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Executives

Marco Tronchetti Provera - Chairman and CEO

Maurizio Sala - Head of Group Planning and Control Department

Gregorio Borgo - GM, Operations

Analysts

Philip Watkins - Citigroup

Martino DeAmbroggi - EQUITA

Massimo Vecchio - Mediobanca

Niels Fehre - HSBC

Thomas Besson - Kepler Cheuvreux

Alexander Haissl - Credit Suisse

Gaetan Toulemonde - Deutsche Bank

Pirelli & C. SpA (OTCPK:PPAMF) Q2 2014 Earnings Conference Call August 5, 2014 12:30 PM ET

Operator

Ladies and gentlemen, welcome to Pirelli’s Conference Call in which the Chairman and CEO of Pirelli & Co., Mr. Marco Tronchetti Provera will present Pirelli Financial Results for the First Half of 2014. I remind you that in Q&A session will follow the presentation. Moreover, a live webcasting of the event and the presentation slides are available in the Investor Relations section of the Pirelli website. Now I would like to introduce Mr. Marco Tronchetti Provera.

Marco Tronchetti Provera

Good evening, ladies and gentlemen and thank you for joining us at this conference call on 2014 half year results.

I believe that based on the results just approved by the Board of Directors, the following key messages can be drawn. Premium platform for value growth exceeded our expectation worldwide. The Original Equipment market saw increase, we are experiencing now about over 20%, that means plus 5 point percent since 2011 is translating into replacement sales with a very high pull-through rate in market items.

In this segment resilient in terms of pricing increased our market homologation portfolio by more than 60 items per year in the last five years, becoming a clear leader with a total homologation portfolio of more than 1,700 items.

The premium concept is a moving target. Every time, a new premium car is launched, tyres of larger size and new technological solutions are needed to set them apart in terms of quality standards. Probability we offer run flat, self-sealing, and self-sealing tires. For the better parameter monitoring, our cyber tyre technology connects tyres to the car control unit.

For consumption and comfort, we’ve developed technologies such as ultra-rolling resistance and noise reduction. For customers’ specific requirements, we provide summer, winter, all season and tailor made tires. For perfect fit, with electronic dry control systems, we co-design tyres with premium car manufacturers to device OE market tires.

All of this fits in with our current premium range, with different tyre sizes and lower unit volumes for each manufacturer. To lead in this segment, we must be focused on a fast portfolio renewal and extremely flexible manufacturing facilities. We distinguish ourselves from our competitors on the basis of this leverage and assets and we accelerate our progress to fully trace market opportunities.

In the last six months, speed and flexibility of execution combined with the value creation car to increasing and terminating our organization allowed us to manage price mix, raw materials and high foreign exchange rate volatility in the best possible manner.

To get positive impact of these three elements of approximately €60 million under the EBIT bridge, we are best performers against our peers. At the same time, we keep improving our efficiency plan which fully offset input cost inflation. As per our outlet for second half of 2014, despite economic slowdown in some developing markets, the exchange rate volatility in some of them and a strong reduction in the car and truck original equipment segments, the tyre industry want to get solid to be resilient. And the main players keep on focusing on profitability and free cash flow generation. In this context, we are confident to achieve our 2014 targets. We are implementing short-term recovery plans in Latin America and new medium term projects are under scrutiny.

At this point, let’s quickly review our results to leave you more time for the Q&A session. We delivered profitable growth, improved our positioning to top product segments globally and we were able to generate cash after dividend payments, making solid progress towards our 2013 targets.

Second quarter results show continued organic revenue growth due to the acceleration of price mix plus 6% was flat 4.6 in first quarter and the best in industry as we reaffirm our commitment to volume focus on the most profitable market segments. Improved position in the premium segment and volumes up nearly 21%, in line with the first quarter and a clear market outperformance in Europe, North America, Asia Pacific and Middle-East Africa.

While providing resilience to economic cycles, this segment is now 56% of our customer sales, an increase of 6 point percent and more than 77% in terms of EBIT, that means plus 4.6 point percent year-on-year.

Efficiency gains was approximately €21 million and reaching 54% of our yearly target already in first half of 2014. EBIT growth at 12.6 year-on-year with margin improving by more than 2 percentage points and approaching 15%. Net income of about €100 million plus 31% year-on-year.

Cash flow generation of nearly €190 million before dividends due to strong operating cash flow performance

Look in to the first half performance by region, on a regional basis, half year results were characterized by strong growth in our core premium markets, Europe, Asia Pacific and North America. Positive progress in Russia, in line with expectations, despite the decreasing market we ended first half with the market share gain of more than 2 points in the second quarter, reaching around 12% and high single-digit profitability. Turnaround is progressing with the Winter product renewal. A new Pirelli studded Zero is available in a wide range, Pirelli I Zero has more than doubled its sizes versus 2013 and we extended the range also for the studded formula Ice.

