as the Italian business with the best corporate governance. This recognition took the form of the World Finance Award 2011, the prestigious international prize that since 2007 has selected leading businesses in the areas of corporate governance and financial activity management. The survey by The Boston Consulting Group (BCG), a global leader in business strategy consulting, ranked Pirelli in the top ten of value creators. In fact, the Company was one of the top ten Italian companies that posted the highest rates of stock earnings in 2010. At Moline, Illinois in the United States, John Deere, one of the biggest makers of agricultural and construction equipment in the world, gave Pirelli Agro its highest recognition in the Hall of Fame sector, awarded every year only to those suppliers that over time (five years) have been confirmed as offering excellent products and service. For the fifth year in a row, Pirelli Agro Brasil won the world prize for excellence as best supplier.
FEBRUARY 2011
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In Tokyo Pirelli won the Toyota Regional Contribution Award as best supplier of tyres to this Japanese car maker in South America. The prize, awarded by the Chairman of Toyota, was given as part of the Toyota Global Contribution Award. Pirelli, the first tyre supplier to receive this prestigious Toyota award, was recognised for quality, price and prompt deliveries. PZero won the summer tyre tests organised by the specialised German magazine Auto Zeitung, which pitted 14 different tyres makers against each other in the 225/45 R 17 tyre category. In six tests under wet conditions, PZero proved exceptional in stopping from 100 km/h, safe driving and road hold, and very good in aquaplaning. In the seven tests under dry conditions, PZero stunned observers by its extremely fast speed in curves and directional stability.
JANUARY 2011
In China, at the Guangzhou Auto Show, the magazine Auto News ranked the Pirelli Cinturato P7 tyre as “The best balanced tyre of the year.” The Cinturato P7 stood out for its road hold, stability, tread pattern optimised to reduce noise and the low-carbon emissions production process. In England, Pirelli was ranked as the Most Recommended Tyre Brand for 2010, according to the market survey conducted by Encircle Marketing. Pirelli won the first edition of the Lundquist Employer Branding Online Awards Italy 100, qualifying as number one in Italy in online communication of employer branding, i.e. the company’s appeal as employer on the basis of the transparent, clear and concise communication through which it seeks to attract job applicants. The analysis considers the principal components of online employer branding: Proposition (how the company presents itself and what it offers to employees), Recruitment (information for job candidates) and User experience (presentation of content).
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2. ECONOMIC DIMENSION
“Working to ensure long-term responsible growth in full awareness of the inter-dependence of the economic, social, and environmental spheres, and being mindful of the effects a decision in one such sphere has on the others. Seeking to be a leader of R&D in green technologies and products, ahead of market demand, in the knowledge of the benefits that today’s achievements will bring to tomorrow’s world. Linking together value creation, social progress, concern for stakeholders, and higher standards of living and environmental quality.”
(Values and Ethical Code – Sustainable Growth)
“The Pirelli Group endorses and, where appropriate gives support to educational, cultural and social initiatives for promoting personal development and improving living standards.”
(Values and Ethical Code – Community)
2.1 ADDED VALUE
Added value means the wealth created over a given reporting period, calculated as the difference between the revenues generated and the external costs sustained in the period. The distribution of added value between stakeholders enables the expression in monetary terms of the existing relations between Pirelli and the major stakeholders, thus shifting attention to the socio-economic system in which the Group operates, as shown in the diagram below.
43 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
The added value created by the Pirelli & C. S.p.A. Group in 2013, 2012 and 2011 is broken down as follows.
DISTRIBUZIONE DEL VALORE AGGIUNTO (in migliaia di euro)
2.013 2012 2011
VALORE AGGIUNTO GLOBALE LORDO 2.217.739 2.210.618 1.918.054
A Remunerazione del personale (1.210.928) 54,6% (1.205.608) 54,5% (1.123.507) 58,6%
B Remunerazione della Pubblica Amministrazione (210.392) 9,5% (200.837) 9,1% (34.457) 1,8%
C Remunerazione del capitale di credito (195.832) 8,8% (129.471) 5,9% (89.440) 4,7%
D Remunerazione del capitale di rischio (156.743) 7,1% (132.382) 6,0% (81.151) 4,2%
E Remunerazione dell'azienda (438.682) 19,8% (537.259) 24,3% (584.435) 30,5%
F Liberalità esterne (5.162) 0,2% (5.061) 0,2% (5.064) 0,3%
The growth in added value created in 2013 is 0.3%, compared with 2012, and 15.6% vs 2011. The trends of the items that determine total gross added value, as shown above, are explained fully in Volume 1: Annual Financial Report at December 31, 2013, to which the reader is referred for details.
Account must also be taken of the value generated by the price increase of Pirelli shares on the stock market. Their market performance in 2013 confirmed Pirelli as one of the best stocks in the European Auto & Parts sector, with a 45.3% increase, thus significantly outperforming the Italian Blue Chip index (+28.7 percentage points compared to the MIB FTSE) and the European sector index (+8 percentage points compared to Stoxx auto).
With reference to outside donations, the following table shows the amount of contributions and donations disbursed by Pirelli in the years 2013, 2012 and 2011, broken down by category.
Settore di intervento €/000 €/000 €/000 2.013 2012 2011
Formazione 655 714 674 Cultura, Ricerca 4.003 3.859 3.319 Solidarietà, Sport 504 488 1.071 5.162 5.061 5.064
For the correct sizing and proportion of the expense in the various sectors of intervention it must be considered that the data are consolidated in euro even though the sums were mainly disbursed in the local currencies in the various different countries in which Pirelli works, many of which are emerging markets/developing economies. This is particularly true for the Education and Solidarity categories. Paradoxically, the reported amounts, which are less in absolute terms than the amount allocated to Culture and Research, were instead used to finance a large array of development projects in the grant recipient countries. We invite you to refer to Chapter 4 – Social Dimension for descriptive details of the main initiatives correlated with the disbursals indicated above.
Finally, the Group “does not provide contributions, advantages, or other benefits to political parties or trade union organisations, nor to their representatives or candidates, this without prejudice to its compliance with any relevant legislation” (Values and Ethical Code – The wider Community).
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2.2 LOANS AND CONTRIBUTIONS RECEIVED FROM THE PUBLIC ADMINISTRATION
Romania In March 2012 the European Investment Bank (EIB) disbursed euro 10 million to Pirelli Tyres Romania S.r.l., pursuant to an agreement for a total of euro 50 million in financing as support for an investment of euro 263 million to be used to expand the Pirelli plant in Slatina, Romania, for the production of car tyres and light commercial vehicles. This loan complements a similar loan that was granted in 2007 to support establishment of that same manufacturing site. In 2012 and 2013: - S.C. Pirelli Tyres Romania S.R.L. received euro 7.0 million and euro 4.8 million, respectively, from the Romanian government as incentives for local investment; - S.C. Cord Romania S.R.L. received euro 2.0 million and euro 4.3 million, respectively, again from the Romanian government as incentives for local investment. Italy In September 2012 Pirelli Tyre S.p.A. received euro 1.4 million from the Region of Piedmont as contributions to the Next Mirs project. Mexico In 2012 and 2013 Pirelli Neumaticos S.A. de C.V. (Mexico) received grants from the Government of the state of Guanajuato, Mexico for investments and job creation in the amounts of euro 4.5 million and euro 3.1 million, respectively. In 2013 the company also received grants from the federal government through ProMexico for the equivalent of euro 1.5 million for investment and jobs creation.
2.2 SHAREHOLDERS, INVESTORS AND THE FINANCIAL COMMUNITY
“In its relations with all classes of shareholders, with institutional and private investors, financial analysts, market operators and, in general, with the financial community, the Pirelli Group is fully transparent, complies with the requirements of accuracy, timeliness, and equal access, and aims to ensure that a proper valuation of Group assets can be made.”
(Values and Ethical Code – Shareholders, Investors and the Financial Community)
Pirelli attributes great strategic importance to financial communication, considering it a key tool for building a trust-based relationship with the markets. Accuracy, timeliness, equality and transparency are the basic rules that Pirelli applies to its financial disclosures. Through top management and the Investor Relations Function, Pirelli maintains an open and transparent dialogue with analysts and institutional and individual investors to assure that its assets are fairly valued.
Beyond the constant promotion of the Pirelli equity story throughout the year, financial communication activity focused on the presentation of the new Industrial Plan 2013-2017 to the financial community, which includes sustainability targets to 2020
The new plan represents the strategic evolution of the transformation process that since 2010 has led to Pirelli to focus on value segments and double its profitability. The evolution of this process is a renewed approach to business management, focused on the generation of cash and guaranteeing a high return on investments.
The plan content presented to the financial community in London on November 6, 2013, is reported in a dedicated section in Chapter 1 of this report, to which reference is made. Financial communication
Financial communication in 2013 was characterised by reinforcing dialogue with the Group's principal stakeholders: from institutional investors – who now represent 47.5% of the share capital (36.3% in 2012) – including SRI (Socially Responsible Investing) investors, individual shareholders (10% of the share capital), bond holders and financial analysts through roadshows and dedicated meetings.
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The roadshow and meeting activities, together with growing investor interest in the specific details of the Pirelli equity story in the Tyre Business, has led to the growing internationalisation of the shareholder base. At December 31, 2013 foreign institutional investors represented 43% of ordinary share capital (36% in November 2013, 27% at December 31, 2011).
The presentation of the Industrial Plan 2013-2017 in London on November 6, 2013 represented an important opportunity to meet with the international financial community. The visibility of business drivers and geographic areas where Pirelli works, and its openness to dialogue with management were particularly appreciated. The participation of Pirelli in Formula 1 competition as the sole supplier of tyres also represented a major opportunity for acquaiting the financial community with the company business. In 2013, at the time of the main Grand Prix (MonteCarlo, Monza, Austin Texas, etc.) Pirelli organised meetings with financial analysts and leading local investors, with detailed sections dedicated to technology, the product, the brand and distribution.
In 2013 the Company proceeded with its dialogue with ethical investors, the incidence of which is gradually increasing, making Pirelli one of the key protagonists in the sector. This result is also the fruit of communication activity, which management has organised on an ad hoc basis for analysts and SRI investors. In March 2013, as part of the joint UNPRI-UN Global Compact project (an initiative sponsored by the United Nations and aimed at improving the communication between companies and investors on ESG related issues), the top management of Pirelli held an investor briefing (webcast conference), presenting the ESG Guidelines and responding to questions by SRI investors and analysts.
For the second year in a row, Pirelli also took part – as sponsor – in the Annual Conference and General Meeting of ICGN (International Corporate Governance Network) held in New York from June 26 to 28, an important occasion for dialogue with international investors and leading companies on the issue of Corporate Governance. Confirming the importance that corporate governance issues have for the company, at the beginning of 2013 Pirelli was announced as having the “Best Corporate Governance in Italy” for the third year in a row by the Word Finance Corporate Governance Award 2013.
During 2013, Pirelli also continued its dialogue with bondholders, an important category of stakeholders in the Company, at targeted roadshows in the leading financial centres of London, Frankfurt, Paris and Milan.
The attention of the financial community on the Company is confirmed by the fact that 24 brokers at leading Italian and especially international investment banks cover its financial instruments, and represent more than half of the coverage (52% of global institutions).
The stock market trend in 2013, shown in the following chart, confirms that Pirelli is among the best stocks in the European Auto & Parts sector with growth of +45.3%, significantly outperforming the Italian Blue Chip index (+ +28.7 percentage points vs the MIB FTSE index) and the European sector index (+8 percentage points vs Stoxx auto).
For more information reference is made to the Investors section of the Pirelli website, which offers a comprehensive and constantly updated source of information on matters of interest to shareholders and the financial community.
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2.3 OUR CUSTOMERS
“The Pirelli Group bases the excellence of its products and services on nonstop innovation. Its goal is to anticipate customers’ needs and meet their demands with an immediate and professional response that is delivered with propriety, courtesy, and unstinting cooperation.”
(Values and Ethical Code – Customers)
Pirelli Tyre's business is represented by two main segments: Consumer (tyres for cars, SUV, light commercial vehicles and motorcycles) and Industrial (tyres for buses, trucks, agricultural equipment and steel cord). These businesses are in turn pursued through two sales channels:
Original Equipment, addressed directly to the world's leading car and truck makers; Replacement, for the replacement of tyres on vehicles already in circulation.
In the context of the replacement segment we can make a macro distinction between "Specialised Resellers" and "Distributors". The former are tyre specialists operating on the market in the role of independent businesses; specialised dealers constitute a fundamental point of contact between the Group and the end consumer. Particular attention is devoted to specialised dealers in terms of shared development to enhance the product offering integrated with a high quality level of service, in compliance with Pirelli values and consumer expectations. “Distributors” are partners who are fundamental to guaranteeing continuity in the supply of tyres to specialised resellers. They do so by offering local delivery and distribution services throughout the entire territory. In addition to the core Tyre Business customers there is a mixed panel of customers associated with the other Pirelli businesses, namely a quality niche composed of Pirelli & C. Ambiente, active in the waste-to-fuel and photovoltaic renewable energy sectors and in environmental clean-up; Pirelli Eco Technology, which operates in the diesel vehicle and heating plant emissions control technology sector; PZero, a fashion design project supporting the tyre business focusing on the premium and prestige segment in which fashion exerts special appeal and shares the principles of constant commitment to research, innovation and technology with the core Tyre Business.
Customer focus
Customer focus is the pivotal element of Pirelli Group Values and Ethical Code , and it is based on Pirelli's continuous commitment in terms of: comprehension of the market context in which the Group operates; consideration of the impact of the Group's actions and behaviour on the customer; exploitation of every opportunity offered by doing business to satisfy the customer's needs; “anticipation” of customer needs; top product quality, in addition to excellence of production systems and processes; constant focus on performance to satisfy customer performance and safety expectations; excellence and competitiveness on the market to offer customers quality products and services that provide an efficient response to their demands. The above commitments are also set out in the General Conditions of Supply applied by Group companies.
In accordance with the mentioned focus on customer care, Pirelli also adopted a clear procedure to grant a feedback to any customer claim. Drafted in the form of internal, interdepartmental rules, it requires giving immediate responses to complainants.
Transparency
In the sphere of advertising communication, through the centralisation of all advertising activities since 2009, Pirelli has defined a traceable and transparent process of all decisions relative to advertising campaigns and media coordination. In terms of both production and media planning Pirelli has defined specifications and central auditing and certification
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The Pirelli Group is a member of UPA (Utenti Pubblicità Associati - "associated advertising users") in which it also holds the office of Deputy Chairman thanks to the unfailing commitment and primary role it has assumed in supporting the UPA Code of Conduct. Moreover, Pirelli is a member of IAB (Interactive Advertising Bureau).
The Group is also a member of IAP (Istituto dell’Autodisciplina Pubblicitaria - advertising self-regulation institute) and the Consumer Forum, an organisation set up by consumer associations and companies to safeguard and protect consumers.
Through the UPA, Pirelli is also a member of the WFA (World Federation of Advertisers), which commits participating firms to pursue honest, truthful and fair competition and communication in compliance with the code of conduct and self- regulation they adhere to.
Consumer protection is also guaranteed by the Company's choice of suppliers in the communication sector (creative agencies, media centres, production companies) that in turn belong to business and professional associations governed by communication ethical codes..
In terms of compliance, during 2013:
• no cases emerged of non-compliance with regulations or voluntary codes concerning marketing activities, including advertising, promotion and sponsorship;
• no significant final penalties were levied or paid relating to infringement of laws or regulations, including matters relating to the supply and use of the Group's products and/or services;
• no cases emerged of non-compliance with regulations or voluntary codes concerning information and labelling of products/services;
• there were no cases of non-compliance with regulations or voluntary codes concerning health and safety impacts of products/services during their life cycle;
• there were no documented complaints concerning both privacy violation and the loss of consumers' data;
• there was no prohibition to sell any Pirelli product, and the sale of no products was challenged.
Information and training
Pirelli provides information to customer-distributors and end customers on a continual basis. This information concerns both the product and related initiatives, and is disseminated in a variety of ways. Online communication plays a strategic role in distributing information, and this is complemented by information distributed in hard copy format, as well as the range of off-line and online training activities that have contributed to the success of Pirelli over the years.
Pirelli continued to invest in online communication in 2013, especially on its own websites as constant points of reference for its own clients and end customers. The development of new sites has improved mobile use of information, which provides immediate access to useful information for customers/consumers through the ever-increasing use of smartphones and mobile devices. All 37 of Pirelli online sites were accessed more than 8 million times in 2013. The most visited sites were its Dealer locator and products catalogue.
The iPhone #OnTheRoad application was launced in the second half of the year, and has a community of over 60,000 users. This application allows consumers to obtain information about their own vehicle simply by entering their license plate number. The #OnTheRoad application also offers numbers services and information, beginning with finding points of interest like parking lots, auto repair shops and Pirelli dealers. Furthermore, it offers simple functions on the iPhone that give notices and deadlines related to the operation of one's own car.
In 2013 Pirelli also continued informing customers with a digital newsletter, Paddock News. The main aim is to provide an additional tool of communication and contact with the trade, composed of an international edition, coordinated from Company headquarters, and is published in a local language edition for each market in which Pirelli is present. Paddock News features a gallery of new products and news from the Company and its Business Units: Car, Motorcycle, Motorsport and Truck.
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In the realm of traditional hard copy communication on the other hand, a key role is played by the corporate magazines Pirelli World and, for Brazil, Giro, in addition to publications for the international market including Truck, a magazine dedicated to the world of road transport available online and published in Europe in four languages (Italian, Spanish, German and English) and in two languages in South America (Spanish and Portuguese). The magazines help to maintain a constant link between Pirelli and dealers and professionals in the world of road transport and represent an important tool for the dissemination of information and updates concerning products and applications.
A series of supports have been developed for training dealers about products, in order to explain the peculiar details of the Pirelli line and assist the trade in making sales pitches to end customers. Hard copy materials were complemented by the development of videos for dealer waiting rooms to explain the concept of the most appropriate tyre for each season, the principal recommendations of Pirelli experts and the tyres that are most suitable for each need.
In 2013 the Group strengthened the Tyre Campus project at the local level. With this project, Pirelli aims to achieve excellence in terms of product training both in terms of contents and methods: from factory visits – about 600 dealers (+40% from the previous year) from 15 countries visited the two plants in Settimo Torinese (Italy) and Izmit (Turkey) and also the Vizzola (Italy) test circuit – to tyre performance simulations. Information and training are therefore conducted with a global approach. Product training was a very big activity on all markets, to illustrate the new products of the Company and the peculiar details of Pirelli branded tyres. In addition, deployment of the online Tyre Campus “The Road to Success” training platform continued, covering a total of 15 markets. This platform aims to grow the international coverage of training activities exponentially, by means of a homogeneous approach. Product training is delivered in a captivating style and with the metaphor of a path towards the final goal of certification. Pirelli therefore certifies all its dealers who complete the proposed product training successfully. The status of certified dealer is shown in the dealer locator and by means of a plaque displayed in the point of sale so that the consumer has all the necessary elements to identify dealers who are the most informed with regard to the technical characteristics and benefits of all products in the Pirelli range. The project to expand the geographical reach of the platform is extremely challenging. During the year, it was launched in fivew new countries – the United States, Germany, United Kingdom, Canada and Austria It is expected that the roll-out will be concluded on all markets by the end of 2014.
The Tyre Campus Case tool was developed to support employees involved in providing training to the trade. It is aimed at concretely illustrating the characteristics of our tyres, the differences between different tyre treads and the raw materials used to make our products. With this tool, Pirelli trainers around the world have a concrete and innovative support so that customers can personally verify the key characteristics of our products.
Regulation on General Safety of Motor Vehicles (661/2009)
With this regulation, which came into effect on November 1, 2012, the European Commission aims to improve road safety through the adoption of an integrated approach benefiting users, the environment and industry. The regulation makes it obligatory to equip vehicles with several safety devices, such as the "electronic stability control system". With regard to tyre safety measures, it requires the obligatory adoption of the "inflation pressure monitoring system" on cars and also imposes new limits in terms of rolling resistance of tyres for cars and light, medium and heavy commercial vehicles. Also for vehicles of these types and with respect to the limits already in force since 2001 the regulation establishes new limits concerning exterior rolling noise and the wet grip performance of car tyres.
Tyre labelling regulation (EC 1222/2009)
From November 1st, 2012 all new tyres for cars, light vehicles and heavy vehicles released on the European market must have a label on the tread that informs consumers of the fuel efficiency, wet grip and exterior rolling noise of the tyres they are about to purchase. Fuel efficiency and wet grip are rated on the basis of a scale from class "A" (green class, the best) to "G" (red class, the worst).This classification system resembles the one already in use for domestic appliances.
The US on the other hand requires the Uniform Tyre Quality Grading (UTQG) disclosure: these prescriptions are currently being revised and integrated with the rolling resistance class. Regardless, all sold Pirelli products have a safety warning on the tyre wall, even though this is not required by law.
Voluntary prescriptions for tyre labelling also exist (on a voluntary basis) in Japan and came into effect at the end of 2012 also in Korea.
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ETRMA (European Tyre and Rubber Manufacturers Association) is the main partner of EU institutions for the development of new regulations for the sector and the rules for their implementation. With the institutional support of the Pirelli Group, the association worked ceaselessly throughout 2013 on the development of rules for implementation of the European Commission regulations on general safety of vehicles and tyres and energy efficiency.
In the role of Premium Tyre Company, Pirelli fully supported and continues to support the EU labelling regulation, especially because of the transparency it introduces to the benefit of the consumer, who can thus make an informed purchase in consideration of essential parameters. It is no accident that Pirelli was the world's first manufacturer on the European market with a tyre, the P7 Blue, which in certain sizes carries the prestigious double "A" rating. The three indicators covered by labelling (rolling resistance, noise levels and wet surface braking), although essential, however, do not complete all the parameters that must be assessed by consumers when assessing a tyre to gain an understanding of its effective "value" in terms of performance and safety. A long list of parameters – including dry braking, aquaplaning and road holding – are essential and distinctive features of Pirelli tyres that the Company obviously tests with the utmost attention, without detracting from its continual drive towards innovation. Not least is the importance of informing consumers about concepts whereby fuel efficiency and road safety also depend greatly on the driving style of each driver, and proper tyre maintenance, from checking of the level of wear and tear to correct inflation pressure.
Listening and exchanging ideas as sources for continual improvement
Customer relationships are managed principally through two channels:
the local sales organization, which has direct contact with the customer network and which, thanks to advanced information management systems, is able to process and respond to all information requirements of the interlocutor on site; the Pirelli Tyre Contact Centers, numbering 31 worldwide and are staffed by more than 200 employees developing activities of both IT support and order management (inbound), telemarketing and teleselling (outbound) with a score of 97% in 2013.
These two traditional contact channels are complemented by the presence of Pirelli in the new media. During 2013 Pirelli consolidated its presence on the social networks, first and foremost Facebook and Twitter. The Global Page of Facebook that is dedicated to the brand has over 465,000 fans, while the Motorsport page has about 375,000 fans (February 2014 figures). There are also two Twitter accounts, Pirelli Media (63,000 followers) and Pirelli Motorsport (30,000 followers). Then, the Company has a presence on Instagram (@pirelli_f1), Youtube and Google Plus. With the principal aims of disseminating Company know-how, bolstering the credibility of Pirelli and supporting its premium product and price position, the growing involvement of users through social channels also allows it to collect insight for the product and service and constantly monitor Pirelli brand sentiment online.
In the Motorcycle Business Unit, the German Metzeler brand is particularly active through a local web page in nine countries (Italy, Germany, Spain, Brazil, United Kingdom, United States, Switzerland, Austria and France) and its international site, all under the auspices of Metzeler.com. A new Facebook page dedicated to motorcyclists was created in 2012, with 175,000 likes at year end and content posted in 14 different countries in the various local languages. Other initiatives include the implementation of “Metzeler maps”, active participation in the Ridexperience blog and activation of a new 'answers' function. In addition, an e-commerce function was integrated in the Italian language version of the Metzeler.com site. The multilingual blog RIDEXPERIENCE, on which contributors offer details of extreme travel, technical advice and news features from the biker world, has continued to be extremely popular, as is the fan page dedicated to the Italy, Germany, United Kingdom, Spain, France and United States markets and the YouTube channel dedicated to Metzeler.
The principal marketing research studies that Pirelli has been performing for years to monitor it customer satisfaction and perceived positioning of the Pirelli brand have assumed strategic importance, with a growing level of innovation in the methods and contents of their analyses. Pirelli conducted a trade customer satisfaction survey (in the car sector) again in 2013. As in prior years, the aim of the Dealer Satisfaction Survey was to identify the level of satisfaction of the customer base during the various stages of company-customer interaction in order to map the effectiveness of the action plans implemented throughout the previous years. The 2013 survey involved 14 countries worldwide (with the addition of Russia, Sweden, Italy, Germany, France, Spain, United Kingdom, Poland, Belgium, Switzerland, Brazil, China, United States and Turkey), for a total of about 2,400 interviews. The interviews conducted at the individual retail outlet in “anonymous” form (i.e. in the name of the research institute and not Pirelli), more in-depth interviews were added this year in the name of
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Pirelli on the principal key customers in the various countries involved. This has made it possible to obtain punctual and absolutely transparent feedback, which is useful for defining targeted action plans for our principal partners. The position of Pirelli in comparison with its competitors was positive overall. In general, Pirelli scored in the top three in terms of satisfaction, and the percentage of customers who are completely or very satisfied is very high in various countries (>75% in Germany, Spain, Switzerland, and between 60% and 75% in the other countries on a scale of 0-100 [Completely satisfied = 100; Very satisfied = 75; Somewhat satisfied = 50; Not very satisfied = 25; Not at all satisfied = 0]). In Germany, Spain, Switzerland and Turkey, Pirelli has a score >75 and only in four cases was it lower than 70. In particular, in Italy Pirelli had a score of 72, up 3 percentage points from 2012 and consistent with the score of best performers. In terms of satisfaction in different areas of company-customer interaction, Pirelli performed particularly well in the “premium product range” and “logistics” (in most cases, above the market average). The importance of the “product quality” and “marketing” areas was confirmed. Pirelli is particularly strong in marketing, and not only in most European countries, but also in Russia and Brazil, through its multibrand customer dealer networks.
The innovation in 2013 in the dealer area is represented by the realisation of a customer communication project, by using a web-based search platform that is currently focused on principal European countries, with the possibility of extending it to new non-European markets in 2015. This is comprised by a “voice of the customers” project, which is absolutely innovative for the tyre industry, and has the aim of transforming our customers into a selected panel of partners who are able to assist us both in comprehending market dynamics and developing new market and business opportunity advantages.
Through constant research, contact and collection of feedback in an open, transparent and innovative way, studies are conducted on different marketing issues through surveys, quick polls and online forums. The principal results are then shared with the panel members through publication on the dedicated portal and transmission of monthly eDirect Mails with updates on the principal activities under way. This activates a listening and discussing process as the source for continuous improvement.
At the consumer level, the significant end customer listening activity continued through evolution and reinforcement of the brand tracking survey in the top ten markets of Pirelli (Italy, Germany, Spain, France, United Kingdom, Brazil, China, United States, Turkey and Russia). The principal changes made to the continuous study have made it possible to refine and improve the precision of business insights into the brand role, image profile and characteristics of the different touchpoints that influence the end customer purchase decision. The aim of Pirelli is to monitor this behaviour, measure the position of the brand over its various phases and support the planning activities in support of marketing strategies. The survey that has just been concluded has confirmed the position of Pirelli as one of the top two best recognised tyre brands in Italy, Germany, Spain and the United Kingdom. Specifically in Germany, Pirelli has grown both in terms of “top of mind” (14.6%, up 3 percentage points from 2012) and, more in general, “brand awareness” (44.8%, up 6.8 percentage points from 2012). It has confirmed its leadership in Italy even in terms of “brand consideration” (intention to buy). Outside Europe, Pirelli has also performed very well in Brazil (in first place for each brand KPI) and in China, where Pirelli has a highly characterised and distinctive image profile for the premium consumers target. Generally speaking, the performance of Pirelli in all countries is even more positive precisely amongst its principal monitored core targets: owners of premium cars or Formula 1 fans.
Quality procedures and policy
In 2011 the effects of the new Group premium strategy led to definition of a new quality strategy, named Premium Quality, which is focused on each of the four identified areas of the value chain.
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The analytical process then began in 2012, so that the organisation would have an adequate organisational structure for the quality standard to be pursued and to identify and undertake projects for improvement to be undertaken in each of the four areas.
In 2013, various activities were undertaken that focused on the quality perceived by the customer, extending the scope of investigation worldwide and expanding the range of the various product lines under observation. This activity began in 2012 with 586 in-depth market visits and nine reports on the products in all product lines. Following the satisfying results realised with the winter product line, for example, this activity expanded in 2013 to 1,433 in-depth market visits on all continents, resulting in 15 detailed reports providing top management with important information of significance for the entire value chain.
The global Quality Week, held November 11-15 at all Pirelli sites, offered the occasion for promoting quality culture in the Group, the Premium Quality strategy to all employees and invited outside guests, and letting the “customer's” voice be heard inside the Group.
The organised visits to Group customers Ducati and Maserati were great successes. The most significant comment made by one of the participants emphasised that “the duided tour let me feel the passion of Ducati for motorcycles, which perfectly matches our history and passion for motorcycles and racing”.
The interviews of important automotive customers also aroused special interest. Their testimonials highlighted their expectations of Pirelli products, the service it offers and its spirit of collaboration.
Quality Week was celebrated with 257 events in the Pirelli world and 19,112 participants.
An important event was Quality Celebration Day (Thursday, November 14). Reciting the slogan “We All Make Quality”, the Quality Manager introduced the premium quality value stream to the Board of Directors and other participants.
Two events involving a blind test were also held on the theme of improving customer knowledge and awareness: “SOMETIMES THEY COME BACK – Let's find out what defects customers complain about” and “LET'S TAKE A LOOK! – A simulation of factory quality control”. They were a big success and greatly appreciated by employees. These events proved to be very useful in highlighting the product quality characteristics that customers expect.
Quality certifications ISO 9001
Since 1970 the Group has had its own quality management system, which has been gradually extended to include all production centres. Since 1993 Pirelli has pursued a policy of certification of its quality system in compliance with ISO 9001. Today, 100% of existing Pirelli plants are certified in compliance with the most recent edition of the standard, including the new plant in Mexico and the acquired Russian plants, as well as the activities of the Manresa logistics hub in Spain.
ISO/TS 16949
In 1999 the Group obtained certification for its Quality Management System in compliance with ISO/TS 16949 and it has since maintained compliance with the standard as currently applicable. All plants, whether new or acquired, that supply the automotive sector have obtained or maintain this quality certification.
ISO/IEC 17025
Since 1993 the Group's materials and experimentation laboratory, and since 1996 the Pirelli Pneus (Latam) Experimentation Laboratory, have implemented the quality management system and are accredited according to ISO/IEC 17025. This system is maintained in compliance with the standard in force and the capacity of the Laboratories to perform the accredited tests is assessed on an annual basis. The labs participate in proficiency tests organised by the International Standard Organisation, by ETRTO or by international circuits organised by auto makers. Specifically in regard to car tyres, the quality focus is confirmed by Pirelli's supremacy in numerous product tests. It is also guaranteed by collaboration in terms of
52 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A. product development and experimentation with the most prestigious partners (auto makers, specialised magazines, driving schools, etc.).
Product certifications
Product certifications that allow the sale of products on various markets in compliance with the regulations in force in each country are kept regularly up to date. The main product certifications secured by the Pirelli Group concern the EMEA (Europe, Middle East and Africa) NAFTA (North America Free Trade Agreement), and Brazilian Argentine, Uruguayan, Chinese, Indian, and Indonesian markets and involve all Pirelli plants. These certifications call for annual audits by ministerial institutions of the country in question or by organisations delegated by state institutions, which verify compliance of the product at the certified plant.
Focus on human health and the environment
All raw materials and auxiliary products are carefully tested before they can be used in Group operating units. These tests seek to identify potentially unacceptable risks to human health and/or the environment. This assessment is performed on a centralised basis and carried out in all countries where Pirelli operates, taking account not only of the requirements imposed by European regulations concerning the management of hazardous substances, but also know-how currently available worldwide (specifications, databases, etc.). Monitoring of producers and suppliers of raw materials used by the Group continues, especially in regard to the registration processes of these substances by producers/distributors/importers and in compliance with Regulation CE REACH 1907/2006.
Product safety, performance and eco-sustainability
The commitment of Pirelli to development of products that are increasingly focused on combining eco-sustainability and safety has led to renewal of its product lines. Compared with the previous generation, this guarantees significant reductions in parameters like rolling resistance.
