NED COMUNITY ERM & BUSINESS CASES PRESENTATIONBase case, Best case, Worst case. PIRELLI ENTERPRISE...

NED COMUNITY

ERM & BUSINESS CASES PRESENTATION

JULY 2014

Pirelli Property

AGENDA

ENTERPRISE RISK MANAGEMENT IN PIRELLI- A WALKTHROUGH

BUSINESS GAME: ERM MEETS THE STRATEGIC PLANNING DURING LATEST INDUSTRIAL PLAN

BUSINESS GAME: ERM GOES BEYOND STRATEGIC PLANNING EMBRACING THE LONG TERM HORIZON

1 Pirelli Property

BUSINESS CASE: ERM EMBRACES REPUTATION

manage risks in terms of

prevention and mitigation

proactively seize the

opportunity factors

disseminate the “culture” of the value@Risk within the Company, in particular, in the strategic and

operating planning and in the most significant

business choices

assure transparency on Pirelli risk profile and on risk

management strategies to the Board of Directors and to all

the Stakeholders

PIRELLI ENTERPRISE RISK MANAGEMENT (ERM)

Philosophy & Mission

OUR PHILOSOPHY

ERM MISSION

Pirelli Property 2

TOP-DOWN

Enabling Board of Directors and

Top Managers to assess and

manage risk in all key business

decisions

VALUE-DRIVEN

Focusing on risk

threatening both

strategic objectives and

tangible and

intangible assets

PROACTIVE

Leading

to recovery plans

and mitigation

actions

INTEGRATED

In the strategic

and operational

planning and in the

decision-making

process


Approach

QUANTITATIVE

3 Pirelli Property

EXTERNAL

RISKS

STRATEGIC

OBJECTIVE

STRATEGIC

ASSETS

STRATEGIC

BUSINESS RISKS

OPERATIONAL

CROSS RISKS

PIRELLI KEY

VALUE DRIVERS


Key value drivers and main risk areas

4 Pirelli Property

EXTERNAL RISKS

STRATEGIC BUSINESS RISKS

MACRO ECONOMIC TREND COMPETITORS FUTURE REGULATION

CUSTOMER TECHNOLOGICAL WANTS INNOVATION

COUNTRY RISK (Economics, Politics, Security, Environment)

ORGANIZATION

PURCHASING

MARKETS

INNOVATION

OPERATIONS

PARTNERSHIP / JOINT VENTURE / M&A

SUSTAINABILITY

INFORMATION TECHNOLOGY

BUSINESS INTERRUPTION

HEALTH, SAFETY & ENVIRONMENTAL

SECURITY

COMPLIANCE

OPERATIONAL CROSS RISKS

FINANCE

PIRELLI KEY VALUE DRIVERS


Pirelli Risk Model

5 Pirelli Property

RISK MANAGEMENT

OBJECTIVES

PIRELLI «CONTROL»

MODEL

RISK DEPARTMENT ROLE

EXTERNAL RISKS STRATEGIC BUSINESS RISKS OPERATIONAL CROSS RISKS

Reduce impact should risk event occur

Reduce likelihood and impact cost-effectively

Avoid or strongly reduce occurrence cost-effectively

«Envisioning» risk through scenario planning, stress test ,

business case etc.

Interactive discussion about risks related to strategic objectives,

measurement of Value@Risk, risk appetite/tolerance setting & check,

monitor of KRIs, resource allocation to mitigate critical risk events.

Develop mission statement, rules & boundaries systems, limit and actions, set up action plan to

reduce risk occurrence, monitor their implementation.

Complement strategy team in run stress-test/scenario planning, «envisioning»

scenarios, monitoring the risk evolution

Complement strategy team in target settings. Act as indipendent facilitator or indipendent experts for critical risk

events (including mitigation plan monitoring).

Act as an indipendent overseers on risk assessment and mitigation

plans monitoring

REPORTING TO CEO & CCIRCG*


Risk Management objectives, «control model» and risk department role

6 Pirelli Property

The Board is responsible for

supervising the risk management

process so that the risks assumed in

the business are consistent with the

strategies. Furthermore, the Board

defines the attitude to risk (the

“acceptable risk threshold”) and

establishes the guidelines to manage

significant risks, in line with its top

management and strategic policy-

making mission

Focus on enabling the Board of Directors and Top Management to assess and manage risks in all key business decisions

Transversal to the organization and fully integrated in the planning processes


The Board of Directors plays a central role with reference to the risk “governance”

7 Pirelli Property

EXTERNAL RISKS

External risks: examples of risk monitoring

EUROZONE USA CHINA BRAZIL RUSSIA

2012 forecast at 13/04/2012

2012 GDP OUTLOOK -0.5 2.2 8.4 3.2 3.7

Year end forecast vs current month

EXCHANGE RATE OUTLOOK* STABLE STABLE STABLE STABLE

POLICY RATE OUTLOOK STABLE STABLE STABLE STABLE FALLING

Momentum vs previous month

CONSUMER CONFIDENCE

RETAIL SALES

MANUFACTURING CONFIDENCE (PMI) <50 >50 >50 >50 >50

INDUSTRIAL PRODUCTION

UNEMPLOYMENT RATE N/A

INFLATION RATE

Financial stress indicator vs previous month ( 20/4/2012)

5 years CDS (bps)** 83 31 115 130 201

MA

CR

O

COUNTRIES

8 Pirelli Property

2010 - 2011: ENHANCED RISK AWARENESS

- Methodology -

9

Three criteria to quantify risk exposure:

EBIT, financial-fiscal charges and cash flow.