In terms of industrializations, we are ahead of schedule in both [indiscernible] plans and retail development continue supported by geolocalization, the partnership with Rosneft. In South America, despite market contraction in original equipment was minus 19% year-to-date and resilient replacement plus 4% year-to-date. We protected our profitability which is confirmed in the mid-teen range after 1 point percentage drop in EBIT margin compared with 2013. In this region, we proactively realized the volume drop with an improvement in price mix which counterbalanced the headwind from raw materials and foreign exchange volatility and a great focus on efficiencies.

We are also designing specific plans to strengthen our positioning in the market and new efficiency programs to protect values in the medium term. More specifically for the premium segment, in Europe which is our main premium market, the positive effect of the OE pull through strategy continues. Premium replacement sales of market tyres increased by 20% year-on-year in the first half and now account for about 50%. Winter market forecasts are positive. Negotiation in Central Europe winter closed positively and in line with expectation for the year end. To support this growth a number of programs are already in place to consolidate our premium leadership.

Original equipment market, in the second market over 30 new homologations were added to our portfolio which in Europe account for around 87% of our global homologation portfolio. Retail, increased market coverage and stronger support through tailored marketing initiatives for those outlets most exposed to premium consumers with North America OE pull through is working well and we are benefiting from our past investment in the original equipment channel. Mapped (Ph) tyres sales increased by 19% year-on-year accounted for about 39% of premium replacement sales in the first half. Bigger performance in premium OEMs in particular BMW with an original equipment share well above 40%.

Meaningful improvement also in distribution coverage through our FasTrack program, a successful loyalty program that we started in 2013 and now accounts of more than 700 point of sales with increasing volume and solid premium mix. Over 50% of volumes is 18-inches and above. In South America, we are driving expansion of the premium replacement market today less than 6% of the car tyre market and 17% year-on-year in first half, leveraging on the evolution of regulation for green products and car market trends.

Finally, in APAC we are reinforcing our original equipment strategy. In second half, the positive effect of the link with the premium brands was even better than in first quarter with an improvement in market share, strengthening our partnership with Mercedes, BMW and Volvo. Original equipment pull through is working well, in the first half of 2013 in incidence of market tyres on premium replacement sales reached 45%, increase of 4 percentage points versus full year 2013. Net income in the first six months of 2014 was positive for €193.8 million euro or €0.39 in terms of attributable income. This is growth of more than €43 million compared with a first six months of 2014 which is to say more than 29% year-on-year above our percentage growth in EBIT.

This growth stems from our operating performance which delivered nearly €48 million in additional EBIT. Financial charges were lower by more than €11 million year-on-year as they discount a slightly lower cost of debt, which now stands at approximately 6% when compares with a 2013 figure which included one-off charges linked to foreign exchange devaluation was more than €8 million. Results from equity participation negative €2.9 million year-on-year, mainly related to valuation adjustment of our stake in both Prelios and Alitalia. Finally tax rate improved year-on-year at seasonally high 37.4% in line with our full year targets of 36%. But better operating results led to higher tax charges for approximately €14 million.

Look into the debt structure, Pirelli gross debt is worth approximately €2.5 billion, around 50% of which maturing from 2016 onwards. Our main maturities come due in 2015 and 2016. And they will be

refinanced in both banking and capital markets which are very supportive for our credit. The liquidity margin of €0.85 billion includes €0.5 billion of cash and cash equivalents. Finally, the cost of debt stood at 6% in line with the target of below 6.5%. As announced to the market for the full year 2014.

Let us now review the development of our net financial position over the second quarter of 2014. Net cash flow generation before dividends was on a €90 million or 20.6% of our sales in the quarter almost double as compared with the first half of 2013. Positive cash flow generation was mainly achieved through an improvement in net working capital as we cash in the seasonally higher receivable booked in first quarter. Our inventory also structurally improved and now stands seasonally at approximately 17.5% on sales equal to June 2013. Also for the winter season preparation and we’ve reduced within the other hand to approximately 16.5%.

Investment totaled approximately €78 million or 1.1 for the precision in line with our full year target which implies as usual higher CapEx towards the end of the year. Therefore, at the end of June 2014, our net financial position amounted to approximately €1.9 billion. This really is in line with our budget and we expect to meet our full year target of approximately €1.2 billion at cost and consolidated perimeter. Turning to outlook and targets, we reviewed evolving scenario we are witnessing in global tyre markets. Although the overall picture remains unchanged and our targets our confirm, I’d like to address a updated assumptions versus the first quarter 2014 presentation.

In brief, we still see the global tyre markets growing between 3% and 4% this year. The premium market confirm growing three times more than non-premium with the main differences being a pickup in growth in Europe and the lower original equipment market in South America. On our optimistic view on Europe, with faster growth by 1 percentage point as compared with the previous guidance given in May, is based upon better expectation for the premium segment as well as improved original equipment markets in general.

Even accounting for this growth, European market is well below the expectation we had in our 2011 industrial plan. Central European markets are performing particular well and winter pre-booking is positive, also due to favorable stock levels in the distribution channel. Our valuable position and continued investments are proving successful in allowing us to benefit from this market growth, hence improved outlook by single-digit revenue growth and mid-teen profitability for the region.

