Pirelli & C. S.p.
Annual Report 2017

Plain-text annual report

Pirelli & C. S.p.a. - Milan DATA MEETS PASSION 2017 Annual Report CONTENTS LETTER FROM THE CHAIRMAN LETTER FROM CEO NOTICE OF SHAREHOLDERS’ MEETING CORPORATE BODIES PRESENTATION OF 2017 PIRELLI INTEGRATED REPORT DATA MEETS PASSION HOW THE DIGITAL REVOLUTION HAS CHANGED EVERY ASPECT OF OUR LIVES, PRIVATE AND BUSINESS by Tom McCarthy THE TECHNOLOGY OF OUR DESIRE by Mohsin Hamid THE NEXT COGNITIVE REVOLUTION by Ted Chiang EMILIANO PONZI 01. DIRECTORS’ REPORT ON OPERATIONS COMPANY PROFILE MACROECONOMIC AND MARKET SCENARIO SIGNIFICANT EVENTS OF 2017 GROUP PERFORMANCE AND RESULTS RESEARCH AND DEVELOPMENT ACTIVITIES PARENT COMPANY HIGHLIGHTS RISK FACTORS AND UNCERTAINTY OUTLOOK FOR 2018 6 8 10 11 14 18 22 24 26 28 32 42 57 61 63 74 77 79 85 SIGNIFICANT EVENTS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR ALTERNATIVE PERFORMANCE INDICATORS OTHER INFORMATION 02. REPORT ON RESPONSIBLE MANAGEMENT OF THE VALUE CHAIN METHODOLOGICAL NOTE ECONOMIC DIMENSION ENVIRONMENTAL DIMENSION SOCIAL DIMENSION 86 87 88 92 102 112 132 153 03. REPORT ON THE CORPORATE GOVERNANCE AND STRUCTURE OF SHARE OWNERSHIP 192 GLOSSARY INTRODUCTION COMPANY PROFILE INFORMATION ON THE OWNERSHIP STRUCTURE COMPLIANCE BOARD OF DIRECTORS PROCESSING OF CORPORATE INFORMATION BOARD COMMITTEES STRATEGIES COMMITTEE APPOINTMENTS AND SUCCESSION COMMITTEE RELATED-PARTY TRANSACTIONS COMMITTEE COMPENSATION COMMITTEE REMUNERATION OF THE DIRECTORS 202 203 203 205 209 209 215 216 217 217 218 218 219 07. 08. RESOLUTIONS CERTIFICATIONS 466 480 482 A. CERTIFICATION OF THE CONSOLIDATED FINANCIAL STATEMENTS PURSUANT TO ART. 154 BIS OF LEGISLATIVE DECREE 58 OF FEBRUARY 24, 1998 B. INDEPENDENT AUDITORS REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS C. CERTIFICATION OF THE PARENT FINANCIAL STATEMENTS PURSUANT TO ART. 154 BIS OF LEGISLATIVE DECREE 58 OF FEBRUARY 24, 1998 D. INDEPENDENT AUDITORS REPORT ON THE PARENT FINANCIAL STATEMENTS E. SUMMARY/CORRELATION TABLES F. INDEPENDENT AUDITOR’S REPORT ON THE CONSOLIDATED NON-FINANCIAL DISCLOSURE PURSUANT TO ARTICLE 3 OF THE ITALIAN LEGISLATIVE DECREE 254 OF 30 DECEMBER 2016 AND ARTICLE 5 OF CONSOB REGULATION N. 20267 494 500 484 492 511 CORPORATE GOVERNANCE, SUSTAINABILITY, CONTROL AND RISKS COMMITTEE SYSTEM OF INTERNAL CONTROL AND RISK MANAGEMENT INTERESTS OF THE DIRECTORS AND RELATED-PARTY TRANSACTIONS BOARD OF STATUTORY AUDITORS INFORMATION FLOWS TO THE DIRECTORS AND STATUTORY AUDITOR RELATIONS WITH SHAREHOLDER SHAREHOLDERS’ MEETINGS CHANGES SINCE THE END OF THE YEAR 04. REMUNERATION REPORT REMUNERATION POLICY FOR YEAR 2018 2017 REMUNERATION REPORT 219 220 224 224 227 227 228 229 244 255 273 05. CONSOLIDATED FINANCIAL STATEMENTS 284 FINANCIAL STATEMENTS FORMATS EXPLANATORY NOTES SCOPE OF CONSOLIDATION 06. SEPARATE FINANCIAL STATEMENTS OF PIRELLI & C. S.P.A. FINANCIAL STATEMENTS FORMATS EXPLANATORY NOTES ANNEXES TO THE EXPLANATORY NOTES REPORT OF THE BOARD OF AUDITORS TO THE SHAREHOLDERS’ MEETING 294 300 379 388 390 395 439 446 LETTER FROM THE CHAIRMAN Ren Jianxin A N N U A L R E P O R T 2 0 1 7 6 L e t t e r f r o m t h e C h a i r m a n D ear Stakeholders, The year 2017 was one of great achievement for Pirelli and one in which the company made great strides towards the realization of its strategic vision, drawing on the Company’s deep industrial heritage, prestigious brand, and excellent innovation ability. Pirelli last year completed the separation of its Industrial activities from its Consumer ones with the aim of strengthening both based on different target markets. The first are destined to be combined with ChemChina’s Industrial activities to ensure long-term success through scale expansion, capacity integration, institutional investors’ over-subscription rate was 2.4 times the offering and retail investors’ was around 1.4 times. This reflected investors’ recognition of our value and their confidence in our future development. The accomplishments of 2017 confirm the excellence of Pirelli. It must be stressed in particular that Pirelli’s excellence is attributed to Marco Tronchetti Provera and his team. It is his strategic vision, creativity, enthusiasm, and extraordinary appeal that drive Pirelli to grow robustly and overtake its competitors, for which he well deserves the praise of the world as a first-class entrepreneur. These achievements validate my great belief in Pirelli’s future prospects which, as always, will be built on the passion and commitment of its people, ability and business coordination by relying on the great potential of China's industrial tyre market. On the other hand, to innovate, team work and care for both customers and employees. Pirelli will remain strategically focused on tyres for cars and motorcycles, in particular the high end, with the I extend sincere thanks to Marco, his team, our hard working employees, our customers, stakeholders, and all goal of further strengthening its position of leadership. others who have contributed to Pirelli’s success. Ren Jianxin Chairman This strategy will enhance Pirelli’s push into the “High Value” segment, including Premium and Prestige, which means to continuously improve the extraordinary quality of Pirelli products through technological innovation. This segment will enjoy faster growth, higher profit margins, and greater resilience even in the face of economic downturns. This segment is forecast to grow by 9% between 2016 and 2020, a rate 4 times faster than standard tyres, driven particularly by demand in Europe, North America and, not least, China. To maintain market leadership the company must formulate a forward-looking industry plan. Digitalization is today already central to mobility and its importance will only grow over time. Year 2017 saw Pirelli’s launch of “Connesso,” the first smart tyre for cars marketed in the world. Thanks to the implementation of the company’s digitalization strategy, the ability to receive information directly from the road, which Pirelli can already offer, will have great value for car makers and drivers, as well as helping to develop products that better serve the market. Pirelli always adheres to value creation and value sharing. The company is also studying the market for electric, hybrid and autonomous vehicles and last year returned to the bicycle tyre market with its Velo range. Based on a long-term vision, these actions will lead consumption and embody the values of sustainability, environmental awareness, and social responsibility, all of which are key elements for the future and sustainable growth of the company and the world economy on