Three possible scenarios for each risk/opportunity:

Base case, Best case, Worst case.


Strategic Risks: our methodology to quantify the Value@Risk

Simulation analysis based on historical raw

material price and exchange rate volatility.

Risks aggregation through Montecarlo simulations

and representation of the overall Group exposure

to risk (Value@Risk).

Pirelli Property


Operational Cross Risks: an example of indept risk analysis on supply chain

10 Pirelli Property

AGENDA


BUSINESS CASE: ERM MEETS THE STRATEGIC PLANNING DURING LATEST INDUSTRIAL PLAN

BUSINESS CASE: ERM GOES BEYOND STRATEGIC PLANNING EMBRACING THE LONG TERM HORIZON

11 Pirelli Property


OVERVIEW

According to the evolution journey of the Enterprise Risk Management Model adopted, Pirelli decided to foster the analysis of risk and opportunity events related to Industrial Plan 2013-2017

The risk analysis was aimed at providing the Management and the Board with relevant information on key risks related to expected targets and the degree of volatility of Industrial Plan financial results as well as a first outlook to Group results in case of strong changes in macroeconomic / market trends

For this purposes, the risk analysis focused on:

the creation of macroeconomic and tyre market alternative scenarios (“what if analysis”) distinctive with respect to the one considered in making Industrial Plan (“Base Case Scenario”);

the calculation of volatility of Industrial Plan (“Base Case Scenario”) results, based on risk and opportunity events potentially affecting Group business and related performance

► The analysis was performed in line with the Industrial Planning Process timeframe in order to present Group/BU expected financial results together with related risk profiles

1

2

12 Pirelli Property

1- ALTERNATIVE SCENARIOs

Management to be involved

Group Controller e Risk Officer: identification and evaluation of

macro economic scenarios

Selected Management:

Marketing + BU

Purchasing: Raw Material prices

Finance: Exchange rates

Sharing results

Identification of macro economic Worst / Best worldwide scenarios and

of related assumptions in terms of:

Markets: OE / replacement / Premium & Std

Sales: Volumes, Market Share, Price erosion.

Industrial Efficiency / Production capacity constraints

Raw Material prices

Exchange Rates

Identification of potential «disruptive» events at Country level

(es. ARS and VEF depreciation vs USD, etc.).

For each selected scenario, evaluation of PBIT and Cash Flow 2014-2017 profiles

Identification of Group main leverages (commercial, crash program, investments, etc.) to reduce scenario impact in case of occurrence

Activities

13 Pirelli Property

VENEZUELA - Stress Scenario

Steeper than currently expected Bolivar devaluation coupled with few import licences for not strategic sector and tighter implementation of price control

STRESS SCENARIO

2014 2015 2016 2017

10.0 17.0 25.0 30.0

59%y/y* 70%y/y 47%y/y 20%y/y

*% y/y appreciation USD vs LCU

The government implements a steeper devaluation in order to boost its revenues from flat $-oil exports prices/further reduced $ availability for not-strategic sectors

Gap between official and parallel market becomes unsustainable, Maduro administration is “forced” to devaluate again in a desperately attempt to reduce the gap.

Rising importance of Shale gas put downward pressure on WTI, thus reducing government revenues. Maduro push the usual devaluation / price control botton to keep government spending (in LCU) afloat

………………….

…………………..

……………………

…………………..

…………………..

POSSIBLE RAMIFICATIONS ON PIRELLI BUSINESS

*% y/y appreciation USD vs LCU

METRIC

Cash Flow

Cash reserve

PBIT

PBIT

PBIT

ALTERNATIVE SCENARIOs- The Venezuelan case…

14 Pirelli Property

Analysis of main risk/opportunity events related to Industrial Plan, with focus on:

Strategic Guidelines and Targets :

Volatility of market variables (raw material prices, exchange rates, etc.)

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

Pro

bability

AR PBIT [M EUR]

424 M €

74% probabilità di avere PBIT < AR PBIT 26% probabilità di avere PBIT > AR PBIT

Probabilità di avere:

PBIT < 540 M€ 19 %

540 < PBIT < 599,5 M€ 55 %

599,5 < PBIT < 660 M€ 25 %

PBIT > 660 M€ 1 %

718 M €

660 M €

PBIT atteso 572,6 M€

AR PBIT 599,5 M€

540 M €0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

Pro

bability

AR PBIT [M EUR]

424 M €



PBIT < 540 M€ 19 %

540 < PBIT < 599,5 M€ 55 %

599,5 < PBIT < 660 M€ 25 %

PBIT > 660 M€ 1 %

718 M €

660 M €


AR PBIT 599,5 M€

540 M €0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

Pro

bability

AR PBIT [M EUR]

424 M €



PBIT < 540 M€ 19 %

540 < PBIT < 599,5 M€ 55 %

599,5 < PBIT < 660 M€ 25 %

PBIT > 660 M€ 1 %

718 M €

660 M €


AR PBIT 599,5 M€

540 M €

GROWTH on PREMIUM SEGMENT

COST / EFFICIENCY COMPETITIVENESS

COMMERCIAL TRANSFORMATION

Activities

Management to be involved

Regions: Region CEO/CFO, Controlling and other Corporate functions (i.e.