The Scorpion Winter is a concrete example: a new winter product created to equip SUVs, it was developed by exploiting the experience gained from introduction of the Scorpion Verde and Scorpion Verde All Season, pioneering products of the Green Performance philosophy for the SUV segment. It guarantees more than 30% lower rolling resistance than the previous product.
In 2013 Pirelli doubled the Cinturato P7 Blue product line. This was the first AA rated tyre for braking in wet conditions and rolling resistance in certain sizes, by expanding the commercial range of car products that offer top performance and safety.
The development of innovative solutions for performance and eco-sustainability is also guided by the close collaboration of Pirelli with the world's top car makers, which are demanding ever-more stringent safety and reduced rolling resistance and fuel consumption performance. At the same time, technologies that Pirelli has been using in its products for years are growing more and more common, with a growing number of products like the Self Supporting or Run Flat Tyres, which guarantee mobility and vehicle control even upon sudden loss of pressure, the Seal Inside tyres, which use a special polymer sealer to prevent the loss of air when the tyre tread is punctured, and the Cyber Tyre, which represents a further evolution in terms of safety in that it is able to “read” the road surface by means of an integrated chip that transmits important information for safe driving to the driver.
In the Truck Business, Pirelli designs and sells high-performing products in terms of safety and fuel savings. The Serie01 tyres are on par with its best-in-class competitors as measured by energy efficiency (rolling resistance) and at the top of class in terms of wet grip. One example of this is the ST:01 Neverending product launched in 2013. This was the first product in its segment to have AA label ratings. In terms of safety, special mention should be made of the tyres in the W:01 line. Having passed the test imposed by European regulations, it already has the 3PMSF mark on its sidewall.
The range of Pirelli products offered for efficient and sustainable mobility in the freight and passenger transport sector is rounded bout by a series of solutions, which includes the Cyber Fleet in terms of technology and innovation. This system
53 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A. automatically measures tyre pressure and temperature under operating conditions, thereby reducing fleet operating costs and making it possible to reduce fuel consumption costs by simultaneously maximising efficiency in tyre maintenance and pressure control operations. All of these features offer significant advantages in terms of CO2 emissions reduction. This has consequently beneficial effects in terms of environmental impact and improved road safety standards. Greater or lower tyre pressure than what is recommended by the manufacturer corresponds to higher rolling resistance, irregular wear and tear, difficulty in controlling the vehicle and lengthening braking distance. These factors negatively impact fuel consumption, tyre life and driving safety. Cyber Fleet is thus becoming the tool that fleets use to maximise the benefits expressed by energy efficiency classes and wet grip indicated on the European label, which refer to tyres kept at the proper pressure.
Safe, high-performance tyres may also incorporate raw materials obtained from plants. The plans for use of these materials at Pirelli plants in Brazil were accelerated to meet in 2014 the percentage target originally set for 2015. Rice husks are the specific plant origin raw materials, a non-edible renewable substance that does not impact available food supplies and is used to make silica, a key component in making tyres. This type of silica is used in both high performance products and also low rolling resistance tyres – the product lines that reduce fuel consumption through lower heating of the tyre during operation. In general, the use of silica in tyres impacts road safety because it provides better wet grip and guarantees high performance levels. Rice husk silica makes it possible to produce tyres that are more environmentally friendly: the silica is extracted from the waste vegetable matter by using less fossil fuel energy, resulting in significant environmental and cost benefits in a global ecological approach from the production chain through to the finished product.
More information on Pirelli product eco-sustainability is reported in Chapter 3 of this report, to which reference is made. Road safety culture and international initiatives
International initiatives and commitments are discussed in Chapter 4 of this Report, in the section “Initiatives on behalf of the External Community”.
2.5 OUR SUPPLIERS
“Suppliers and outside workers play a key role in improving the competitiveness of the business. While seeking the keenest competitive edge, the Group bases its relations with suppliers and outside workers on fairness, impartiality, and ensuring equal opportunities for all parties concerned. The Pirelli Group requires that its suppliers and outside workers comply with the principles and rules in this Code”.
(Values and Ethical Code – "Suppliers and Outside Workers")
“The Pirelli Group pursues and supports compliance with internationally proclaimed human rights. Pirelli considers protection of the integrity, health and welfare of its employees and the environment as one of the primary needs to be satisfied in organizing and developing its activities. Pirelli Group activities are governed by the Code of Ethics approved by the Board of Directors and comply with the Sustainability Model envisaged by the United Nations Global Compact that was signed in 2004. The Group’s sustainable development strategies pursue various objectives, including continuous improvement in the environmental and occupational health and safety conditions affected by its own activities, in firm compliance with and support of the “Universal Declaration of Human Rights,” the “International Labour Organization’s Declaration on Fundamental Principles and Rights at Work,” the “Rio Declaration on Environment and Development” and the “United Nations Convention against Corruption.” To these ends, the Pirelli Group is committed to: [...] establishing and maintaining appropriate procedures to evaluate and select suppliers and sub-contractors based on their commitments to social and environmental accountability”. [...]
(Pirelli “Social Responsibility Policy for Occupational Health, Safety and Rights, and Environment”)
“The Pirelli Group considers: [...] strategic co-operation with suppliers [...] to be basic and general elements in defining its own strategies and objectives, in view of obtaining ever more competitiveness on the global market on a long-lasting and sustainable basis. The following tools are key to supporting implementation of this Policy: [...] the adoption of measures to assess and monitor Supplier performance from the selection phase on, in terms of competitive advantage, qualitative
54 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A. performance, possibility of shared strategic development, their economic, social and environmental sustainability and in their relationship with the Group”. [...]
(Pirelli Quality Policy)
“The Pirelli approach to environmental management is set forth in accordance with the United Nations Global Compact , of which Pirelli has been an active member since 2004, and pursuant to the “Rio Declaration on Environment and Development”.
These principles have become an integral part of the Group Sustainability Policies according to which Pirelli undertakes, inter alia, to assess and reduce the environmental impact of its own activities and products throughout their life cycle, as well as to use materials and natural resources responsibly, with a view to contributing to sustainable growth for the environment and future generations. [...]
With this Green Sourcing Policy, Pirelli seeks further to reduce the company’s environmental footprint related to the sourcing of materials, products and services. [...]
Pirelli aims to maximise the benefits of this Green Sourcing policy by encouraging its Suppliers to apply it to their own sourcing process and throughout their own supply chain”. [...]
(Pirelli Green Sourcing Policy)
Supply chain sustainable management system
The procurement processes and partnership relationships with suppliers are managed by the Pirelli Purchasing Department, which is headquartered at Milano Bicocca and has specialists located at the various Group affiliates worldwide.
Responsible management that is integrated in economic, social, environmental and governance terms characterises the relations between Pirelli and its suppliers. The “quality” of firms that provide goods and services is also a fundamental element in realising the Pirelli premium strategy.
The Sustainable Management System of the Pirelli supply chain was audited by an independent third party using a high standard of auditing procedures, in accordance with the AA1000 Assurance Standard (2008), in both 2009 and 2011, as documented in the Assurance Statements accompanying the Sustainability Reports for the years indicated.
The social and environmental responsibility and business ethics of a Pirelli outsourcer are evaluated together with the economic quality and the quality of the product or service to be provided from time that a potential supplier is assessed. Analysis of its ESG performance then continues with qualification of the future supplier that was pre-analysed during assessment, and is then incorporated in the supply agreement with the Sustainability and Business Ethics Clauses included in all contracts. After the supply agreement has been made, the sustainability performance of the supplier is audited by an independent third party.
The ESG elements analysed during Suppliers assessment, selection, qualification and audit phases
Pirelli uses the same ESG performance approach through the entire process of interacting with the supplier, although in different ways according to the intensity of interaction that characterises each specific procedural step.
Beginning with the assessment phase, Pirelli suppliers are assessed according to their awareness, management and performance system in regard to: - human rights compliance with a focus on: o ban of child labour; o non discrimination; o ban of forced or compulsory labour;
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o protection of freedom of association and free bargaining; - respect for the rights of indigenous populations and the local community; - rejection of corporal punishment, mental and physical coercion, and verbal abuse; - compliance with the laws and industry standards concerning working hours and assurance that wages are sufficient to cover the basic needs of personnel; - monitoring occupational health and safety performance and improvement targets; - zero tolerance for any type of corruption in any form or way, in any jurisdiction; - assessing and reducing the environmental impact of their own products and services throughout their entire life cycle; - responsible use of environmental resources in view of continuous improvement; - capability to impose the foregoing principles, values and policies on any subcontractors and sub-suppliers, regularly monitoring their actual compliance with this obligation. During initial assessment of the possible suppliers of the good or service sought on the market, the adequately informed buyer is able to get an initial impression of whether the potential supplier complies or not with the product and ESG requirements. This makes it possible to eliminate potential future suppliers that are clearly in possible violation of Pirelli expectations.
For those suppliers proceed to the qualification phase, Pirelli requires that they use the dedicated web portal available in their local language.
By accessing it, the supplier views and simultaneously accepts the Pirelli economic, social, environment and business ethics policies.
The first step entails compilation of a questionnaire on ESG issues, where certain questions are “disqualifying”. This means that an inadequate response to them will prevent a positive conclusion to the qualification process, since they involve minimum requirements that are necessary to become a Pirelli supplier.
These questions require that the potential supplier attest that its firm: - checks workers' ages before hiring them, and it ascertains that all of its employees satisfy the minimum legal working age; - all workers have written employment agreements and work on a volountary basis; - respect the workers' right to free association and participation in trade union activities; - wages and salaries comply with minimum legal standards, if defined; - disciplinary practices, if there are any, comply with the provisions of law; - statutory and contractual provisions applying to working hours, overtime and rest periods are complied with and enforced. According to the merchandise category for which the supplier has initiated the qualification procedure, a particularly detailed questionnaire must be filled out, to which the supplier must attach quality, health and safety certifications, document its own approach to responsible management by attaching policies and codes. The rate of incidence of occupational accidents is investigated, while compliance with the aforementioned labour laws and the existence of labour lawsuits must be certified.
Filling out the questionnaire is one of the essential conditions required for qualification. The rating relative to ESG elements has an incidence of 33% in the final rating of candidate suppliers.
The portal has also been designed to support the realisation of communication, awareness raising and training campaigns for suppliers, for which sustainability is an essential element.
The Sustainability and Business Ethics Clause is included in all supply contracts during the contractual phase. With regard to the contractual stage, from 2008 the sustainability clauses have been introduced systematically in contracts and orders for the purchase of goods and/or services and/or works, both with private suppliers and with the Public Administration (or institutes/enterprises under public control) or NGOs, worldwide. In 2012 the clauses were improved in the drive to achieve greater syntactical simplicity, although while maintaining the pivotal elements of social and environmental responsibility and business ethics currently present, and also the facility for verification by Pirelli by means of audits. In particular, the clauses: call for awareness, on the part of our suppliers, of the principles, commitments and values set down in the Pirelli sustainability documents, namely "The Values and Ethical Code", the "Code of Conduct", and the "Social
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Responsibility Policy for Occupational Health, Safety and Rights, and Environment”, published and accessible on the Web, which enshrine the principles on the basis of which Pirelli manages its activities and contractual or non- contractual relations with third parties; require that Suppliers confirm their commitment to: o not using or supporting the use of child labour and forced labour; o ensuring equal opportunities and freedom of association, promoting the development of each individual; o opposing the use of corporal punishment, mental and physical coercion, and verbal abuse; o compliyng with the laws and industry standards concerning working hours and ensuring that waves are sufficient to cover the basic needs of personnel; o establishing and maintaining the necessary procedures to evaluate and select suppliers and sub- suppliers on the basis of their commitments to social and environmental responsibility; o not tolerating any type or bribery in any form or manner and in any legal jurisdiction, even where such practices are effectively permitted, tolerated, or not subject to prosecution; o assessing and reducing the environmental impact of their own products and services throughout their entire life cycle; o using resources responsibly with the aim of achieving sustainable development in compliance with the principles of respect for the environment and the rights of future generations; o imposing the foregoing principles, values and policies on any subcontractors and sub-suppliers, regularly monitoring the effective respect of this obligation. On the basis of these sustainability clauses Pirelli is entitled to conduct audits at any time it deems fit, either directly or through third parties, to assess the supplier's effective compliance with the obligations it has assumed (detailed informationof audit performed activities is given further ahead in this heading).
The sustainability clauses have been translated into 24 languages in order to ensure the utmost clarity and transparency for suppliers in terms of the contractual obligations they enter into, not only in their relations with the company but also at their own facility and in their relations with their own suppliers.
To provide maximum protection, the Group's suppliers are provided with the Whistleblowing Procedure ([email protected]), expressly indicated in the clauses and available for reporting, absolutely confidentially, any violation or suspected violation they become aware of in relations with Pirelli and with reference to the contents of the "Values and Ethical Code", "Code of Conduct" and the "Social Responsibility Policy for Occupational Health, Safety and Rights, and Environment” of the Group. With reference to the number of concerns raised by Group suppliers at the time of writing none have been received. It is not objectively possible to confirm with absolute certainty that no whistleblowing reports were received from suppliers because several concerns were raised anonymously, as specified in the heading "Group Whistleblowing Procedure" in the first chapter of this report. Moreover, there is no evidence of whistleblowing reports in regard to violations by suppliers used by the Group.
In addition, each purchase contract gives the name of the contact buyer so that the counterparty always has access to a company channel to use to transmit any feedback. According to the issue raised, the contact buyer will then forward the report to the right interlocutor or function.
The supplier is monitored by using the Vendor Rating procedure, aimed at defining the quality level of supplies, the quality of the commercial relationship, the technical-scientific collaboration and performance in relation to occupational safety, the environment, and social responsibility by means of on-site audits and periodic monitoring the progress of the actions set down in any improvement plans signed with the supplier. The results of the Vendor Rating are reviewed periodically and commented on by the Purchasing Department at the time of meetings organized with the suppliers, in order to identify any corrective or performance improvement actions required.
The Vendor Rating covers all the goods and geographical purchasing areas and utilized as an integral part of commercial negotiations.
The suppliers' sustainability audit activity is discussed in the following section.
ESG Materiality and third party audits of supplier sustainability
Pirelli manages its sustainability by using materiality analyses.
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In environmental terms, the impacts are absolutely prevalent in the raw materials category, and specifically in regard to the use of water in natural rubber transformation processes. The social impact (human rights and labour rights in particular) is found in all procurement categories, although it demands special attention by the Company towards suppliers operating in countries that the international community deems to be more risky than others in terms of compliance with national and international labour laws.
Every year since 2009 and with joint activities by the Group Risk Governance, Sustainability and Purchasing Departments, local buyers and Sustainability Managers are asked to prepare a list of suppliers that, on the basis of the results of adequate Risk Assessment, may be usefully subjected to independent audits. Therefore, the “criticality” of the supplier guides the choice. It may be so insofar as:
the supplier is bound to Pirelli by multi-year contracts; the possible replacement of the supplier may be complex; news of ESG risk events is received; or the economic magnitude of the purchase is material, and thus it is decided to audit the supplier's on-site compliance with the Pirelli ESG standards, as agreed by the supplier during the contractual phase, with independent audits commissioned by Pirelli.
At the central level a team composed of the Group Sustainability and Purchasing Departments defines the Guidelines for the selection of suppliers to be audited, supporting the corresponding local functions that manage the process on an operational level. The Purchasing and Sustainability managers who coordinate the supplier auditing activity locally are adequately trained and made aware of the subject and method of auditing by the central functions in charge, namely Sustainability and the Purchasing Department.
The external auditors conduct their audits on the basis of a checklist of sustainability parameters derived from the SA8000® standard (the reference tool officially adopted by the Group for the management of social responsibility since 2004), from the Pirelli Social Responsibility Policy for Occupational Health, Safety, Rights, Environment, consistently with the Social Sustainability, Environmental and Governance areas dictated by the United Nations Global, and from the Group Ethical Code.
Independent audits, each lasting an average of two-three days on site, include extensive interviews with workers, management and trade union representatives.
Seventy-two audits were carried out between the end of 2009 and the beginning of 2010, a further 56 were conducted between the end of 2010 and the beginning of 2011 and in the second half of 2012 some 62 new audits on suppliers of raw materials, machinery, logistics and services began, and were completed in 2013. In the majority of cases the audits involved suppliers of Pirelli Tyre operating in Brazil, Argentina, Egypt, China, Romania, Turkey, and Venezuela, or countries from which Pirelli purchases raw materials, such as Indonesia, India, Malaysia, Thailand, Japan, Russia and Korea. Among the Western countries in which Pirelli conducts its business, audits were carried out on Pirelli Tyre suppliers in Italy, UK, Germany, the Netherlands and the United States.
On the basis of the audit results, as necessary and appropriate, Pirelli prepares a compliance plan that may be designed to prevent, mitigate or remedy any found compliance violations.
The Plan envisages specific actions to be implemented by precise deadlines agreed by the parties, in addition to clear identification of the person in charge of the action at the supplier company.
Critically observing the results of the audits performed between 2009 and 2013, the observed non compliances continued to be related to the health and safety management processes, use of overtime and proper implementation of the Environmental Management Systems. However, from one audit cycle to another, their number is steadily decreasing, just as their seriousness has steadily decreased. No violations of human rights or fundamental work rights have been found. There have been no cases where the supply relationship was terminated due to the results of the audits.
The compliance plans resulting from the 2013 audits have been completed.
The achieved results are attributable to the Sustainable Management System adopted by Pirelli, which is extensive and covers all phases of the relationship with the supplier. Over the years, it has allowed constant improvements in the panel of suppliers.
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Then, it must be considered that Pirelli suppliers perceive the importance of compliance with sustainable management factors, also in consequence of the engagement of a number oftheir customers. This certainly contributes to a virtuous circle of continuous improvement.
The Internal Audit function has been directly involved in the process of monitoring of progress on supplier compliance recovery plans since 2012. This function stands out for its independence at Pirelli insofar as, aside from the Board of Statutory Auditors, it reports to the Internal Control, Risks and Corporate Governance Committee of Pirelli & C. S.p.A., which is composed only of Independent Directors.
Green Sourcing Policy
In December 2012 Pirelli published and issued the Green Sourcing Policy with the aim of stimulating and encouraging environmental awareness throughout the entire supply chain and promoting strategies capable of reducing the environmental impact of Pirelli goods and services procurement activities.
The Green Sourcing Policy implementation system was defined in 2013, both inside Pirelli and in supplier relationships. It is organised as follows:
drafting of the“Pirelli Green Sourcing Manual”, an internal document containing operating Guidelines, intended to guide the activities of the Pirelli functions involved in the Green Sourcing process; drafting of the “Pirelli Green Purchasing Guidelines”, a document targeting Pirelli suppliers, and part of the Supply Agreement, based on the Green Sourcing Manual, which contains the KPI (Key Performance Indicators) for assessing the Green Performance of suppliers, integration of Green Performance in the traditional process of measuring supplier performance (vendor rating).
The Pirelli Green Sourcing Manual defines four areas of Green Sourcing: Materials, Capex, Opex and Logistics. Interdepartmental working groups, comprised of Purchasing, R&D, Quality, HSE and Sustainability analysed the Green Sourcing process associated with the merchandise categories falling within the four areas mentioned above. Green Engineering Guidelines were defined for the Materials and Capex areas, where the design component (what is conceived in- house) is material to the Pirelli core business. Instead, in the Opex and Logistics areas, which are characterised by merchandise categories where the design component is not as material, Green Operating Guidelines were nonetheless drafted in reference to internationally recognised best practices.
So, the Green Sourcing Manual is a unique document that contains:
the general part on Green Sourcing issues; the Green Engineering Guidelines (Materials, Capex); the Green Operating Guidelines (Opex, Logistics).
The Green Sourcing Manual will also be adopted by the Pirelli Training Academies for training of the departments involved in the Green Sourcing process.
On the basis of the Green Sourcing Manual Guidelines, the Pirelli Green Purchasing Guidelines to be provided to Pirelli suppliers will be published in 2014. This document will not only explain the organisation of the Pirelli Green Sourcing system, but will also contain the KPIs used to assess the suppliers' own green performance.
So, in 2015 the measurement of Pirelli suppier green performance will be integrated in the Vendor Rating to promote continuous improvement in this aera, aside from those that have been traditionally present.
Training of suppliers on sustainability issues
Following the training project targeting strategic suppliers provided in the e-learning format during 2012, Pirelli extended the same sessions to all Group security service providers worldwide during 2013.
Expansion of the scope of this project to security service providers involved the participation of suppliers located in the United Kingdom and in Russia, Egypt, Brazil, Mexico, Italy, China, Romania and Turkey.
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The activity involved elements of labour law, human rights, respect for the environment and business ethics.
The tool used for training was a platform specifically developed for this purpose by the Pirelli Group.
After receiving a personal ID and password, the supplier could connect with the online platform and participate in training activities at any time. The course included very practical examples toallow participants to easily check their company level of compliance with the various ESG issues.
To determine the effectiveness of e-learning, a mandatory test was also included, which the participants had to pass at the end of the session.
Supplier award
The 2013 Supplier Award ceremony was held at the Pirelli Bicocca headquarters, with the participation of the Chairman and Chief Executive Officer. Pirelli awarded nine suppliers operating in Japan, Germany, China, Korea, Poland, Thailand and Italy that had distinguished themselves in 2012 for their quality, innovation, speed, sustainable performance, global presence, price, and level of support and service.
In particular, the sustainable performance award aims at recognising long-term responsibility that truly makes a difference by bringing benefits throughout the entire value chain.
The award established by Pirelli is given every year to suppliers of excellence and is aimed at achieving constant improvement of relations with partners in view of shared development.
Trend of Purchases
The Pirelli Tyre core business in 2013 accounts for 97% of Group purchases (vs 96% in 2012).
The following tables show the value of purchases made by Pirelli Tyre and the percentage of the relative suppliers divided by geographical area. The provided information reveals that the value of purchases in OECD areas is approximately the same as the value of purchases in non-OECD areas, while the number of suppliers is slightly higher in OECD areas.
Note that 78% (vs 76% in 2011) of suppliers – excluding raw material suppliers - operate locally with respect to the supplied Pirelli Tyre affiliates, in accordance with a “local for local” supply logic.
Percentage Value of Pirelli Tyre Purchasing by Geographical Area
2013 2012 2011
OECD COUNTRIES EUROPE 40.2% 42.7% 43.2%
NORTH AMERICA 3.0% 2.7% 2.6%
OTHERS 2.8% 2.6% 1.3%
Non-OECD countries LATIN AMERICA 20.2% 26.8% 27.0%
ASIA 19.5% 15.5% 18.9%
AFRICA 1.2% 1.0% 1.0%
OTHERS 13.0% 8.7% 6.1%
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Percentage of Pirelli Tyre Suppliers by Geographical Area
2013 2012 2011
OECD COUNTRIES EUROPE 47.5% 51.6% 59.2%
NORTH AMERICA 3.0% 3.6% 3.3%
OTHERS 2.2% 1.9% 0.3%
Non-OECD countries LATIN AMERICA 28.0% 30.1% 25.5%
ASIA 8.8% 4.5% 5.2%
AFRICA 2.2% 2.1% 1.2%
OTHERS 8.3% 6.2% 5.3%
The following table shows a breakdown of the percentage value of Pirelli Tyre purchases by type. It reveals that the largest and most significant purchasing category concerns raw materials, with an incidence on total purchases in 2013 of 60.5%, substantially in line with the figure for 2012 and on which impacted the increase in prices that characterised the year.
Percentage Value of Pirelli Tyre Purchasing 2013 2012 2011 by Type
Commodities 60.5% 58.4% 58.5%
Supplies 5.1% 4.4% 4.6%
Services 25.0% 26.5% 23.8%
Capital goods 9.4% 10.8% 13.1%
Total 100% 100% 100%
With reference to the percentages of Pirelli Tyre suppliers by type and number as at the following table, already from 2010 the consumables and services suppliers categorisation criteria had been defined. The sum of the number of operators in the two categories remains in excess of 80% of the total, even though the incidence on total purchases is significantly lower than, for example, that of raw material purchases. The fragmentation of consumables and services suppliers is clearly visible compared to the substantial concentration of raw materials purchases over a small number of operators.
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Percentage of di Pirelli Tyre Suppliers by 2013 2012 2011 type of purchase
Commodities 2.6% 3.0% 2.8%
Supplies 34.6% 38.9% 40.5%
Services 51.4% 46.1% 46.2%
Capital goods 11.4% 12.0% 10.5%
Total 100% 100% 100%
Finally, the following table shows the percentage breakdown by value of the mix of raw materials purchased by Pirelli Tyre in 2013, 2012 and 2011. With respect to 2012, in 2013 we see an increase in the incidence of synthetic rubber, chemicals and textiles versus a reduction of natural rubber due to the general price of rubber and the production mix.
The volume of raw materials utilised for the production of tyres in 2013 amounted to approximately one million tonnes, of which approximately 6%, in line with the previous year.
Purchased Raw Materials Purchased by Pirelli Tyre Mix (by Value) 2013 2012 2011
Natural rubber 24% 26% 35%
Synthetic rubber 29% 31% 27%
Carbon black 13% 12% 11%
Chemicals 16% 14% 12%
Textiles 11% 10% 8%
Steel 7% 7% 7%
Targets for 2014 Green Sourcing Policy: definition and implementation of the operational guidelines. Continued training of suppliers New audits on suppliers identified on the basis of the 2013 Risk Assessment, follow-up of the previously completed audits. Supplier Awards 2014: once again this year Pirelli will reward suppliers that have excelled during 2013 in terms of quality level, innovation, rapidity, sustainability, global presence, price, level of assistance and service.
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3. ENVIRONMENTAL DIMENSION
“In running its operations the Pirelli Group is mindful of the Environment and public health. A key consideration in investment and business decisions is environmental sustainability, with the Group supporting eco-compatible growth, not least through the adoption of special technologies and production methods (where this is operationally feasible and economically viable) that allow for the reduction of the environmental impact of Group operations, in some cases even below statutory limits. The Group has adopted certified Environmental Management Systems to control its operations, chooses production methods and technologies that reduce waste and conserve natural resources, and assesses the indirect and direct environmental impact of its products and services. The Group works alongside leading national and international organizations to promote environmental sustainability both on a local and a global scale.”
(The Values and the Ethical Code – Environment)
The Pirelli approach to sustainable environmental management is set forth in accordance with the Sustainability System envisaged in the United Nations Global Compact, signed in 2004, and the “Rio Declaration on Environment and Development.” The above principles are illustrated in the Group Social Responsibility Policy for Occupational Health, Safety, Rights and Environment, according to which Pirelli undertakes to:
assessing and reducing the environmental impact of their own products and services throughout their entire life cycle; promote use of the most advanced technologies to achieve excellence in environmental protection; manage its environmental activities in compliance with the highest international standards; communicate and provide material information to internal and external stakeholders; use material resources responsibly, in view of achieving sustainable growth that respects the environment and the rights of future generations; establish and maintain appropriate procedures to evaluate and select suppliers and subcontractors on the basis of their commitment to environmental accountability.
In its Group Quality Policy, Pirelli specifies that continuous innovation, product excellence and safety, and environmental protection throughout the product life cycle represent one of the principal sources of sustainable competitiveness on the global market. Through adoption of the Green Sourcing Policy, all Group employees undertake to consider environmental aspects in all of their design choices and sourcing of goods and services. The documents cited above have been distributed to all employees in their local languages and are published in the Sustainability section of the Pirelli website, and not just in the languages spoken by employees but also in those that are most representative of the panel of suppliers.
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3.1 THE PIRELLI GROUP ENVIRONMENTAL STRATEGY
Management of environmental issues has always played a key role in business strategy at Pirelli. Indeed, by having a long- term perspective, which is the first priority of sustainability, Pirelli has always considered control over the environmental impact of its own industrial activity to be fundamental.
Given the intrinsic complexity of managing the reduction of its own environmental impact with targets that are contextualised only in specific parts of the tyre life cycle, the Group has implemented a control system that can display, analyse, decide and manage all of its own activities, with a 360° view. This makes it possible to identify the materiality of the impacts and, therefore, the consequent action plans. In accordance with the target set in its Industrial Plan, in 2013 Pirelli has calculated the carbon footprint and water footprint of its entire organisation.
The infographic illustrated on the following pages aims to give a unified and comprehensive view of the Pirelli approach to environmental management, which aims at reducing its impact on resources, the climate and ecosystems. It may be read both horizontally, following the phases of the tyre life cycle one by one, and vertically. This offers the possibility of grasping all the qualitative and quantitative elements related to each individual phase in the life cycle.
These life cycle phases have been analysed by using the Life Cycle Assessment, as defined by the ISO 14040 family of standards. This latter method is capable of validating the results and strategic decisions related to it as objectively as possible. Moreover, reporting of the emissions impacts also complies with the provisions of the GHG Protocol GRI-G4 Guidelines. All those impacts that are listed by the standard but that are not mentioned, both upstream and downstream from the industrial activity of Pirelli, are not applicable or are not material. Moreover, the Pirelli calculation model uses the ISO-TS 14067 technical specification and the draft ISO-DIS 14046 to determine its carbon footprint and water footprint, respectively.
In the upper part of the infographic, the drivers that exert pressure on the environment show how two principal actors alternate at Pirelli, the suppliers and the customers. The principal impact is generated at every stage by different types of activity. In the case of raw materials, their production and distribution – and so the natural resources consumed with this aim – are discussed. In the case of tyre manufacturing, the discussion focuses on the consumption of electric power and natural gas. The greatest amount of environmental pressure has to be attributed to these energy sources, and specifically in terms of atmospheric emissions and water consumption. In the case of distribution of new tyres and their use by customers, the environmental impact results from vehicle fuel consumption. In the specific case of customers, only the fuel consumption related to the power absorbed by the rolling resistance of the tyres themselves is allocated. Finally, in the last considered phase of life, the impact deriving from the preparation of end-of-life tyres for recovery in the form of energy or recycled raw material is calculated.
In regard to the carbon footprint, the drivers category also contains the breakdown of emissions in the three scope categories in relation to the GHG Protocol principles.
The central part of the infographic shows the actual quantification, in percentage terms, of the carbon and water footprint. These two aspects are summarised by four principal indicators: Primary Energy Demand (PED), Global Warming Potential (GWP), Blue Water Consumption (BWC) and Eutrophication Potential (EP). The values are managed in terms of GJ of energy, tons of CO2, cubic metres of water and kilograms of equivalent phosphates. The Primary Energy Demand (PED) refers to the quantity of energy that is taken directly from the hydrosphere, the atmosphere or the geosphere, be it renewable or non-renewable energy.
The Global Warming Potential (GWP) refers to the effect of anthropic activities on the climate, and is calculated in tons of
CO2 equivalent. This means that the potential greenhouse effect is given in relation to CO2. The calculation assumed that the CO2 would stay in the atmosphere for 100 years. Blue Water Consumption (BWC) is given by the volume of consumed surface and underground water in consequence of the production of a good or service. Consumption refers to the fresh water used and then evaporated or incorporated in the product.
The Eutrophication Potential (EP) is the enrichment of nutrients in a specific aquatic or terrestrial ecosystem. Air pollution, water emissions and agricultural fertilizers all contribute to eutrophication. The result in aquatic systems is accelerated growth of algae, which does not allow sunlight to pass beyond the surface of water basins. This reduces photosynthesis and thus reduces the production of oxygen. Low concentrations of oxygen may cause mass death of fish and anaerobic decomposition of organic material, seriously compromising the entire ecosystem.
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Consistently with the product environmental footprint, as already shown in the sustainability reports for the previous years, the tyre use phase is the most significant one for each of the four indicators.
The environmental materiality deriving from this type of analysis, which would logically lead to concentrating all actions on improvement of the product characteristics that determine the use phase, flanks economic materiality. The latter is identified on the basis of different management elements such as, for example, the amount of corporate spending and thus the level of opportunity in reducing and avoiding costs, as in the case of investments in energy efficiency.
In its response strategy, which may be consulted in the lower part of the infographic and corresponding to what has also been stated in the Industrial Plan, Pirelli has adopted adequate management models for monitoring and managing environmental issues, and has also voluntarily adopted specific targets to reduce its impact in each phase of the product life cycle.
All the models, projects and targets mentioned above and indicated in the infographic are discussed in the continuation of this chapter.
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3.2 RESEARCH AND DEVELOPMENT OF RAW MATERIALS
The research and development of innovative materials are key to the design and fabrication of ever-more sustainable tyres that guarantee reduced environmental impact, greater driving safety and improved production efficiency. For this purpose, Pirelli has made Joint Development Agreements with leading suppliers for the study of new polymers to be used for rolling resistance, performance under low temperature conditions, durability and grip.