which we depend. In the area of sustainability, Pirelli gained significant recognition in 2017, being placed first in the world in the auto components industry in one of the sector’s most prestigious rankings. Sustainability targets are an integral part of the 2017-2020 Industrial Plan and a new “Sustainability Plan” addresses all aspects of the business from green performance products to environmentally efficient industrial processes to employment policies favoring employee diversity, safety and continuous training in line with the company’s strategy. The year’s work culminated, at the conclusion of the transformation, with the return to the Milan stock exchange with the biggest IPO of 2017 in continental Europe. The operation was seen favorably by financial markets where n a m r i a h C e h t m o r f r e t t e L 7 7 1 0 2 T R O P E R L A U N N A LETTER FROM CEO Marco Tronchetti Provera A N N U A L R E P O R T 2 0 1 7 8 L e t t e r f r o m C E O D ear Stakeholders, For Pirelli 2017 was a year of intense work, deep transformation and significant results. In less than two years from our delisting, in October we returned to the stock exchange a different and stronger company. In fact, we concluded the process of transformation which turned Pirelli into the sector’s only Pure Consumer Tyre Company, focused on the High Value segment with a high level of technological content. A renewed strategic vision which – together with clear governance based on the best international practices – earned the appreciation of the market as seen in the solid demand for the IPO. of growth and where we have a solid industrial presence. We have, as well, a strong position in the Latam area and in Russia: two markets of great potential which have shown signs of significant improvement. Our dedication to making Pirelli always more forward looking was underscored by the results achieved in 2017 which reflect both the guidelines set out in the 2017-2020 industrial plan and commitments to the market. Profitability exceeded 17% (adjusted ebit margin before start-up costs) on sales of over 5.3 billion euro - of which more than 3 billion derived from High Value products, an increase of 11.8% - while net profit from continuing operations grew by 60.5%. Thanks to the support of shareholders, who accompanied Pirelli back to the stock exchange, a solid operating performance and great cash generation our financial profile We operate in a highly competitive segment of the market, where technology represents a strong barrier also improved, with the net financial position/Adjusted Ebitda before charges and start-up costs ratio at to entry. In 2017 Pirelli once again distinguished itself through its great commitment to innovation and 2.7 times (compared with 4.6 times in 2016). technology. In 2017, over 90% of total expenditure in Research and Development went towards High Value These results are the fruit of the professionalism and passion of all the men and women who work for products, equal to 6.5% of the relative revenues, one of the highest levels among the principle tyre makers Pirelli, who compete every day to make our company a leading example of Italian excellence in the world worldwide. and our brand one of the most recognized at the global level. To all of them and to all our stakeholders The commitment to innovation is one experienced each day by all the men and women of Pirelli through our digital transformation. Thanks to a team dedicated to the study and analysis of Big Data we are implementing new tools capable of further improving our production processes, offering greater demand predictability and making the work of our people more dynamic. All this contributes to the improvement of our offering to an end consumer who today requires not only tyres but ever more personalized services, which keep them safer, more informed, better able to manage their time and always at the center of attention. The launch of P Zero Connesso was a step in this direction. After many years’ work on the cyber tyre, we have produced a tyre that can “talk” to the driver, offering information on the tyre’s performance such as pressure, temperature and wear. The P Zero color edition also demonstrates that a tyre is more than just a round, black object and that its personalization, in line with our Perfect Fit strategy, can also come through the color that already distinguishes us in Formula 1. Our experience on the track, where we have been sole supplier since 2011, allows us to also meet the challenges of the road thanks to tyres that are always more technological and innovative. The return to the bicycle world, through the Velo project, and attention to electric cars, an area in which we are developing partnerships with the main global car makers, make Pirelli an essential player in the great transformation of mobility we are experiencing - a mobility which is always more connected, attentive to sustainability and safety. Our wide geographic presence in areas which are strategic for the business’s development allow us to better capture and take advantage of signs of growth in the market. We are present in Europe which is the preeminent High Value market, but also in the Nafta area and Apac which have shown the highest rate thank you once again. Marco Tronchetti Provera Executive Vice Chairman and Ceo O E C m o r f r e t t e L 9 7 1 0 2 T R O P E R L A U N N A A N N U A L R E P O R T 2 0 1 7 1 0 N o t i c e o f S h a r e h o l d e r s ’ m e e t i n g NOTICE OF SHAREHOLDERS’ MEETING CORPORATE BODIES Board of Directors1 Chairman Executive Vice Chairman Ren Jianxin The persons entitled to vote in the general meeting of ordinary shareholders of Pirelli & C. Società per Azioni are called to an and Chief Executive Officer Marco Tronchetti Provera Ordinary Shareholders’ Meeting in Milan at Viale Sarca no. 214, at 10:30 on Tuesday, 15 May 2018, in a single call, to discuss and resolve on the following AGENDA 1. Financial Statements as at 31 December 2017. Related and consequent resolutions. Director Director Director Independent Director Independent Director Independent Director 2. Appointment of a Director subject to an increase to 15 in the number of members of the Board of Directors. Related and Director consequent resolutions. 3. Board of Statutory Auditors: >> appointment of standing and alternate auditors; >> appointment of the Chairman; >> determination of remuneration of auditors. 