In South America and while the premium segment is still growing rapidly, the original equipment market has worsened in connection with the deteriorated market environment and limited car production. We will address this market more in detail later. But we are confident in our ability to maintain a solid profitability in the region in the mid-teens as a present demand is proving resilient, benefitting from the strong car part growth since over the last four years. We can also rely on the wider distribution network and improved operating efficiency. Market growth expectations for the other regions have not changed significantly. What we have seen so far this year weather makes us more confident in market growth for the premium segment in Asia Pacific while we confirm our revenue targets but we will deliver better profitability to an improved product mix.

Successful deployment of our premium strategy in selected markets of the Middle-East Africa region should allow us to achieve an EBIT margin in high-teens and change assumption as far as market growth is concerned.

While the Russian car tyre market is expected to contract in 2014 as compared with the previous year, our improved product offering and wider market coverage will allow us to outperform, gain market share and rich a profitability in high-single digit above our previous expectations. In addition to shift from legacy brands Pirelli is progressing above our expectations.

Concerning the well-known issue of U.S. sanctions against Russia and possible implication of Pirelli or Pirelli Board members, I believe it is important to share with you the legal opinion by prominent international legal firm that we just received two days ago, which states that, under current US law, Pirelli is not in violation of the Office of Foreign Assets Control sanctions. On account of the ownership interest of Rosneft and or the presence of Mr. Sachin and other Rosneft designees on the Pirelli Board. Lastly, we confirm our assumptions of a low single digit tyre market growth in North America where we aim at growing revenues in the mid-single digit and reach an EBIT margin in the middle teens.

Now I’d like to focus on the actions we are putting in place to navigate the current challenges in South America market. As we are aware of macroeconomic scenarios has changed significantly over the last two to three quarters.

High interest rates still it now being as high as 11% having depressed consumer demand and investments. High inflation also due to energy shortage has impacted our consumer and business confidence, this notwithstanding the Brazilian economy of strong fundamentals which reinforced our long-term plans for the region. Low domestic debt as a percentage of GDP, 50% of the average matured countries and fast growing middle-class with 53% of the population now having a former job, having access to credit and having acquired a car or the motorbike. As for the car tyre market, in line with the cyclicality, growth is expected to return in 2015 by the mid-single digit rate and depending on the government support. The car market needs to improve and with which the quality of the tyre market expected to include an increasing higher production of 17-inches and up tires.

The tyre replacement market is still growing benefiting from the car park growth we saw in last four years which will support tyre sales for the years to come. The tyre business is highly cyclical and discount reduction in governmental financing support, a strong response to the replacement channel which compares with the particularly challenging comparison base given the strong volume growth in 2013. For the full year 2014, we expect the replacement market down 3% but with the all three segments still positive up to 2%. We aim at counterbalancing the current market weakness by leveraging on our strengths. And currently we are protecting our leadership by acquiring new homologations.

In tyre replacement we have strengthened our positioning through new services to premium dealers and new product launches, maintaining our pricing leadership. Premium asset growing contribution in South America is up. It is more than 6% of current volumes but nearly four times as EBIT. Market coverage through our integrated retail network accounting more than 600 points of sales out of which 130 are equities. On track, we will speed up introduction of the new OC product platform on one series and we are focus on upgrading our current service offer to medium and large fleets. These will be then leveraging on our channel like Marangoni and recreating track and telematic services as well as future partners.

Acceleration of our efficiency program working both on the complexity in order to make our plans early and use our G&A expenses. Increased export to markets where we are currently underrepresented and have the potential for strong growth. As mentioned, overall 2014 targets are confirmed. Revenues are expected at €690 million with the different dynamics, 4.5% volume growth almost 1 percentage point less than previous guidance due to revision of our sanction for industrial business, stronger premium growth related to better price mix and expected more negative foreign exchange impact. The consumer business is expected to show a stronger growth profile as compared with the previous assumptions mostly due to our performance in premium segment and overall in Europe and Asia Pacific.

This will compensate lower top-line growth in business, general market slowdown in South America. Profitability is confirmed at approximately €850 million and net debt of €1.2 billion before the impact. More specifically on our two business units, we expect the consumer business to show high revenue growth driven by volume of more than 6.5% year-on-year, price mix now seeing between 4.5 and 5.5 where the difference is essentially the mix improvement and slightly lower negative foreign exchange impact. Profitability will improve to at least 15% of the EBIT margin and re-compensate for EBIT due to volume drop of 2% year-on-year, lower price improvement of around 1 percentage point mostly due to lower price increase as compared with the previous assumption consistently with the current raw materials and foreign exchange rate scenario.

Our profitability guidance is confirmed at €850 million after restructuring cost and we are benign to raw material prices as well as foreign exchange rates, will allow us to compensate for lower contribution from volume growth, approximately €30 million, coming from the industrial business. The positive €50 million difference will finance the high investments in premium growth in market which is confirm growing three times as faster than premium. As we increased our marketing initiatives in relation to Formula One partnership activation, premium retail and equity expansion projects, return marketing activities and deal support and premium prestige relationships such as co-marketing activities and marketing partnership.