Pirelli Research & Development also focuses on:
biomaterials, such as silica from renewable sources; high-dispersion silica for wet grip, rolling resistance and durability; high-performance carbon black derived from racing competition applications for extreme grip; nanofillers for more stable compounds, lighter structures and highly impermeable liners; new silanes to guarantee performance stability and processability.
The Consortium for Research on Advanced Materials (CORIMAV) and the University of Milan – Bicocca campus are studying a new selective vulcanisation technology for recycling materials derived from end-of-life tyre compounds. This would permit a significant reduction in production costs and the related environmental impact.
The three-year (2012-2014) JOINT LABS agreement made between Pirelli and the Milan Polytechnic for research and training in the tyre industry focuses its research on the de-vulcanisation of materials derived from used tyre compounds and on biopolymers. Pirelli is working with universities to develop a natural rubber obtained from sources other than the rubber tree. Research is aimed at diversifying the potential supply sources, thereby reducing pressure on the biodiversity of producer countries and allowing the Company to manage the potential scarcity of raw materials more flexibly.
Research on alternative sources of natural rubber
In March 2013 Versalis (Eni) and Pirelli signed an important Memorandum of Understanding to undertake a joint research project on the use of natural rubber from guayule in tyre production. The guayule (Parthenium argentatum) is a non-edible shrub that needs little water and no pesticides, and represents an alternative source to natural rubber thanks to its hypo- allergenic properties, unlike the more common Hevea brasiliensis rubber.
This study will engage the two firms for a period of three years. During that time, and operating on an exclusive basis between the parties, Versalis will provide innovative types of natural rubber extracted from guayule that will be tested by Pirelli for use in tyre production.
On the basis of this new collaboration and, upon industrial scale production of rubber from guayule, Versalis may provide Pirelli with new products that will consolidate and round out the commercial range of synthetic rubber made by Versalis and already used by Pirelli for quite some time in tyre production.
The agreement with Versalis will complement and expand the commitment made by Pirelli to research on innovative materials from renewable sources, and particularly from biomasses. Pirelli, which already makes tyres using raw materials derived from rice husks (as discussed in the following section), aims at steadily reducing petroleum-derived components by replacing them with new raw materials that simultaneously guarantee constant improvement in the performance and environmental sustainability of processes and products.
Silica from rice husks
Silica is used in tyres to reduce rolling resistance, improving vehicle efficiency without reducing its road hold, especially under wet conditions. In its research on ever-more sustainable materials, Pirelli has concentrated on this raw material by seeking an alternative source for traditional processing methods.
The Group has developed a process at its plant in Santa Catarina, a renowned rice producing centre in southern Brazil, which can extract silica from rice husks. Rice husks are the external shell of the rice grain. Rice husks account for 20% of the weight of raw rice, and represent the principal scrap material of rice processing. Given the volume of global rice production, rice husks are available in huge quantities in many areas of the world. Rice husks already have many applications that are
68 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A. more or less sophisticated: from bedding for livestock to organic fertilizer, to solid fuel for electric power generation. In fact, rice husks have a significant energy content, amounting to 14 MJ/kg. However, it is not yet appreciated in less developed areas of the world, and is burned in the field without exploiting its potential.
Aside from its interesting level of energy content, rice husks have another exploitable property, represented by its high silica content, which accounts for about 18% of its weight. In the traditional process, silica is made with a chemical process where crystalline silica, typically sand, is dissolved in a solution of water and caustic soda (NaOH). The result of this first step in the process is sodium silicate. Then an acid is added (typically sulphuric acid) to obtain silica precipitate as the principal product and sodium sulphate as the by-product. The reaction of crystalline silica with caustic soda requires a huge amount of thermal energy. But when rice husks are burned, the resulting ash is composed of non-crystalline silica that has a maximum residual carbon content of 8%. Compared with crystalline silica, this silica requires much less energy in the initial reaction. It is easy to imagine that this biomass may thus constitute an ideal raw material for the production of silica precipitate. All the thermal energy necessary for production can be generated if the rice husks are burned in the right way, and, at the same time, the non-crystalline silica reacts at far lower temperatures than in the traditional method.
Since the production process is thermally self-sufficient, the production of silica from rice husks not only allows energy recovery but also a significant reduction in CO2 emissions, precisely because all the necessary thermal energy is derived from the combustion of renewable biomass. This processing activity has been included in the research project being conducted in collaboration with the Italian Environment Ministry. More information about this project may be found in the section “Relations with Institutions and Public Administrations”, in the Social Dimension chapter of this Report. Initial analyses show that this process offers a great advantage in terms of carbon footprint. Pirelli silica made from rice husks can reduce the carbon footprint by over 90% as compared with silica made with traditional processing techniques.
The production of silica from rice husks by Pirelli stands as a clear example of how innovations in the area of materials can be totally sustainable, contributing both to the exploitation of by-products that would otherwise be only partially reused, and the eco-sustainability of production processes. All of these benefits are accompanied by economic advantages that can be immediately related to the efficiency of the process. This project was also reported in one of the most prestigious newspapers in the world, The Economist, at the beginning of 2013. In an article dedicated to Pirelli, this periodical mentioned the environmental benefits resulting from use of a substance obtained from renewable sources.
Pirelli has set itself the target of extending the use of silica obtained from rice husks to premium tyres by 2017.
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3.3 ENVIRONMENTAL IMPACT OF PRODUCTION
As previously indicated in the introduction to this chapter, less than 5% of the environmental impact of the tyre life cycle results from the processing phase, where the principal component is the use of energy and production of related fuels. Nevertheless, this is precisely the phase when impacts occur due to activities directly operated by Pirelli (i.e. Scopes 1 and 2). Moreover, the economic materiality of this phase has led the Company to commit itself to specific targets in all impact categories. These targets were presented to the External Community in the Group Industrial Plan 2013-2017. The targets have a long-term time horizon (2020), are described in detail in the following paragraphs, and concern the Group's specific energy consumption, specific water uptake, CO2 emissions and waste recovery.
THE TYRE PRODUCTION PROCESS
Before describing process performance, the production phases involved in the creation of a tyre are described here. There are two principal phases:
1. production of the rubber compounds used in the various components of the tyre: tread, sidewalls, liner, bead filler, etc.; 2. construction of the base structure, an actual rubber “framework” that supports all the components.
The rubber part of the tyre (tread, sides and fabric) is a special mix, more commonly referred to as a “compound,” which is mainly composed of rubber (both natural and synthetic), binders (mainly carbon black and silica) and plasticizers. Taken together, these components constitute about 90% of the compounds, while the remaining 10% or so is comprised of other components with specific functions such as, for example, accelerants, antioxidants, vulcanising agents, etc. The plasticizing components, the carbon black and the silica are stocked in dedicated silos and sent to a closed mixer (banbury), in which the compound undergoes its initial processing. A computer monitors and manages the quantity of ingredients coming from the silos. The lighter ingredients are instead pre-batched with specific control systems. In a second phase of mixing, special ingredients, such as vulcanising agents and accelerants, are added. The compound is then unloaded onto an open mixer consisting of two big rollers in order to complete its mixing and optimise its dispersion. Next, the compound sheet is plunged into a vat (batchoff) for cooling.
The prepared compound is then used to make the tyre tread and/or other tyre components. It is then extruded and assumes the appropriate form for subsequent processing. The heart of the tyre structure is represented by the fabrics, which are formed by longitudinal threads (weft) and may be comprised of various materials. The fabrics are then cut at a certain angle with respect to the longitudinal direction (the direction of movement, of rolling or of the weft). Other key parts of the tyre are the tread and the sidewall. The first of these performs critical functions, such as stopping on dry and wet surfaces. The second is the area close to the metal rim, which is called the “bead.” The base of the bead is supported by the ring, comprised of a series of steel wires, which stiffens the part touching the wheel rim. The semi-finished components described thus far (tread, beads, rubberised fabrics, sidewalls, etc.) must be assembled together to make the finished tyre, using “building machines”. The resulting tyre (called a “raw tyre”) is then sent to be vulcanised, which involves a genuine solid state chemical reaction. After being cooled, the vulcanised tyre is deburred to remove any imperfections that might alter its appearance. Then it is subjected to visual inspection (both internal and external) which is then followed – in the case of truck tyres – by X-ray inspection in specially shielded areas. The uniformity and balancing of the tyres are then checked.
70 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
71 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
ENVIRONMENTAL MANAGEMENT SYSTEM AND MONITORING OF ENVIRONMENTAL PERFORMANCE
Pirelli has adopted ISO 14001 since 1997 as the benchmark standard for its Environmental Management Systems. In 2012 all Pirelli Tyre industrial production sites and the tyre testing ground at Vizzola Ticino have pursued continuous improvement of their environmental performance by using Environmental Management Systems certified in accordance with ISO 14001. The sole exception is represented by the Russian site at Voronezh, which entered the scope of reporting this year. Implementation of the Environmental Management System has begun at that site, and it will be certified in 2014. The international standard ISO 14001 was adopted by Pirelli in 1997, and since 2011 all certificates have been given further SAS international accreditation (the Swiss Accreditation Service that assesses and accredits compliance assessment entities – laboratories, inspection and certification bodies).
Group policy mandates implementation and certification in accordance with ISO 14001. As such, it is also applied to new facilities. The certification activity, together with control and maintenance of previously implemented and certified systems, is coordinated on a centralised basis by the Health, Safety and Environment Department.
The environmental, health and safety performance of every tyre business production site is monitored with the web-based Health, Safety and Environment Data Management (HSE-DM) system, which is processed and managed centrally by the Health, Safety and Environment Department. Pirelli has also completed the CSR-DM (CSR Data Management) IT system for managing Group sustainability information, which is used to consolidate the economic, environmental and social performance of all Group business units worldwide. Both systems support consolidation of the performance accounted for in this report.
SCOPE OF PERFORMANCE REPORTING
The described performance covers the three-year period 2011-2012-2013 and covers the entire scope of consolidation of the Group, consistently with the Annual Financial Report at December 31, 2013.
The amount of finished product in 2013 was approximately 1,030,000 tonnes. This value also includes production by the steel cord business unit for the part sold to customers outside the Pirelli Group. The scope of reporting was expanded in 2013 upon inclusion of the Russian Voronezh plant. The entry of this site within this scope is instead classed as “acquisition” as this production unit was already in existence. As from 2013 Pirelli was in fact able to start work of modernisation and streamlining of that plant in order to bring production efficiency in line with the Pirelli Group standards. In accordance with the principles set out by the GRI, the historic value of the environmental indicators reported below has been recalculated by adding the Voronezh data from 2012 and 2011, regardless of the fact that that plant did not belong to Pirelli in those years. The purpose of doing so is to guarantee the comparability of the data on a like-for-like basis. Considering the reporting scope adopted following the “operational control” approach, the steel cord production site in Yanzhou (China) was not consolidated instead, as this is an associated company.
In light of the foregoing, the following figures comprise the impact of all Pirelli units, from industrial units to commercial and administrative sites.
72 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
73 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
PERFORMANCE INDEX TREND
The economic performance of Pirelli was positive again in 2013 in terms of net sales, as fully discussed in its Annual Financial Report 2013. This result is accompanied by the increase in production volumes that occurred from the previous year. The number of tons of finished product in 2013 was up by about 4.5% (increase calculated on a like-for-like basis). In regard to the performance of conventional indices based on this latter parameter, the increase in volumes has made it possible to increase the rate of use of manufacturing sites by interrupting the previous negative trend and improving the energy efficiency of investments that are made. In any case, it must be remembered that, in regard to the Group strategy of continuous pushing towards premium products, the latter are characterised by significant earnings margins but, on the other hand, also by extremely intense energy use. This stems from very stringent quality standards, smaller production lots than those for products made for the medìum-low end segment, and obviously on more complex processing in a greater number of phases.
From this it is inferred that indices generally improved in 2013, when they are calculated according to the number of tons of finished product, even if the trend of standardised operating income indicators worsened instead. This was due not so much to the efficiency of Pirelli production processes but to stabilisation in PBIT when production volumes increase. However, if the view is expanded to the last three years, the performance of this last KPI is even more positive.
ENERGY MANAGEMENT
Pirelli monitors and reports its own energy consumption by using three principal indicators:
absolute consumption, measured in GJ, which includes the total consumption of electrical energy, thermal energy, natural gas and petroleum derivatives (fuel oil, gasoline, diesel, and LPG); specific consumption, measured in GJ per tonne of finished product, which indicates the energy used to produce a tonne of finished product; specific consumption, as measured in GJ per euro of Operating Income.
In November 2013 the Pirelli Industrial Plan was revised and extended to 2017, with Vision on certain issues to 2020. This long-term strategy has renewed the specific energy consumption target, by reducing it to 18% in 2010 as compared with 2009 values. In 2013 the energy efficiency plan continued at all Group plants continued in 2013. This had already been undertaken over the last several years and has been characterised by the following actions:
improving energy management systems, by exactly measuring consumption and focusing daily on technical indicators; improving the quality of energy transformation by streamlining resource and plant use; improving the efficiency of distribution plants; improving the efficiency of production plants; recovering energy for other uses; applying targeted maintenance plans in order to reduce energy waste.
The efficiency improvement actions follow internal assessment rules. In the case of investments, these comply with the criteria of economic benefit normally applied to Pirelli industrial projects. The economic aspect is also completed by assessment of its environmental impact, in accordance with the reporting rules applied to this Sustainability Report. The areas for technical action both concern the traditional themes applied to each industrial area, such as modernisation of thermal insulation, maintenance of distribution plants, use of technologies using inverters, and special projects assessed according to the needs of each manufacturing site.
The actions undertaken in 2013 include the new thermal power plant at one of the Russian plants and start-up of the thermal recovery operations that provide energy for heating the Settimo Torinese plant. The first project will make it possible drastically to reduce thermal energy consumption through the reduction of nearly five kilometres of distribution networks. The second project will provide nearly one third of heating through the recovery of thermal wastes both from the manufacturing cycle and from the new cogeneration plant.
As explained in the paragraph “Performance Index Trend”, the weight of the energy index on tons of finished product fell slightly by -1%, as compared with 2012. In contrast, the weight of the energy index on operating income grew by 4% from 2012, although the trend was still in steep decline over the past three years (-27% since 2011). The reported data were
74 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A. calculated by using direct measurements according to procedure and were subsequently converted into GJ by using heating values from official IPCC sources.
Absolute consumption
Specific consumption
Specific consumption
75 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
2011 2012 2013 ConsumiAbsolute consumption assoluti GJ 15.169.730 14.563.789 15.054.137 GJ/tonPF 13,94 14,75 14,58 ConsumiSpecific consumption specifici GJ/k€ 26,07 18,38 19,03 The energy efficiency plan applied to factories in 2013 made it possible to save about 190,000 GJ. This value was calculated on the basis of the production volumes of the reporting year and the change in efficiencies achieved in 2013 from the previous year.
The following graph illustrates the distribution of the energy sources used by Pirelli and reported overall in the previous graphs. The direct sources, all of fossil origin, include natural gas and, in smaller quantities, other liquid fuels such as oil, LPG and diesel (the last two classified as “others”). These direct sources constitute 31% of the whole. The remaining 69% is made up of indirect sources of purchased electrical energy and steam. On the basis of IEA (International Energy Agency) data, about 38% of electric power is generated by renewable sources.
Disribution of Energy Sources - 2013
Electicity
Fuel Oil
Natural Gas
Purchased Steam
Other
Every industrial plant complies with local laws in regard to energy consumption and management. No substantial changes have been made since 2012. Certain countries are introducing incentive mechanisms for the firms that certify their own energy management system. For example, the Energy Efficiency Directive 2012/27/EU that was issued to accelerate achievement of the 20-20-20 targets in Europe requires that all large enterprises conduct an energy audit by the end of 2015. This obligation may be satisfied with the ISO 50001 certification.
Likewise, the rate subsidies for high-energy consuming plants, according to the different definitions that are locally given, are increasingly conditioned on performance of energy audits or certification of the management system.
GREENHOUSE GAS EMISSIONS MANAGEMENT
Pirelli has monitored and reported on its CO2eq emissions since 2002. The expression CO2eq is used, which accounts for the contribution, albeit marginal, of methane (CH4) and nitrous oxide (N2O). Greenhouse gases are generated by the combustion of hydrocarbons at production sites, mainly to operate heat generators that power Group plants, and particularly those that produce steam for vulcanisers, or by the consumption of electrical or thermal energy. The first are called “direct emissions” or Scope 1 emissions insofar as they are produced at company production sites, while the emissions resulting from electrical power or thermal energy consumption are defined as “indirect emissions”, or Scope 2 emissions insofar as they are not produced within the perimeter of company production sites but at the plants that generate the energy and steam purchased and consumed by Pirelli. Performance as measured by energy and greenhouse gas emissions is calculated on the basis of coefficients obtained from the following official sources:
IPCC: Guidelines for National Greenhouse Gas Inventories (2006);
IEA: CO2 Emissions from Fuel Combustion and reported according to the scheme proposed by:
GHG Protocol: A Corporate Accounting and Reporting Standard.
76 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
Specifically in regard to the CO2eq emissions of Scope 2, the average national coefficients are defined in relation to the last available year in the aforementioned reports and are updated annually. It must be pointed out that tyre manufacturing industry is not carbon intensive, to the point that it is covered by the European Emission Trading Scheme only in reference to thermal plants having more than 20 MW of installed power. The Company is not subject to other specific regulations at the global level.
As in the case of energy, Pirelli monitors and accounts for its direct and indirect CO2 emissions (either Scope 1 or Scope 2 as defined above) by using two principal indicators::
absolute emissions, as measured in tons; specific emissions, as measured in tons per ton of finished product; specific emissions, as measured in tons per euro of Operating Income.
The Pirelli Industrial Plan has set a target to reduce specific CO2 emissions by -15% by 2020 from its 2009 levels. The horizon for meeting this target has been extended from the previous goal (2015), due to the delay in production cycles that affected the previous Strategic Plan.
Disribution of Greenhouse Gas Emissions bu Scope - 2013
Absolute emissions [ton]
77 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
Specific Emissions
Specific Emissions
2011 2012 2013 EmissioniAbsolute emissions assolute ton 1.083.392 1.076.361 1.116.762 ton/tonPF 1,00 1,09 1,08 EmissioniSpecific Emissions specifiche ton/k€ 1,86 1,36 1,41
The close link between energy consumption and CO2 emissions was confirmed again in 2013, with a decrease in specific emissions per tons of finished product down by -1% from the previous year. In contrast, the weight of the energy index on operating income grew by 4% from 2012, although the trend was still in steep decline over the past three years (-24% since 2011).
Biogenic CO2, generated by the small rice husk silica manufacturing site, Pirelli emitted about 5,300 tons of CO2 equivalent in 2013. This amount is not counted in the absolute emissions of the Group mentioned above.
The Pirelli greenhouse gas emissions management, calculation and reporting system was certified by an independent third party that implemented ISO 14064-1. This audit satisfies the criteria of materiality, competence, independence, terminology and methdology.
Pirelli participated in the Carbon Disclosure Project (CDP) again in 2013. The company reached the top positions in the ranking, obtaining a disclosure score of 96 points out of 100, falling in the top scoring bracket: Senior Management. In consequence of this score, and recognising the transparency and reporting quality of the information that relate to climate change, the CDP added Pirelli to the CDLI 2013 (Carbon Disclosure Leadership Index).
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Carbon Action Plan
As part of the Carbon Action Plan, the conversion of the Egyptian manufacturing site to natural gas was completed in 2013, while its effects on the emissions intensity of this factory will be seen beginning in the next year. In regard to the supply of electric power from renewable resources, the opportunity sought last year found that the contract-making phase was still open. However, the Company is working to extend this opportunity to other Group affiliates as well. A 500 kW photovoltaic energy plant was installed at the United States manufacturing facility in 2013, with the aim of generating more than 13,000 MWh of clean energy over the next 20 years. This project will make it possible to reduce emissions at the affected manufacturing plant by 5%.
With the collaboration of the Forum das Américas, Pirelli and the Italian Environment Ministry presented a project in 2013 to build the first large solar energy plant in the world at the Pirelli Feira de Santana, Brazil plant for the direct production of medium temperature steam to serve the production process of a factory.
Construction of the plant implements the collaboration agreement signed in January 2012 by the Ministry and Pirelli to reduce carbon dioxide emissions, and falls in the context of environmental cooperation between Italy and Brazil, reinforced in June 2012 by the agreement signed by the Italian Environment Minister and the Brazilian Energy Minister. In particular, the Group will implement the most advanced technologies and know-how in the sector. The Milan Polytechnic as well as Italian and Brazilian firms assisted with the design of the plant, which is expected to be built in 2014. With this pilot plant, it is estimated that CO2 emissions will be reduced by 2,000 tons over five years, avoiding the use of natural gas. The new Pirelli Tyre plant at Settimo Torinese started up its cogeneration plant to produce electricity, steam and hot water. There are two cogeneration modules, yielding a total of 6 MW in electric power. A 4.8 MW turbine fed by natural gas, and a 1 MW endothermic engine fuelled with vegetable oil will thus guarantee that 20% of energy comes from renewable sources. The generated electricity is used for the internal power needs of the plant. Thermal energy is used primarily to generate high pressure steam used by the production plant. Low temperature recoveries are instead dedicated to the production of hot water, used to improve the efficiency of the thermal power plant and to supplement plant heating. The plant is completed with an approximately 1.2 MWe photovoltaic plant, thereby complementing the generation of renewable energy at the Italian plant.
The benefits expected from the actions listed hitherto will have an impact on the trend in the indices in coming years. The actions taken over the past years, especially those related to energy efficiency, have helped to reduce emissions of CO2eq by about 9,815 tons in 2013. This value was calculated on the basis of the production volumes of the reporting year and the change in efficiencies achieved in 2013 from the previous year.
Emissions offset activities
A new internal policy covering management of the company car fleet in Italy was drafted at the end of 2011. It applies to Italy, the Pirelli Group centre where most vehicles owned by the Group are concentrated. The policy affects all cars assigned to managers and the sales force, by calling for the complete offset of CO2 emissions by each fleet vehicle with forest protection and development work.
Aside from being an incentive to choose more sustainable cars, the new policy has the merit of spreading the culture of environmental responsibility in a simple, tangible way, through the direct participation of employees. The calculation model used took account of the emission factors of each individual vehicle and of the miles covered. In 2013 about 1,290 tons of
CO2 were released, nearly 8% less than in 2012, when about 1,400 tons were released. In 2012 the Company had offset its consumption by purchasing credits from ARBolivia, a project associated with the reforestation of an area in Latin America, where Pirelli has a strong, recognised presence. By pursuing this philosophy, half the 2013 amount will be offset by an Italian forestry conservation project, while the other half will be offset by a Brazilian reforestation project.
The Italian project is named Forcredit and consists of a plant to manage the forest properties of the Township of Lemie in the Province of Turin, about 50 kilometres from the Pirelli manufacturing plant at Settimo Torinese. Its purpose is to promote sustainable forest management as a tool to reinforce biodiversity and promote the increase in carbon stored in forest ecosystems. The planned work is part of a management plan aimed at reducing wood cutting and uptake of wood material, so that tall trees may grow. Regardless of whether these woods consist of maple and ash trees, birch or beech trees, the activities are aimed at improving the structural quality of the plants. In addition to active forestry management
79 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A. for sustainable development of local economies, the project aims at improving forestry assets and developing natural resources and the landscape for local tourism and recreational activities. The management implemented with this project allows lasting accumulation of carbon (i.e. “carbon sink”) in its components of epigeal biomass (trunk, branches, leaves), hypogeal biomass (roots), necromass (dead trees, stumps), forest bed and soil. In other words, this material is accumulated in the reservoirs that capture carbon and remove CO2 from the atmosphere, in consequence of the natural process of photosynthesis. The affected area measures 670 hectares. Certification of the independent party VCS by CSQA and SAI Global Italia is still underway.
The Brazilian project is named Climate Protection Acacia. Its overall goal is a 3.7 million ton reduction in CO2 through reforestation with Acacia mangium of 3,507 hectares of land in the far north of the South American nation, in the Boa Vista region. The project, aimed at sustainable production of wood and capture of CO2, generates numerous benefits for local communities, such as the creation of over 200 permanent jobs, the construction of a new school and the implementation of professional courses. The project also respects the rights of local populations to collect non-wood materials from the forests, improves water and soil quality and secures over 15,000 hectares of bordering forest areas with great benefits for local biodiversity. The plantings are carried out in accordance with the principles and criteria set out in the Forest Stewardship Council (FSC) certification, which guarantees appropriate environmental management of forests, social benefits and economic feasibility. The project is audited by an independent certifying entity, using recognised standards. The Acacia Brazil project is developed according to the ACR (American Carbon Registry) standard and certified by SCS (Scientific Certification System).
Just as it has done every year, in 2013 Pirelli offset the CO2 emissions at its Vizzola Ticino testing ground, corresponding to its 2012 test activities (about 20 tons of CO2) with work to protect 3,704 square metres of forest in Italy, at the Rio Vallone park and in Costa Rica, with 6,300 square metres of growing forest. Pirelli is again committed to the Impatto Zero (“zero impact”) project that, through LifeGate, assigns a proportionate area of forest to be protected according to the CO2 that is produced.
WATER MANAGEMENT
Efficient and conscious water use is one of the principal components of the Pirelli environmental strategy, which has undergone numerous improvements over the last several years. These activities have involved and still involve both the overall efficiency of production processes, from design of machinery to facility management, and the contribution which every employee can make towards reducing consumption of this precious resource.
Since 2009, the commitment made at all manufacturing sites has led to saving 14.5 million cubic metres of water. This amount is very close to the absolute volume of the annual water uptake by the entire Pirelli Group. This figure might be the one that best expresses the commitment of the Company to protection of water sources in the communities where it operates. In fact, aside from the quantitative and global aspect, Pirelli dedicates great attention to the local context of water resources, aware that any water savings or improvement in discharges immediately and directly benefits the local community.
In quantitative terms, there was an absolute uptake of 15 million cubic metres in 2013, with a reduction in the specific amount that was 10% higher than in 2012. Notwithstanding this tangible and significant saving, following the macroeconomic conditions and new scope of reporting, the goal of reducing specific water uptake was redefined and transferred to 2020. As compared with 2009, the specific uptake will be reduced by 50% by 2017 and 58% by 2020.
Accordingly, to give a comprehensive overview of its water uptake, Pirelli monitors and reports on the following three indicators: absolute uptake, measured in cubic metres, which comprises the total uptake of water by the Group; specific uptake, measured in cubic metres per ton of finished product, which indicates the uptake of water used to make one ton of finished product; specific uptake, as measured in cubic metres per euro of Operating Income.
All the figures reported in this section have been collected by taking direct or indirect measurements, and are communicated by the local units.
80 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
17.000.000
15.000.000
13.000.000
11.000.000 Absolute withdrawalPrelievo Assoluto (m3) 9.000.000
7.000.000
5.000.000 2011 2012 2013
18,00 17,00 16,00 15,00 14,00 13,00 PrelievoSpecific Specifico withdrawal 12,00 (m3/tonFP) 11,00 10,00 9,00 8,00 2011 2012 2013
30,00
25,00
20,00
15,00 PrelievoSpecific Specifico withdrawal (m3/k€) 10,00
5,00
0,00 2011 2012 2013
2011 2012 2013 PrelievoAbsolute Assoluto withdrawal (m3) 16.349.000 16.174.000 15.119.000 (m3/tonFP) 15,0 16,4 14,6 PrelievoSpecific withdrawal Specifico (m3/k€) 28,1 20,4 19,1 The two graphs below show the weight of the water procurement per type of source and the distribution of absolute uptakes per type of production business.
81 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
Type of water sources - 2013 Disribution of water withdrawal by use - 2013
Public acqueduct
and other sources
Internal wells
Surface water Other non productive
More than half the water drawn is taken from wells within the plants and authorised by the delegated authorities. Furthermore, Pirelli obtains about one fourth of its requirements from surface water, while dedicating special care to guaranteeing that this volume is marginal in relation to the volume of the affected water bodies (always less than 5%). In particular, about 10% is taken from water bodies located in Brazil and protected by national laws and regulations. Finally, about 700,000 cubic metres of water used are obtained from treatment of waste water generated by its own manufacturing processes.
A total of about 10 million cubic metres of water were discharged, with about 70% of this into surface water bodies, but always in quantities that are marginal in relation to the volume of the capture basis (always less than 5%) and without significantly impacting biodiversity.
The remaining amount was discharged into sewer networks. Before being discharged into the final recipient, industrial waste water – adequately treated as necessary – is periodically subjected to analytical tests that certify compliance with locally applicable statutory limits. Specifically in regard to the quality of industrial discharges at the Tyre sites, indicative values of the total average are: 8 mg/l of BOD5 (Biochemical Oxygen Demand), 41 mg/l of COD (Chemical Oxygen Demand) and 23 mg/l of Total Suspended Solids.
WASTE MANAGEMENT
The aim in this section is to complete the overview of the environmental sustainability process by describing the approach adopted to improve environmental performance resulting from the production and management of waste, pursued through the following activities:
innovation of production processes, with the aim of preventing the production of waste at the source, progressively reducing processing rejects and replacing current raw materials with other new ones that have a lower environmental impact; operating management of generated waste, aimed at identifying and ensuring the selection of waste treatment channels that can maximise recovery and recycling, gradually eliminating the amount sent to the landfill with the Zero Waste to Landfill vision; streamlining packaging management, both for the packaging of purchased products and the packaging for products made by the Group.
Pirelli monitors and reports on its own waste production, as measured and communicated by all operating units, using three key indicators:
absolute production, as measured in tons; specific production, as measured in kilograms per ton of finished product; specific production, as measured in kilograms per euro of Operating Income.
82 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
The Industrial Plan that was presented to the international financial community in November 2013 has redesigned the strategy to reduce the impact associated with wastes generated by Pirelli Group manufacturing activities, focusing attention on the value of wastes as a resource and then on its development through recovery activity. By 2020, more than 95% of waste products will be sent for recovery, with Vision Zero Waste to Landfill, extending the approach previously adopted with success at Breuberg in Germany and Rome in the United States to all operating affiliates.
As anticipated in the section “Performance Index Trend”, 80% of the wastes were recovered in 2013, resulting an an increase of 4% from the previous year. The same trend was also recorded for the specific quantity of wastes produced, determined principally by conversion and renovation of manufacturing sites. Hazardous wastes represent slight less than 20% of total production and are sent in their entirety to plants located in the same country where they are produced.
Distribution of waste by type of treatment - 2013
83 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
180.000
160.000
140.000
120.000 ProduzioneAbsolute production assoluta (ton) 100.000
80.000
60.000 2011 2012 2013
160
150
140
130 Produzione specificaSpecific production (kg/tonFP) (kg/ton FP) 120
110
100 2011 2012 2013
300
250
200
150 Produzione specificaSpecific production(kg/k€) (kg/k€) 100
50
0 2011 2012 2013
2009 2010 20092011 20102012 20112013 2012 2013 Absolute production Produzione assoluta Produzione(ton) assoluta 0 (ton)129.497 141.0000 129.497149.000 141.000163.000 149.000 163.000 (kg/tonFP) 0 (kg/tonFP)127 0130 127151 130158 151 158 Produzione specifica ProduzioneSpecific production specifica (kg/k€) 0 (kg/k€)318 0242 318188 242206 188 206
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Type of waste - 2013
Hazardous
Non-hazardous
Handling of packaging
Different procedures for handling packaging materials exist for different types of products. While tyres are products generally sold without packaging materials, steel cord involves specific packaging. In this respect it should be pointed out that tyre sales account for over 99% of all Group sales in 2013. To reduce the waste from packaging of the products sold, the Steel Cord Business Unit manages and streamlines the use of packaging materials, in collaboration with its own customers. The purpose of these actions is to increase the quantities of reusable packaging materials, both through their being returned to production sites and through replacement of certain types of packaging with more resistant models that are less subject to wear and tear and thus having a longer life.
More specifically, attention was focused on the replacement of traditional wood pallets with new plastic or metal versions, which have a high rate of reusability. A plastic pallet can be reused about ten times, compared with one or at most two times for a traditional wooden pallet. Reducing waste generates obvious benefits. The data received by the Steel Cord Markets and Logistic Department confirm that beginning in early 2013, 100% of the pallets used in reverse logistic circuits are made of plastic or metal, covering 95% of sales volumes. For the remaining 5% wooden pallets are used, where they are more easy to reuse and recover in the areas where they are dispatched.
OTHER ENVIRONMENTAL ASPECTS Solvents
Solvents are used as ingredients in processing, mainly to reactivate vulcanised rubber, during the fabrication and finishing of tyres. The Pirelli strategy is focused on steady reduction of these substances, both through streamlined use of solvents and dissemination of solvent-free technologies for those operations that may be carried out even without the use of these substances. This strategy has translated into a more than 30% reduction in the specific consumption of solvents, and the related emission of volatile organic compounds, as compared with the forecast 15% reduction from 2009 levels, with aggregate related emissions slightly lower than total consumption.