4. Remuneration policy: consultation. Independent Director Independent Director Independent Director Director Independent Director Yang Xingqiang Bai Xinping Giorgio Luca Bruno Laura Cioli Domenico De Sole Fan Xiaohua Ze’ev Goldberg Marisa Pappalardo Cristina Scocchia Tao Haisu Giovanni Tronchetti Provera Wei Yintao 5. Three-year monetary incentive plan (2018-2020) for Pirelli’s Group Management. Related and consequent resolutions. Secretary of the Board Alberto Bastanzio 6. Insurance policy designated “Directors and Officers Liability Insurance”. Related and consequent resolutions. Board of Statutory Auditors2 Chairman Statutory auditors Alternate Auditors Audit, Risk, Sustainability and Corporate Governance Committee Chairman – Independent Director Independent Director Independent Director Francesco Fallacara Fabio Artoni Antonella Carù Luca Nicodemi Alberto Villani Fabio Facchini Giovanna Oddo Fan Xiaohua Laura Cioli Cristina Scocchia 1 Appointment: August 1, 2017, effective as of August 31, 2017. Expiry: Shareholders’ Meeting convened for the approval of the Financial Statements at December 31, 2019. 2 Appointment: May 14, 2015. Expiry: Shareholders’ Meeting convened for the approval of the Financial Statements at December 31, 2017 (Antonella Carù appointed by the Shareholders’ Meeting held on August 1, 2017, Alberto Villani and Luca Nicodemi appointed by the Shareholders’ Meeting held on September 5, 2017). s e i d o B e t a r o p r o C 1 1 7 1 0 2 T R O P E R L A U N N A Committee for Related Party Transactions Chairman – Independent Director Independent Director Independent Director Nominations and Successions Committee Chairman Director Director Director Remuneration Committee Chairman – Independent Director Director Independent Director Strategies Committee Chairman Director Director Director Independent Director Director Independent Director Domenico De Sole Marisa Pappalardo Cristina Scocchia Marco Tronchetti Provera Ren Jianxin Bai Xinping Giovanni Tronchetti Provera Tao Haisu Bai Xinping Laura Cioli Marco Tronchetti Provera Yang Xinqiang Bai Xinping Giorgio Luca Bruno Domenico De Sole Ze’ev Goldberg Wei Yintao Independent Auditing Firm3 PricewaterhouseCoopers S.p.A. Corporate Financial Reporting Manager4 Francesco Tanzi The Supervisory Board (as provided for by the Organizational Model 231 adopted by the company) is chaired by Prof. Carlo Secchi. A N N U A L R E P O R T 2 0 1 7 1 2 C o r p o r a t e B o d i e s 3 Appointment: August 1, 2017, effective as of the date of the commencement of trading of Pirelli shares on the Mercato Telematico Azionario (screen-based stock exchange) which is organised and managed by Borsa Italiana S.p.A. (October 4, 2017). Expiry: Shareholders’ Meeting convened for the approval of the Financial Statements at December 31, 2025. 4 Appointment: Board of Directors Meeting held on August 31, 2017. Expiry: jointly with the current Board of Directors. s e i d o B e t a r o p r o C 3 1 7 1 0 2 T R O P E R L A U N N A PRESENTATION OF 2017 PIRELLI INTEGRATED ANNUAL REPORT to 2016 and an investment in training that reached 8 average days per employee, thus surpassing for the fifth consecutive year the target of 7 average-per-capita days as envisaged by the Sustainability Plan. Pirelli’s social and relational capitals are based on the continuous and transparent dialogue that the Company maintains with its Stakeholders. During 2017, particular importance was given to the consultation of the relevant stakeholders (among which international NGOs, Pirelli’s main natural rubber suppliers, traders and farmers in the supply chain, automotive customers, international multilateral organizations) in order to issue the Pirelli Policy on Natural Rubber. In methodological terms, the drafting of the Annual Report 2017 took into consideration the Integrated Reporting principles contained in the framework of the International Integrated Reporting Council (IIRC), the Financial Statements and Consolidated The Pirelli 2017 integrated report (Annual Report 2017) aims to provide a comprehensive overview of the process of creating value Financial Statements were drawn up according to IAS/IFRS international accounting standards, and the sustainability performance for the Company’s Stakeholders, as resulting from the integrated management of the financial, productive, intellectual, human, meets the GRI Standards and the provisions of the Legislative Decree of December 30, 2016, no. 254. A N N U A L R E P O R T 2 0 1 7 1 4 P r e s e n t a t i o n O F 2 0 1 7 P i r e l l i I n t e g r a t e d A n n u a l R e p o r t natural, social and relational capitals. Reporting reflects the business model adopted by Pirelli, which is inspired by the United Nations’ Global Compact, the principles of Stakeholder Engagement set forth by the AA1000, and the Guidelines of ISO 26000. The financial capital, which comprises the company’s financial resources, drives the sustainable management of the other capitals and is in turn influenced by the value created by the latter. In 2017, business operations generated an EBIT adjusted (before non- recurring and restructuring expenses and before amortization of intangible assets related to assets recorded as a result of the Business Combination) and before start-up costs equal to 927 million euro (17.3% the EBIT Margin Adjusted), up 10% from the previous year on a like-for-like basis. In turn, the Company’s productive capital, which includes 19 tyre factories in 13 Countries in four continents, is managed in a perspective of environmental efficiency, with targets by 2020 in terms of a reduction of the specific indices of energy consumption, CO2 emissions and water withdrawal and an increase in waste recovery. In this regard, in 2017 vs 2016, Pirelli has registered a reduction of the energy specific consumption by 4%, a decrease in water withdrawal of 14%, a reduction of specific CO2 emissions by over 4% and an increase of 5% of renewable electrical energy used, reaching 43% on total electricity used, compared to the 38% of 2016. Waste recovery reached 93%, efficaciously pursuing the target of “zero waste to landfill”. All this has helped to achieve efficiencies on costs amounting to 46.6 million euro in total, around 1% of the turnover. The research and development activities, which have always been at the heart of Pirelli’s strategy, contribute substantially to the improvement of environmental efficiency along the entire product life-cycle, from the innovative raw materials to the process, distribution, use and up to the end of life of tyres. In 2017, Pirelli invested 221.5 million euro in research and development (4.1% of revenues) of which 199.9 million euro destined to High Value activities (6.5% of High Value revenues). In turn, Pirelli’s Green Performance