And now I will leave the floor to Mr. Sala. Mr. Sala?

Maurizio Sala

Thank you, Mr. Tronchetti and good evening everyone. The second quarter results of the tyre business continue along the profit growth path starting with first quarter, posting mid-single-digit organic growth and 2% in EBIT margin growth. Despite foreign exchange volatility and uneven group profile regions and channels, these results makes us confident we can reach our full year target. Price mix was the main driver of top-line growth plus 6% year-on-year, improving sequentially from first quarter, due to strong development of premium volumes almost plus 21% and the balanced approach to pricing.

This allowed to mitigate the ForEx impact on sales minus 9.4% year-on-year, stemming from our business in South America as well as Russia and Middle-East Africa. Volumes were stable in second quarter with an outperformance of Europe, North America and Asia Pacific, compensating for decline in South America concentrated in our OE channel and industrial businesses. And this leads to the overall sales figures being down 3.6%. Quality organic growth and efficiency improvement allowed us to increase profitability by almost €23 million, bringing our tight margin to 15.2% of sales and 15.6% before restructurings.

Let’s now turn to analyzing the internal levers which brought about a profitability of €229.1 million in second quarter 2014, an increase of 11.1% year-on-year. The effectiveness of our value strategy translated into a €31.5 million net gain deriving from €54 million price mix growth and thus more raw material benefit of €6 million, despite €28.3 million foreign exchange translation headwind.

Efficiencies, €21 million in the second quarter, neutralized the quarterly impact of cost inflation and totaled nearly €49 million in first half of 2014, slightly above the per (Ph) quarter of our yearly target of €90 million. Additionally, we increased our investment in premium growth by €10 million in the first half of 2014 related to the mentioned marketing activities and retail support.

Our overall performance in second quarter rests mainly on the result of our consumer business worth 77% of tyre sales and showing organic growth of approximately 10% year-on-year. This was achieved on the back of an improving price mix momentum plus 5.8% in the quarter as we get a build driven approach to prices and resale in the premium segment with volumes up 20.9% now worth nearly 56% of sales plus 6 percentage points year-over-year.

In mature market, characterized by higher unit prices now 57% of total sales plus 4 percentage points year-on-year and given the replacement channel plus 1 percentage point’s year-on-year at 74%. Even after a heavy 8.3% negative impact of foreign exchange rates consumer sales were up 1.8% year-on-year. Quality top line growth allow for a strong increase in EBIT margin at 15.1% before restructuring cost plus 3.2 percentage points as compared with the second quarter of 2013.

The results of our industrial business reflect a relevant impact of foreign exchange devaluation and the market slowdown in specific regions and product segments. Foreign exchange devaluation translated in a 12.4% negative impact on sales which decreased by a total of 18.1% in the second quarter.

This was partially offset by an improvement in price mix plus 6.5% year-over-year and better than the first quarter of 2014 as we executed price increase in emerging markets and introduced our renewed product and service offerings.

Volumes were down 12.2% discounting and unfavorable comparison base plus 20.6% in second quarter of 2013, a reduction in the lower added value [indiscernible] segment minus 20% year-over-year and the contraction in original equipment manufacturing in South America. Despite the factors, profitability was slightly up as compared with first quarter 2014 and EBIT margins stayed at 14% before restructuring costs.

Our commitment to efficiency is confirmed. The result achieved in the first semester 54% of the full year 2014 target built up on our track record of the last few years. Our [indiscernible] envisaged savings are approximately €350 million accumulating savings of 1% on sales each year equally spread over four years.

More than 50% of the over €49 million savings achieved in the first half or down the raw material. Well we worked on the complexity with our raw material portfolio streamlining and component capitalization and with spread reduction.

And the remainder are related to productivity improvement through the complexity across plant, production planning of finish and semi-finish products, adoption of common best practice and sale organization and allocation to countries by fully exploiting track delocalization and more competitive export from location with devalued currencies.

Now briefing on raw materials, increased visibility of the profit and loss for 2014 leads us to increase our guidance. Maintaining a degree of cautiousness, we now expect natural rubber prices to average $2100 per ton in 2014, implying a slight increase from current spot prices. We still expect brent oil at about $110 per barrel while butadiene is now expected at an average of €1030 per ton. The impact of foreign exchange is now seen at negative €170 million for total raw material headwind of €55 million in 2014 EBIT or €40 million better than previously assumed.

And thank you for your attention and I will leave the floor back to Mr. Tronchetti.

Marco Tronchetti Provera

Thank you. Ladies and gentlemen, now we may open a Q&A session. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). We will now take our first question from Philip Watkins from Citigroup. Please go ahead.

Philip Watkins - Citigroup

Yes, good evening. And thank you for taking my questions. Just firstly, in terms of the guidance, it looks like it was a good second quarter for you. The winter tyre market looks like it's shaping up quite well from what I hear from your comments and your peers. And I was just wondering if the guidance EUR850 million was perhaps a bit conservative, or is there anything I need to take into account? That was my first question. And I'll ask the second one after. Hello?