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4.000
3.500
3.000
2.500 ConsumoAbsolute assolutoconsumption tonSOLV 2.000
1.500
1.000 2011 2012 2013
3,50
3,00
2,50
2,00 ConsumoSpecific consumption specifico 1,50 kgSOLV/tonPF 1,00
0,50
0,00 2011 2012 2013
2011 2012 2013 Absolute consumption Consumo assoluto ton 3.435 2.826 2.496 Consumo specifico kg/tonPF 3,2 2,9 2,4 Specific consumption
Biodiversity
For Pirelli, the responsible integration of its sites within the local territorial context is an essential cultural aspect. The greatest care is taken to guarantee that the corporate activities do not interfere with the typical biodiversity of the local environments. There are currently two Pirelli sites located inside protected areas that are extremely valuable in terms of biodiversity: the Vizzola Ticino site and the Gravataì site.
The Vizzola Ticino site, which has an area of 0.26 square kilometre, is part of the Parco del Ticino in Lombardy, an MAB (Man and Biosphere, a collection of 425 biosphere reserves located in 95 countries around the world) area of UNESCO. It features 27 species included on the IUCN Red List.
In view of better guaranteeing protection of the natural environment where the Vizzola test track is located, Pirelli has implemented an ISO 14001 certified Environmental Management System in accordance with the Parco del Ticino. The environmental impact on the biodiversity of the area is not significant; nevertheles, various activities have been undertaken to mitigate and improve the interaction of Pirelli activities with the natural context, performed directly both by the park administration, as agreed in writing in 2001, and aimed at improvement of the landscape and ecosystem functionality of the neighbouring areas or where the test track is located.
The Gravataì site in Brazil, measuring 0.57 square kilometre, including 0.16 square kilometre of land ecosystem protected under federal law. Here again, Pirelli has implemented an ISO 14001 certified environmental management system to guarantee that all potential impact on the environment and on biodiversity, while deemed relatively insignificant, be duly considered and managed in every case to reduce all possible interference to a minimum.
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NOX emissions
The NOX emissions derive directly from the generation of energy used. For this reason they are impacted, both in absolute terms and in relation to the unit of finished product, by energy consumption trends, to which a specific section has been dedicated elsewhere in this report.
Absolute emissions
Specific emissions
2011 2012 2013 AbsoluteEmissioni emissions assolute tonNOx 2.208 2.164 2.290 Emissioni specifiche kgNOx/tonPF 2,03 2,19 2,22 Specific emissions
The following graph shows the weight in 2013 of the direct and indirect emissions of NOX out of the total NOX emissions. The emissions have been calculated by using the emission factors defined BUWAL 250 and IDEMAT 2001.
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Distribution of NOx emissions - 2013
Indirect
Direct
Other emissions and environmental aspects
The production process does not directly use substances that are harmful to the ozone layer. These are contained in certain closed circuits of the cooling and air conditioning plants. Therefore, except for accidental and unforeseeable losses, there are no free emissions into the atmosphere that can correlated to Pirelli manufacturing activities.
Direct emissions of SOX, caused by the combustion of diesel and fuel oil, was estimated to be about 325 tons in 2013 (U.S. EPA emissions standards).
The environmental management systems implemented at the production units have assured constant and prompt monitoring and intervention in potential emergency situations that may arise, as well as the reports received from stakeholders.
No significant environmental spills occurred in 2013, no complaints occurred in relation to significant environmental reasons, and no fines connected with them have been recorded.
Expenses and investments
In 2013 environmental expenses and investments related to the manufacturing process totalled over euro 15 million. About 85% is covered by normal management and administration of factories, while the remaining 15% is dedicated to preventive measures and improvement in environmental management.
To complete the picture, it must be pointed out that, consistently with the materiality analysis at the beginning of this chapter, the most important expenses dedicated by Pirelli to the environment are definitely those related to product research and development. In 2013 the Company invested euro 199 million in research and innovation of its own products, with a constant focus on safety performance and reduction of environmental impact and, at the same time, production efficiency.
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3.4 PRODUCT AND USE PHASE
The impact of the use phase is completely indirect in relation to the industrial activity of Pirelli, there is no doubt that this is the phase that makes the greatest contribution by far during the tyre life cycle. The carbon and water impact varies from 75% to 90% of the total. This is due almost entirely to the power absorbed by the tyres, which deform by absorbing energy to guarantee road hold and braking performance. Rolling resistance is the characteristic that determines the level of energy absorption, and it precisely on this environmental performance that Pirelli is intensifying its own research. The reduction in rolling resistance entails lower fuel consumption by the vehicle system. This consumption, which is realised with combustion in vehicle heat engines, combined with production of the fuels themselves, results in the impact of this phase in the life cycle.
Green Performance targets
The decision to focus on the premium segment forces Pirelli to develop and introduce increasingly sophisticated products on the market in a macroeconomic scenario that is undergoing constant, rapid evolution.
The major corporate investment in research and development on ever-more innovative compounds, structures and tread patterns allows Pirelli products to achieve extremely high performance in terms of braking under dry and wet conditions and, at the same time, improved environmental performance such as:
less rolling resistance – lower CO2 emissions; less noise – reduced noise pollution; increased mileage – lengthening of tyre life and reduced exploitation of resources; improved rebuildability – less waste to be disposed; reduced weight – less use of raw materials and lower impact on natural resources.
The new EU environmental and safety tyre labelling regulation applicable to tyres for sale in the replacement segment came into force on the European market in 2012. This regulation requires that tyre makers apply a label (the "Eurolabel") informing consumers about key product characteristics, such as rolling resistance (an indicator of energy efficiency), wet grip (a safety indicator) and external rolling noise (environmental impact indicator). Energy efficiency and safety are ranked by classes that run from "A" to "G", while external noise is measured in decibels and is shown with the sound wave symbol. The Eurolabel is applied to car tyres (C1) and light and heavy commercial vehicle tyres (C2 and C3).
During presentation of the Industrial Plan 2013-2017, Pirelli Research and Development committed itself by adopting targets to improve the environmental performance of its own products in an objective, measurable and transparent manner. In particular, the Group focused its commitment to the parameters of the European Rolling Resistance, Wet Grip and Noise labelling requirements, without neglecting all the other fundamental parameters in the Green Performance strategy. They will be presented in the following paragraphs.
Car Tyres
Pirelli is one of the most sustainable manufacturers of car tyres, with two outstanding products: the CinturatoTM P7TM Blue and the Winter SottozeroTM 3.
With the CinturatoTM P7TM Blue, Pirelli is the first tyre maker in the world that offers a tyre carrying a double A rating for certain sizes on the Eurolabel scale. According to its size, this tyre is sold either with a double A class rating or a class B rating for rolling resistance, while all sizes have an A rating for wet grip. On average, the CinturatoTM P7TM Blue guarantees 23% less rolling resistance compared with the Pirelli benchmark (class C rolling resistance), and thus lower fuel consumption and noxious emissions. Here is a concrete example: a sedan equipped with the CinturatoTM P7TM Blue tyre that travels 15,000 kilometres a year consumes 5.1% less fuel, equal to 52 litres of fuel, and reduces greenhouse gas emissions by 123.5 kilograms of CO2. Its braking distance on wet surfaces is 9% less than the Pirelli benchmark (class B for wet grip) in the same segment. Moreover, the comparative tests by TÜV SÜD show that at a speed of 80 km/h on wet roads, P7TM Blue reduces braking distance by 2.6 metres as compared with a class B tyre. The CinturatoTM P7TM Blue has been developed for medium-high powered engines, as further evolution of the CinturatoTM P7TM, the most famous Pirelli Green Performance
89 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A. tyre presented in 2009. The evolution of the Cinturato line became necessary to meet drivers' growing need for safety and economy. The CinturatoTM P7TM Blue is sold only on the replacement market, unlike the CinturatoTM P7TM, which is sold mainly through the original equipment channel. This latter model has taken just a few years to become the benchmark tyre for the most prestigious car makers in the sedan, coupé and medium-high powered sedan segments.
In March 2013 the Winter SottozeroTM 3 tyres were presented in a preview offered to over 400 European dealers in Austria, between Seefeld and the Kühtai pass at over 2,000 metres. The third generation of ultra-high performance tyres for the winter season, it was conceived to equip sports cars and powerful sedans and offer maximum grip on water, ice and snow. Here are the principal characteristics of this new product line:
an innovative compound made of functional polymers (that improve the mechanical, thermal and dynamic properties of the compounds), improving tyre performance; an improved profile to guarantee greater mileage through uniform contact with the ground; more ground contact for better road hold, rendered possible by tbe Lamella 3D.
The new line guarantees control, mileage and grip under wintry conditions. The Winter SottozeroTM 3 tyres are offered in bore sizes ranging from 16 to 21 inches and in 11 runflat versions.
The following infographic refers to the entire range of car products and illustrates the technological progress made from 2007 until now, and the targets for 2020. In its Industrial Plan 2013-2017, Pirelli has undertaken to reduce the average rolling resistance of its own products by 40% from the 2007 average.
Truck Tyres
The R&D objective for the Truck Business Unit is to strike the greatest possible balance amongst the top characteristics of a tyre: performance, safety and respect for the environment. In other words this involves reducing its overall environmental impact while remaining focused on improving the product's performance.
From the design stage on, Pirelli takes account of all product use conditions, including abnormal ones.
This permits the development of tyres that do not stop at compliance with legal regulations, but have all the characteristics necessary to guarantee complete safety, both for the customer and for the environment, in accordance with the highest Pirelli product standards. Numerous eco-compatibility features characterise the new generations of Pirelli truck tyres, beginning with the reduction in weight that in turn reduces both the quantity of raw materials used and energy needed to produce them. Furthermore the reusable materials that are employed and their durability are reflected in the duration of the “first life” of the tyre and the number of times that the same casing can be used for retreading the tyre. The Serie 01 is the green performance range of tyres for industrial vehicles, launched by Pirelli in 2009. The Serie 01 tyres share the latest generation SATT™ structure, the most advanced for production of truck tyres, and constitutes the basis for lengthening product life, elevated rebuildability, extremely regular wear and tear, and better driving precision. Compounds and tread
90 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A. patterns are designed and optimised according to the performance requested for different uses. All Serie 01 product lines bear the Ecoimpact mark, which translates into:
high mileage and uniform tyre tread wear, through the use of high specific yield compounds, the SATT (Spiral Advanced Technology for Truck) structure, and an optimised tyre tread profile; low rolling resistance (already in compliance with 2016 regulatory limits) and consequent reduction in fuel
consumption and CO2 emissions; highly retreadability, construed as the greater residual durability at the end of the tyre’s first life thanks to the new SATT structure combined with compounds having low hysteresis (i.e. generating less heat), with the hexagonal flush ring and reinforced bead; low noise, construed as quiet ride and driving comfort, consistent with European regulations governing noise limits.
The ST:01™ Neverending Energy™ stands out among the top products. Developed specifically for equipping trailers and semi-trailers, ST:01™ Neverending Energy™ is the first line of truck tyres to be awarded the double class “A” of the European label, and thus both for rolling resistance and grip on wet roads. Like all the new Pirelli product groups, ST:01™ Neverending Energy™ also aims at maximum fuel consumption efficiency. There are considerable benefits for the fleet, considering that in a vehicle made up of a traction engine and semi-trailer the tyres fitted on the latter have 50% impact on the rolling resistance generated by all the tyres. The ST:01™ Neverending Energy™ line combines safety with energy saving (generating lower emissions), maintaining high performance in terms of mileage and durability, typical of a truck tyre. The benefits of the ST:01™ Neverending Energy™ line are made possible by:
an innovative tread pattern; a tread compound with dual-layer technology with high silica content that reduces rolling resistance and thus fuel consumption, as well as ensuring improved resistance to tearing and higher mileage; a new profile and different shape of the sidewalls and bead.
The product line dedicated to the medium and long-distance transport segment has also been rounded out by a new tyre that enhances safety and minimises operating costs, by means of energy efficiency, high mileage, possibility of reconstruction, reduced noise and use of innovative materials. With the new ST:01™ Base™ – characterised by innovative materials, optimal reduction of wear and tear and use of a Pirelli patent – all different types of transport operator requirements are covered.
The following infographic refers to the entire range of car products and illustrates the technological progress made from 2007 until now, and the targets for 2020. In its Industrial Plan 2013-2017, Pirelli has undertaken to reduce the average rolling resistance of its own products by 20% from the 2007 average.
91 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A.
Motorcycle Tyres
Pirelli confirms its competitive advantage in terms of performance and safety on the motorcycle tyre market, characteristics that have made our Company the best tyre maker in this segment. However, by anticipating market demand, Pirelli is also focusing its research on the environmental performance of its motorcycle tyres, by equipping the innovative BMW C Evolution electric scooter. Engineers at Metzeler (the 100% Pirelli owned brand) are developing the new Feelgreen project, which will lead to marketing a product that, in comparison with the present standard, will reduce weight by 13% and rolling resistance by about 25%. However, the driving performance of the Feelgreen maintains the characteristic elements for which this brand's products are famous: fast warm-up and handling, which are essential for city driving conditions. Feelgreen was designed with the support of the FEA (Finite Elements Analysis) technique. It a high silica content compound, new tread design and new profile that were specifically designed to reduce rolling resistance.
The following infographic refers to the entire range of car products and illustrates the technological progress made from 2007 until now, and the targets for 2020. In its Industrial Plan 2013-2017, Pirelli has undertaken to reduce the average rolling resistance of its own products by 10% from the 2007 average. For the overall efficiency of motorcycles, the influence of this tyre characteristic is less significant than it is in the four-wheel vehicle world.
Cyber™ Tyre
The integration of electronics in tyres is one of the cornerstones of Pirelli’s premium innovation strategy, aimed at guaranteeing continuous monitoring of key physical parameters, particularly tyre pressure. The use of tyres whose pressure is 20% less than its recommended pressure may result in up to 3% higher fuel consumption, with a correspondingly greater environmental impact in terms of CO2 emissions. National Transportation Safety Board studies have shown that for every 20 kPa of under inflation, there is an average increase in fuel consumption of 1%. Furthermore, tyre pressure that is 20% below what it should be causes irregular wear on the tyre tread and consequently increases wear and tear by 25%, which translates into a 30% reduction in the lifetime of the tyre. Pirelli is able to offer its customers a family of Cyber products for monitoring tyres:
the CyberFleet™ TPMS (Tyre Pressure Monitoring System) for truck use; the Cyber™ Tyre TMS (Tyre Mounted System) for car use.
In particular the CyberFleet™ technology, already available on the Brazilian market for end users (fleets of trucks, buses and dealers) since 2012, uses an electronic sensor embedded in the tyre to dialogue with the fleet management centre, reporting tyre pressure and temperature in real time. The new system is designed to keep tyres under continuous control by measuring any faults to assure proper maintenance. This leads to a significant reduction in the environmental impact from tyre use, by lengthening its useful life and limiting fuel consumption, as well as having a big impact on fleet safety.
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The Cyber™ Tyre system of monitoring tyre dynamics, initially applied to car use, can interact in real time with the systems for controlling vehicle dynamics, benefiting driving safety, performance and fuel consumption. The TMS technology is a high performance solution of the TPMS system that is already widely used on cars in the United States. It can integrate additional functions, such as the amount of vertical static force to optimise tyre pressure according to load, and the RFID, or electronic tag that uniquely identifies the tyre. The Pirelli Cyber™ Tyre system, which is at an advanced stage of development and testing with certain prestige and premium car makers, constitutes the technological breakthrough that can significantly improve the performance limits of road hold and driving safety. This is accomplished on account of the sensor's capacity to transmit data and information to the vehicle in real time, being updated at every revolution of the tyre, in contrast with the previous methods used until now to make indirect and relatively inaccurate estimates. The Cyber™ Tyre technology was developed entirely at Pirelli, from the electronics, the heart of the system, to the algorithms for extraction of parameters, the basis for creating new vehicle control systems.
3.5 END-OF-LIFE MANAGEMENT OF TYRES
About 1.5 billion tyres are sold worldwide every year (IRSG Report 2010), and they are naturally destined to become end-of- life tyres. In 2011, about 2.9 million tons of tyres were manufactured in Europe. In the United States, 4.6 million tons of tyres were made in 2007, and 800,000 tons of tyres were produced in Japan. These numbers clearly indicate the dimensions of the phenomenon and its potential environmental impact. In these three cases, the efforts made by institutions, producers and recovery chains have made extremely positive results possible. In 2011, 95% of end-of-life tyres (ELT– End- of-Life Tyres) were recycled in Europe. In the United States, the figure is around 90%, while in Japan the percentage is slightly higher (ETRMA ELT 2011 data). Pirelli has been committed for years now to the management of ELTs both internally, through the research and innovation activity of Pirelli Labs, and by collaborating with major national and international organisations in the sector. Pirelli is in fact active in the Tyre Industry Project (TIPG) of the World Business Council for Sustainable Development (WBCSD), in the ELTs working group of ETRMA (European Tyres and Rubber Manufacturers’ Association) and, at the national and local level, it interacts directly with leading organisations active in the recovery and recycling of ELTs. As a member of TIPG, Pirelli Tyre has collaborated on the publication of a report on the management of ELTs, taking a proactive approach to raising the awareness both of emerging countries and those that do not yet have a system for recycling ELTs, and to promote their recycling and reuse according to defined management models, which have already been launched successfully.
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Products that can be obtained from recycling ELTs
Tyres are a mix of numerous materials that influence how they are recovered:
material recycling: the tyre can be used as-is, or after physical treatment in countless applications, from civil engineering works to the production of asphalt and compounds ready to be reused in production processes; energy recovery: due to the high energy content that characterises ELTs, higher even than coal, ELTs are used as fuel in thermoelectric plant ovens and in cement manufacturing plant ovens, guaranteeing a reduction in greenhouse gas emissions due to their biomass content resulting from natural rubber, which is close to or greater than 20% of their weight.
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In regard to material recovery, recycled rubber is already reused by Pirelli in the compounds of new tyres. Together with traditional recovery and disposal methods, this contributes to reducing its environmental impact. Through research in collaboration with various university centres, in the near future it will be possible to improve the quality of compounds in terms of the affinity of their ingredients, thereby increasing the quantity of recoveries introduced with another environmental benefit. All this in addition to a positive drop in the consumption of non-renewable materials.
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3.6 OTHER BUSINESSES Pirelli Ambiente
This business operates in the field of sustainable mobility and renewable energy sources. This entity results from merger of the activities of Pirelli Eco Technology S.p.A. and Pirelli Ambiente S.p.A. In regard to the activities contributed by Pirelli Eco Technology, Pirelli makes, sells and markets products developed for the control of pollution emissions: FEELPURE™ anti- particulate filters and systems.
The activities taken over from Pirelli Ambiente offer solutions for sustainable development as part of energy issues. In this sector, Pirelli produces CDR-P, a quality fuel derived from solid urban waste. Pirelli also owns an indirect minority stake in the listed Danish company Greentech Energy Systems A/S, which operates in the renewable energy sector – wind power and photovoltaic energy. Pzero
With the PZero project Pirelli decided in 2002 to enter the world of industrial design of clothing. The attention and care dedicated to researching cutting-edge materials and technological solutions, both in terms of design and eco-friendliness, represent the Pirelli Premium and green performance strategy also within PZero.
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4. SOCIAL DIMENSION 4.1 INTERNAL COMMUNITY
“The Pirelli Group recognizes the crucial importance of human resources, in the belief that the key to success in any business is the professional input of the people that work for it in a climate of fairness and mutual trust. The Pirelli Group safeguards health, safety and industrial hygiene in the workplace, both through management systems that are continually improving and developing and by promoting an approach to health and safety based on prevention and the effective handling of occupational risk. The Pirelli Group consider respect for workers’ rights as fundamental to the business. Working relationships are managed by placing particular emphasis on equal opportunity, on furthering each person’s career development, and on turning their diversity to account by creating a multi-cultural working environment.”
(The Values and Ethical Code – “Human Resources”)
“The Pirelli Group pursues and supports compliance with internationally proclaimed human rights. Pirelli considers protection of the integrity, health and welfare of its employees and the environment as one of the primary needs to be satisfied in organizing and developing its activities. The Group’s sustainable development strategies pursue various objectives, including continuous improvement in the environmental and occupational health and safety conditions affected by its own activities, in firm compliance with and support of the “Universal Declaration of Human Rights,” the “International Labour Organization’s Declaration on Fundamental Principles and Rights at Work,” the “Rio Declaration on Environment and Development” and the “United Nations Convention against Corruption.” To these ends, the Pirelli Group is committed to:
management of its activities by adopting occupational health, safety and rights and environmental policies in compliance with the highest international standards; the dissemination occupational health, safety and labour rights and environmental information to its internal and external stakeholders, both by communicating with them and actively co-operating with national and international government and academic bodies; promoting use of the most advanced technologies to achieve excellence in occupational health and safety and environmental protection; [...] not using or supporting the use of child labour and forced labour; ensuring equal opportunity, freedom of association and promotion of the development of each individual; opposing the use of corporal punishment, mental or physical coercion, or verbal abuse; compliance with applicable laws and industry standards on working hours.” [...]
(Pirelli “Social Responsibility Policy for Occupational Health, Safety and Rights, and Environment”)
“The Pirelli Group has been and remains firmly committed to compliance with the principles of Equal Opportunities in the workplace, without any form of discrimination on the basis of gender, marital status, sexual orientation, religious or political beliefs, union membership, colour, ethnic origins, nationality, age or disability.”
“The Pirelli Group is committed to the prevention of discrimination in all areas of working life, including selection and all decisions related to remuneration, professional status, the assignment of responsibilities, training and career development. All such decisions are made solely and exclusively on the basis of the competencies, experience and professional potential that individuals possess and the results that they achieve.”
(Group Equal Opportunities Statement)
The above principles of the Ethical Code are discussed in detail in the Group Social Responsibility Policy for Occupational Health, Safety, Rights and Environment. The commitments made by Pirelli in its Social Responsibility Policy are inspired by the SA8000Ⓡ standard, which for years has been the benchmark tool for management of Group Social Responsibility, by the United Nations Global Compact, to which Pirelli has subscribed since 2004, and by the ISO 26000 Guidelines.
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PIRELLI EMPLOYEES AROUND THE WORLD
The Pirelli headcount at December 31, 2013 was 37,979 employees (37,338 in 2012 and 34,259 in 2011), for a net increase of 641 employees yoy, including 60 executives and white collar employees and 581 blue collar employees.
BREAKDOWN OF EMPLOYEES BY CATEGORY*
2013 EXECUTIVES WHITE COLLARS BLUE COLLARS TOTAL Tyre Business 316 7.217 30.234 37.766 Other Businesses** 6 85 122 213 PIRELLI TOTAL 322 7.302 30.356 37.979
2012 EXECUTIVES WHITE COLLARS BLUE COLLARS TOTAL Tyre Business 343 7.096 29.644,0 37.082 Other Businesses** 11 114 131 256 PIRELLI TOTAL 354 7.210 29.775 37.338
2011 EXECUTIVES WHITE COLLARS BLUE COLLARS TOTAL Tyre Business 315 6.140 27.489 33.945 Other Businesses** 11 140 163 314 PIRELLI TOTAL 326 6.280 27.652 34.259
2013 vs 2012 EXECUTIVES WHITE COLLARS BLUE COLLARS TOTAL Tyre Business -27 121 590 684 Other Businesses** -5 -29 -9 -43 PIRELLI TOTAL -32 92 581 641
2013 vs 2011 EXECUTIVES WHITE COLLARS BLUE COLLARS TOTAL Tyre Business 1 1.077 2.744 3.821 Other Businesses** -5 -56 -41 -101 PIRELLI TOTAL -4 1.021 2.704 3.720
NOTE:
*All figures for the breakdown of employees shown in this section are expressed as Full Time Equivalent.
**This includes P. Zero, P. Ambiente, and P. Eco Tech.
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BREAKDOWN OF EMPLOYEES* BY GEOGRAPHICAL AREA AND GENDER
2013 TYRE BUSINESS OTHER BUSINESSES PIRELLI TOTAL Men Women Total Men Women Total Men Women Total EUROPE 12.770 2.692 15.462 104 108 212 12.874 2.800 15.674 NAFTA 994 158 1.152 0 0 0 994 158 1.152 CENTRAL & SOUTH AMERICA 13.466 779 14.244 0 0 0 13.466 779 14.244 MEA 3.231 80 3.311 0 0 0 3.231 80 3.311 ASIA PACIFIC 2.817 780 3.597 1 0 1 2.818 780 3.598 TOTAL 33.278 4.488 37.766 105 108 213 33.383 4.596 37.979
2012 TYRE BUSINESS OTHER BUSINESSES PIRELLI TOTAL Men Women Total Men Women Total Men Women Total EUROPE 12.674 2.845 15.519 136 115 251 12.810 2.960 15.769 NAFTA 847 147 994 0 0 0 847 147 994 CENTRAL & SOUTH AMERICA 13.049 810 13.860 0 0 0 13.049 810 13.860 MEA 3.228 73 3.301 0 0 0 3.228 73 3.301 ASIA PACIFIC 2.650 759 3.409 5 0 5 2.655 759 3.414 TOTAL 32.448 4.634 37.082 141 115 256 32.589 4.749 37.338 0 2011 TYRE BUSINESS OTHER BUSINESSES PIRELLI TOTAL Men Women Total Men Women Total Men Women Total EUROPE 11.619 2.476 14.095 155 125 280 11.774 2.601 14.375 NAFTA 432 58 490 0 0 0 432 58 490 CENTRAL & SOUTH AMERICA 12.676 526 13.202 0 0 0 12.675 527 13.202 MEA 3.228 68 3.296 0 0 0 3.228 68 3.296 ASIA PACIFIC 2.427 428 2.855 37 4 41 2.464 432 2.896 TOTAL 30.382 3.556 33.938 192 129 321 30.574 3.685 34.259
2013 vs 2012 TYRE BUSINESS OTHER BUSINESSES PIRELLI TOTAL Men Women Total Men Women Total Men Women Total EUROPE 97 -153 -57 -32 -7 -39 65 -160 -96 NAFTA 147 11 158 0 0 0 147 11 158 CENTRAL & SOUTH AMERICA 416 -32 385 0 0 0 416 -32 385 MEA 3 7 10 0 0 0 3 7 10 ASIA PACIFIC 167 21 188 -4 0 -4 163 21 184 TOTAL 830 -146 684 -36 -7 -43 794 -153 641
2013 vs 2011 TYRE BUSINESS OTHER BUSINESSES PIRELLI TOTAL Men Women Total Men Women Total Men Women Total EUROPE 1.151 216 1.367 -51 -17 -68 1.100 199 1.299 NAFTA 562 100 662 0 0 0 562 100 662 CENTRAL & SOUTH AMERICA 790 253 1.042 0 0 0 790 253 1.042 MEA 3 12 15 0 0 0 3 12 15 ASIA PACIFIC 390 352 742 -36 -4 -40 354 348 702 TOTAL 2.896 932 3.828 -87 -21 -108 2.809 911 3.720
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*All figures for the breakdown of employees shown in this section are expressed as Full Time Equivalent.
TYPE OF EMPLOYMENT CONTRACT TYPE OF EMPLOYMENT CONTRACT 2011 2012 2013 13 vs 12 13 vs 11 Permanent 91,6% 92,7% 93,1% 0,4% 1,5% Temporary 8,1% 6,6% 6,6% 0,1% -1,5% Agency 0,3% 0,7% 0,3% -0,4% 0,0%
Part-time (% of total FTE) 0,8% 0,8% 0,8% 0,0% 0,0%
Employee flows by geographic area, gender and age group
The following data refer to incoming/outgoing employees. The disposals and acquisitions of companies or business units, and changes in work schedules from full to part-time are not considered.