products, which combine performance and respect for the environment, at the end of 2017 represent 42%1 of total tyre turnover (40% in 2016 and 32% in 2015). Focusing only on High Value2 products, the percentage of Green Performance rises to 52%. The strong investment in innovation also feeds Pirelli’s intellectual capital, which comprise a total portfolio of active patents gathered in 715 families concerning innovations of product, process and materials, as well as a brand recognised worldwide. The evolution of the cited capitals is closely related to the commitment, the competence and the dedication of the human capital, at the heart of the Company’s growth. Merit, ethics and sharing of strong values and clear policies, dialogues, attention to welfare and diversity are accompanied by advanced instruments to attract and retain the best talent. The investment in the “culture of health and safety at work” and in training is fundamental, with an accident frequency index that in 2017 decreased by 18% compared 1 Figure obtained by weighing the value of sales of Green Performance tyres on the total value of sales of Group tyres. Green Performance products identify the tyres that Pirelli produces throughout the world and that fall only under rolling resistance and wet grip classes A, B, C according to the labelling parameters set by European legislation. The new calculation criterion introduced in 2017 required a restatement on previous years. 2 High Value products are determined by rims equal or greater than 18 inches and, in addition, include all “Specialties” products (Run Flat, Self-Sealing, Noise Cancellation System). t r o p e R l a u n n A d e t a r g e t n I i l l e r i P 7 1 0 2 F O n o i t a t n e s e r P 5 1 7 1 0 2 T R O P E R L A U N N A by companies, but also within wider society and the personal lives of individuals. So Pirelli commissioned three internationally-renowned authors, known for their expertise in analysing and interpreting the contemporary scene, to share their thoughts on current trends. Read on for the insights of English writer Tom McCarthy, Pakistan’s Mohsin Hamid and Ted Chiang from the United States. So welcome to the world of digital, where data meets passion. Pirelli’s Annual Report 2017 has the title Data Meets Passion. This reflects the digital transformation currently taking place across the company – from the factory floor to customer- relationship management – fuelled by Pirelli’s ongoing passion for innovation. It is a process that combines the potential of state-of- the-art technology with a people- centred approach and a commitment to corporate development.   Pirelli’s Annual Report 2017 offers the stories of five Italian digital businesses – a kind of “Made in Italy 4.0”. Some of these entrepreneurs are harnessing technology to bring traditional crafts up-to-date – from tailoring to upholstery to making surfboards. Others are using technology’s potential to address current problems – whether to transform our relationship with food or protect the future of bees. Pirelli called on the leading Italian illustrator Emiliano Ponzi - who collaborates with some prestigious publication Italian and non (like New Yorker and New York Times and many others) - to provide an artistic interpretation of these stories using a 3D virtual-reality painting app. Clearly the impact of digital technology is being felt not only A N N U A L R E P O R T 2 0 1 7 1 8 D a t a m e e t s p a s s i o n DATA MEETS PASSION revolution – from electricity to automation. Now it is harnessing the possibilities of A s a company founded in 1872, Pirelli has made the most of each new technological Pirelli only started its digital transformation process a year ago but already some digital technology to become data-driven, something that reaches into its factories, its products and its relationship with customers. pleasing – and surprising – results are emerging. It is here, in fact, that some workers who work on machines are involved in the transformation process that, through the use of data and calculation algorithms, aims to anticipate problems rather than react to solve them. At the forefront of the process are Pirelli’s factories where some machine operators are now using data to anticipate problems and solve them rather than simply react to them. It is an example of the vital part Pirelli’s people are playing in the company’s digital tran- sformation – taking the technology in new directions and making new things possible. Smart manufacturing is just one of a series of digitalisation projects to have been started since November 2016 – others include forecasting, marketing and customer relationship management – and it demonstrates the far-reaching impact of the new approach as the company starts on its digital journey. A WORKER WHO HAD PREVIOUSLY OPERATED A MACHINE WAS NOW LOOKING AT DATA, INTERPRETING IT AND PROACTIVELY TAKING STEPS TO AVOID POTENTIAL ISSUES. Initially everything was run by a smart manufacturing team from Milan, but when the team visited the factories and started demonstrating how the digital tools could be an advantage some factory colleagues sought to make their own contribution. They wanted to know how it worked and started proactively to propose additional things they wanted to have, all the time supported by a change management programme called Manufacturing to Digital – or M2D – which aims to build a digital culture based on lean principles. REAL-TIME INFORMATION Now some factories have smart manufacturing teams who are customising what they want in the plant, and sharing information and best practice via WhatsApp and Yammer groups. This has been a boost to the workforce as well as factory efficiency and productivity, with lower scrap and less unplanned maintenance. And it is having a domino effect across the company. Today some Pirelli plants are equipped with systems for displaying the parameters relevant to each individual process, such as the vulcanisation times for a given tyre. This enables the machine operator and the factory engineers to intervene in real time if the process is not proceeding as planned. Some workers are equipped with wearable technology such as smart watches to supply them with key data. While our virtual reality training programme – PLAY 2.0 – is being used to further accelerate the improvement process. In the future the factories will continue to evolve towards predictive maintenance, harnessing the power of artificial intelligence. The plan is to connect the data coming from Pirelli’s factories around the world with the ultimate goal of creating a data-driven culture and