Marco Tronchetti Provera

Okay, thank you. So, I think the guidance, we gladly changed the guidance because of different mix between industrial and car tyres but we confirm we can deliver the target we have set at the end of last year. Thanks mostly to the better mix we have achieved everywhere and thanks to the investments we are making in the marketing structure where we are having a very good results in a pull through effect on replacement with the premium car tires.

Philip Watkins - Citigroup

Thank you. And the second question was on the [indiscernible] ownership with Rosneft. I don't know if you might be able to elaborate at all on why the lawyers said that you wouldn't be affected by sanctions. I never thought you would be, quite frankly, but because it's a small shareholder. But, I just wanted to understand what specifically they said, why you wouldn't be encompassed by these potential risks. Thank you.

Marco Tronchetti Provera

Just because there are wrong number of information that are not driven by correct analysis of the sanctions we are in opinion in order to deliver the answer that we knew was there to answer because of company is not affected by the shareholder structure at counting level but anyhow we wanted to have a full answer from an American law firm just to make all our investor confident and comfortable.

Operator

We will now take our next question from Martino DeAmbroggi from EQUITA. Please go ahead sir.

Martino DeAmbroggi - EQUITA

Thank you. Good evening, everybody. First question is on pricing environment, if you could split your comments between standard and premium products. I don't know if it's possible by region, but just to understand if there is additional pressure on the standard that could affect the standard performance because, at the end, consumer performance in terms of volumes was essentially driven by premium, while standards were down quite significantly in the second quarter.

Marco Tronchetti Provera

I will ask Mr. Borgo to give you the answer. As a general answer, the situation is so well balanced that we confirmed the price effect by year and it will be slightly negative but fully under control, no negative effect on the high end where we are protecting, thanks to the launch of new platforms prices. So, the effect on prices in the high end offset by the launch of new product platform and now I will leave the floor to Mr. Borgo.

Gregorio Borgo

So, good evening as well from my side. I think the price environment is overall flat with different situation in the various areas. In Europe, USA and China, we see a slight decrease given part of the raw material advantage to the value chain. But as Mr. Tronchetti said before in this region our premium mix is so high that we are more than compensating the price by an higher mix. So all in all the average unit price is increasing. Of course in Russia and Latin America, our pricing balancing, actually Latin America where the content of the premium is lower, the pricing is balancing ForEx situation. So basically we are able in the market to keep the pricing or even slight increase in the pricing in Latin America.

So we think as well that because we see a better outlook in the second half as Mr. Tronchetti mentioned before, thanks to switch of the seasonal market to winter, we feel as well less lower pressure on prices and because the stock generally speaking is much lower than a year ago and we had a quite successful winter pre-booking where all in all we are at 25% higher than a year ago.

Martino DeAmbroggi - EQUITA

Okay. Thank you. The second question is on Russia. I saw in your slide number 11 you are reducing the projection for the revenues, while improving the EBIT margin guidance. If you could elaborate a bit more on this, if it's possible to have a more precise indication. Thank you.

Marco Tronchetti Provera

In Russia, now we are profiting -- the improvement we had in the factories in terms of authorization and the product mix we are launching in the market. This is now matching more and more with a better distribution we have in the country. Thanks to the agreements we made at the regional level with distribution and big players and thanks also to the support of Rosneft, we are starting distributing with this year with just 5 point or 6 point of sales but it is helping us in making agreements with the wholesalers at the regional level. And also, the OE level, we are benefitting on the mix of products we have and of the local production. So all in all we are accelerating the turnaround of the last year results and that’s why we are confident that in an environment that is not positive at all, the mix of products and the distribution channel where open provide us better performances than expected.

Martino DeAmbroggi - EQUITA

Okay. If I may, my last question is on the search of an Asian partner that you mentioned in previous conference and presentations, just to know if there is any step forward in this search.

Marco Tronchetti Provera

Yes, we continue and we are in touch with some players, and we are going deep into this matter there is nothing consistent we can put into the market but we see that looking forward an integration in industrial business is convenient for both parties take into account some big players that is placed in Asia has already good market there. So we are going ahead, nothing urgent, that has to be analyzed well before being deployed but we continue in consistent with these analysis and we are attractive because of the markets we cover and because of the technology that we handle today.

Operator

We will now take our next question from Massimo Vecchio from Mediobanca. Please go ahead.

Massimo Vecchio - Mediobanca

Yes, good afternoon. Two questions from my side, if I may. The first one is on CapEx, EUR144 million spent in the first half. The industrial part was looking, if I'm not wrong to something like EUR400 million. I was wondering if you can give an indication of where you can end up at the end of the year. EUR260 million spend in the second half in the current scenario seems quite a lot. But, of course, there may be some projects that justify that. Second question is on the Steel Cord disposal, if you can give us an update on when you expect the closing after you got approval from the antitrust in Europe. Thanks.