EMPLOYEE FLOWS BY GEOGRAPHIC AREA IN THE THREE-YEAR PERIOD 2011-2013
EMPLOYEE FLOWS BY GEOGRAPHIC AREA 2013 2012 2011 INCOMING OUTGOING INCOMING OUTGOING INCOMING OUTGOING EUROPE 1.805 1.891 1.378 1.581 1.606 1.218 NAFTA 507 355 770 247 245 35 CENTRAL & SOUTH AMERICA 2.945 2.527 2.733 2.633 3.191 2.525 MEA 573 531 243 212 1.018 688 ASIA PACIFIC 789 596 1.297 769 1.142 693 TOTAL 6.619 5.900 6.420 5.443 7.202 5.159
EMPLOYEE FLOWS 2013 BY GEOGRAPHIC AREA, GENDER AND AGE GROUP: TOTAL VALUES INCOMING OUTGOING <30 30-50 >50 MEN WOMEN <30 30-50 >50 MEN WOMEN EUROPE 1.030 661 115 1.481 324 580 741 570 1.432 459 NAFTA 384 121 2 442 65 279 76 0 299 56 CENTRAL & SOUTH AMERICA 1.950 974 22 2.747 199 1.399 1.019 109 2.332 195 MEA 534 38 1 567 6 417 104 10 528 3 ASIA PACIFIC 602 187 0 667 122 471 122 3 504 92 TOTAL 4.500 1.980 140 5.903 716 3.146 2.062 692 5.096 804
EMPLOYEE FLOWS 2013 BY GEOGRAPHIC AREA, GENDER AND AGE GROUP: PERCENTAGE VALUES INCOMING OUTGOING <30 30-50 >50 MEN WOMEN <30 30-50 >50 MEN WOMEN EUROPE 57% 37% 6% 82% 18% 31% 39% 30% 76% 24% NAFTA 76% 24% 0% 87% 13% 79% 21% 0% 84% 16% CENTRAL & SOUTH AMERICA 66% 33% 1% 93% 7% 55% 40% 4% 92% 8% MEA 93% 7% 0% 99% 1% 79% 20% 2% 99% 1% ASIA PACIFIC 76% 24% 0% 85% 15% 79% 20% 1% 85% 15% TOTAL 68% 30% 2% 89% 11% 53% 35% 12% 86% 14%
EMPLOYEE FLOWS 2012 BY GEOGRAPHIC AREA, GENDER AND AGE GROUP: TOTAL VALUES INCOMING OUTGOING <30 30-50 >50 MEN WOMEN <30 30-50 >50 MEN WOMEN EUROPE 697 437 35 1.025 145 439 399 173 896 114 NAFTA 589 178 3 658 112 165 77 5 217 30 CENTRAL & SOUTH AMERICA 1.861 853 19 2.522 211 1.557 971 105 2.499 134 MEA 206 37 0 230 13 110 95 7 204 8 ASIA PACIFIC 1.007 287 3 860 437 614 149 6 648 121 TOTAL 4.360 1.792 60 5.295 918 2.885 1.691 296 4.464 407
EMPLOYEE FLOWS 2012 BY GEOGRAPHIC AREA, GENDER AND AGE GROUP: PERCENTAGE VALUES INCOMING OUTGOING <30 30-50 >50 MEN WOMEN <30 30-50 >50 MEN WOMEN EUROPE 60% 37% 3% 88% 12% 43% 39% 17% 89% 11% NAFTA 76% 23% 0% 85% 15% 67% 31% 2% 88% 12% CENTRAL & SOUTH AMERICA 68% 31% 1% 92% 8% 59% 37% 4% 95% 5% MEA 85% 15% 0% 95% 5% 52% 45% 3% 96% 4% 100 ASIA PACIFIC 78% 22% 0% 66% 34% 80% 19% 1% 84% 16% TOTAL VOLUME70% 3 of An29%nual Financial1% 85%Report at15% December59% 31,35% 2013 6% 92% 8%
EMPLOYEE FLOWS 2011 BY GEOGRAPHIC AREA, GENDER AND AGE GROUP: TOTAL VALUES INCOMING OUTGOING <30 30-50 >50 MEN WOMEN <30 30-50 >50 MEN WOMEN EUROPE 1.001 564 41 1.364 242 593 487 139 1.075 143 NAFTA 167 77 1 219 26 14 21 0 26 9 CENTRAL & SOUTH AMERICA 2.252 923 16 3.044 147 1.539 918 68 2.390 135 MEA 980 38 0 998 20 579 95 14 680 8 ASIA PACIFIC 975 167 0 930 212 595 97 1 627 66 TOTAL 5.375 1.769 58 6.555 647 3.320 1.618 222 4.798 360
EMPLOYEE FLOWS 2011 BY GEOGRAPHIC AREA, GENDER AND AGE GROUP: PERCENTAGE VALUES INCOMING OUTGOING <30 30-50 >50 MEN WOMEN <30 30-50 >50 MEN WOMEN EUROPE 62% 35% 3% 85% 15% 49% 40% 11% 88% 12% NAFTA 68% 31% 0% 89% 11% 40% 60% 0% 74% 26% CENTRAL & SOUTH AMERICA 71% 29% 0% 95% 5% 61% 36% 3% 95% 5% MEA 96% 4% 0% 98% 2% 84% 14% 2% 99% 1% ASIA PACIFIC 85% 15% 0% 81% 19% 86% 14% 0% 90% 10% TOTAL 75% 25% 1% 91% 9% 64% 31% 4% 93% 7% EMPLOYEE FLOWS BY GEOGRAPHIC AREA 2013 2012 2011 INCOMING OUTGOING INCOMING OUTGOING INCOMING OUTGOING EUROPE 1.805 1.891 1.378 1.581 1.606 1.218 NAFTA 507 355 770 247 245 35 CENTRAL & SOUTH AMERICA 2.945 2.527 2.733 2.633 3.191 2.525 MEA 573 531 243 212 1.018 688 ASIA PACIFIC 789 596 1.297 769 1.142 693 TOTAL 6.619 5.900 6.420 5.443 7.202 5.159
EMPLOYEE FLOWS 2013 BY GEOGRAPHIC AREA, GENDER AND AGE GROUP: TOTAL VALUES INCOMING OUTGOING <30 30-50 >50 MEN WOMEN <30 30-50 >50 MEN WOMEN EUROPE 1.030 661 115 1.481 324 580 741 570 1.432 459 NAFTA 384 121 2 442 65 279 76 0 299 56 CENTRAL & SOUTH AMERICA 1.950 974 22 2.747 199 1.399 1.019 109 2.332 195 MEA 534 38 1 567 6 417 104 10 528 3 ASIA PACIFIC 602 187 0 667 122 471 122 3 504 92 TOTAL 4.500 1.980 140 5.903 716 3.146 2.062 692 5.096 804
EMPLOYEE FLOWS 2013 BY GEOGRAPHIC AREA, GENDER AND AGE GROUP: PERCENTAGE VALUES INCOMING OUTGOING <30 30-50 >50 MEN WOMEN <30 30-50 >50 MEN WOMEN EUROPE 57% 37% 6% 82% 18% 31% 39% 30% 76% 24% NAFTA 76% 24% 0% 87% 13% 79% 21% 0% 84% 16% CENTRAL & SOUTH AMERICA 66% 33% 1% 93% 7% 55% 40% 4% 92% 8% MEA 93% 7% 0% 99% 1% 79% 20% 2% 99% 1% ASIA PACIFIC Sustainability76% 24% Report0% 201385% – Pirelli15% & C. 79%S.p.A. 20% 1% 85% 15% TOTAL 68% 30% 2% 89% 11% 53% 35% 12% 86% 14%
EMPLOYEE FLOWS 2012 BY GEOGRAPHIC AREA, GENDER AND AGE GROUP: TOTAL VALUES INCOMING OUTGOING <30 30-50 >50 MEN WOMEN <30 30-50 >50 MEN WOMEN EUROPE 697 437 35 1.025 145 439 399 173 896 114 NAFTA 589 178 3 658 112 165 77 5 217 30 CENTRAL & SOUTH AMERICA 1.861 853 19 2.522 211 1.557 971 105 2.499 134 MEA 206 37 0 230 13 110 95 7 204 8 ASIA PACIFIC 1.007 287 3 860 437 614 149 6 648 121 TOTAL 4.360 1.792 60 5.295 918 2.885 1.691 296 4.464 407
EMPLOYEE FLOWS 2012 BY GEOGRAPHIC AREA, GENDER AND AGE GROUP: PERCENTAGE VALUES INCOMING OUTGOING <30 30-50 >50 MEN WOMEN <30 30-50 >50 MEN WOMEN EUROPE 60% 37% 3% 88% 12% 43% 39% 17% 89% 11% NAFTA 76% 23% 0% 85% 15% 67% 31% 2% 88% 12% CENTRAL & SOUTH AMERICA 68% 31% 1% 92% 8% 59% 37% 4% 95% 5% MEA 85% 15% 0% 95% 5% 52% 45% 3% 96% 4% ASIA PACIFIC 78% 22% 0% 66% 34% 80% 19% 1% 84% 16% TOTAL 70% 29% 1% 85% 15% 59% 35% 6% 92% 8%
EMPLOYEE FLOWS 2011 BY GEOGRAPHIC AREA, GENDER AND AGE GROUP: TOTAL VALUES INCOMING OUTGOING <30 30-50 >50 MEN WOMEN <30 30-50 >50 MEN WOMEN EUROPE 1.001 564 41 1.364 242 593 487 139 1.075 143 NAFTA 167 77 1 219 26 14 21 0 26 9 CENTRAL & SOUTH AMERICA 2.252 923 16 3.044 147 1.539 918 68 2.390 135 MEA 980 38 0 998 20 579 95 14 680 8 ASIA PACIFIC 975 167 0 930 212 595 97 1 627 66 TOTAL 5.375 1.769 58 6.555 647 3.320 1.618 222 4.798 360
EMPLOYEE FLOWS 2011 BY GEOGRAPHIC AREA, GENDER AND AGE GROUP: PERCENTAGE VALUES INCOMING OUTGOING <30 30-50 >50 MEN WOMEN <30 30-50 >50 MEN WOMEN EUROPE 62% 35% 3% 85% 15% 49% 40% 11% 88% 12% NAFTA 68% 31% 0% 89% 11% 40% 60% 0% 74% 26% CENTRAL & SOUTH AMERICA 71% 29% 0% 95% 5% 61% 36% 3% 95% 5% MEA 96% 4% 0% 98% 2% 84% 14% 2% 99% 1% ASIA PACIFIC 85% 15% 0% 81% 19% 86% 14% 0% 90% 10% TOTAL 75% 25% 1% 91% 9% 64% 31% 4% 93% 7%
The overall trend with regards to personnel in 2013 was therefore one of substantial growth. In mature countries (those countries where Pirelli operates that are internationally defined as “mature” markets or “non-emerging” markets), efficiency improvement plans continued at Settimo Torinese in connection with the technological and organisational reorganisation related to start-up of the New Car Centre (-22 employees). In Germany, instead, 278 employees were added at the Pneumobil company for expansion of the Pirelli retail chain, while closure of the Merzig steel cord plant took place (- 70 employees). In regard to emerging markets (those countries where Pirelli operates that are internationally defined as “emerging”, i.e. Romania, Russia, Argentina, Brazil, Chile, Colombia, Mexico, Venezuela, Egypt, Turkey and China), the increases in production volumes contributed to growth in the labour force in China (+193), in Romania (+88), in Argentina (+103), in Brazil (+266) and in Mexico (+136) upon expansion of the new plant at Silao. Moreover, reorganisation is underway at the Russian plants in Kirov and Voronezh, leading to the reduction of 364 employees from 2012.
With regard to annual employee turnover, the number of employees hired in 2013 was up from the previous year, essentially due to a higher volume of production in the factories compared to 2012.
Pirelli does not employ anyone under the age of 14. The Company employs 58 young people aged between 16 and 18 (24 in Brazil, 23 in Germany, 3 in Switzerland, 3 in the United Kingdom and 2 in Venezuela) and, as an exception, 6 young people aged between 14 and 16 (of whom 5 in Brazil and 1 in Switzerland), all of whom are involved in training and integration programmes in line with local legislation.
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DIVERSITY MANAGEMENT
Pirelli is characterised by a multinational context where individuals manifest a great diversity, whose conscious management simultaneously creates a competitive advantage for the Company and a shared social value.
The commitment made by Pirelli to equal opportunity and development of diversity at the workplace is stated in the Group's principal sustainability documents: the Ethical Code approved by the Board of Directors, in the Group Social Responsibility Policy for Occupational Health, Safety, Rights and Environment and in the Equal Opportunities Statement, both signed by the Chairman. These documents have been distributed to all employees in their local language and published on the institutional website www.pirelli.com/Sustainability.
While respecting the cultural differences of the individual countries, what necessarily unites all Pirelli affiliates in the same culture are its shared corporate values, policies and rules, which are applied everywhere with the sole difference of the language into which they are translated.
Internationality and multiculturalism are the characteristic elements of the Group: Pirelli operates in over 160 countries on five continents, and 90.5% of employees on the payroll at December 31, 2013 worked outside of Italy.
Awareness of the cultural differences that create the identity of the company entails maximum confidence in management having local origins: 75% of the senior managers work in their country of origin, with “senior managers” meaning those who reported directly to the Chairman & C.E.O. at December 31, 2013.
To develop the innovative and managerial potential latent in a multicultural environment and in the encounter with diverse professional environments, the Company promotes the growth of its own managers through international mobility between different Group companies (see the following sections on “Compensation and International Mobility”). It is no accident that 50% of the senior managers active in 2013 had had at least one foreign intercompany work experience during their professional career at the Pirelli Group. Moreover, at December 31, 2013, 15% of all managers on foreign assignment were women.
Pirelli is also committed to promoting maximum awareness of the positive differences that exist between the two sexes in a complex organisation like Pirelli, while giving due consideration to the fact that it is necessarily impacted by the different cultures existing in the different countries.
Following below is a breakdown of employees by gender in the three-year period 2011-2011-2013, expressed as the percentage weight of women against the total number of employees in each job category, the data shown in the following table demonstrate the positive evolution underway: in 2013 the number of women in the executive category reached 9%, up from the previous two years, while the percentage of women in the managerial category was 18%, and thus stable in comparison with the figures for the previous two years. The female presence in the blue collar category in 2013 reflected continuation of the growth recorded in 2012, amounting to 8% of workers in that category and up substantially from 2011. In 2013 female employees accounted for 12% of the total Group workforce, 3 percentage points above 2011.
PERCENTAGE OF WOMEN BY PROFESSIONAL CATEGORY
EXEC+CADRES EXECUTIVES CADRES WHITE COLLARS BLUE COLLARS TOTAL (=Tot Managers)
2011 8% 20% 18% 31% 5% 9%
2012 8% 20% 18% 35% 8% 13%
2013 9% 19% 18% 33% 8% 12%
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Analysing the following table, the breakdown by gender in terms of employment contract shows a substantial balance between men and women. However, there is a small difference: the percentage of women with an indefinite term employment contract is slightly higher, while there is a greater percentage of men having a temporary employment position.
Moreover, the number of women with an indefinite term employment contract climbed from 93% in 2011 to 97% in 2013, while men rose from 92% to 93%. This is an extremely positive phenomenon in view of non-discrimination, since it is a commonly held opinion in society that indefinite term jobs are held more by men, whereas definite term jobs are held more by women. Well, the Pirelli data show a positively inverted reality.
TYPE OF EMPLOYMENT CONTRACT BY GENDER
2011 2012 2013 MEN WOMEN TOTAL MEN WOMEN TOTAL MEN WOMEN TOTAL PERMANENT 92% 93% 92% 92% 96% 93% 92,6% 97% 93% TEMPORARY 8% 6% 8% 7% 3% 6% 7,1% 3% 7% AGENCY 0% 1% 0% 1% 1% 1% 0,2% 0% 0% TOTAL 100% 100% 100% 100% 100% 100% 100% 100% 100,0%
The rate of employee return to work after maternity/paternity leave at Pirelli in relation to its total workforce in all industrial countries where the Company operates was positive. In particular, one year after the date when the maternity or paternity event occurred in 2012, 90% of the women and 96% of the men were still employed at the Company in 2013. The difference, in the face of what must be considered a positive figure for women in any event, must be considered physiological in light of the different socio-cultural contexts in which Pirelli women work.
In the context of gender diversity, Pirelli dedicates special attention to equal remuneration, constantly monitoring it and seeking out the causes tied to the differences found in pay.
The countries considered in the analysis at December 31, 2013 are Brazil, China, Germany, Great Britain, Italy, Romania and Turkey, representing about two thirds of the total workforce covered by the remuneration policy (executives, cadres and white collar employees). At the methodological level, the remuneration ratios between men and women have been calculated, just like last year, for each individual country and by equal weight for the positions held, since a figure calculated at the Group level would not be representative insofar as it cannot give due consideration to the structural differences on different local markets, differences in professional seniority, and market remuneration logics whose peculiar characteristics are not comparable with each other.
The average differences in remuneration between men and men measured in the aforementioned countries is 6% (as opposed to 7% in 2012) in favour of men in the white collar job category, while it is 4% (compared with 5% in 2012), again in favour of men in the cadre category. Some examples: Italy, which features a difference of about 2% between the average remuneration for men and average remuneration for women (as opposed to 5% in 2012) in favour of men in the white collar job category, while it is 3% (compared with 7% in 2012), again in favour of men in the cadre category; Turkey, where the ratios favour men for both categories, with discrepancies of 1% (compared with 4% in 2012) if we refer to cadre and 6% (unchanged from 2012) for white collar workers; Romania, where the white collar category has a ratio of 3% (compared with 4% in 2012) in favour of women, while women are again favoured by 4% in the cadre category (in 2012 the ratio was 4% in favour of men); Brazil, where the ratio in the white collar category was 8% (compared with 6% in 2012) in favour of men, and 4% in favour of men in the cadre category (in 2012, there was substantial pay equality instead).
Finally, in regard to the executive category, where women account for 9% of the total (up from the 8% value in 2012), there was an average difference of about 1% in pay (compared with 3% in 2012), for the first time in favour of women. So, we have a situation of substantial pay equality that counterbalances the factors that are traditionally at the basis of differences in remuneration, such as professional seniority and age of the employees in the different cultures of the local markets.
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In general, it must be considered that on the various markets, the “professional seniority” factor, which has had a powerful impact on pay trends, still favours men on average. On the other hand, the positive change in the international context in terms of attention to gender diversity and, especially, the numbers of women who are increasingly entering the labour market, will plausibly lead to greater gender balance over the medium term, including in terms of professional seniority, when the average seniority of women will have grown sufficiently to be comparable to that of men in most markets. The inclusive culture adopted by Pirelli as the basis for doing business permeates corporate life also in regard to individuals with handicaps.
As stated in the Group Sustainability Plan 2013-2017 with Targets to 2020, Pirelli is committed to increasing refinement of its proxy to identify any pay gaps, by expanding the formula to include elements of performance, rank, and seniority that heavily impact remuneration, that might plausibly cause an objective reduction in the gap, where it exists.
In regard to the standard salary of new hires during their first year of work at Pirelli, this is greater than the minimums prescribed by local legislation And there are no differences between men, women, or any other sort of diversity. The inclusive corporate culture cultivated by Pirelli in its way of doing business permeates corporate life even in the case of persons with different abilities. In order to standardise the corporate culture of subsidiaries and associated companies towards disabled persons, the Pirelli Equal Opportunities Policy lists disability among protected differences, as a value and operating model applicable to all affiliates.
In Italy, the Group has made and signed specific agreements with the relevant authorities to promote hiring of disabled workers by the Group. It participates in social programmes that facilitate matching the demand and supply of work between the Company and disabled candidates, but not only in relation to them (also between Company and foreign candidates).
The percentage measurement of disabled employees in the multinational context of the company clashes with the objective difficulty of measuring their number, both because in many countries where the Group is present, there are no specific laws or regulations promoting their employment and therefore disabilities are not automatically detected, and because in many countries this information is deemed confidential and protected by privacy laws. All this considered, about 1.5% of the total work force is comprised of disabled emplyees as defined by local legislation. It is likely that the actual percentage of disabled persons working at Pirelli might be higher, although any estimates would be discriminatory per se.
In regard to the “age” factor, the following table illustrates how the population (including the managerial population) is evenly young between the two genders, so that the average age of men and women was substantially the same over the entire three-year period.
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AVERAGE AGE BY CATEGORY AND GENDER
2011** Executives Cadre White Collars Blue Collars Total average Women 46 42 37 33 36 Men 48 44 38 35 36 Average by category 48 44 38 35 36
2012*** Executives Cadre Staff Blue Collars Total average Women 46 41 37 36 37 Men 48 43 38 35 36 Average by category 48 43 38 36 36
2013**** Executives Cadre Staff Blue Collars Total average Women 46 42 37 36 37 Men 48 44 38 36 36 Average by category 48 43 38 36 36
**: Figure covering 97% of total workforce ***:Figure covering 98% of total workforce ****: Figure covering 99.8% of total workforce
The following table instead shows the average seniority in service as highlighted by job category and gender. No significant differences are noted between men and women, since those measured over the last two years are substantially attributable to the entry into the scope of reporting of a large number of women who naturally began accumulating seniority at Pirelli only in 2012 and 2013.
In spite of the low average age of employees, their length of service at Pirelli is proportionately high, confirming a high sense of loyalty.
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AVERAGE JOB SENIORITY BY CATEGORY AND GENDER
2011** Executives Cadre White Collars Blue Collars Total average Women 16 14 10 4 8 Men 17 15 11 8 9 Average by category 17 15 11 8 9
2012*** Executives Cadre White Collars Blue Collars Total average Women 13 10 8 3 6 Men 16 14 10 8 8 Average by category 16 13 9 8 8
2013**** Executives Cadre White Collars Blue Collars Total average Women 12 13 8 4 6 Men 16 14 9 8 8 Average by category 16 14 8 8 8
**: Figure covering 97% of total workforce ***:Figure covering 98% of total workforce ****: Figure covering 99.8% of total workforce
The following activities have been well-established for years to promote equal opportunities: as far as possible in the recruitment process, seek to provide a high proportion of women in the range of candidates; use of training to impact the cultural change connected with the promotion of diversity, using specific modules dedicated to “Diversity Management," beginning with the courses dedicated to new hires (e.g. Pirelli’s way Joining the Group); take positive measures for respect of cultural and religious diversity, such as different foods that are clearly marked in company canteens so that everyone may freely comply with their own religious dietary restrictions; multilingual book stores in the factory, and multilingual welcome kits for those joining Pirelli at a facility in a country other than their home country.
Monitoring by the company of the level of acceptance and promotion of diversity as perceived by employees at its facilities plays a key role in terms of management opportunities. The Your Opinion survey is conducted in local languages at the Group level every two years. The results of the survey conducted at the end of 2013 are being consolidated and will be presented to employees during the first quarter of 2014, and thus reported in the next Sustainability Report. The results of the previous survey were highly appreciated in regard to employees’ perception of high level of acceptance of gender, cultural and age differences within the Group.
The Group Whistleblowing Procedure is a tool that supports compliance and internal control activities, as well as risk prevention. It is used specifically for reports of possible cases of corruption, violation of the principles or precepts set out in the Ethical Code laws and regulations, obviously including equal opportunities.
There were no whistleblowing reports in 2013 concerning acts of discrimination. Reference is made to the section “Group Whistleblowing Procedure” in Chapter 1 of this report for more details on the whistleblowing reports received in 2012 and 2013.
Pirelli has been active for years in promoting external diversity, both nationally and internationally. Its membership in the European Alliance for CSR, CSR Europe, (of which Pirelli was a member of the Board as well), preparation of toolkits for management of multiculturalism and gender differences with the Sodalitas Foundation (the Group has a seat on its Management Committee), active participation in drafting the Italian Charter for Equal Opportunities and Job Equality are
106 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A. some of the most representative activities that have engaged the Group in sharing its good practices with other responsible companies.
Pirelli is also committed to promoting welfare programmes for its own employees. For this purpose, it has created an ad hoc organisational function, the Welfare Group Manager with group level responsibility, confirming its growing attention to this issue. The Group has been historically supporting its own employees, with numerous measures calibrated to the different socio-cultural contexts in which the affiliates operate. Widespread measures include: day care centres offering special discounts to Group employees, subsidised holidays for employee children, scholarships, healthcare benefits, prevention campaigns, company discount arrangements with various service providers (from medical exams to car rental).
More details are found in the section “Welfare and initiatives for the internal community” in this report.
Compensation
The compensation policies adopted by Pirelli aim to ensure fair remuneration in line with the individual’s contribution to the success of the Company, recognising the performance and quality of the individual’s professional input, in a philosophy of sustainable remuneration. Such policies have a dual aim: on the one hand, they seek to attract, retain and motivate the best human resources; on the other hand, they seek to promote conduct that is as consistent as possible with corporate culture and values.
Compensation policies and processes for the executive group are managed by the central HR department, while for non- executive personnel they are handled on a country basis.
Following the organisational changes that took place at Pirelli between May 2012 and 2013, this year the executive population has reassessed the weight of its organisational positions. This is the prerequisite for proper management of numerous HR processes, including, for example, the salary review process, which verifies both internal pay equity and competitiveness with the external market, and the process by which the population is segmented into the various “broad bands” applied by Pirelli, which are in turn anchored to various systems of compensation, such as short term and long term incentive plans.
The following events are reported in regard to management compensation policy.
Once again for 2013, the Pirelli Board of Directors approved the General Remuneration Policy that establishes general principles and Guidelines followed by Pirelli to (i) determine and (ii) monitor application of the remuneration practices relating to:
- the Directors holding specific positions, the General Managers and Executives with strategic responsibilities;s; - the senior managers and the other executives of the Group.
For the individuals at the top of the organisation and for senior managers, the Pirelli Remuneration Policy has distinctly attractive characteristics by aiming at the third quartile of the benchmark market (as compared with commonly used benchmarks), and characteristics consistent with the benchmark market for the remainder of management, in order to attract, motivate and retain those resources who possess the professional qualities that the Group needs to pursue its goals profitably.
The Policy is defined in such a way as to align the interests of management with the priority goal of value creation that is sustainable over the medium-long term, through the creation of an effective and verifiable link between remuneration, on the one hand, and individual and Group performance on the other hand.
The remuneration structure of management, which is defined with the aid of companies specialised in executive compensation and on the basis of international benchmarks, is composed of three principal elements: - fixed component: for those Directors holding specific positions, the fixed component is approved by the Board of Directors when they are appointed and for their entire term; for the remainder of management, the fixed component is determined at the time they are hired and may be periodically revised to account for their performance, assumption of new responsibilities, and the market remuneration trend for the position held by the individual employee; - variable annual component (MBO): this is defined as a percentage of the fixed component with growing percentages according to the position held and considering the benchmarks for each job position. According
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to the beneficiary, this component tends to reward the annual performance of the Group, the Company and/or the department to which the employee belongs; - variable long-term component (LTI plan): this too is set as a percentage of the fixed component and is designed to reward the medium-term, and thus sustainable performance of the Group.
Once again in 2013, and in accordance with market best practices, the impact of the (short-term and medium-term) variable component on the aggregate remuneration of Group management remained very high, which means that there is a strict correlation between remuneration and performance.
Entering into the specific operating characteristics of the incentive plans existing in 2013, it is seen how most of Group management participates in an annual incentive plan (MBO) tied to achievement of Group and/or business unit and/or country annual earnings/financial targets and the qualitative assessment resulting from the PM Tool. This was introduced for the first time in the MBO 2012, and makes it possible to attribute greater significance to organisational behaviour (how), and not just the achieved results (how much) in accordance with a remuneration logic that is sustainable over time.
In regard to medium-long term incentives, on February 28, 2014 the Pirelli Board of Directors resolved in favour of premature termination of the management Long Term Incentive (LTI) plan adopted in 2012 to support the goals for the 2012-2014 three-year period, without any full or pro-rated payment of the three-year incentive. The Board of Directors simultaneously approved the adoption of a new plan –applicable to all Executives– related to the targets set out in the 2014-2016 period contained in the Industrial Plan 2013-2017 presented on November 6, 2013, whose guidelines had already been previewed on that occasion.
The decision to terminate the previous LTI and to introduce the new one stemmed from the fact that in November 2013 Pirelli had presented its new Industrial Plan for the four-year period 201432017. This plan marks a significant departure from the plan presented in November 2011, partly in light of the changed economic context and industry performance. Termination of the old LTI and introduction of the new one highlights this discontinuity and makes it possible to give the necessary motivational push to incentive plans supporting realisation of the new business objectives.
The “new” LTI plan was resolved on proposal by the Remuneration Committee and with the favourable opinion of the Board of Statutory Auditors, in relation to the parties for which this opinion is required. In the part tied to Total Shareholder Return, the LTI 2014-2016 plan will be submitted for approval by the Shareholders' Meeting called to approve the Annual Financial Report at December 31, 2013.
Consistently with the variable compensation mechanisms adopted at the international level, the three-year LTI 2014-2016 plan is entirely self-financed as in the past, given that the related liabilities are included in the profit and loss figures of the Industrial Plan.
The “new” LTI Plan includes an on/off condition, represented by the creation of value over the three-year period, and the following three targets:
Total Shareholder Return (TSR) for the Group, with an aggregate target weight of 60% of the LTI bonus; Return on Sales (ROS) for the Group, with an aggregate target weight of 30% of the LTI bonus; position of Pirelli in selected global sustainability indicators, with an aggregate target weight of 10% of the LTI bonus.
The functioning of the TSR target is in turn broken down into two, mutually independent “sub-targets”:
absolute TSR (with a target weight of 40% of the total LTI bonus); relative TSR in terms of a panel of selected peers (target weight 20% of the LTI bonus).
The Plan expires on December 31, 2016 and sets April 2017 as the date for any payment of the accrued long-term incentive to the plan participants, on condition that at December 31, 2016 their mandate and/or employment relationship have not terminated (for any reason) – if they should be terminated for any reason before December 31, 2016, no payment of the three-year incentive will be made either in full or on a pro-rated basis.
The Chairman and Chief Executive Officer of Pirelli & C., top management and Group executives in general participate in the LTI 2014-2016 Plan.
At the same time the new LTI Plan was adopted, it was decided to introduce several changes and improvements to the annual incentive system (MBO) that during the three-year period 2014-2016 will no longer be interrelated with the three- year LTI Plan, but will offer a form of payment deferred to the following year of a portion (25%) of the annual accrued incentive, on condition that the MBO for the following year is accrued. Payment of an additional amount equal to a variable
108 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A. percentage of the entire MBO accrued during the previous year will be paid according to the degree that the MBO is achieved in the following year (this mechanism is envisaged to be rolling for the entire three-year period 2014-2016). This deferral mechanism means that the time when part of the variable long-term period amounts accrued will actually be paid in 2018, insofar as it is conditioned on the degree to which the financial year 2017 results are achieved (and thus two years after conclusion of the three-year period covered by the LTI 2014-2016).
These implemented modifications set the following principal goals:
• reinforce the alignment of management interest with that of stakeholders;
• preserve unchanged the allocation of total remuneration between the fixed component, the variable annual component and the variable long-term component (confirming that the variable part has a major impact overall).
INTERNATIONAL MOBILITY
With regards to international mobility, which Pirelli has always pursued with a view to integrating cultures and values, in 2012 there were 70 new expatriate employees, compared to around 100 in 2012. Numerous transfers (about one fifth) to the new industrial activities in Indonesia, Mexico and Russia are confirmed, and the mobility flow from emerging countries to mature countries continued. International mobility thus continues to play a key role in the Group’s geographical expansion strategy, spreading Pirelli culture around the world and transferring precious technical know-how to the new start-ups.
At December 31, 2013 the expatriate population totalled about 240 persons (about 10 less than at December 31, 2012) from 17 different nations who moved to 32 different destination countries on all five continents, and 73% were non- executive employees and about 15% were women.
Most of the expatriate population (about 52%) is now comprised by non-Italian citizens, demonstrating the concrete progress being made towards the goal of creating an increasingly international management team.
In view of the complexity of this situation, the Group decided to introduce a new International Mobility Policy, which applies to all new international assignments as of January 1, 2013.
The principal new features of this policy are the introduction of a tax equalisation policy which neutralises differences in taxation arising between the destination country and the country of origin, ensuring remuneration is fair and adequate. There has also been a review of the rules for assigning certain benefits, ensuring an increasing level of care for expatriate workers and their accompanying families.
The new policy is harmonised and applied worldwide (with common rules of treatment), allowing uniform management of expatriate personnel throughout the entire Group.
Finally, through the application of “inviolable” rules, based on empirical considerations and facts and certified by specialised external service providers, clear and transparent ex ante communication of the criteria and “rules of the game” is facilitated.
EMPLOYER BRANDING, DEVELOPMENT AND TRAINING Employer Branding: becoming acquainted with Pirelli
For quite some time now, Pirelli has been dedicating specific resources to employer branding activities, inasmuch as it believes it is crucial to present itself on the market as the employer of choice. It does so by communicating its characteristic traits outside the Company (e.g. internationality, meritocracy, stimulating and dynamic work environment, training and growth paths for young people and technological innovation), and spotlighting the work opportunities dedicated to new university graduates. Naturally, this is not done only on the Italian market but also globally. Considering only the countries where Pirelli has a presence with one or more production plants in Europe, the United States, South America, the Middle East, Africa, Russia and Asia Pacific, about 180 events/projects/occasions to meet were organised in 2013, where the Company promoted its own employer branding initiatives.
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Special mention must be made of Brazil which, thanks to an enthusiastic and motivated HR team, has managed to achieve excellent results through its employer branding activities. It is worth mentioning that Pirelli Brazil had contacts with about 44,000 students in 2013 alone. About 4,000 persons applied for 100 internship positions offered in Brazil. A dedicated page was created on Facebook, where the Pirelli Brazil interns could share their experience at the Company, generating a significant virtual word of mouth process and causing the number of fans of this page to grow significantly. The careers sections on the Pirelli Brazil website was also made more visible and functional – through creation of the Work With Us channel – which led to the systematic and organised collection of curricula vitae. All of this has allowed Pirelli Brazil to draw on a greater number of talents wishing to join the Company, while also making the percentage of new university graduates hired by the Company after their 2013 internship rise to 55%, one of the best levels achieved in Brazil over the last several years.
In regard to the projects pursued at headquarters, they may be divided between several which can be defined as ongoing (i.e. which, on the basis of valid, justified reasons, are continued from year to year), and others that arise from particular or contingent opportunities or needs.
The former include all the activities that Pirelli operates in collaboration with its own university partners:
Polytechnic of Milan, Polytechnic of Turin, the Bocconi University, the Catholic University of Milan, the University of Florence and the University of Turin (these universities are considered partners both on account of the type of students that they have – principally economists and engineers – and because they are physically located close to Pirelli sites in Italy). With these institutions, Pirelli has organised Career Day, panel discussions, job fairs, corporate presentations and occasions for meeting students directly at the firm so that they can “touch our company with their own hand”.
Also within the framework of these ongoing activities, it is worth mentioning the presence of Pirelli on the web through the publication of its company profile and job want ads on targeted sites: LinkedIn and Monster. In regard to Linkedin, between June 2012 and December 2013 our followers rose from 9,000 to 64,000, which means that they grew at a rate of more than 700%. At the time this report was written, Pirelli had the greatest number of followers amongst its leading competitors. Moreover, two more pages were created, one dedicated to new university graduates and the other to PZero.
Monster remains one of the principal channels for hiring new university graduates, together with Job Meeting and Job Advisor (both were new entries in 2013).
Visibility and promotion through universities and a significant web presence have enabled the Company to carry forward its new university graduate search and hiring process with success. A total of 23,311 persons applied for 42 internships offered in Italy over the course of the year (for a similar number of positions, there were 14,267 candidates in 2012 and 1,470 in 2011). Sixty-five assessment sessions were held for a total of 611 interviewed candidates. Of these 601, 192 candidates proceeded from the first step (the assessment centre) to the second selection step. The final 42 new interns were chosen from that second group.
Aside from these activities, mentioned should also be made of other projects that were successfully carried out in 2013, including:
- Bocconi Merit Award: to give support to worthy young people worldwide, Pirelli decided to collaborate with the Bocconi Foundation and make its own contribution to scholarships for particularly outstanding youths, with donations being made in both 2013 and 2014 (for more information, see: www.unibocconi.eu).
- Leonardo Mobility Project: in 2013 Pirelli participated in an initiative promoted by AIDP (Italian Association of Human Resources Directors), which involved several Italian companies that offered to host one or more HR professionals from Romania at their Human Resources Department. More specifically, Pirelli hosted two persons from medium-large Romanian companies and assigned a project to each of them, to be developed and completed over the course of two weeks, one in the organisational unit and the other in the ambit of training unit. At the end of the two weeks, the projects were presented to the heads of the two units. On the one hand, the result was useful for Pirelli, which was able to “exploit” the new and international point of view of the two professionals. On the other hand, the two hosted individuals acquired training that allowed them to become more familiar with a structured multinational organisation.