an integration of the supply chain inside and outside the factory. THE ULTIMATE GOAL IS TO CREATE A DATA-DRIVEN CULTURE DIGITAL MINDSET The enthusiasm of the manufacturing workforce has shown what can be achieved with people at the centre of the digital transformation. A major training and development programme is underway across Pirelli to explain the changes and support a shift towards a flexible, “digital” mindset and a more data- and customer-driven approach. There is no doubt that the switch to digital involves more than just adopting new technology – Industry 4.0-style – it also requires changes to the whole company from the cultural, organisational and managerial perspective. That’s why it has been vital to have strong endorsement from the very top of the company in the shape of executive vice- chairman and CEO Marco Tronchetti Provera for what is set to be a quite long process. The most challenging part is changing how Pirelli approaches the customer and it’s the company’s long record of work on digital technologies – and its passion for research and development and pushing boundaries – that is making that future data-driven approach to the customer possible. Pirelli’s scientists and researchers first dared to dream of the intelligent tyre – gathering and relaying information from the only part of a car in contact with the road – more than 20 years ago. The first three related patents were registered in 1999. Since then, Pirelli’s Cyber Technologies team has collaborated with a series of prestigious partners, including the Milan Polytechnic Foundation for Smart Mobility and Berkeley IT’S PIRELLI’S LONG RECORD OF WORK ON DIGITAL TECHNOLOGIES THAT IS MAKING THAT FUTURE DATA-DRIVEN APPROACH TO THE CUSTOMER POSSIBLE. Wireless Research Center, adopting the latest technologies as they emerged – and filing 300 patents along the way. n o i s s a p s t e e m a t a D 9 1 7 1 0 2 T R O P E R L A U N N A A N N U A L R E P O R T 2 0 1 7 2 0 D a t a m e e t s p a s s i o n CYBER TECHNOLOGIES The team has developed four digital platforms, all based on data coming from a sensor housed inside the car tyre. This can provide accurate real-time monitoring of tyre temperature and pressure that is quite different to that derived from a rim-based sensor. It is also the only technology to offer a measure of tyre wear, which Pirelli calculates by running the car’s data through a specially-developed algorithm before feeding it back to the driver. THE TEAM HAS DEVELOPED FOUR DIGITAL PLATFORMS, ALL BASED ON DATA COMING FROM A SENSOR HOUSED INSIDE THE CAR TYRE. Three of these digital platforms are ready for use. The first car model fitted with the company’s Cyber Car system, designed in close collaboration with vehicle manufacturers, is expected to be ready for market this year. Meanwhile the mobile phone-based Connesso system went on sale in the US last summer, with a rollout planned for several countries in Europe, followed by China in 2019. The company’s pioneering Cyberfleet system, launched in 2012 and aimed at trucks, has been updated using Bluetooth technology and extended to car fleets as well. It goes into testing in April before being launched later this year. The team is also working on a Cyber Tyre system which is billed as a breakthrough technology and is due to be unveiled in 2019. It is data coming from the intelligent tyre – and delivered via these four digital platforms – that is giving Pirelli insights into what is actually happening in the market and giving the company the opportunity to forge new relationships with all its customers and partners, including individual drivers, fleet companies, car manufacturers and tyre dealers. NEW POSSIBILITIES A car owner in Los Angeles, for example, can install P Zero tyres with Pirelli Connesso, open an app on his mobile phone and check on their car’s tyre pressure, temperature and wear. The same app can also show her – or him – figures for any other Connesso- connected cars in their garage. With this kind of data available it is then possible for Pirelli and its partners to offer consumers a range of services for the first time, in particular around roadside assistance and tyre related servicing. Car manufacturers are interested in information provided by the intelligent tyre about the car’s static vertical load and “Tyre ID” which can be used to optimise the car’s chassis control system to improve safety and performance. The static vertical load – the downward force applied to the tyre – is particularly useful for makers of electric cars as by knowing the car’s accurate weight, the vehicle’s central control unit can calculate more precisely how much longer the battery will last before needing a recharge. A PERSONAL APPROACH The Tyre ID – a record of the tyre’s brand, size, load capacity, and more – makes it possible to offer new services. For example, the car could remind a driver using summer tyres that it is November and time to switch to winter tyres. If your tyre has a puncture, a repair team would be able to check the Tyre ID via the Cloud and come directly to where you are with a suitable replacement, ending the cycle of wasted time and money involved in taking a car into a garage. In the future a tyre dealer will be able to come and change your tyres while you are having dinner with your family, so that in the morning your tyres will be mounted and ready to go. Pirelli’s relationship with its partners – such as tyre dealers – will become even more important as the data coming directly from the end user can be processed and interpreted THE CAR COULD REMIND A DRIVER USING SUMMER to provide better products and services. TYRES THAT IT IS NOVEMBER AND TIME TO SWITCH TO WINTER TYRES. For example, data on tyre wear helps to predict the demand for tyres. Pirelli can then suggest to a dealer how to optimise the type and number of tyres it needs in stock. The dealer will also be able to know when to contact a driver – via Pirelli’s dealer portal which is currently being built – to tell them that their tread wear is high and they need to change their tyre. So the dealer can contact the end user directly and make an appointment to do that. PIRELLI GOES DIGITAL These data-driven insights are changing Pirelli’s relationships with its customers; they are also changing the nature of Pirelli itself. Including the existing IT department, the Pirelli Digital team has grown to 300 people, the majority of whom are based in Milan. Here people with new competencies and skills – such as Full-Stack and UX developers – will manage the data science and algorithms driving the company, along with