Marco Tronchetti Provera

The steelcord transaction is going ahead as it was planned and before we are reaching November and December, we should finalize the deal. Everything is inline and there are no surprises. For the investment rate, we have a target of around €380 million by year end; and considering the seasonality, we are on track with this target. So there are no delays. And all is focusing in new plant and the CapEx we are more and more going close to the depreciation as it was planned and as we had in the first quarter, but we remain in line with the targets.

Operator

We will now take our next question from Niels Fehre from HSBC. Please go ahead.

Niels Fehre - HSBC

Yes, thanks for taking my question. I just have two questions. On the premium business, on slide 6, you show here the organic growth rates per region. If I compare them to the first quarter, I see that Europe in the second quarter significantly cooled down versus the first quarter. The first quarter was up 16%, now in second quarter only at more (Ph) 10% probably. But, on the flip side, NAFTA improved a lot from 7% in Q1 to something like 14% in the second quarter to arrive at 12% for H1. Can you elaborate here probably what are the different -- the reason for the different trends in the different regions, Europe versus NAFTA, in terms of premium growth? So, that would be my first question. The second one is then for the full year. Having achieved now more than 20% premium growth in terms of volumes in the first half, I'm wondering why you are guiding only for 16% growth in the full year with a strong -- with probably a strong winter tyre season ahead of us. Is that probably too cautious, or what's the reason here why we should see premium cooling down a lot in the second half versus the first half? Thanks.

Marco Tronchetti Provera

Thank you. There are two reasons in terms with your questions. The first, second quarter of last year in Europe there was recovery on the premium segment and first quarter was very low level. So that growth as a comparison base that is different. And looking forward in second half third and fourth quarter last year were better and so the comparison base again is much in favor of last year in the third and fourth quarter and that’s why the second quarter has been so performing because the comparison base was lower.

Niels Fehre - HSBC

And on the U.S. as well or?

Marco Tronchetti Provera

Yes, in the APAC, the comparison is equal because it was the trend there was without drops and hops like it happened in Europe the comparison base is more stable and that’s why we don’t see these effect. Take into account also that Europe is affected by the winter seasonality that changes the parameters comparing with year.

Niels Fehre - HSBC

Okay. So it’s just comparison reasons, there is no cool down you see in the premium growth or something like that.

Marco Tronchetti Provera

No, no and the growth continues, there is only as pick related to seasonality that create these effects.

Niels Fehre - HSBC

Okay. Thanks very much.

Operator

We will now take our next question from Thomas Besson from Kepler Cheuvreux. Please go ahead sir.

Thomas Besson - Kepler Cheuvreux

Thank you very much. Two questions please. On winter tires, can you comment on the split in your selling business between the second and third quarter? Is it a fair comment to say that the industry has been more aggressive than in previous year, putting already winter tyres in the distribution, or is that unfair, and we're going to see a bigger share of that selling in Q3 than Q2?

Marco Tronchetti Provera

Yes. I think the winter season was slightly anticipated in some of the market because of the weather condition. So we have to basically a shorter winter and so the anticipation of summer season is basically sell in and consequently the sellout was as well giving us a slightly different seasonality in the winter. But if we see that we’re expecting especially in Europe and in Russia a positive winter season also because we are completing our product range with Zero and Ice Zero in Russia. So we are confident we can reach the target that we put in this.

Unidentified Company Representative

For me it’s a just a question, we expect the better seasonality because of the stocks. There hasn’t been a major change in seasonality until now so we didn’t anticipate much the winter season with the first and second quarter. But we expect we have a better sell out and so a better sell in because of the low level of stocks.

Thomas Besson - Kepler Cheuvreux

Okay. Thank you. My second question is a bit more long term -- or not long term, midterm let's say. You've adjusted your scenario for South America for this year. Can I ask you, what's your best view on what we should expect for car OE, truck OE and car replacement and truck replacement in South America in 2015 please?

Marco Tronchetti Provera

We see a market that continues to grow in the replacement. This is due to the sales of new cars in the last year. So the improvement that there has been Latin America generally and specifically in Brazil will provide good seasonality for this year and next year. So we do not expect drops in Brazil in the present market because of the Car Parc. There has been 1.5 million new cars per year since 2009. So in the last four years, there is a bulk for new cars in the market that makes the replacement market quite sound despite the situation of the original equipment.

Thomas Besson - Kepler Cheuvreux

Okay. Thank you. Last question from me, please. Can you give us your latest perception of the balance between supply and demand in South America and Brazil in particular, please?

Marco Tronchetti Provera

Supply and demand in Brazil today there is not oversupply, there is capacity coming in. We expect to have a growth that should partly balance the reduction expected in the important hours because all the players that are investing, have been importing a lot in the last few years. Premium is growing and that is let’s say the umbrella we have that covers the future today it’s only 6% of volumes that is growing 2 digit and it is already in the replacement market for us represents four times the volumes and in EBITDA. So it’s more than 25% of our total EBIT margin. So that growth in which we are playing as we play everywhere a leading role protected in that scenario. So from the distribution we handle directly make us comfortable that even an increase in volumes delivered locally to the market will not affect growth in profitability in the replacement market for us.