- HRC Talent Days: In collaboration with the HR Community, Pirelli sponsored an orientation day aimed at young university graduates, who were thus able to profit from the practical knowledge of experienced company managers at both Pirelli and other host companies. Aside from having sponsored, organised and hosted an orientation day with the participation of about 50 youths and eight testimonial companies, Pirelli was also
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testimonial during other orientation days held at other companies. Some of the topics that were addressed included: how to write a curriculum vitae; how to handle a job interview; work and social networks; the most requested professional specialities; self-marketing: promoting “myself as the product”; job seeking methods; specialised search portals. The response of the youths participating through HRC was quite positive, and the organisers said that they were very proud to have contributed to clarifying their ideas and guiding the choices of young people who are finding their way around the complicated job world for the first time.
Participation at this event gave the participating Pirelli representatives the HRC CSR Ambassador award “for its exquisite cooperation, invaluable participation in the HRC Talent Days project, and important contribution made to the professional orientation of our country's youths”.
The work accomplished and commitment lavished on employer branding issues earned Pirelli recognition by Universum, the global leader in employer branding solutions. Its mission is to promote and improve communication between students seeking work and and the companies that want to recruit them. In 2013 Pirelli was awarded for the fastest and most significant growth in the ranking of top employers from one year to the next. This recognition motivates Pirelli to stay the course, well aware of the value that persons have in the organisation and thus the importance of being recognised more and more as an employer of choice.
DEVELOPMENT Performance Management
Performance management means the process whereby the contribution of each employee in an organisation is defined, observed and assessed. This assessment is made on the basis of a series of predefined indicators that are critical to the success of the Company and the employee himself.
PM is a unique, vital opportunity for personal development and guidance; during the process, particular value is given to feedback, with an open dialogue between the employee and management. In short, we could say that Performance Management starts from the past to improve the future. PM engages all Pirelli office staff worldwide (executives, managers and white collar employees). The opening of the process takes place between January and March, while the closing takes place one year later, when the process starts over again for the following year. So, the previous year was closed in 2013, and showed that the redemption rate (namely the percentage of all opened assessments that were closed) was very high: 92.1% (out of a total of about 6,000 people assessed), among whom 92.5% of women successfully completed their Performance Management process, and thus topping the overall average by 0.4 percentage points.
Alongside this significant quantitative result, there is another consideration linked to the quality of the assessments: the introduction of Calibration Meetings. These are meetings organised by the managers of individual functions, Business Units and countries, those they report to directly and the HR managers in question. During these meetings the assessments of the people belonging to that specific unit are discussed and evaluated together, with the aim of guaranteeing a shared, balanced distribution of assessments, and making the process more homogeneous and consistent.
In the 2013 a new PM software programme was implemented and made available over :Pnet, the Pirelli intranet. It is designed to be more flexible, more in line with the company organisation, more intuitive and usable, and perfectly integrated with the other Human Resources Management systems currently in use. The new Performance Management platform, chosen from the leading software packages on the market, was launched on occasion of the 2013 Opening. The new system boasts a range of innovative features: the option of selecting objectives from a catalogue of corporate business indicators; cascading the objectives top-down; assigning technical competences that can be selected from a library organised into professional families. These new characteristics sit alongside those present in the previous programme and included in the new programme with the aim of assessing the quality and efficacy of the work carried out and constructing a structured Development Plan which enables the Company to identify actions to support performance improvement and fulfilment of objectives assigned.
All the PM forms of the participants in the process worldwide contain the Core Values. These are model forms of conduct applicable to all functions and regions that are aimed at realising the premium strategy of the Company. There are three Core Values, and they are broken down into as many areas that are considered crucial to the Company: the Business area, which covers aspects that relate particularly to the product and market; the People area, which highlights the attention
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Competence Mapping
Beginning in 2011, a skills mapping process was undertaken on the Performance Management platform to provide:
the Company with a complete, punctual snapshot of the distribution of skills and include specific training campaigns in the plan; the supervisor an opportunity to discuss his/her subordinates' strengths and areas needing improvement. The professional families involved in the process were Industrial, Quality and HSE, in eight countries (China, Egypt, Italy, Romania, Turkey, United Kingdom, United States, and Germany).
In the 2012 and 2013 Performance Management processes, drawing on the results of 2011, the technical skills deemed crucial to covering the various roles in all the professional families were mapped and compiled in a catalogue of selectable skills in the Performance Management software programme. This enables the Company to identify the areas where specific skills are present, with a view to the mobility and transferability of resources.
These technical skills can be selected by supervisors using the PM management software, and they are naturally complemented by the revised training catalogue which, in the section dedicated to the Professional Academies (i.e. the professional academies for each professional family), contains training courses conceived and provided (mainly but not exclusively) by trainers within the specific professional family. This provides individuals not only with the skills target to be achieved but also the most appropriate tool to be able to do so.
TRAINING
In view of tailoring training activities to meet the requirements of the premium strategy, Pirelli created a global training system in 2013 that makes it possible to align skills, contribute to the comprehensive system of knowledge management and create permanent training processes.
Pirelli training in the previous years was strongly and largely tied to local needs, or aimed at developing strategic skills at the international level, but often with a “campaign” and “on demand” slant. On the other hand, the ongoing global activities were mainly dedicated to talented employees.
The new training model, named Training@Pirelli, has simultaneously made it possible to extend the global reach of offered training courses to all countries, realising economies of scale and expanding the number of potential participants. Indeed, for the first time, the target of this innovation in training courses is comprised by the entire company population, albeit broken down by professional families and critical roles.
Finally, Training@Pirelli has the aim of implementing an organised educational and learning system, globally structured but nonetheless equipped to meet the needs that can arise at any time at the local level in each of the countries where Pirelli is present. In a word, it is “glocal”. The “glocal” dimension is also assured in terms of knowledge management, by providing all training content in digital format and didactically transferable to every country in the Group.
The new training system is based on three principal “pillars”: the Professional Academy, the School of Management and Local Education. The first two are centrally designed and are locally delivered in the various countries, but also centrally at headquarters in Milan for the most critical populations or skills. Local Education is instead locally established and provided in the individual countries and addresses specific local needs.
The Professional Academies
Nine Professional Academies have been set up, one for each principal professional area, which provide for development of the expertise and technical and professional skills of the principal rolls of each corporate function. The Academies are: Product, Manufacturing, Commercial, Quality, Supply Chain, Purchasing, Finance, Planning & Controlling, and HR.
The elements of Sustainable Management run through all the Academies, for example with a focus on product LCA, process environmental efficiency, health and safety, sustainable management of the supply chain and risk management.
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The IT Academy, dedicated to information technology, will be created in 2014.
The Academies provide permanent training and guarantee the exchange of knowledge between countries, while contributing to the achievement of excellence, implementing and sharing Pirelli know-how, tools and procedures in every region and country. The training offered by the Academies targets the entire working population. The faculty of the Academies is composed primarily of in-house instructors who are expert in their specific functions that, according to training requirements and logistic needs, work mainly at the local and regional level, or via online seminars and webinar sessions. Certain specific courses targeting managerial levels are held at Milan headquarters.
The real peculiarity of the Professional Academies lies in the fact that each of them is headed by an accredited expert of the function, and is composed of a team of professionals from the function itself. The HR Department (and particularly the Training Department) closely monitor all staff members of the Academies, guaranteeing the uniformity of design, teaching, and learning assessment methods, while assuring consistency with human resource development policies.
The Academies have offered a total of 227 courses in 2014. Although each Academy differs from the others in terms of content and themes, it is broken down into common areas and types.
- A Day Into: a common course for someone who does not belong to the professional family in question, it provides an overview of the processes, roles and activities of the function. - Basic Professional: aimed at newly hired persons and all resources of the function interested in broadening their own base knowledge, it aims to implement comprehension of key processes in view of improving the integration between different departments and areas. - Advanced Professional: its focus aims to provide skills excellence in the specific professional segments, through highly specialised training courses. - Functional Tools: a training area focused on knowledge and use of the typical tools, software and technologies of each department. - Functional Skills: dedicated to improving specific behavioural skills in the professional family, in view of standardising and aligning processes and skills in each specific sector.
The School of Management
The School of Management aims to be the principal tool for development of the Pirelli Group managerial culture. Skills and training topics have been centrally defined at headquarters by senior management, deriving them directly from the strategic priorities of the Company.
The School of Management courses are focused on three broad training areas:
Business: for reading and interpreting the market and business culture, with a passion for technical and product aspects. Being able to draw concrete results from available information responsibly, with quick decision making and execution.
People: to obtain results through human resource management, working to comprehend the talent of everyone while developing a climate that favours open dialogue that allows everyone to be fully aware of his or her own contribution to the creation of corporate value.
Change: to be capable of making changes, innovating, improving, and comparing oneself with the best on the market; to develop the ability to assume risks and manage any resulting mistakes.
The School of Management offers a set of courses focused on three specific populations that are critical to the firm:
Executives;
Middle Management/Senior Professionals;
New university graduates/Junior (up to two years working experience).
The executive courses are held centrally in Milan, to guarantee debate and sharing of strategies directly with senior management and to encourage the interdepartmental and geographical circulation of local practices as much as possible.
The courses and content for middle management and senior professionals were designed centrally and offered locally in the various countries and regions, through a network of centrally certified management education partners.
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In regard to the population of new university graduates, the School of Management has put the finishing touches on a uniform biennial course for young hires every year in all countries for the first time at the Group. The general aim is to provide a shared vision of the business, its strategies and its operating processes from the very beginning, and to assure development in all countries of the most important basic skills for a young person who wants to become a future member of Company management.
The course has been significantly entitled WarmingUp@Pirelli. It is shaped as an induction programme that is deeply rooted in the Company business and its specific functional skills. This is why great emphasis has been placed on knowledge of the product, the functioning of internal processes and direct familiarity with customers and markets.
WarmingUp@Pirelli is essentially a course whose full duration is about two years. It opens with Plunga, an historic institutional course lasting five days. For years the Plunga course has not only represented an important opportunity to become familiar with corporate processes and strategies, but also continues to be a common denominator for all new hires at all locations in the Pirelli world, offering important occasions for networking.
On the job training follows that course: lasting a total of about three months, the participants at WarmingUp spend an average of two days a week at the individual company departments, beginning with the materials area until they go out into the field with the sales force. All modules have been planned to include a theoretical part in the classroom and an on the job part. This is why visits to suppliers, test tracks, the plant and sales outlets are planned. The participants take a final learning assessment test at the end of their on the job training.
This is followed by several, more traditional training modules to round out training on the behaviour and comprehension of the economics of business management.
A brief stint of being teamed up with a coach eases the transition from the first to the second year, in order to take stock of one's personal skills.
In contrast with the first year, the second year is more heavily concentrated on all the interdisciplinary skills. This will also be the year when, after acquiring greater awareness of one's own role in the Company, it will be possible to attend the training courses offered by the Academies, as compatible with the skills specifically required by one's own department.
At the end of the two years of Warming Up, all of its participants are supposed to attend an Orientation and Skills Review session, also called the “Orienteering Lab”. Based on the observations of several independent professionals and a battery of logical and numerical exercises, the Orienteering Lab aims to develop the participants' self-awareness of their role at the Company and their command of the skills requested by the Company.
The highly innovative element of the Warming Up programme consists in its international character and its application at all Pirelli Group sites. During 2013 different editions of the course were organised for a total of 130 Pirelli Group employees in seven countries. The participating countries were: Italy, Romania, China, Brazil, Germany, Turkey, and Mexico.
Local Education
The training provided at the local level is obviously very important. The fundamental difference with the training provided before the creation of Training@Pirelli is the global structure of the courses. It is now the same for all countries, although a local focus is maintained for specific activities addressing the distinctive aspects of each individual nation.
The Local Education courses are typically related to basic training and then to the specific needs of the country or compliance with local laws and regulations. These seminars cover specific skills areas, which range from improving relationship skills to stress management, from development of computer and language skills to seminars on local welfare issues or improving sensitivity for local projects.
For example, several ad hoc training experiences were held in Italy during 2013, including:
Working Parents Workshop: a mother is born... and also a father. Short coaching modules are led by professional psychologists to assist the employees who have just become parents in assuming their new role as working parents;
course for Management Assistants;
Customer Delighting course (targeting the entire population of the IT Department at headquarters in Italy).
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In conclusion, the entire new Pirelli training scheme ultimately aims at contributing to the search for professional and managerial excellence consistently with the challenges faced by the Company, without losing sight of individual growth and development and support for performance. As in the past, the new training system is strictly related to the Pirelli system of Performance Management. Training priorities and the courses to be attended are largely defined during the annual and half-yearly performance meetings.
Training@Pirelli is offered to all employees in the form of a specific catalogue that explains the proposed courses in detail. The catalogue highlights all the programmes, which are broken down into the three course tracks described above. Employees choose their training by checking the level, contents and duration of each course in the catalogue through dialogue with their own supervisor and the applicable HR manager.
In the Learning Lab, all employees may check the training offered, find the description and Guidelines of the training courses, while learning about the details, educational materials used, in-depth readings and the possibility of self- enrolment.
Sustainability training
2013 saw the continuation of training regarding the Pirelli Model of Sustainable Management in line with the Sustainability plan. Training was diversified according to the target group. In the context of the international corporate course Pirelli’s Way Joining the Group, Pirelli presents the Group’s Sustainable Management strategy to all new employees, starting from the multi-stakeholder approach in the context of integrated economic, environmental and social management. The Pirelli Training Model also draws new employees’ attention to the Group’s Sustainability Policies and the commitments they involve, as detailed in the Ethical Code, the Code of Conduct, the Equal Opportunities Policy, and the Group Social Responsibility Policy for Occupational Health, Safety, Rights, and Environment. In addition to this Pirelli complies with and upholds the contents of the “Universal Declaration of Human Rights”, the International Labour Organisation’s “Declaration on Fundamental Principles and Rights at Work”, the “Rio Declaration on Environment and Development” and the United Nations “Convention against Corruption”, as well as the provisions of Standard SA8000® and internationally recognised human rights, including the ban on forced labour and child labour, proceeds to free bargaining, equal opportunities and non-discrimination.
All of these issues are also presented in training courses for all Group sustainability managers and buyers.
Pirelli training statistics
Analysing the new training strategy in terms of numbers, training effort rose again in 2013. The number of average days of training pro-capita was 7.2 at the global level, thus meeting the target of 7 average days of training pro-capita two years early, after originally being set for 2015.
The distribution by type of participants and type of training is highlighted in the following graphics.
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On average, training involved 80% of the Company population with at least one day pro-capita. There was substantial balance between the sexes even when this figure is broken down by gender, with 80% of female employees being involved in training activities, exactly the same as the 80% participation rate for the male population.
Of the total training provided by the Group in 2013, about 64% was provided at the local level. In regard to the type of training, 13.06% is accounted for by the Academies, 6.07% by the School of Management, and about 11% of the total training was related to Health and Safety.
The new global training model based on the Professional Academies and the School of Management was launched in 2013 and will gradually replace most of the training previously offered at the local level.
Pirelli thus intends to standardise and gradually expand its global training effort, reaching 2017 with half of the training in every country being focused on the courses offered by the Academies and School of Management and an average number of training days pro-capita remaining at 7, plus the involvement of 90% of employees in at least one day pro-capita.
AVERAGE DAYS OF TRAINING PER CAPITA: PIRELLI TOTAL
AVERAGE DAYS OF TRAINING PER CAPITA: BLUE COLLARS AVERAGE DAYS OF TRAINING PER CAPITA: MANAGEMENT + STAFF
GROUP OPINION SURVEY MY VOICE – Pirelli Global Employee Survey
Over the years Pirelli has introduced and affirmed attitudinal surveys as a tool for actively listening to its own employees. The first global survey targeting white collar employees, conducted in 2008, was characterised by a high level of participation. This signalled the interest of Pirelli employees in expressing their own opinion about corporate life. Analysis of the results has suggested interesting possibilities for improvement that have been translated into specific action plans and follow-up both globally and locally. The second survey of white collar employees conducted in 2010 had the same response rate as the previous one (78%).
Over the last three years, the Company has been transforming its strategy, organisation, processes and managerial structure. This has led to the need to redefine the ways it engages people as well, according to a new logic aimed at determining the level of confidence that employees have in the organisation to identify the variables that render a Company an excellent work environment.
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The basic assumption is that excellent work environments are the fruit of the daily relationships of its employees and managers, which are clearly based on trust. The responses given by employees to the questions on the trust index questionnaire will give Pirelli an idea of the organisational culture, as viewed in five dimensions. It derives from the credibility of management itself, the respect accorded to employees and the extent to which they believe they are treated fairly. The level of pride in their organisation, the level of sincerity in relationships and the quality of relationships between employees are other fundamental aspects of an excellent working environment.
The principle that drives the survey and the consequent employee engagement actions resulting from it begin with the premise that the Company can improve its own performance by leveraging and constantly improving the atmosphere of trust in the working environment.
In November 2013 Pirelli launched My Voice, the global company climate survey conducted among all employees for the very first time. Both white and blue collar employees in 34 countries were asked over the course of four weeks to express their own opinion on how they felt at the Company.
The survey was conducted in the form of an online questionnaire with 59 questions, available on a dedicated website maintained outside the Company. Special areas with PCs connected to the interest were set up at the various plants, where blue collar workers were able to go and complete the survey. All employees also had the possibility of filling out the questionnaire from their own PC at home, using the access credentials provided by the Company.
The survey had very high response rates, albeit with a certain degree of variation from country to country: 81% for white collar employees and 57% for blue collar employees. About 70% of the participants in the survey also responded to the open question at the end of the questionnaire. Taken together, these free comments will offer interesting qualitative insights that will facilitate more precise reading and interpretation of the results.
The success of the survey in terms of its overall participation rate was made possible by a series of enabling factors: effective internal communication and active involvement of management and local Human Resources Departments.
It is expected that the results will be returned beginning in March 2014, and their summary will be passed on to all employees over the Company intranet and local internal media reports. Locally dedicated action plans will be prepared on the basis of the survey results and be implemented over the course of 2014.
INTERNAL COMMUNICATIONS: INTERNATIONAL OUTLOOK, ENGAGEMENT AND SHARING Targeted and smart information
Internal communication played an important role in 2013, both for the role it played yet again in support of the dissemination and comprehension of corporate strategies and goals, which marked the year and culminated in the new Industrial Plan presented on November 6, 2013, and for the innovations that were introduced, particularly by – and thanks to – the intranet.
Awareness of the Company, communication targeting the business, focus on individuals and internationalisation are the strong points of the strategy and tools implemented in 2013, with a more interdisciplinary objective that aims to reinforce trust and the sense of belonging in the Company.
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OnAir: live communication on the intranet
During 2013, the OnAir information and communication channel revised its graphics and contents, accommodating new languages, always keeping pace with the new media, in view of further reducing the distance between what the individual sees in the Company (as an employee) and what he experiences outside the Company (as an individual). In the final analysis, this objective aims to realise increasingly direct and prompt communication and thus capable of contributing to reinforcement of the sense of trust in which the Company is investing globally. In was this sense that an expanded editorial office for OnAir was created in 2013. Periodic meetings are held with representatives from all corporate departments for continuous and direct updates on events and individuals.
In April OnAir introduced itself to over 10,000 users in the world with a new look and feel. This was done in response to requests from certain users that were received in the form of statistics and through sample surveys. In fact, interaction with employees was the constant theme of OnAir communication in 2013, during which the employees were involved both as “active” users (e.g. through the quick polls) and as protagonists of Company stories. Even the new formats – Faces&Jobs, CartoOnAir’ and From A to Z – have employees directly recount the jobs, numbers and words of Pirelli people. These three columns, which use smart languages (videos with animation and cartoons), have been much appreciated, as demonstrated by the statistics.
While the international editorial offices have continued to feed not only their own local information space (466 country news in 10 languages), but also the shared global news space (68 from the world news), 2013 witnessed the début of OnAir in Italian production plants with special totems set up in the break areas.
The distribution of OnAir content crosses the borders of intranet to feed other channels and tools of communication in various countries. For example, in Brazil a newsletter named No Ar was created, and in Russia cartoons of CartoOnAir have become posters in the factory.
In 2014 plans call for continued work on live communication that engages more and more employees in story telling. New formats are on the way, including :Passion, the photographic space dedicated to persons and sharing of ideas and interests,and “Today in the editorial office”, the video feature that narrates Pirelli events and even hosts outside guests.
The House Organs in the world: the newsstand goes online
The corporate publications (newsletters, house organs, manuals and presentations), both online and hard copy, continue adjusting to comply with the Guidelines issued in 2012. The multitude of foreign magazines started to find a shared space in the section House Organs & Newsletter of OnAir to encourage the sharing of experiences and events in each country.
Beginning with Fatti & Notizie, the magazine distributed to Italian employees, the decision has been made to dedicate increasing attention to the business and factories with targeted articles and dedicated specials, like the one prepared in November 2013 on quality. World: a transformation
Following a new editorial project, World has transformed into a monographic international magazine that is more oriented to the stakeholders of the Company. While remaining sensitive to corporate themes, it reflects on topical issues, the relations between Pirelli and the economy, industry, science, the markets and culture, to get into the quick of transformations in the contemporary world, thanks to the contribution of leading personalities in the academic, scientific and cultural world. The frequency of publication is scheduled to change in 2014, from once every six months to once every four months.
Programmes for employees and families
In 2013 the monthly meetings of :PBook, the book club at the Bicocca that will continue to meet in 2014, were animated by visits, on three separate occasions, of certain renowned authors, including the mystery writers Gianrico Carofiglio and
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Maurizio De Giovanni, and the stage actor Alessandro Bergonzoni. In response to strong demand by employees, the Bicocca hosted an open day last September.
Brazil: an example of widespread communication
With over 12,000 Company employees and a communications team that was organised and expanded during 2013, Brazil represents an exemplary case for the diffusion of activities. Every working space is reached by a tool: from the canteen (Company TV, personalised placemats, advertising panels) to the factory (periodic meetings between blue collar workers and the Production Manager – Espaço Aberto da Fábrica – new visual communication systems), from the offices (a new newsletter – No Ar – via e-mail) to residences (magazine Giro em casa).
Russia: communication also focuses on families
Russia confirms its position as a strategic country on account of the approximately 3,500 employees who are the targets of numerous communication programmes, which often extend to their families. In addition to the magazine Shinnik, a quarterly publication dedicated to blue collar workers and the quarterly newsletter for white collar employees, soccer tournaments, photography competitions, celebration of employee children who get top grades in school, factory visits by former employees, family days are organised, receiving the enthusiastic approval of everyone.
WELFARE AND INITIATIVES FOR THE INTERNAL COMMUNITY
With the creation of the Group Welfare Manager, the welfare activities that have already been undertaken by the Pirelli Group have gradually been organised and expanded at the local and international level.
For several years now, the Group has been implementing a series of measures in various areas to support its employees, from healthcare to company discount arrangements with various entities, from social to leisure time activities and assistance for families and their children.
At the end of 2011 an ad hoc organisational function was set up – the Group Welfare Manager – with Group level responsibility, confirming the increasing attention dedicated to this issue.
The Company’s initiatives for the Internal Community have always varied from country to country, and address the specific needs that are typical of the various social contexts in which the affiliates operate.
They are aimed at all employees, regardless of whether they are unlimited term, limited term or part-time employees.
Periodic surveys and exchanges of experiences with the management located in different countries has shown that the work/professional services and private/family services offered to the Internal Community can be broken down into four basic areas of action: health care, the family, leisure time, and work (facility, training, group celebrations).
With regards to celebratory events for employees and their friends and families, as usual the company organised a number of open days on various sites. In terms of health assistance, Pirelli factories have always had infirmaries, with medical personnel and specialised doctors available for all employees during working hours. These facilities also offer first aid services, advice for health problems not connected to the workplace and health surveillance for any workers exposed to specific risks. The infirmaries also support the various health-related promotional campaigns that are launched on a local level, and prevention campaigns. Once again in 2013, Pirelli offered all its employees the opportunity to be inoculated with the seasonal flu vaccine free of charge.
The programmes offered to employees have been significantly expanded in Italy, and even the services that were already active and present in the Company (company canteen, tax assistance, health care assistance, specialised day hospital, summer holidays and scholarships, shuttle buses, merchant discounts for company employees...) have been communicated in a more organic and structured way and, as such, used more. In this sense, consider the realisation and distribution of the pamphlet Pirelli Plus, a detailed hard copy guide that describes the services and offers available to Pirelli employees, in view of growing reconciliation between personal life and work.
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To guarantee ever easier and more immediate access to the welfare services offered by the Company, a special portal was also created in 2013 that all Italian employees can access from the intranet, from special totems set up in the factory or from the comfort of one's own home. The portal, named Pirelli People Care and that had over 1,350 registered users in January 2014, was created with the intent of bringing together in one space all available welfare services offered and to allow employees fast use in just a few clicks.
The range of services offered in 2013 responds to specific wishes of employees who, after being engaged in specific focus groups at the beginning of the year, identified areas of interest to them for which they asked the Company to take specific actions.
This has given rise to services dedicated to families, such as the possibility of reserving baby sitters, housekeepers, social workers, domestic assistants, personal services such as legal advice, car pooling, and a wide range of merchant discounts for company employees at the local and national level for shopping, free time and health.
Among the services that immediately generated particular among employees was the possibility of purchasing monthly or annual passes for use of public transport and school books at discounted prices through instalment payments deducted from their paychecks and delivery at the Company.
Convinced that welfare activities must first and foremost satisfy the needs of employees and be designed for the direct users, the Welfare Department is committed to monitoring the level of employee satisfaction and constantly receives feedback and reports. For example, the People Care portal contains a section where employees may indicate merchant discounts for company employees that they want to obtain or any other needs.
In response to what was requested by the focus groups and to provide employees with concrete, tangible assistance, a special space named People Care for Bicocca was set up in early 2013 near the company canteen at the Milan headquarters of the Pirelli Group. Two days a week, during the lunch break, dedicated staff provides laundry, tailoring and postal services on behalf of employees. This is an important and efficient aid that saves employees time.
To promote the new programmes and internally publicise what welfare services are now available, several information counters have been set up. These “Welfare Corners” are found at the Milan headquarters and at the Settimo Torinese plant.
During 2013 special attention was also dedicated to the contribution that the Pirelli Group can make in its daily activities to the socio-economic context in Lombardy. The various charitable activities that have been set up include the one organised with Citycibo. For years Pirelli has contributed the complete, uneaten meals from its company canteen to this entity years ago, and in 2014 the Group will organise volunteer work by its employees together with that institution.
One of the next goals that the Welfare Manager is already working on is a campaign to raise awareness of preventive health and wellness, so that people can take care of their own physical and mental health at the Company.
Even on the international front, welfare activities in 2013 have taken an increasingly leading role in the individual local realities and individual countries where they have been historically located. These have been communicated internally in a more organic and structured way, made possible largely by the new communication channels that have been created in the meantime.
The welfare experiences accumulated in the individual countries have been collected at Company headquarters, with the aim of initiating a process of structured sharing of internal best practices in 2014. Two of the most virtuous and original examples found at our non-Italian sites definitely include the establishment of an in-house gym at the Company (e.g. in France, Germany, Mexico, Russia, Turkey and the United States) and, nearly everywhere, the availability of a Company shuttle. The Smile Campaign organised in Romania is an innovative programme that promotes organisational wellness. Another innovative programme is represented by the choice made by Pirelli Argentina to have interested blue collar workers attend professional technical schools to improve their educational level and develop specific technical skills. In this regard, it is worth mentioning that Pirelli devotes constant and widespread attention to the education of its employees' children. This is substantiated by the fact that in nearly all countries where the Group operates, the Company partially or fully subsidises the purchase of school books for those children.
Finally, the programme operated by Pirelli China is particularly interesting: it provides fully furnished apartments to newly hired employees who do not originally come from the place where the Company is located.
Moreover, Pirelli tyres have been supplied to employees at heavily discounted prices for years in nearly all countries.
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INDUSTRIAL RELATIONS
Pirelli Group industrial relations are conducted on the basis of constructive dialogue, fairness and respect of the various roles involved. Guaranteeing and respecting free trade union activities is one of the key values on which Pirelli bases its own Human Resource Management System. Relations and negotiations with trade unions are managed locally by each affiliate in accordance with the laws, national and/or company-level collective bargaining agreements, and the prevailing customs and practices in each country. At this level, these activities are supported by the central departments, which coordinate activities and ensure that the aforementioned principles are observed throughout the Group.
During 2013 this activity achieved significant negotiating results for the renewal of collective agreements at various Group sites, such as Mexico. This is complemented by the important role played by the Group in Italy for renewal of the national collective bargaining agreement in the Rubber and Plastic sector, signed on January 8, 2014.
Following the persistently sharp contraction in consumption at the European level in 2013, which also impacted the tyre industry, the Company continued with an organisational and production streamlining process to contain its costs. In this perspective, an agreement was signed in July 2013 at the Bollate plant together with plant union representatives and local trade union representatives. They agreed that beginning January 2014, two new types of products would gradually come into production, in order to support a forecast output of about 2 million units annually during the two-year period 2014- 2015. Accordingly, agreement was also reached on the following: a different and coherent operating structure based on a new organisation of work, a new staff of permanent employees for regular operation of the plant, amounting to 239 blue collar employees and 37 white collar employees; the redundancy of 90 workers (80 blue collar employees and 10 white collar employees); the non-traumatic management of redundancies through recourse to solidarity contracts for the period January 1, 2014 – December 31, 2015.
In the context of restructuring resulting from the crisis, the activities for closure of the steel cord plant at Merzig, Germany that began in 2012 were completed in June 2013. This closure affected about 100 employees, of whom 70 left the Company in 2013.
Consistently with the Company’s sustainable approach to restructuring processes, professional reassignment policies were adopted through framework agreements with major international companies for outplacement plans.
During 2013 Pirelli initiated a process to dispose of its steel cord business, by examining – with the support of an internationally prestigious advisor – the opportunities to sell in view of better development of the business by potential buyers that might be able to guarantee a significant international presence and adequate competitive standards.
At the end of February 2014 Pirelli & C. S.p.A. and Bekaert announced that they had signed an agreement for sale of 100% of the Pirelli steel cord activities to Bekaert for an enterprise value of about euro 255 million. Disposal of the steel cord business will enable Pirelli to withdraw from an activity whose dimensions are no longer competitive and to focus on the more profitable premium tyre segment, while simultaneously assuring that the steel cord business would have a future in a group that is a leader in transformation technologies and sheathing of steel cables.
As part of the agreement, the two companies agreed on a long-term supply and on joint products development to boost R&D activities and guarantee that the transition to the new agreement be consistent with the companies' respective growth and development plans, while also developing existing assets and simultaneously laying the basis for gradually opening to the market. The closing of the deal, which is subject to regulatory approval, is expected to take place in the second half of 2014 and affects all five of the Pirelli steel cord plants located in Italy, Turkey, Romania, China and Brazil.
Finally, Industrial Relations play an active role in the Group's commitment to health and safety. In fact, 81% of Group employees are covered by representative bodies that periodically collaborate with the Company and the support of specialists in monitoring and confronting current issues and the awareness plans or programmes, in view of continuous dialogue aimed at improving the various activities operated by Pirelli to protect the health and safety of its own workers.
European Works Council (EWC)
The Pirelli European Works Council (EWC), formed in 1998, holds its ordinary meeting once annually after presentation of the Group Annual Financial Report, where it is informed about the operating performance, operating and financial forecasts, investments made and planned, research progress, and other matters concerning the Group. The agreement
121 VOLUME 3 of Annual Financial Report at December 31, 2013 Sustainability Report 2013 – Pirelli & C. S.p.A. establishing the EWC envisages the possibility of holding additional, special meetings to comply with disclosure obligations towards delegates in consequence of transnational events concerning material changes in the organisational structure of the Company: opening, restructuring or closure of offices and plants, and important and widespread changes in the organisation of work. EWC delegates are provided with the IT tools that they need to perform their duties and a connection with the corporate intranet system, for the real time communication of official Company press releases.
The Committee currently has 14 members from the Company installations in countries entitled to be represented on the Committee itself, i.e. Italy, Germany, Spain, Sweden, Romania and the United Kingdom.
Compliance with statutory and contractual obligations governing overtime, time off, association and negotiation, Equal Opportunities and Non- Discrimination, bans on child and forced labour
Group policy has always promoted compliance with all legal and/or contractual requirements concerning working hours, the use of overtime and the right to regular days of rest.
These requirements are often the subject of agreements with trade unions, in line with the regulatory context of each country. There are no restrictions on any worker’s right to use his/her total number of holidays. The holiday period is generally agreed between the worker and the Company.
As the Company also states in its Social Responsibility Policy for Occupational Health, Safety, Rights, and Environment, and in compliance with the provisions of International Standard SA8000, which it adopted in 2004 as the benchmark tool for the management of social responsibility at its own subsidiaries and associated companies, Pirelli audits the application of provisions governing social sustainability and, in particular, respect of human and labour rights through periodic audits that are commissioned to specialised independent firms and/or performed by the Internal Audit Department. This latter entity has a high degree of independence at Pirelli insofar as it reports not only to the Board of Statutory Auditors but also to the Internal Control, Risks and Corporate Governance Committee of Pirelli, which is composed only of Independent Directors. Particular attention is devoted to the sustainability of Pirelli’s sites (and the company’s suppliers) operating in emerging countries.