its major digital projects, as well as develop its customer-facing digital platforms. The new office will be in keeping with Pirelli’s digital philosophy – open-plan offices, hot-desking and rooms designed to encourage teamwork and agile thinking. All of which demonstrates Pirelli’s commit- ment to developing a transparent data-dri- ven approach and decision-making process with horizontal teams that are all working DATA-DRIVEN INSIGHTS ARE CHANGING PIRELLI’S RELATIONSHIPS WITH ITS CUSTOMERS; THEY ARE ALSO CHANGING THE NATURE OF PIRELLI ITSELF. together, and a focus on listening to customers and creating value for them. When this is blended with the company’s core experience in tyre production and R&D and passion for advancing the future of mobility, it promises a powerful digital future. n o i s s a p s t e e m a t a D 1 2 7 1 0 2 T R O P E R L A U N N A HOW THE DIGITAL REVOLUTION HAS CHANGED EVERY ASPECT OF OUR LIVES, PRIVATE AND BUSINESS by Tom McCarthy Mallarmé first unleashed his most famous claim: ‘Everything that exists,’ he wrote, ‘does so in or- der to end up in a book.’ Mallarmé was not just thinking of some book or other, but (as he would I n 1895, in an essay entitled ‘The Book, Spiritual Instrument’, the French symbolist poet Stephane remainder of his life, he dedicated himself to this project: since the book in its present form was not up to put it in a letter to his friend Verlaine) ‘the book, convinced as I am that in the final analysis there’s only one… architectural and premeditated… the Orphic explanation of the earth.’ For the the task, he set out to create a new, expanded and cross-media über-book that would take in theatre, dan- Literary in the sense that public — and private — life finds itself governed by inscription: when everything gets notated in some data-ledger, then experience itself, and with it the question of agency (are we free subjects? or are all our gestures and decisions ruled and determined by the algorithms), boil down to moments and acts of writing. Kafka saw this coming. In his short story In the Penal Colony he envisages a giant machine into which prisoners are strapped, whose furrows carve into their flesh, in a grotesquely self-reflective loop, the law’s ce and music, even ritual, consume and reconfigure all these forms within a total ‘system of relationships’ own words: ‘Be just.’ For the philosopher Michel de Certeau, we all live in this machine: under capitalism, that he would simply call (using a capital L) le Livre. he claims, all bodies ‘are thus transformed into texts in conformity with the Western desire to read its products.’ If you want to see the machine’s latest manifestation, look at Trevor Paglen’s famous photo of Three decades later, the father of modern anthropology, Bronislaw Malinowski, laid out a similar ambition the NSA’s Maryland headquarters. A colossal black box, it contains records of… well, everything really. for the ethnographic field. His First Commandment to all would-be anthropologists was simply: Write This is the late-modern Book — but who can read it? Even the NSA are at a loss to parse and sift and Everything Down. Since every detail, from the minutiae of a tea-ritual to the the shape of a ceremonial correlate the billions of data-points contained within their black book’s covers, to ‘interpret’ it. belt-buckle, might turn out to unlock the entire logic of a given tribe, he reasoned, it should all be notated, analysed, every last detail correlated with every last other one until — presto! — the entire social fabric This, perhaps, is where the question starts to shift: perhaps it is no longer writing that’s the core renders up the secret of its pattern. Skip forward ninety years, and it might seem that both men’s aspirations have been realised. Mallarmé’s ‘system of relationships’ in which all objects and phenomena are held finds its embodiment in the World Wide Web. Malinowski’s Commandment, too, has been executed — not on distant tribes but on the citizens of hyper-developed countries. Now, it is all written down. There’s hardly a moment of our lives that isn’t documented; walking down a stretch of street, we’re filmed by cameras, GPS-marked, data-tracked by phones we carry in our pockets. Every website that we visit, every keystroke that we make is archived. Networks of kinship are now mapped by software that tabulates and cross-indexes what we buy with who we know, and what they buy, or like, and with the other objects that are bought or liked by others we don’t know but with whom we share buying and liking patterns. Where does this leave the anthropologist, or writer? For that matter, where does this leave the citizen? Perhaps these questions are in fact the same one. What fascinates me, as a novelist, about the ascent of digital culture and the regimes of super-surveillance it brings with it, is not so much the old adage that all literature is political, but rather the inverse: that politics itself becomes a literary question. issue, but reading. The task, for the citizen as for the artist, is no longer to find new forms of expression; but to find new ways of mapping, navigating, reading our way out of, or at least through, the writing-machine. © 2018 by Tom McCarthy Tom McCarthy Tom McCarthy lives in London, where he was born in 1969. He is known in the art world for his role within the avant-garde International Necronautical Society (INS). His novels include: Remainder, Men in Space, Tintin and the Secret of Literature, and C (Bompiani, 2013). He was shortlisted for both the Man Booker Prize and Walter Scott Prize in 2010. A N N U A L R E P O R T 2 0 1 7 2 2 H o w t h e d i g i t a l r e v o l u t i o n h a s c h a n g e d e v e r y a s p e c t o f o u r l i v e s , p r i v a t e a n d b u s i n e s s b y T o m M c C a r t h y y h t r a C c M m o T y b s s e n i s u b d n a e t a v i r p , s e v i l r u o f o t c e p s a y r e v e d e g n a h c s a h n o i t u l o v e r l a t i g i d e h t w o H 3 2 7 1 0 2 T R O P E R L A U N N A THE TECHNOLOGY OF OUR DESIRE by Mohsin Hamid A N N U A L R E P O R T 2 0 1 7 2 4 T h e t e c h n o l o g y o f o u r d e s i r e b y M o h s i n H a m i d We say that I have X type of mobile phone, featuring V type of operating W hen we speak of technology, too often we use the language of technology. Instead we must recall that we are human beings when we speak of technology. We must use human system, running Z type of application. But this causes us to lose contact with real meaning, to miss out on the possibility of communicating what language, the language of our feelings, of our senses. For we humans