Operator

We will now take our next question from Alexander Haissl from Credit Suisse. Please go ahead.

Alexander Haissl - Credit Suisse

Hi, good evening. This is Alex Haissl, Credit Suisse. My first question will be on currency. In the first half, you've lost some EUR48 million on EBIT. And what you guide for the full year would imply that it's getting worse. Given recent currency trends, how likely is it that the impact from currency in the second half is basically the same than what you have seen in the first half?

Marco Tronchetti Provera

We expect to have a slighter lower effect because of the let’s say level of the reals is today that is a bit lower than -- a bit better than what it was expected in the first half. So we have a target that is between 8.5 and 9.5. And for this, I will leave the floor to Mr. Sala keeping in mind what we have been able to do in the first half and we continue to do is to balance positively between price mix for extra material. So that is the game we play and in this game I think we have been and we will continue to be the best performer, thanks to the mix, but Mr. Sala, please.

Maurizio Sala

Coming from the translation, the ForEx impact on EBIT is coming from the translation of the previous year results in countries that have different currencies than euro. And the same historical previous year result expressed in euro with the current exchange rate. So it depends on the impact in EBIT according to the different mix result that we did in the different countries in the different quarter. So for instance, also if the second quarter impact in terms of sales, in terms of exchange rate devaluation was lower than the first quarter.

The impact on EBIT was higher because of the fact that absolute value of EBIT in the second quarter was higher -- second quarter 2013 was higher than first quarter 2013 and also the component of the result in the second quarter of 2013 was higher in South America. This has what happened in the past. For the future, what we forecasted is concerning exchange rate, we took certain cautiousness in the exchange rate.

So we reduced by 0.5 points the impact negative on sales versus the previous guidance, but we took certain cautiousness because we included certain farther devaluation in Brazil for the Brazilian real, certain part of devaluation in Argentina and certain part of devaluation in Venezuela. So we took an average for the full year 235% for the real, 9% for the Argentinean pesos, 11.5% for the Venezuela. And this will drive and according our extension an impact on EBIT of €110 million, so first quarter almost first half almost 50 million; second half, 60 million taking into consideration also the growing results that we had in second half of 2013.

Alexander Haissl - Credit Suisse

Okay. That's clear now. So, there is a [indiscernible] of cautiousness. That's clear. My other question is on Russia. Have you seen towards the end of the second quarter any changes in particular for A and B class tyres in June? Has there been any improvement in the market?

Marco Tronchetti Provera

The improvement has been in our product mix portfolio. So we launched this year a large portfolio of items in the winter season and the effects would be seen in the next months both on studded tyres and non-studded tires. So, we deliver more than 100 sizes of the new lines we are launching and that is providing us a better performance compared to last year.

Alexander Haissl - Credit Suisse

Okay. My second question would be on the price mix in the -- on the consumer. You had almost 6% in the second quarter. And for the full year, you guide 4.5% roundabout. What is going to change in terms of price mix in the second half? And sorry if I didn't get the answer in your presentation.

Marco Tronchetti Provera

I will leave the floor for the details to Mr. Borgo but it’s always the comparison base that is reducing the gap.

Gregorio Borgo

See, as we said before, the price mix is different market and market is also in the area where there is a higher percentage on the premium product, I think there is a little bit more pressure on the price mix even if in the second half we are thinking that thanks to the fact there is not a big stock on the winter, this pressure on prices is going to be lower than the first half. As far as the other area that is basically Russia and LATAM where there is, let me say the ForEx issue, as I would say before. We think we are keeping the price or slightly increasing the price to compensate the ForEx movement, so we don’t see any major change in the price mix in the second half.

Alexander Haissl - Credit Suisse

And my last question would be on pricing in Europe, I mean clearly that the European market is running 100 to 200 basis points ahead of expectations. Do you see any risk of import pressure or is that not an issue at all right now?

Gregorio Borgo

No, on the European market as we said before, we are confident of growing the business especially in the central part of the Europe, so I mean in the part going from Belgium till Poland, thanks as we said to a better winter season to lower stock. Of course the fact that we are now consolidating the investment we have done one year ago in buying some point of sales in Germany. This is giving us better market coverage and more speed and I think as well for us is improving as well our situation in Italy where despite pretty high market share we have in the premium segment, we are, thanks to let me say the exploiting of the marketing better coverage of the market, we are still increasing our presence even in the Italian market. So we don’t see any major risk for the second half of the year in Europe.

Operator

We will now take our last question from Gaetan Toulemonde from Deutsche Bank. Please go ahead.

Gaetan Toulemonde - Deutsche Bank

Good evening, try to be short. I have only two question. The first one is the volume growth in the first half was 2%. You're still guiding for 5% for the full year, which underlined higher growth in the second part of this year. Any specific region were you expect that growth to accelerate, because7% in the second half is not a small number? And my second question will be on premium. But, maybe we can go on after another one.