The three year internal auditing plan covers all Pirelli sites. Normally every audit is carried out by two auditors and takes three weeks on site. The Internal Audit Team receives training on the environmental, social and ethical elements of an audit from the directors of the various departments to enable them to carry out an effective, clear and structured audit, giving Pirelli effective control over all aspects of sustainability. If compliance violations were found during these audits, an action plan was agreed between the local managers and central management, with precise implementation dates and responsibilities.
The Internal Audit Department is monitoring the status of implementation of agreed action plans, through specific follow- up measures.
All the managers of the affiliates involved in the audits receive training on the purpose and procedures of the audit from the central departments in question: Sustainability and Industrial Relations. In 2008 independent audits were conducted at Company sites located in Turkey, Brazil, Venezuela, Argentina, Egypt, China, Romania, Colombia, Mexico and Chile. In 2011, Pirelli commissioned new, independent audits at production sites located in Argentina, Venezuela, Brazil, China, Egypt, Turkey and Romania. In 2012 the Internal Audit function conducted sustainability audits at Company facilities in Italy, Brazil, Argentina, Venezuela and Turkey and, in 2013, in Argentina, the United States, Romania and Brazil. The audits will continue in Italy, United Kingdom, Egypt and China in 2014.
Although the instances of non-compliance revealed by the audits were not serious, they were addressed in action plans agreed by the local managers and central management, and will be subject to follow up in 2014 by the Internal Audit Department.
It should be noted that none of the audits revealed any breach of ILO Core Labour Standards, with specific reference to forced labour or child labour, freedom of association and bargaining, and non-discrimination.
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Labour and social security lawsuits
In 2013, as in the past, the level of work and social security litigation remained low, thanks to a continuing trend of conflict avoidance, substantially in line with previous years.
Just as in previous years the level of litigation remains high in Brazil, to the point of representing about 90% of all the labour lawsuits currently pending against the entire Group. Labour lawsuits are extremely common in this country and depend on the peculiarities of the local culture. As such, they affect not only Pirelli but also the other multinational companies operating there. Labour lawsuits are generally initiated when an employment contract is terminated, and they usually involve the interpretation of regulatory, legal and contractual issues that have long been controversial. The Company has made a major commitment both to prevent these disputes – to the extent possible within the previously mentioned cultural context – and resolve them, including use of settlement procedures.
Unionisation levels and industrial action
It is impossible to exactly measure the consolidated percentage of union membership at Group companies, since this information is not legitimately available in all countries where Pirelli has a presence (over 160 countries on five continents). However, it is estimated that about half the Group’s employees are trade union members.
The percentage of workers covered by a collective bargaining agreement amounted to about 81%, consistently with the previous three-year period. This figure is associated with the historical, regulatory and cultural differences between each country.
Trade union agitation affected the Italian manufacturing sites only during renewal of the national collective bargaining agreement for the rubber and plastic sector and, in regard to the steel cord plant at Figline Valdarno, during the phases related to disposal of the steel cord business.
Occupational retirement and health-care plans
Defined benefit plans are in place in the United Kingdom (the fund was closed for all employees on the payroll at April 1, 2010), in the United States (these plans were closed a number of years ago to employees on the payroll, in favour of defined contribution plans; since then, they only apply to retired employees but are not tied to wage increases) and in Germany (this scheme was closed to new hires in 1982). Other defined benefit plans exist in The Netherlands, but they represent a relatively insignificant liability for the Group.
Group affiliates provide supplemental company medical benefits according to local requirements. These healthcare schemes vary from country to country in terms of allocation levels and the types of coverage provided. The plans are managed by insurance companies or funds created ad hoc, in which the Company participates by paying a fixed amount as is done in Italy, or an insurance premium as is done in Brazil and the United States. For measurement of the liabilities and costs represented by these benefits, reference is made to notes 22 – Provisions for employee benefits and 31 – Personnel expenses in Volume 1: Annual Financial Report at December 31, 2013.
OCCUPATIONAL HEALTH, SAFETY AND HYGIENE
“The Pirelli Group safeguards health, safety and industrial hygiene in the workplace, both through management systems that are continually improving and developing and by promoting an approach to health and safety based on prevention and the effective handling of occupational risk.”
(The Values and Ethical Code – “Human Resources”)
“The Pirelli Group pursues and supports compliance with internationally proclaimed human rights. Pirelli considers protection of the integrity, health and welfare of its employees and the environment as one of the primary needs to be satisfied in organising and developing its activities.
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To these ends, the Pirelli Group is committed to:
- management of its activities by adopting occupational health, safety and rights and environmental policies in compliance with the highest international standards; - the dissemination of occupational health, safety and labour rights and environmental information to its internal and external stakeholders, both by communicating with them and actively co-operating with national and international government and academic bodies; - promoting use of the most advanced technologies to achieve excellence in occupational health and safety and environmental protection”.
(Group Social Responsibility Policy for Occupational Health, Safety, Rights, and Environment)
“The Pirelli Group considers protection of the safety, health and well-being of its employees as one of the basic and general elements in defining its own strategies and objectives, in view of obtaining ever-more competitiveness on the global market on a long-lasting and sustainable basis.”
(Quality Policy)
The management approach to Occupational Health, Safety and Hygiene is based on the principles and commitments set out in the cited Sustainability documents, which are discussed in the introductory section of this report and whose complete text has been distributed to all Group employees in their local languages as well as having been published in the “Sustainability” section of the Pirelli website.
Safety Management System
Pirelli Tyre implements a Safety Management System that is structured and certified in accordance with OHSAS 18001:2007..
All certificates have been issued with the SAS international accreditation (SAS is the Swiss Accreditation Service, which assesses and accredits compliance assessment bodies – laboratories, inspection and certification bodies – in accordance with international rules).
Beginning in 2014, RINA Services S.p.A. will be the new compliance auditor of the Pirelli Tyre Safety Management System and environment. The Company has opted for ANAB (a United States accreditation entity) international accreditation. The introduction of this new service provider addresses the need to have the greatest degree of transparency in the certification process, which assumes periodic changes in both the Management Systems compliance assessment entity and the accreditation entity.
For reasons related to transfer of the certifications from one compliance assessment entity to another, the Merlo, Argentina plant will have to get its Safety Management System recertified in the first few months of 2014.
To date all Pirelli Tyre production sites are certified according to this standard, with the exception of:
the plant in Rome (United States), which in line with local legislation already has a management system comparable to the OHSAS 18001 standard. For this reason, the certification activity is a parallel activity whose value is relative. Instead, the Environmental Management System is fully operative and certified pursuant to ISO 14001;
the process for the two recently acquired Russian plants at Kirov and Voronezh was initiated in 2013 so that they may be certified in 2014;
the plant in Merlo, Argentina, due to purely technical reasons related to the change in certifying entity as described above.
The OHSAS 18001 (as well as the ISO 14001) certification of the Tyre manufacturing site operating in Mexico was completed in 2013 as planned.
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The Safety Management System and the Environmental Management System implemented at the Pirelli Tyre production sites have been developed on the basis of procedures and guidelines drafted at corporate headquarters. This has made it possible to adopt a “common language” within the Group, in terms of the key elements of operating that guarantee effective, uniform and shared management.
Safety Culture
The Zero Accidents Target is a precise and strong corporate position. Pirelli strongly believes that leaders play a strategic role in risk prevention. Their behaviour must therefore be an example for all employees. Management must make a clear, visible commitment to safety culture in order to achieve the ambitious aims that the Group has set itself.
From an industrial point of view, this objective is pursued through a major plan of investments for technical improvement of work conditions, while constantly insisting on the cultural and behavioural aspect of all Company players. Safety culture is of paramount importance, and it is necessary to pursue it in accordance with the rules, while maintaining a very clear idea of everyone’s responsibilities to themselves, others, and their family. In this area as well, fostering engagement and ongoing communications between management and staff has proved a successful strategy. In 2013 the Company continued to reinforce and consolidate the behaviour-related aspects of safety culture. The Company has maintained and developed the focus on Leading Indicators, namely measuring what preventive measures should be implemented and how this should be done, rather than Lagging Indicators, namely reactive indicators such as the number or frequency of accidents.
In 2013 the Company signed a global agreement with DuPont Sustainable Solution in support of the Management System outlined above, with a special focus on a standard approach to Behavioural Safety in the Group.
The resulting programme begins in 2014, initially at the English sites and in Venezuela, and will then be extended to all Pirelli industrial sites.
Communication and sharing information play an important role in internal dissemination of the Safety Culture. This is accomplished with monthly newsletters like the Safety Bulletin, and the periodic publication of significant events through the traditional channels of internal communication.
Consistently with its own “cultural” approach to occupational safety, Pirelli has been an official partner of the European Occupational Health and Safety Agency (EU-OSHA) for years, actively supporting its campaigns. Every two years the Agency tackles a different issue. The theme for the 2012-2013 period was “Working together for Risk Prevention”.
The common goal of the various European Agency campaigns is to provide further support to management when it comes to showing leadership in the context of occupational health and safety, and fostering worker participation. Workers and their representatives are encouraged to share their ideas and work with management to improve health and safety for all.
Safety training
In addition to safety training offered locally at every Pirelli location (which is illustrated in the section of this report dedicated to employee training), special mention has to be made of Group activities and projects, which simultaneously target several countries by allowing an alignment of culture and vision, fully benefiting pursuit of the Company’s own improvement targets.
The Manufacturing Academy merits special mention. This is the Pirelli Professional Academy dedicated to factories, where health, safety and environment issues are discussed in detail. In 2013 attention was focused on training for assessing the risks related to machinery, consistently with the concurrent update of applicable internal procedures.
It must be pointed out that 11% of the training provided by Pirelli in 2013 addressed occupational health and safety issues.
The sixth edition of the Pirelli Health, Safety and Environment global meeting is scheduled to be held in the first quarter of 2014, at the Pirelli manufacturing centre in Yanzhou, China. The meeting has always had the purpose of treating the best practices applied by the various Pirelli sites in the world as a common factor.
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Healthcare assistance during working hours and prevention campaigns
The infirmaries at the production units offer all employees care by health care workers and specialised physicians on duty during working hours.
These facilities provide first aid care, advice on health problems unrelated to work and health supervision for workers exposed to specific hazards.
Once again in 2013, Pirelli offered all its employees the opportunity to be inoculated with the seasonal flu vaccine free of charge.
The Health and Lifestyle campaign developed in Brazil was particularly significant, engaging the participation of nearly 4,000 employees, and will be completed in 2014. This programme involves medical exams, blood chemistry and instrumental tests, and individual interviews aimed at improved understanding.
Monitoring of performance
Alongside establishing specific guidelines and procedures for implementing management systems, Pirelli uses the web- based Health, Safety and Environment Data Management (HSE-DM) system, elaborated and managed at corporate headquarters by the Health, Safety and Environment Department. This system makes it possible to monitor HSE performance at every production site in the Tyre Business and prepare numerous types of reports as necessary for management or operating purposes.
In particular, the HSE-DM system collects all information about accidents that occur in factories (accident analysis, corrective measures adopted, etc.).
If the dynamics of a particular case are significant, all plants are not only provided with the information via a Safety Alert system, but also urged to conduct an internal audit as to whether conditions similar to the ones that caused the injury exist at their plants too and define any corrective measures. By using this system, every site may audit the solutions adopted by other plants in order to share the best choices.
In 2013 the HSE-DM system was further developed, enhancing its data management and analysis capabilities.
Performance
In 2013 Pirelli achieved an FI (Frequency Index – i.e. the ratio of accidents to the hours actually worked)) of 0.62, meeting and surpassing two years early the target it had set in the Industrial Plan 2012-2014 and Vision to 2015. This target called for reducing the Occupational Accident FI by 60% in 2015 from the 2009 figure. The new target, set with the Industrial Plan 2013-2017 and Vision to 2020, calls for reducing the FI by 90% between 2009 and 2020.
In 2013 the Frequency Index (FI) of accidents at the Group (i.e. for all employees) fell by a total of 20% from 2012.
It should be pointed out that the frequency index for women is considerably lower than the Group’s average, partly due to the fact that most of the female employees are engaged in activities with a lower level of risk as compared with male employees.
Even the Severity Index (SI) of accidents at the Group continued tracking a steady downward trend that had begun in the previous years, falling from 0.26 in 2012 to 0.18 in 2013.
The Severity Index (SI) was calculated by considering all calendar days (excluding the date of the accident) between the injured person’s work interruption and the employee’s return to the factory as “lost,” i.e. the actual days necessary for complete rehabilitation.
Both in the case of the Frequency Index and the Severity Index, Europe and Latin America have a higher rate than the other geographical areas where Pirelli operates (Africa, Asia, North America and Oceania), although it has been steadily declining for years.
The calculation of the IF and IG rates mentioned above do not include the business in itinere accidents and agency worker accidents, which are listed separately.
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ACCIDENTS FREQUENCY AND SEVERITY INDEXES
2013 2012 2011
Frequency Index 0.62 0.77 1.10
Frequency Index Men 0.68 0.86 N/A
Frequency Index Women 0.10 0.18 N/A
Severity Index 0.18 0.26 0.27
In itinere accidents 107 136 142
The most representative accidents involve events resulting in contusions, cuts and fractures to upper limbs. There were seven accident events involving agency workers at the Group in 2013.
There were 104 accident events involving workers of independent contractors working at Pirelli.
There are no workers in the manufacturing process who have a high incidence or high risk of illness related to their occupation.
As illustrated in the following table, the Frequency Index of occupational diseases in 2013 fell to 0.09.
OCCUPATIONAL DISEASES
2013 2012 2011
Occupational Diseases Frequency Index 0.09 0.10 0.07
Fatalities
2013: there was no fatal accident involving Group employees or employees of independent contractors working at the Group’s operating sites. 2012: there was no fatal accident involving employees of independent contractors working at the Group's operating sites; on September 30, 2012, one Group employee suffered a fatal accident at the Carlisle, United Kingdom plant. Following and investigation of the incident, the authorities found that it was accidental. Pirelli continues to provide full support to the UK Health & Safety Executive authority as the investigation proceeds. 2011: there was no fatal accident involving Group employees or employees of independent contractors working at the Group’s operating sites.
Best Practices
Eight tyre manufacturing plants were “sites of excellence” in 2013, since no employees were injured there in 2013:
CMP Milano (since 2009);
Slatina-Steelcord in Romania (as in 2012);
Breuberg-MIRS in Germany;
Kirov in Russia;
Rome-MIRS in the United States;
three “Fitted Units” in Brazil (Sao Josè dos Pinhais, Camaçarì, Sorocaba).
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These results should be attributed to the constant focus on leading indicators, namely in terms of prevention.
Health and Safety Expenditure
In 2013 health and safety expenditure by Pirelli Tyre totalled more than 14 million euro. Pirelli Tyre expenditure (in millions of euro):
2011: 12.2;
2012: 14.7;
2013: 14.3.
The expenditure made targeted improvements on machines and plant and, more in general, the workplace environment as a whole (e.g. improvement of microclimate and lighting conditions, changes in layout for ergonomic improvement of activities, measures to protect the healthfulness of infrastructure, etc.).
Health and Safety targets
Quantitative
2015: reduction in the Accident Frequency Index by 60% in 2015 from 2009 (strategic plan to 2015): achieved two years early in 2013.
2020: reduction in the Accident Frequency Index by 90% from 2009.
Qualitative
OHSAS18001 certification of the Guacara factory (Venezuela) achieved;
2013-2014: OHSAS 18001 and ISO 14001 of the Silao, Mexico site: achieved;
OHSAS 18001 certification for the Voronhez and Kirov, Russia sites and ISO 14001 certification for the Voronezh site: pending;
2011-2012: integration of an HSE module in the Process Kaizen Engineer training course; this goal has been broadened to include HSE training in the new Manufacturing Academy: achieved;
2013-2015: implementation and consolidation of the systems Behaviour Based Safety (BBS), LockOut tagOut (LOTO), and Point of Work Risk Assessment (POWRA): pending;
2014-2018: implementation of the global programme “Excellence in Safety”. Starting in Carlisle, Burton and Guacara.
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4.2 EXTERNAL COMMUNITY RELATIONS WITH INSTITUTIONS AND PUBLIC AUTHORITIES
“Relations between the Pirelli Group and public authorities at local, national, and supranational levels are characterized by full and active cooperation, transparency, and due recognition of their mutual independence, economic targets, and the values in this Code.
The Pirelli Group intends to contribute to the prosperity and growth of the communities it operates in by providing efficient and technologically advanced services. The Pirelli Group endorses and, where appropriate, gives support to educational, cultural, and social initiatives for promoting personal development and improving living standards.
The Pirelli Group does not provide contributions, advantages, or other benefits to political parties or trade union organizations, or to their representatives or candidates, this without prejudice to its compliance with any relevant legislation.”
(The Values and Ethical Code – “Wider Community”)
In all countries where Pirelli has a presence, the aim of institutional relations is aimed primarily at the creation of structured and constant relations with institutions to assure adequate representation of Group interests, including participation in the different phases of the decision-making process. All activities are characterised by maximum transparency, legitimate authority and responsibility for all information that is released in public venues and in direct relations with institutions.
In the process of consolidating and developing institutional relations, Pirelli focuses on active monitoring and detailed analysis of the legislation and regulations in force with a view to verifying possible areas of interest as well as identifying the stakeholders in question. To guarantee optimum comprehension of the activities performed and the interests represented, institutional interlocutors are targeted by a constant flow of information about the industrial identity of the Pirelli Group, its principal business activities, the development of new process and product technologies, and, last but not least, elements of economic, environmental and social sustainability.
In view of guaranteeing more effective engagement of Group stakeholders, institutional dialogue is also enriched by numerous projects and initiatives undertaken with institutions to promote and support issues of public interest.
The geographical scope of the Pirelli Group’s industrial and economic interests calls for an extended network of institutional relations on a national, European and international level. In Italy, the Group interacts in a system of relations involving the most important institutional bodies at both the national and regional levels. At the parliamentary level, it analyses draft legislation affecting the Group, focusing on the initiatives taken by the standing committees of the lower house of Parliament and the Senate, and occasionally offering support to parliamentary activity in the form of technical information, studies and specialised analyses concerning the Group's activities. At the government level, Pirelli maintains constant relations with the Prime Minister’s Office and the principal ministries and related governmental entities that have an impact on the Group. At the local level, Pirelli devotes special attention to relations with governmental bodies in the regions where Pirelli has a presence with its manufacturing plants.
During the year, the Institutional Affairs Department constantly worked to defend and support Group interests, by promoting the most effective representation at the various levels of the political and administrative system. Among the ordinary activities carried out to defend these interests, initiatives have been taken in relation to: support for industrial development, particularly in regard to research and development projects; promotion and reinforcement of international relations in the countries where the Group has a presence with industrial sites; analysis and study of the impact of tyre regulations; warnings on highway safety issues.
Pirelli also considers its relations with European Union institutions to be of key importance, dedicating special attention to them. In this context as well, continuous dialogue with the European Commission, the European Council and the European Parliament is conducted in the form of legislative analyses and concerns a broad range of issues that run from transport to environmental policies, and internal market or international trade issues. Pirelli represents Group interests to stakeholders, contributing to the formation of adequate and informed legislative decisions, while always guaranteeing an approach based on maximum transparency, fairness and collaboration with institutional representatives.
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The Pirelli Group is entered in the European Transparency Register established and maintained by the European Parliament and Commission with the aim of improving levels of transparency in EU decision-making processes.
At the international level, Pirelli is planning numerous meetings with its principal institutional counterparts in the countries where the Company has manufacturing facilities, in order to promote an effective Institutional Relations strategy based on a fair perception of the Group's industrial presence and encouraging dialogue to further mutual understanding. On these occasions, all issues related to local growth and competitive factors are presented to direct sustainable investments and facilitate appropriate initiatives to remove any obstacles to economic and industrial development. Public initiatives aimed at solid institutional engagement are also promoted and facilitated in these contexts, and they are often tied to the needs of local communities in collaboration with Group Sustainability Departments.
PRINCIPAL INTERNATIONAL COMMITMENTS FOR SUSTAINABILITY
A number of the principal commitments made by Pirelli worldwide are illustrated as follows. The list does not include the numerous activities and agreements existing at the local level with Group affiliates.
ETRMA – European Tyre and Rubber Manufacturers Association
ETRMA, the principal partner of EU institutions for the sustainable development of new European policies for the sector and their proper implementation with the institutional support of the Pirelli Group, worked very intensely again in 2013 on the preparation of provisions to implement regulations issued by the European Commission covering the general vehicle and tyre safety and energy efficiency, as well as tyre labelling, which represents an absolute first for the sector in Europe.
In conjunction with these activities, ETRMA is actively involved in defining the European Commission market supervision regulation. It continues to urge EU Member States to develop policies for monitoring the compliance sold on the market with EU laws. Partly for this reason, it has reinforced its partnership with national tyre industry associations. Rounding out its vehicle safety regulatory objectives, ETRMA has contributed to revision of the European policy governing periodic technical inspections, where tyre compliance plays a key role in road safety.
ETRMA actively participates in the implementation of the new CARS 2020 (Competitive Automotive Regulatory System) system. Pirelli has participated in the working groups supporting the high level CARS 21 group, and its challenges concern access to raw materials, the need for new skills and greater worker flexibility, the sustainability of production processes and the need to guarantee compliance with the new and sophisticated product regulations that focus on safety and environmental impact. The CARS 2020 strategy is part of the Europe 2020 strategy, in which ETRMA is heavily involved. It aims at defining the economic and social action of the Community over the next decade. It is continuing with its programme of activities to raise awareness of road safety and sustainable mobility.
Another strategic activity in which ETRMA is heavily involved is implementation of the Emission Trading Scheme. This aims to reduce the economic impact of European energy policies, and just as in the European Innovation Partnership on Raw Materials, it has the goal of guaranteeing fair and unrestricted access to key raw materials for the sector. Finally, the association is successfully promoting sustainable manufacturer responsibility practices for the management of end-of-life tyres. This has led Europe to achieve a more than 95% recovery rate, through close collaboration with the various operating partnerships existing in European countries. Special mention must be made of the fact that the good ETRMA and European practices constitute an international benchmark.
IRSG – International Rubber Study Group
Pirelli is a member of the Industry Advisory Panel of the International Rubber Study Group (IRSG), an intergovernmental organisation that brings together rubber producers and consumers, acting as a valuable platform for discussion on issues regarding the supply and demand for natural and synthetic rubber. It is the principal source for information and analyses on all aspects related to the rubber industry.
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Under the auspices of the IRSG, since 2012 Pirelli has been involved in the Sustainability Rubber Project, among other initiatives. The aim is to create a Global Standard for Sustainable Management in the rubber industry. The initial focus is on natural rubber and, at a later time, the project may also be extended to synthetic rubber.
The Sustainable Natural Rubber Action Plan was announced at the World Rubber Summit in May 2013. This Plan is based on the recommendations of the Heads of Delegation and the Industry Advisory Panel to which Pirelli belongs. It aims to promote the use of a voluntary standard for sustainable natural rubber that is valid for all stakeholders.
About 85% of natural rubber is produced by small-scale farmers who own less than three hectares of land. The decision to plant trees and produce natural rubber thus depends on the cost/benefit relationship, and consequently on an adequate long-term plan to guarantee stable growth, which must be based on sustainability.
The announced plan is complementary to national economic, social and environmental programmes promoted in the producer nations.
WBCSD – World Business Council for Sustainable Development
Pirelli actively participated in the WBCSD – World Business Council for Sustainable Development again in 2013. This is a Geneva-based association of about 200 multinational companies based in over 30 countries that have made a voluntary commitment to link economic growth to sustainable development.
In particular, Pirelli Tyre belongs to the Tyre Industry Project Group, whose members represent about 75% of global production capacity. The goal of the project, which was launched in 2005, is to seize and even anticipate the challenges of sustainable development through assessment of the potential impact of tyres on health and the environment throughout their life cycle. The project, which initially focussed solely on raw materials and tyre debris, with the aim of developing new knowledge and formulating a new approach in the industry, has extended its scope to nanomaterials. Its goal is to develop a specific guide for the sector in collaboration with the Organization for Economic Cooperation and Development (OECD). This guide would set out the best practices for research, development and production of new nanomaterials, ensuring that the use of any nanomaterial is safe for both people and the environment.
The members of the group have also continued promoting best practices for end-of-life tyre management in emerging countries, to encourage their recovery and reuse as a resource (secondary raw material). This will make it possible to reduce the use of raw materials and environmental impact that this involves.
In view of contributing to guidance for technological choices, management systems and sustainable mobility policy, since 2013 Pirelli Tyre has actively participated in the Sustainable Mobility 2.0 (SMP 2.0) project. Its principal aim is to make a tangible contribution to realisation of the Vision (2050) linked to a notion of universally accessible urban mobility having a low environmental impact, both for human transport and freight transport in motor vehicles. In this three-year project (2013-2015), which originates from two previous works by the WBCSD (Mobility 2020 and Mobility For Development), the key player is a heterogeneous group of international companies that are largely involved in the automotive and auto&parts sector.
Sustainable Mobility 2.0 will raise awareness of the need to promote sustainable mobility, both in an environmental perspective (low impact in terms of energy consumption) and social perspective (with special focus on less affluent segments of the population, fewer road accidents). Through this comprehensive approach to urban mobility, SMP 2.0 will contribute to a more prosperous society, not only in terms of new mobility solutions, but especially by altering the existing paradigms of urban travel.
SMP 2.0 recognises the need for city governments, private business and non-governmental organisations to work together to achieve these ambitious, but now essential goals for a world in which 70% of the population will live in urban areas by 2050. Precisely for this reason, the companies participating in the Sustainability Mobility 2.0 project, assisted by WBCSD, have selected six pilot cities (which are highly representative of the different geographic, economic and infrastructure contexts) for which to develop a roadmap that offers a detailed action plan to improve urban performance in terms of sustainable mobility.
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EU-OSHA – European Occupational Safety and Health Agency
For the fifth consecutive year, Pirelli continued to be an official partner of the European Occupational Safety and Health Agency (EU-OSHA) in 2013. Every two years the Agency tackles a different issue. The new campaign for 2012-2013 is entitled “Working together for Risk Prevention”, and focuses on fostering leadership in the context of health and safety at work, fundamental when it comes to involving all members of personnel in reducing the number of accidents in the workplace. Pirelli is counting a lot on the strategic role of leaders in risk prevention, considering it fundamental that leaders have a clear and visible commitment together with engaging in exemplary conduct for all workers.
CSR Europe Pirelli has been a member of the Board of CSR Europe since 2010. It is represented by the Sustainability and Risk Governance Manager, who holds the position of Deputy Chairman of the Board with delegated authority over Governance and Finance. CSR Europe is a network of companies in Europe that are leaders in the area of corporate social responsibility. Its members include more than 60 multinational companies and 38 national partner organisations from 29 European countries. The network was founded in 1995 by European business leaders, in response to an appeal by European Commission President Jacques Delors. CSR Europe functions as the European platform for the more than 5,000 businesses and interested parties, enabling them to cooperate and exchange experiences to become global leaders with Europe in the areas of sustainable competitiveness and social well-being. The European Commission Statement on the CSR sets out a new European strategy for the CSR and recognises the “Enterprise 2020” initiative of CSR Europe as an example of particularly important business leadership in support of attaining the political objectives of Europe. Jose Manuel Barroso, President of the European Commission, has said: “Europe 2020 aims at building a stronger European Union, based on a competitive economy, with the skills and flexibility necessary to confront a rapidly changing world, but also characterised by social inclusion according to the European Model. This is a task for all of us – the European Commission and all European institutions, the Member States, businesses and social partners – and for this reason the European Commission fully supports the Enterprise 2020 initiative”. Herman Van Rompuy, President of the European Council: “Together, your network and the Union share a common interest: restoration of employment and economic growth. This is not only a common objective that we share, but we must also co-operate to achieve it. European Institutions and governments may jointly decide on the agreements and contexts, but then it is business alone that will have to take action in the field”. Through the Enterprise 2020 initiative that is part of the Europe 2020 strategy adopted by the European Council, CSR Europe promotes collaboration, innovation and practical action to shape the contribution of companies to the Europe 2020 strategy for intelligent, sustainable and inclusive growth. With Enterprise 2020, CSR Europe is committed to: supporting businesses in the creation of sustainable competitiveness, by offering a platform for innovation and the exchange of experiences; encouraging close collaboration between businesses and stakeholders, by exploring new forms of cooperation to create a sustainable future; reinforcing the global leadership of Europe in CSR, by engaging European institutions and a wider range of international players. CSR Europe has prioritised two European business campaigns – Skills for Jobs and Sustainable Living in Cities – as well as a number of collaboration projects and sector initiatives that aim to improve corporate management performance.. Pirelli has participated in the European Alliance for CSR since 2007, fully sharing the approach to sustainability as a strategic and competitive business management technique. Until now, the participation of Pirelli – promoted by the European Commission in Brussels to encourage the dissemination and exchange of best practices for sustainability amongst companies – of active involvement in the European Laboratories of the initiative, coordinated in Italy by the Sodalitas Foundation and by CSR Europe throughout Europe.
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Endorsement of the Communiqué of the Corporate Leaders' Group on Climate Change
Pirelli has renewed its commitment for years in the fight against climate change, promoting the adoption of adequate energy policies to reduce CO2 emissions. It is expected that the next Communiqué of the Corporate Leaders’ Group on Climate Change will be issued in 2014. The last one was issued 2012, when Pirelli signed The Carbon Pricing Communiqué, a planning document that originated at Cambridge University on the initiative of the Prince of Wales. Since its origin, it has aimed to bring together the biggest British, European and international corporate groups, motivated by the conviction that new, long-term policies are essential for coping with climate change. In 2011 Pirelli signed the 2nd Challenge Communiqué, while in 2010 it signed the Cancún Communiqué, in 2009 signed the Copenhagen Communiqué and in 2007 it signed the Bali Communiqué. That was the first document for development of concrete strategies through joint work by governments on a comprehensive global climate agreement.
COMPANY INITIATIVES FOR THE EXTERNAL COMMUNITY
Since it was founded in 1872, Pirelli has been aware that it plays a major role in promoting civil progress in all communities where it operates. Consistently with the Ethical Code and the Group Social Responsibility Policy for Occupational Health, Safety, Rights, and Environment, Pirelli has developed a global strategy for protection of the territory, supporting health, education and training, environmental, cultural and sport initiatives.
Aware of the importance of contributing to the community by capitalising on the natural strengths of the Company, Pirelli has identified three areas of focus. The Company plays an important role in the transport sector, and particular in regard to transportation safety. The four tyres mounted on a vehicle represent the only tangible contact between the vehicle and the road. So, tyre safety is fundamental and of the greatest importance. The experience of Pirelli in the field of road safety has led it to sharing its focus and expertise with stakeholders, i.e. the driving world.
The second area where Pirelli can make a special contribution is technical training. In the countries where it operates, especially in emerging markets, Pirelli possesses technical know-how that can be used as leverage for development of the community. Industrialisation requires training, and good training can become a driver of economic growth. In certain cases, Pirelli has to provide the instruction that its own new hires or future hires need, but in other cases Pirelli contributes to the community and, more in general, offers know-how that is key to development of the area.
Pirelli is now present in many countries undergoing rapid development. Many of its factories have brought jobs to poor communities, where it is important to contribute to children's growth even before it is possible to work on their technical skills. Children can find a supportive community and important lifelong values through social programmes focused on sport. As a sponsor of professional and amateur sport activities for over a century, Pirelli has know-how that it easily re-proposes in the field of social solidarity. In particular, Pirelli is the principal sponsor of the FC Internazionale Milano soccer team. Through the company Inter Futura, it has created an important network of sports and solidarity activities for disadvantage children around the world. Pirelli sponsors these activities in several markets. In other markets, the Company supports other soccer activities or other sports like basketball or baseball.
Pirelli has adopted an internal procedure for years to regulate the distribution of gifts, contributions and payments to the External Community by Group companies and in relation to the roles and responsibilities of the functions involved, the operational process of planning, realising and monitoring the initiatives and making disclosures about these projects.
A key contribution to the initiatives satisfying local requirements is made by the dialogue with locally operating NGOs. Priority is given to those initiatives whose positive effects on the External Community are tangible and measurable according to objective criteria.
The internal procedure also specifies that no initiatives may be taken in favour of beneficiaries for whom there is direct or indirect evidence of violation of human rights, worker rights, environmental protection or business ethics.