are emotional creatures, physical is human. billions of others, we will indeed have a dystopia. But if those surpluses could be shared, and if all could have a say in shaping the direction of technology, then perhaps something that feels like a utopia begins to become thinkable: a world of plenty, where we have the freedom to pursue what we each value most. A world with food and shelter and energy and agency for all. A world better for humans than any that has come before. Humans have long desired to live in heaven. Whether technology makes this possible will depend on whether we open the doors to heaven wide, or whether we seek to limit access to a chosen few, and in the creatures. process give birth to a hell. Then we can say that I carry a rectangular shaped object of metal and glass in my pocket, and it summons my attention, constantly, like a syringe summons the attention of a drug addict, calling out to me, and when I have misplaced it, when I cannot find it and gaze upon it and speak to it, it is as though a part of myself has gone missing. Speaking of technology in such a human language allows us to see that technology is not separate from what is human. Rather, technology comes from what makes us human: technology comes from our desires. The existence of airplanes is not something separate from the existence of human beings. Airplanes exist because we human beings desired to fly. Like desire itself, technology is not inherently good or bad. It does not lead inexorably to either utopia or dystopia. The outcome of technological progress for humanity depends on the relationship between humans and technology: whether technology acts only upon us, or whether we too are able act upon technology. The question we face now, at this moment of exponentially accelerating technological change, is how do we create a world where humans feel comfortable with the progress of technology? How do we restore a sense of ease, a sense that we are not merely readers of a future being written by someone else, but authors of our own future together? One way forward is a radical democratisation of technology. Technology comes from our shared human culture, from the human cultural capital accumulated through all of history, from language and mathematics and physics and the zero and the one, from something that belongs to all of us. Intellectual property, like the oceans, can be fished individually but must collectively be thought of as our commons. Every human, in this democratic vision of technology, would have a share in the benefit that comes from In the world to come, as machines learn, they will make great surpluses possible, and they will also obliterate many jobs. If those surpluses are captured by a few people, and those jobs losses are borne by technology. Mohsin Hamid Mohsin Hamid writes regularly for The New York Times, the Guardian and the New York Review of Books, and was named one of Foreign Policy's 100 Leading Global Thinkers in 2013 and was a 2017 Man Booker Prize nominee. He is the author of the novels The reluctant fundamentalist, How to get filthy rich in rising Asia, and Moth smoke; and a collection of essays, Discontent and its civilizations. Born and mostly raised in Lahore, he has since lived in between Lahore, New York and London. d i m a H n i s h o M y b e r i s e d r u o f o y g o l o n h c e t e h T 5 2 7 1 0 2 T R O P E R L A U N N A THE NEXT COGNITIVE REVOLUTION by Ted Chiang A N N U A L R E P O R T 2 0 1 7 2 6 T h e n e x t c o g n i t i v e r e v o l u t i o n b y T e d C h i a n g the way automobiles rendered horse-drawn carriages and buggy whips ob- W hen discussing the computer revolution, people often make comparisons to change our lives, we should go back to the very first information technology, solete. But I think to fully appreciate the potential that computers have to which is the written word. Writing is so familiar to us that most people don’t even recognize it as a technology, but that’s what it writing. They’ll be replaced by something more flexible and dynamic; I don’t know what that software will look like, but it will make it easy to express ideas that we currently struggle to convey with words arranged in rows inside a rectangle. The advantages of such software may not be obvious when we first see it, just as the advantages of writing weren’t immediately obvious. Even after the Greek alphabet had been in use for centuries, Socrates remained suspicious of the written word, saying that it offered “the appearance of wisdom, not true is. Writing is entirely different from spoken language, which is part of our biological nature; unless you wisdom.” He pointed out that you could ask questions of a learned person and get real answers, whereas if deliberately deprive a child of stimulation, every child will spontaneously learn to speak. (Or sign, in you tried to ask questions of a piece of writing, it could only say one thing. People make similar criticisms the case of deaf children.) But writing is an invention, and it wasn’t one that came easily. Humans were of computers today, and for the same reason Socrates criticized writing: because you can’t fully appreciate daubing paint on cave walls and making necklaces for tens of thousands of years before it occurred to anyone to represent speech by making marks. Even today, there are thousands of languages that have no written form. a new mode of cognition until you’ve become fluent in it yourself. We’re accustomed to thinking of technology as being cold and hard, something that doesn’t mesh well with our bodies or ourselves, so when someone says that digital technology will become a part of us, it’s Like other technologies,writing has been improved over time. THISSENTENCEISHARDTOREAD- easy to envision cables being plugged into our brains, and then recoil at the thought. But if you think BUTATONEPOINTINHISTORYALLWRITINGLOOKEDLIKETHIS When you read that sentence, you of it as an analogue to the written word, it ceases to be frightening and becomes empowering instead. probably moved your lips to sound it out; the earliest forms of writing were tied closely to speech. Over the Digital technology will become a part of us by transforming the language in which we think. And rather course of centuries, people separated words with spaces, distinguished between capital and small letters, of diminishing us, it will expand our range of possibilities; it will give us new ways to be smart, new ways and added punctuation marks to identify sentences and clauses. These improvements made writing more effective in the same way that advances in metallurgy made