Gregorio Borgo

Yes, I think for sure the area where we still will keep growing even faster in the second half will be Asia Pacific. As we have seen before in Asia Pacific, let me say driven to China we were increasing our presence in the premium and so we will keep developing the sales. Of course as we said before, we are expecting as well a resilient replacement market in Latin America, so I think especially in the car replacement, thanks to the fact that we are consolidating as mentioned before by Mr. Tronchetti our presence in the equity. We have more than 130 point of sales we own out of 600 point of sales from a brand. So, I think we are going to as well go there.

We are expecting as well a better contribution from the industrial business, not only I mean in Europe where the market was growing in the first half of the year but as well from other region. I think we have opportunity especially in the Middle East, Africa, we are speeding up the operation in Egypt and we are growing as well in the area of the Gulf. So, I think these are the biggest opportunities in front of us both for consumer and industrial business.

Marco Tronchetti Provera

I think the information that could help you is that the penetration we have in the market is improving because of the pull through effect thanks to the growth in original equipment we had in last few years in the premium segment in every region. Adding to this, the fact that we implemented our action in the market with new point of sales and comparing the budget we presented in industry plan that where they’ve had let say by 2015 9,000 point of sales branded Pirelli globally. We are ahead the targets and this year, year-end 2014 we will have more than 9,000 already 9,350. So that means that we cover better the different regions and we can penetrate better and profit better of the Q2 effects. The acceleration you see in the mix premium all that staff comes from the better penetration we have that make us in a position to profit of that Q2 effect better than in the past.

Gaetan Toulemonde - Deutsche Bank

Okay. My second question is regarding the premium tire. If you could help us to put a little bit those numbers in perspective because I had in mind that the growth rate of the premium was much more 7% or 8%. So, growing by 20% plus is definitely significantly more than the market. So, is there any specific recovery in Europe or in some other region to explain such a strong performance? So, what I would like to go to get is that your performance vis-a-vis the market. And the second thing is that I remember in the past that the growth rate -- and it's probably a little bit visible, too, when we compare the revenue growth and the volume growth of the premium, probably more growth in OE and therefore some better visibility for the coming years in the replacement. Can you help us to better understand those numbers? I hope I'm clear.

Marco Tronchetti Provera

We continue with the trend that we presented in London November last. We are catching a 1% markets globally on the premium segment that is what we are doing, thanks to the penetration we have with original equipment globally. So we were under presented in the replacement market compare to the share we have in original equipment. Now we are taking up in a market that grows as we confirm three times the growth of the global market. So that’s the area in which we continue to grow and the premium growth is ahead of plan, thanks to the consistent growth of market share mostly in Europe and apart.

So we’re accelerated that’s why we have 15 million of investment in marketing, that’s why, so we’re capitalized the effort we made in developing brand at Pirelli a new point of sales. That’s why we are ahead of the plan in implementing our penetration of the market. And we will reach in year in advance the targets of the industrial plan in terms of point of sales.

So yearend will be having as I mentioned before more than 9,000 point of sales that was the target is to have for 2015. So all these provide us the bulk of opportunities we are delivering to the market.

It is happening on the original equipment side and acting in the market being better presented in each market with new point of sales branded Pirelli.

Gaetan Toulemonde - Deutsche Bank

Again, to better understand the future, do you have a significantly higher market share in the original equipment premium today than the replacement?

Marco Tronchetti Provera

In the premium segment we are underrepresented compared to the market share we have today in original equipment, is definitely an opportunity we have in North America where we are underrepresented so we can cash opportunities. In Europe we are catching up a bit easier, but we are still far from the 20% we have in original equipment premium with the larger car manufacturers. In Asia Pacific we have presence with the original equipment that we’ll capitalize in the next year as we are growing faster than any competitors in getting the amulogation (Ph) with the original equipment and that’s the name of the game for us. And that’s opportunity we have in the replacement market. That is why we are investing in accelerating the process of penetration with new point of sales, because we see that the growth we had in last few years and we’re having even this year and looking forward even the next year, the original equipment is providing us better opportunities in the replacement. So that growth will continue.

Gaetan Toulemonde - Deutsche Bank

Okay. Last question on that. There is a very significant price gap between 17 inches and 18 inches and above. When you grow by 22%, is it more on the 18 inches, or is it more on the 17 inches?

Marco Tronchetti Provera

Of course it is the 18 inches. And the fact is that 18 inches will become the real premium within the next few years. Today we value 17 inches in that premium. This is true in Russia; this is true in Latin America. This is less and less too in Europe and North America. In North America, there is the 18 inches for the so called P class that is not premium at all. So I think any market that is not specific differences what is clear evidence is that the 18 inches and up is and will be in the future the premium segment at least for the next few years. 17 inches is going to become a commodity in the next few years.

Operator

That will conclude today’s question-and-answer session. I would now like to turn the call back to the speakers for additional or closing remarks.

Marco Tronchetti Provera

So, thank you. We have come to an end of our conference call. We thank you very much for your attention and whoever has not yet gone on holiday, have a nice holiday to all of you. We will be in any case here to protect your investments. Thank you.

Operator

That will complete today’s conference call. Thank your participation ladies and gentlemen. You may now disconnect.

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