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As envisaged in the “Pirelli Values and Ethical Code”, the Pirelli Group “does not provide contributions, advantages, or other benefits to political parties or trade union organizations, or to their representatives or candidates, this without prejudice to its compliance with any relevant legislation.”
Road Safety
Pirelli is synonymous worldwide not only with high performance, but also safety. Together with environmental protection, road safety is the key element of the Green Performance strategy that inspires the Group’s industrial and commercial choices. Pirelli’s commitment to road safety takes the form of numerous training and awareness-raising activities, but above all in terms of research and the ongoing application of innovative technological solutions for sustainable transport.
The importance of taking action cannot be underestimated. This is why, when it agreed to renew the exclusive supply agreement with the FIA Formula One World Championship, Pirelli and the Federation agreed to discuss the procedures for partnership in the area of highway safety as part of the FIA Action for Road Safety programme.
As a member of the World Business Council for Sustainable Development, Pirelli also wants to assume a responsible leadership role. The Company is active in the Mobility 2.0 working group, an ambitious project that is developing pilot projects in several cities around the world, identifying and implementing sustainable mobility solutions.
Pirelli is also highly focused on the road accident reduction objectives identified by the European Commission in the European Road Safety Charter, of which the Company is a signatory with the following undertakings:
contribute to consumer awareness of the fundamental aspects of road safety, through the safe driver experience, in France for example, and through partnership with driving schools, in Italy and Germany, for example; increase young drivers' awareness of the causes of road accidents, through demonstration crash tests (pilot project in France); provide material on winter road safety, with the support of the Pirelli website (potential reach of 9 million users worldwide in one year); organise training seminars for driving school owners and instructors on the elements of road safety that are directly related to the tyre and its use (pilot project in Germany); train dealers at the international level about the importance of tyres in road safety, the differences between winter tyre performance and summer tyre performance, etc. The activity has already engaged 15 countries and will engage another eight in 2014; actively participate in national road safety programmes, in collaboration with associations, institutions, automotive and motorcycle makers.
In regard to heavy vehicle transport, in 2013 Pirelli Truck continued the activities it had already undertaken in previous years related to sustainable mobility and road safety. Special mention should be made of the Driving Innovation events (the first held in Munich, March 10-12, 2013, the second in Istanbul on October 3, and finally the third in São Paulo, from October 28 to November 1), where the invited customers, who were both operators in the tyre business and transport fleet operators, were treated to in-depth discussions on issues related to transport safety and proper tyre maintenance (with a special focus on the CyberFleet system, the latest Pirelli innovation for precise control of tyre pressure and temperature), and participation at the Environmental Sustainability in Freight Transport seminar organised by Green Freight Europe held on May 10, 2013 at the University of Cranfield in the United Kingdom.
Pirelli Moto dedicated great attention to road safety in 2013, for example with the Bikers Academy, a training course for the youths enrolled at driving schools belonging to Unasca and Confarca to obtain the “young driver's license” and “A1 driver's license”, sponsored by Confindustria ANCMA, Associazione Vittime della Strada, the Italian Senate, the Ministry of Infrastructure and Transport, and the Chamber of Deputies of the Italian Parliament (where press conference for presentation of the project was held).
This project was organised with the aim of promoting the safe use of scooters and motorcycles for oneself and for others. For this reason, Pirelli Moto (acting under the Metzeler brand) supplied materials and information that explained the proper use and maintenance of motorcycle and scooter tyres.
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Metzeler has in turn made it a priority to promote training programmes on the role of tyres as a means to improve motorcycle driving safety.
With the goal of reaching as many motorcyclists as possible, numerous collaboration agreements were signed with on-road and off-road European driving schools, and in particular:
in Germany with Action Team, ADAC – Ressort Motorsport, BMW Motorrad Enduro Park Hechlingen, BMW Motorrad Race Academy;
in the United Kingdom with BMW Motorrad Off Road Skills;
in France with ZEBRA, EASYMONNERET, H2S;
in Spain with BMW Motorrad Enduropark Aras Rural;
in Italy with BMW Motorrad GS Academy.
Pirelli also sponsors specific programmes in certain countries around the world to improve awareness of road safety. Pirelli conducts information and training campaigns in Italy to improve the awareness of Italian motorists and, in particular, new license holders and middle and high school students. Part of this project involved producing an educational video on road safety in collaboration with the Police.
In Romania Pirelli conducted a road safety programme at the high school level. In Turkey, the Company launched a wide- ranging educational project at university level in collaboration with the local office of the World Health Organization, the General Directorate on Safety and the universities to create e-learning courses on road safety. The course for university credits, Traffic is Life – Traffic Safety, was introduced at seven universities, with more than 5,000 students enrolling in it.
The Ciclovias Amigas programme was launched in Brazil to raise awareness about traffic and road safety regulation topics, by presenting stage plays for public school students and several needier schools. Pirelli organised a rally at Kirov in Russia to promote safe driving, with about 2,000 spectators. Pirelli also sponsored a day with the slogan “Kirov is the friendly driver city”.
Training
The promotion of technical education and training are very old values that are well-established in the history of Pirelli.
Pirelli continues to benefit from technical and research cooperation with various universities around the world, beginning with the Milan and Turin Polytechnic Universities, and also the Shandong University in China and the University of Craiova in Romania, among others. Technical training is particularly important for Pirelli, including but not only in terms of creating a pool of skilled labour needed to optimise productivity in its factories..
Internally, Pirelli uses its own resources to optimise training, as in the case of the workers for the new factory in Mexico trained at Slatina in Romania.
Externally, Pirelli has supported projects in the communities where it operates for technical training useful to create a good balance between labour supply and demand.
In Egypt Pirelli launched a major project for developing the Al Amreya Industrial Secondary School. As well as committing itself to full renovation of the facilities, from the sewers to the classrooms, Pirelli provided a complete training course for instructors and developed a curriculum based on various specialisations: refrigeration and air conditioning, electronics and electric power, and construction. About 550-600 students enrol in the courses every year.
In Turkey a large number of teaching programmes are offered by expert Pirelli volunteers in technical schools, together with the sponsorship of Pirelli schools.
The Merlo, Argentina factory hosts students for technical trainin, while Pirelli operates an internship programme in Yanzhou, China.
In Romania, aside from collaboration with the University of Craiova, the Slatina technical college offers training programmes at the Pirelli factory. Other programmes include the Romanian START project for training in manufacturing processes, with the participation of 112 students and nearly 30,000 hours of training offered by Pirelli.
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In Russia the Company collaborates with the Voronezh State Technological University, training students in specific courses and inviting them to the factory for on-site training. About 100 students participated in the programme in 2013.
Sport and social responsibility
There is a close link between solidarity and sport, in a virtuous circle where commitment to sports becomes synonymous with the commitment to promoting solidarity and ethics, especially amongst young people. Getting young people involved in sport is a way to teach the notion of integration to children from different social groups, and helps prevent negative situations like isolation and solitude.
Since 2008, FC Internazionale Milano, Pirelli and Comunità Nuova have been running the “Inter Campus” social project in Slatina, Romania. The sports and recreational activities are organised for the entire year, with the participation of over 80 children from different social contexts who have been learning the values of team work, social integration and friendship through soccer for over two years.
In 2012 Pirelli and FC Internazionale Milano replicated the experience with Inter Campus at Silao, Mexico, near the new Pirelli factory. The Inter Campus Silao, inaugurated by President Felipe Calderon, is attended by 150 local children.
In 2013 the Company sponsored the Pirelli Cup 2013 in Argentina, an important national summer soccer tournament. The election of Pope Francis, from Argentina, prompted an soccer event to promote peace, sponsored by Pirelli. This is an interfaith event for peace, based on the concept of inclusive education and against discrimination, with the PUPI Onlus foundation..
Pirelli also sponsors baseball in Venezuela through the Pirelli Baseball School, which is attended by more than 300 children and teenagers; basketball, volleyball, soccer and motorsport in Brazil; and basketball in Spain, to mention but a few.
In the United States, Pirelli sponsored the Citizens Committee for New York City for all of 2013, with the Pirelli Fun & Fit project, while financing various social sports projects.
In the United Kingdom, Pirelli organises a rally in Carlisle for the Richard Burns Foundation, which assists victims of serious illnesses or accidents.
In Russia Pirelli ha organised an ice hockey tournament, where it promoted “healthy living”.
Solidarity
The inclusive approach taken by Pirelli to involvement and inclusion takes the form of social solidarity worldwide.
The Company supports educational programmes that can give less fortunate children the tools to escape poverty. It contributes scholarships and research projects, firmly believing in training as key to individual growth and the economic growth of a country.
In Brazil, for example, where Pirelli has been historically active in the local community with social projects, the Company provided for about 450 children in the city of Feira de Santana, near the Pirelli factory, in an after-school programme with 15 different types of activities. Similar projects are offered near the factories in Gravatai and Sumaré, and Pirelli has continued to provide support to the Projeto Guri, a project to give musical instrument and singing lessons to 230 children from the poorest families in Campinas and Elias Fausto in São Paulo.
Pirelli also supports Aliança da Misericórdia, an orphanage in São Paulo that offers shelter to 300 orphans and homeless children, as well as the Dr. Klaide Nursery in Santo André and Escadinha do Tempo in Meleiros.
Since 2013 Pirelli has been providing support to the Centro de Convivência Santa Dorotéia in Grajaú, and specifically computer courses combined with drug awareness education.
Pirelli supports the Fundació Mambre in Spain, a foundation that operates as facilitator in social inclusion processes, supporting homeless people on their individual growth paths. Its goal is to create dwelling solutions. The Company also sponsor programmes to provide food to needy families.
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In China Pirelli provides support to the poorest families in the community with donations of rice and oil. In Russia, the employees at the Kirov factory gave support to an orphanage, by organising activities and gifts for the children there. They also organised activities for war veterans. In another charity project, Pirelli employees in Kirov have committed themselves to building a sports field for local children.
In France the Company contributed to the Special Olympics, in Turkey it contributed to a foundation for the education and protection of mentally disturbed children, while in Romania it contributed to a home for disabled youths.
In the United Kingdom Pirelli made a donation to the YMCA in support of the homeless, and in the United States consumers have been involved in a marketing project with donations to the NGO Make a Wish, which realises little dreams for children with terminal illnesses.
In Brazil Pirelli supports Educandario Imaculado Coracao de Maria in Amélia Rodrigues, an elementary school run by Italian nuns and attended by 1,100 children.
In Turkey the Company provides support for ad hoc programmes at the Turk Pirelli Primary School and the Turk Pirelli High School, such as renovation of the school gym.
Under the coordination of the Kocaeli Chamber of Industry in Turkey, a school was built in Gölcük, the new Gölcük Dumlupınar School.
In particular, Pirelli and 16 of its own suppliers collaborated on the construction of a schoolroom.
The school opened in May 2013, with 34 schoolrooms and 900 students.
Special mention must be made of the recent agreement between Pirelli and Qufu Normal University in China: Pirelli will finance 25 excellent students from poor backgrounds so that they can complete their studies.
Health
Pirelli considers contributing to improving the health services of the communities where it operates to be a priority.
Since 2008 Pirelli Tyres Romania, in collaboration with the Niguarda Hospital in Milan, has supported the professional training of medical and nursing professionals and the donation of medical equipment and devices to Slatina Hospital. Over 120 professionals, who annually care for more than 40,000 patients, were trained in this programme, and specifically in oncology, paediatric care and emergency care. Pirelli Tyres Romania has also provided dental treatment to around 350 children in Slatina and Bals through the project Overland for Smile.
Since 2010 Pirelli has supported the Pequeno Principe Hospital in Curitiba, the biggest paediatric hospital in Brazil. In Argentina Pirelli has sponsored a marathon in support of children who had tumours, and a flu vaccination campaign. In the United Kingdom, Pirelli has been involved in a long series of initiatives, sponsorships, fund raising and donations on behalf of research and tumour, paediatric, eye, cardiology and diabetes treatment.
Environmental initiatives
Many Pirelli employees around the world enthusiastically participate every year in Pirelli environmental projects. In Venezuela the company organised a large group of volunteers to clear beaches and adjacent areas.
“Let’s do it Romania” is an important project organised by Pirelli in conjunction with the municipality of Slatina, which recruited 350 volunteers to clean up brownfield sites and restore nature. In China Pirelli employees committed themselves to planting trees in the Friendship Forest project. In Mexico Pirelli signed an important agreement with the government of Guanajuato for a reforestation project. Pirelli Mexico has also committed itself to cleaning up and restoring a river bed in the area. In Russia, 300 Pirelli workers participated in a voluntary cleaning day in the Voronezh area, and another 300 workers did the same in the Kirov area.
For the Earth Day celebration on April 22, Pirelli decided to offset the CO2 emissions produced by its own fleet with carbon credits generated by the Bolivia Project. The direct result of the new car policy adopted by Pirelli in December 2011, this initiative promotes the choice of vehicles that have lower environmental impact and supports a project to save forests and the populations that live there.
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Culture and social value
The international character of Pirelli is also visible in its love for culture, with initiatives that were undertaken in many countries around the world during 2013. Its attention to culture, and even more its commitment to preserve, disseminate and cultivate it, are an integral part of the creation of social value.
Pirelli is one of the sponsors of the São Paulo Modern Art Museum, one of the most important museums in Latin America. Aside from its permanent collection, the museum organises important exhibits, seminars, events and courses during the year.
At the MASP – São Paulo Art Museum – the Company has sponsored the photography biennale. At Rio de Janeiro in 2012, Pirelli supported an important exhibition of European portraits from the 16th-18th centuries from the collections of the Vatican Museums and other Italian museums.
In Argentina Pirelli sponsored the Lucio Fontana art prize, and in Spain a programme for especially talented design students.
The Mozarteum project, which presents great international classical music orchestras, was sponsored by Pirelli in both Brazil and in Argentina, at the famous Teatro Colon.
In Turkey Pirelli sponsored a jazz concert at the Istanbul Culture and Art Foundation.
In Brazil Pirelli also sponsored two movie productions on the theme of challenges by disabled artists, and a television programme on consumer and handicapped persons' rights.
In many countries Pirelli is conducting a small mission, as an Italian multinational company, to protect and disseminate Italian culture abroad. Consequently, Pirelli sponsors the Italian theatre in Romania, Italian cinema programmes in Brazil and the United Kingdom, Italian song in Argentina, and in New York Pirelli sponsored a prize at the Italian Cultural Institute for the best young designers, with a show on Park Avenue.
In regard to the conservation of local cultures, Pirelli underwrites research on Confucianism in China by supporting the China Confucius Website.
In Brazil, Pirelli itself will organise restoration of the Christ the Redeemer statue in Rio de Janeiro, the right hand of which was damaged by lightning in 2014.
Pirelli Foundation
One of the missions of the “Fondazione Pirelli”, or Pirelli Foundation, established in 2009, is the preservation of the Group's historic and cultural heritage and the promotion of its corporate culture through local initiatives and projects having a strong social impact, exhibition activities, as well as collaborations with other cultural institutions.
Numerous projects were carried out again in 2013 to develop and promote the Pirelli archives.
In particular, these included:
- “Pirelli e l’Italia in movimento. Ricerca e tecnologia, il Cinturato conquista i mercati del mondo”, (Pirelli and Italy in Motion. Research and Technology, the Cinturato Conquers World Markets), an exhibition created to provide the public with some of the advertising material that was restored in 2013, including the renowned 1968 Cinturato Campaign by Pino Tovaglia.
- Loan of materials from the Pirelli Historic Archive. The participation of the Foundation in exhibitions and publications both domestically and internationally expanded from 2012, through the lending of materials. A total of 2,424 loans were made, including: 518 for exhibits and events, 277 for publications and 1,297 for study and research.
- Participation in the Business Culture Week (November 2013). These initiatives, aimed at promoting and developing historic Pirelli sites and its cultural heritage, were: the exhibition organised at the Foundation premises, “Sulla sponda del Nilo” (On the Shore of the Nile) dedicated to works created by Renato Guttuso for Pirelli; the special opening and guided tour of the Pirelli Foundation, at the Bicocca degli Arcimboldi and at the HangarBicocca; a Sunday dedicated to creative courses for children. These various initiatives attracted the participation of 470 persons, including 120 children.
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- To celebrate the 50th anniversary of the Pirelli Calendar, the Foundation provided support for historic reconstruction of the 1986 Calendar by Helmut Newton.
In October 2013 the exhibition “L’anima di gomma – estetica e tecnica al passo con la moda” (“The Soul of Rubber – Aesthetics and Technique Keep Up with Fashion”, held at the Milan Triennale in June 2011) won the prestigious Red Dot Award “Best Of The Best” 2013 in the Communication Design category, which is one of the most important prizes of its kind in the world. The exhibition also made it to the short list for the Premio Adi Compasso d'oro prize.
Just as many programmes having a direct social impact were organised, including the following:
- the Fondazione Pirelli Educational project, rolled out in October 2013 and aimed at students in elementary schools and I and II grade secondary schools, with the aim of bringing young people closer to the world of production and work and the values on which the Pirelli business culture is based. Through creative courses and lab activities, children and youths confront topics such as: the history and technology of tyres, graphics and advertising, urban transformation, and the relationship between art and science (in collaboration with HangarBicocca). About 26 classes have visited the Foundation between October 2013 and now, for a total of more than 600 children and youths;
- educational activities for university students (about 250) from different universities and specialist school; - support with the preparation of the university degree thesis for university students nearing graduation. Twenty-seven students conducted research in 2013 at the Pirelli Historic Archive, for preparation of the final thesis in their course of studies; - the inter-generational project “Il tempo dell’uomo: lavoro e no” (Man's Time: Work and Not), launched in 2013 by the Pirelli Foundation and HangarBicocca, aims to assist children in a course to recover the historic memory of Zone 9 in Milan through the direct testimony of local old residents. This objective is flanked by the desire to contribute to developing and enlivening cultural life in Zone 9 of Milan by engaging senior citizens in HangarBicocca activities. The project will be developed in 2014.
Then, since 2010 the Foundation has had a seat of the Board of Trustees of the Scuola dell'Infanzia G.B. Pirelli kindergarten in Varenna, Province of Lecco, just as it actively supports the the activities of the Istituto di Istruzione Superiore Leopoldo Pirelli high school in Rome, where the annual Premio Leopoldo Pirelli prize was established in 2011, and reserved as a scholarship for particularly worthy students. Pirelli also continues its collaboration with the Fondazione Agnelli and the Fondazione Garrone in the Associazione per la Formazione d’Eccellenza.
Altogether, 4,850 researchers, students, artists, historians and designers visited the Foundation headquarters and conducted research at the Pirelli Historic Archive in 2013.
The development and promotion of the enormous artistic heritage of the Group also relies on digital communication. Aside from the website www.fondazionepirelli.org, the Foundation constantly updates its own Facebook page, which has 4,600 followers.
HangarBicocca
Pirelli HangarBicocca is an institution dedicated to contemporary art. It offers a programme of exhibitions by the greatest Italian and international artists, accompanied by a calendar dedicated to the public, youths and schools. The project was created in 2012, in the conviction that contemporary art is a fertile field for research, experimentation and critical reflection on the most important themes of contemporary life. These are values that have been part of the Pirelli corporate culture for over 140 years.
A very large number of visitors was recorded in 2013: over 276,800 visits and a sharp increase in the number of foreign visitors (+20%).
In addition to the communication material available to visitors and obtainable at the exhibition space, a revamping of HangarBicocca digital communication was launched in September 2013.
The artistic programming in 2013 brought high-profile international artists to HangarBicocca, attracting the attention not only of art lovers and art experts, but also families and students. Five exhibitions were presented:
- Tomás Saraceno, On Space Time Foam, 140,000 visitors;
- Apichatpong Weerasethakul, Primitive, 21,405 visitors;
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- Mike Kelley, Eternity is a long time, 32,503 visitors;
- Ragnar Kjartansson, The Visitors, 55,938 visitors;
- Dieter Roth Björn Roth, Islands (counting only the first two months of exhibition in 2013), about 27,000 visitors.
The vocation of Pirelli HangarBicocca is also that of a place open to the city and its hinterland, whose normal exhibition activity is accompanied by a range of programmes and activities intended to attract even the non-specialised public to contemporary art..
With a busy calendar of events, guided tours of the exhibition space and neighbourhood, screenings and meetings with leading figures from the art and culture world, HangarBicocca now offers different types of visitors the possibility of learning more about topical issues specifically related to contemporary art and its expressions.
Different events were held in 2013, dedicated to discovery of the city, knowledge about the most remote corners of the earth, the screening of documentaries, feature length films, unpublished films, and even fund-raising on behalf of NGOs. About 8,000 persons participated at these events, including about 600 children.
HangarBicocca created the Hb Kids programme for the youngest children. It offers creative and laboratory activities to introduce children aged 4 through 10 to the languages of contemporary art.
In 2013, 435 creative projects were presented, attracting over 8,000 visitors.
For students from all types and level of schools, HangarBicocca conceived the HB School programme, which complements traditional art education with a methodology inspired by the principle of educating with art.
In 2013 the programme had the participation of over 3,500 students, for a total of about 130 classes.
HangarBicocca received recognition in 2013 from the most important international museum institutions and official organs of culture. These include: Tate Modern di in London, Shcontemporary in Shanghai, The Reina Sofia Museum in Madrid, MMK in Frankfurt, the Fondazione Prada of Milan, the Carmignac Foundation in Paris, the Trussardi Foundation in Milan, Royal College of Art in London, Getty Center in Los Angeles, Biennale in Taipei, Mart in Rovereto, Madre in Naples, Goldsmiths in London, Schirn Kunsthalle in Frankfurt, Garage in Moscow, NYU in New York, Fondazione Magistretti in Milan and the Haus der Kultuern der Welt in Berlin.
Mention must also be made of the partnership agreements signed with public and private institutions, with the aim of improving the panorama of cultural activities on offer in the local area. The relationship with the Culture Department of the City of Milan also continues on the basis of the agreement made in 2012.
With regards to support for culture and art in general, in 2013 partnerships and collaborations continued between the Pirelli Group and the Pinacoteca di Brera, the Fondazione Cineteca Italiana, FAI, the Piccolo Teatro of Milan, the Franco Parenti Theatre, the MiTo Festival, the Italian Chamber Orchestra led by maestro Salvatore Accardo, the Lezioni di Storia initiative organised by Laterza Editore, and the Villa Arconati Festival.
Finally, it is worth mentioning the work generated by HangarBicocca in 2013: the staging of exhibitions and all events and initiatives involved 32 local businesses and generated 51,600 man days of work.
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SUMMARY TABLES
This section is designed to enable readers to relate the issues addressed in the report to the international experience of the GRI - G4 and the UN Global Compact.
Note: the tables refer to the three volumes of the Annual Financial Report, not just to the present one. Because of this reason they will be duly fulfilled with the page numbers once the final graphic version of the aforementioned books will be available.
REPORTING ISSUES Pirelli & C. S.p.A. Sustainability Report 2013 is prepared ‘in accordance’ with the Comprehensive option of the GRI G4 Sustainability Reporting Guidelines. There are no explicit omissions because all KPIs for each material aspect have been reported.
GENERAL STANDARD DISCLOSURES
Reporting elements Sections Strategy and Analysis Creation of sustainable value - Sustainable Growth strategy: Industrial Plan 2013- G4-1, G4-2 2017 with Sustainability targets 2020 Organizational Profile Creation of sustainable value – Sustainability G4-3, G4-4, G4-5, G4-6, G4- governance – Our suppliers – Pirelli employees 7, G4-8, G4-9, G4-10, G4- around the world – Industrial relations – External 11, G4-12, G4-13, G4-14, community G4-15, G4-16 Identified material aspects and Materiality analysis of sustainable growth elements G4-17, G4-18, G4-19, G4- boundaries 20, G4-21, G4-22, G4-23 Stakeholder engagement Group whistleblowing procedure – Financial communication (Investors) – Information and training (Customers) – Road safety culture and international initiatives (Customers) – Training of suppliers on sustainability issues (Suppliers) – Diversity management – Employer branding, G4-24, G4-25, G4-25, G4- development and training – Group opinion survey – 26, G4-27 Internal communication: international outlook, engagement and sharing – Industrial relations – Occupational Health, Safety and Hygiene – External Community
Report profile A note on methodology – Assurance Statement – G4-28, G4-29, G4-30, G4- Summary Tables 31, G4-32, G4-33 Governance Sustainability governance – Long-term governance G4-34, G4-35, G4-36, G4- tools – Group whistleblowing procedure – Diversity 37, G4-38, G4-39, G4-40, management G4-41, G4-42, G4-43, G4- 44, G4-45, G4-46, G4-47, G4-48, G4-49, G4-50, G4- 51, G4-52, G4-53, G4-54, G4-55 Ethics and integrity Sustainability governance - G4-56, G4-57, G4-58 Group whistleblowing procedure
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GRI G4 PERFORMANCE INDICATORS
SPECIFIC STANDARD DISCLOSURES Disclosures on Management Category Material Aspects Sections Approach (DMAs) and GRI G4 KPIs Sales by geographical area – Risk G4 –DMA Aspect Economic Economic Governance – Added Value - The Pirelli Economic Performance Group environmental strategy – Performance Occupational retirement and health-care plans G4-EC1
G4-EC2 G4-EC3 Loans and contributions received from the G4-EC4 Public Administration Market Presence Diversity management G4 – DMA Aspect Market presence
G4-EC5 G4-EC6 Indirect Economic Added value G4 – DMA Aspect Impacts Indirect Economic Impacts G4-EC7
External community G4-EC8 Procurement Trend of purchases G4 – DMA Aspect Practices Procurement Practices
G4-EC9 Environmental Materials The Pirelli Group environmental strategy - G4 - DMA Aspect Trend of purchases – Research and Materials
development of raw materials
G4-EN1 G4-EN2
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Energy The Pirelli Group environmental strategy - G4 - DMA Aspect Energy management Energy G4-EN3 G4-EN4 G4-EN5 G4-EN6 G4-EN7 Water The Pirelli Group environmental strategy - G4 - DMA Aspect Water management - Other emissions and Water environmental aspects The Pirelli Group environmental strategy - Water management G4-EN8 G4-EN9 G4-EN10
Biodiversity Greenhouse gas emissions management - G4 - DMA Aspect Biodiversity Biodiversity
G4-EN11 G4-EN12 G4-EN13 G4-EN14
Emissions Greenhouse gas emissions management G4 - DMA Aspect Emissions
G4-EN15 G4-EN16 G4-EN17 G4-EN18 G4-EN19 Other emissions and environmental G4-EN20 aspects Solvents - NOx Emissions – Other emissions G4-EN21 and environmental aspects Effluents and waste Waste management – Water management G4 – DMA Aspect Effluents and waste
Water management G4-EN22 Waste management G4-EN23 Other emissions and environmental G4-EN24 aspects Waste management G4-EN25
Water management G4-EN26
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Products and services Product and use phase - The Pirelli Group G4 – DMA Aspect environmental strategy product and services G4-EN27
Packaging Handling of packaging - G4-EN28 End-of-life management of tyres
Compliance Other emissions and environmental G4-EN29 aspects Transport The Pirelli Group environmental strategy - G4 - DMA Aspect Transport
G4-EN30 Overall Expenses and investments G4-EN31
Supplier Our suppliers G4 - DMA Aspect environmental Supplier Assessment environmental Assessment
G4-EN32 G4-EN33 Environmental Other emissions and environmental G4 -DMA Aspect Grievance aspects Environmental Mechanisms Grievance Mechanisms
G4-EN34 Labor practices Employment Pirelli employees around the world G4 - DMA Aspect Employment
G4-LA1 Welfare and initiatives for the internal G4-LA2 community Diversity management - Welfare and G4-LA3 initiatives for the internal community Labor/Management Industrial relations G4-LA4 Relations Occupational Health Industrial relations - Occupational Health, G4 - DMA Aspect and Safety Safety and Hygiene Occupational Health and Safety Industrial relations G4-LA5 G4-LA8
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Occupational Health, Safety and Hygiene G4-LA6 G4- LA7
Training and Employer Branding, development and G4 – DMA Aspect education training – Safety training Training and education G4-LA9 G4-LA10 G4-LA11 Diversity and Equal Pirelli employees around the world – G4 – DMA Aspect Opportunity Diversity management Diversity and Equal Opportunity
G4-LA12 Diversity management G4 – DMA Aspect Equal Remuneration for Women and Men
G4-LA13 Supplier Assessment Our suppliers G4 - DMA Aspect for Labor Practices Supplier Assessment for Labor Practices
G4-LA14 G4-LA15 Labor Practices Group opinion survey G4 - DMA Aspect Grievance Labor Practices Mechanisms Grievance Mechanisms
G4-LA16 Human Rights Investment Independent audits of social and G4 - DMA Aspect environmental responsibility and business Investment ethics – Our suppliers – Sustainability
training G4-HR1
G4-HR2 Non-discrimination Group whistleblowing procedure – G4 - DMA Aspect Diversity management Non-discrimination
G4-HR3
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Freedom of Human Rights governance - Independent G4 - DMA Aspect Association and audits of social and environmental Freedom of Collective Bargaining responsibility and business ethics – Group Association and Collective whistleblowing procedure - Our Suppliers – Bargaining Internal Community - Compliance with statutory and contractual obligations governing overtime, time off, association G4-HR4 and negotiation, Equal Opportunities and Non-Discrimination, bans on child and forced labour.
Child Labor Human Rights governance - Independent G4 - DMA Aspect audits of social and environmental Child Labor responsibility and business ethics – Group
whistleblowing procedure G4-HR5 - Our Suppliers – Internal Community – Diversity management - Compliance with statutory and contractual obligations governing overtime, time off, association and negotiation, Equal Opportunities and Non-Discrimination, bans on child and forced labour. Forced of Human Rights governance - Independent G4 - DMA Aspect Compulsory Labor audits of social and environmental Forced of responsibility and business ethics – Group Compulsory Labor whistleblowing procedure
- Our Suppliers – Internal Community – G4-HR6 Diversity management - Compliance with statutory and contractual obligations governing overtime, time off, association and negotiation, Equal Opportunities and Non-Discrimination, bans on child and forced labour. Security Practices Training of suppliers on sustainability G4 - DMA Aspect issues – Occupational Health, Safety and Security Practices Hygiene
G4-HR7
Indigenous Rights Group whistleblowing procedure G4 - DMA Aspect Indigenous Rights
G4-HR8
Assessment Independent audits of social and G4 - DMA Aspect environmental responsibility and business Assessment ethics - Compliance with statutory and
contractual obligations governing overtime, time off, association and G4-HR9 negotiation, Equal Opportunities and Non- Discrimination, bans on child and forced labour.
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Supplier Human Risk Governance – Our suppliers – Training G4 - DMA Aspect Rights Assessment of suppliers on sustainability issues Human rights Assessment
G4-HR10 (nuovo)
G4-HR11 (nuovo) Human rights Group whistleblowing procedure G4 - DMA Aspect Grievance Human rights
Mechanisms Grievance Mechanisms
G4-HR12 Society Local Communities Stakeholder engagement – Biodiversity– G4 - DMA Aspect External community Local communities
G4-SO1 G4-SO2
Anti-corruption Risk Governance - Group whistleblowing G4 - DMA Aspect procedure - Compliance Anti-corruption
G4-SO3 G4-SO4 G4-SO5
Public Policy Added Value - Loans and contributions G4 - DMA Aspect received from the Public Administration – Public Policy External community
Added Value - Loans and contributions received from the Public Administration – G4-SO6 External community Anti-competitive Added Value - Loans and contributions G4 - DMA Aspect Behavior received from the Public Administration – Anti-competitive External community Behavior
G4-SO7
Compliance Trasparency G4 - DMA Aspect Compliance G4-SO8
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Assessment for Our suppliers G4 - DMA Aspect impacts on Society Assessment for impacts on Society G4-SO9 G4-SO10
Grievance Group whistleblowing procedure G4 - DMA Aspect Mechanisms for Grievance Impacts on Society Mechanisms for Impacts on Society
G4-SO11 Product Responsibility Customer health and Information and training - Quality G4 - DMA Aspect safety Certifications – Focus on Human health Customer health and the environment – Environmental and safety Dimension – Product and use phase
G4-PR1 G4-PR2
Product and service Information and training G4 - DMA labeling Aspect Product and service labeling G4-PR3 Trasparency G4-PR4 Listening and exchanging ideas as sources G4-PR5 for continual improvement Marketing Trasparency G4 - DMA Aspect Communications Marketing Communications
G4-PR6 Trasparency G4-PR7 Customer Privacy Trasparency G4- DMA Aspect Customer Privacy
G4-PR8 Compliance Trasparency G4 - DMA Aspect Compliance
G4-PR9
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