Operations, HR) relevant for Regions

BUs: All BUs. Then, Involvement of Regions to check / fine tune main

risk/opportunity events identified by BUs.

Other Corporate functions (i.e. Purchasing, Finance) to be involved to

analyze corporate risks (i.e. raw material prices, exchange rates)

Sharing results

2- VOLATILITY OF INDUSTRIAL PLAN RESULTS

15 Pirelli Property

AGENDA




16 Pirelli Property


Key forces that may (will?) shape the future of the automotive and auto parts

industries

IMP

AC

T O

N A

UT

OM

OTI

VE

IND

UST

RY

MEDIUM-TERM LONG-TERM SHORT-TERM Downside risks dominate the world economic outlook:

US replaces automatic sequestration with a tighter fiscal policy;

Euro survives intact minus Greece but the recession is prolonged and deepened;

Sluggish emerging markets growth, with China slipping into sub-7% territory.

Brazil fails to exploit World Cup / Olympics to develop infrastructure

Mismanagement withdrawal excess liquidity Country Risks as driver of business

interruption

Strong move towards low carbon economies:

More stringent green -house gas emissions in EU - from 130 g/km in 2015 to 95

g/km in 2020 fleet average emissions .

Tighter municipality regulations ( i.e.

congestion charge/access limited to certain hours)

Strict policies restraining new vehicle purchases* and vehicle on the road in China

(auctions/lotteries to sell limited number of licence plates)

Increased car hybridization, which by 2035 might

account for around 30% of total light duty vehicle sales

Demographic changes – shift in social-cultural behaviours:

Young drivers (16-29 year age) have already been

increasing at slowest pace since 1995 and car ownership will not be perceived as a status symbol.

Aging population (1/4 of world population will be in its

60’s or older by 2050)

Virtual mobility (Connectivity and texting),

telecommuting and video conferencing

Cars is likely to decrease importance in the

mobility mix.

Continued urbanisation- More people will move

away from suburbans/rural areas (emerging economies)

*Already in place in Beijing and Shanghai, which are likely to be followed by 8 more cities over the short term 17

Pirelli Property

AGENDA




18


Pirelli Property

REPUTATION GOVERNANCE

19

Sources: Variation on M. Porter’s Value Chain, Hill+Knowlton, Expanded model of Reputation Institute research

Corporate Principles

employees

INFRASTRUCTURE (ie Finance, Administration & Control, IR)

HUMAN RESOURCES MANAGEMENT (ie Organizational Check)

TECHNOLOGY DEVELOPMENT (ie R&D)

PROCUREMENT (ie Purchasing)

Shareholders, Investors, Financ.

Community, Institutions

Suppliers

OE

INBOUND

LOGISTICS OPERATIONS

OUTBOUND

LOGISTICS

SALES

SERVICES

MARKETING, ADV, BRAND,

COMMUNICATIONS:

OF WHICH:

F1 SPONSORSHIP

INTER SPONSORSHIP

CALENDARIO

SU

PP

OR

T A

CT

IVIT

IES

P

RIM

AR

Y A

CT

IVIT

IES

Environemental

Social

Governance activities

Corporate Culture

Activities

(Culture, Foundation,

Hangar)

P Zero Moda Business*

All other Reputation

activites

MA

RG

IN a

nd

LO

YA

LT

Y

AD

DE

D M

AR

GIN

A

ND

LO

YA

LT

Y D

UE

TO

INT

AN

GIB

LE

S

Employees

Dealers and Final Consumer,

Media

Public

at large

BRAND as the sum of perceptions about a

company’s specific product/service or line of

products/services

held primarily by current and potential client,

LEGENDA

Unique vision

Company

Activities

Key

Stakeholder

Brand

Building

activity

REPUTATION as the sum of perceptions about a Company’s corporate actions held by

the public.Reputation Drivers: Product/Service, Transparency, Innovation, Financial

Performance, Leadership, Workplace, Citizenship.

Pirelli Property

REPUTATIONAL RISKS MODEL

20

Risk Identification

and Framework

Reputation Risk Survey

Mitigation Strategy Definition

General Public, Italy, Germany, Brasil, Us, Russia

and China

3 pillars: learning from the past, understanding the present, foresee the

future

MAIN SOURCES: PAST (10 year database) PRESENT (interviews to key Pirelli executives) FUTURE (interviews to Key opinion leader such as WBCSD, RMA, EU)

Selection of 24 reputational risks events

Survey

Events likelihood evaluation

Tool delivery

Each event will have a mitigation plan and a risk

governance

Pirelli Property

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