knives sharper and stronger. If you have ever delivered a speech, you almost certainly wrote some words down beforehand; maybe just some notecards, but more likely the entire thing, word for word. Why would you do that, when the final product would be delivered orally? Because writing has become more than a way of transcribing sounds; it helps you organize your thoughts and decide what you want to say. Writing is a cognitive technology, a tool for thinking. The conveniences afforded by computers are enormous, but even more profound is the impact that digital technology will have on the way we think. I expect that in the future, when you need to prepare a speech, you will use software to help you formulate your ideas. Not Microsoft Word or Powerpoint, which are attempts to emulate older modes of communication; they’re like the all-capitals, no-spaces versions of to be creative, new ways to be human. Ted Chiang Ted Chiang is an award-winning writer of science fiction. Over the course of 25 years and 15 stories, he has won numerous awards including four Nebulas, four Hugos, four Locuses, and the John W. Campbell Award for Best New Writer. The title story from his collection, Stories of Your Life and Others, was adapted into the movie Oscar- winning movie Arrival, starring Amy Adams and directed by Denis Villeneuve. He freelances as a technical writer and currently resides in Bellevue, Washington, and is a graduate of the Clarion Writers Workshop.  g n a i h C d e T y b n o i t u l o v e r e v i t i n g o c t x e n e h T 7 2 7 1 0 2 T R O P E R L A U N N A EMILIANO PONZI ILLUSTRATOR Emiliano Ponzi is one of today's leading illustrators.  Every afternoon of his childhood was passed sitting at a table drawing, his feet not even touching the floor. Now, Emiliano Ponzi draws at a table in a large studio he shares with other creatives in Milan. He spends a few months every year in New York, where he has received nu- merous awards including three gold medals from the Society of Illustrators, as well as silver and merit ones. He is also the only Italian to have won the Art Directors Club Gold Cube in the Big Apple. You have very probably had your hands on an Emiliano Ponzi work as they feature on the covers of prestigious publications, Italian and non-: the New York Times, New Yor- ker, Le Monde, La Repubblica, Esquire and Vogue, to name but a few. His clients also include institutions such as the Triennale di Milano and MoMA, for which he recently illustrated a New York subway map book. His painstaking daily practice has spawned an unmistakable style of simple strokes and pastel shades reminiscent of Edward Hopper. His are concise, elegant metaphors - be they cover illustrations for a series of Bukowski books, murals for a Milan metro station surrounded by Isozaki, Libeskind and Zaha Hadid skyscrapers or the latest cover However, if you ask Emiliano, his finest illustration is always the one he is going of the Pirelli magazine World. to draw tomorrow. and GABRIELE VERONICA DRUETTA TAPPEZZERIE DRUETTA Next-generation upholsterers, the two Druetta brothers revamped the family business, established in 1953, with 3D design and a virtual room where customers are invited to enjoy an immersive experience and see their finished designed product. BEAUTY IS THE AIM, TECHNOLOGY THE MEANS Technology is the means that has made it possible. Veronica Druetta and her brother T he dream is to keep alive a manual art handed down through the generations. triangle» as it’s known. In 2012 the pair decided to enter the profession as well. Veronica was still very company, based in Moretta, between Saluzzo and Alba - «the Piedmont slow food Gabriele are upholsterers from a three-generation family tradition: their grandfather Matteo founded the business in 1953 and their father Antonello still runs the young (she's now thirty) and her career path seemed to be leading in a completely different direction: after studying languages she began work as an interpreter, and she spent some time living abroad. For his part, her older brother had studied architecture. Then something clicked, and the two of them chose this profession with the aim of bringing it into the new millennium. They equipped themselves with a 3D scanner and a parametric software package. One of the difficulties in traditional upholstery is that to upholster an item of furniture you first need to take measurements and carry out tests, a preliminary phase that takes time and is even needed just to prepare a quote: consequently the profession is becoming increasingly unsustainable. By using a simple three-dimensional scanner, however, Veronica and Gabriele can create a model, complete with all measurements, in just a few seconds. In 2016 their company was selected for Botteghe Digitali, a project to assist in the training and advancement of outstanding Italian craftsmanship. The word upholsterer is rather reductive to describe what they do: they not only upholster furniture but also design it, working with prestigious architectural practices; there are also collaborations with art galleries. The algorithms in the software enable them to modify their designs in situations in which one small adjustment would require complex calculations in a short space of time. These savings in time and energy are enabling them to take «an endangered skill», as Gabriele defines it, and to make it compatible with a globalised market. Veronica’s linguistic knowledge, and her experience abroad, allow them to communicate directly with international customers and suppliers. Innovation and tradition also coexist in the materials they use: the Druetta siblings know how to work with the most classic velvets and horsehair padding, while simultaneously experimenting with 3D printed fabrics, polymer gels and original textures They love eclectic combinations, using fabrics designed for fashion, technical clothing or medical applications. They seek out innovation, says Veronica, but with an age-old spirit. «We go to trade fairs, we knock on doors, we seek direct contact with anyone creating interesting things». They dislike the rhetoric of progress as an end in itself. Digitalisation has revolutionised the design stage, but production is still done by hand. Nonetheless they look with great interest to augmented reality applications such as Google Tilt Brush, the virtual paintbrush that enables the creation of 3D designs. But technology is simply the means: the goal is to do things well, in the pursuit of beauty. COMPANY PROFILE over 160 countries, as well as its high exposure to the three rim diameter ≥18 inches, and thereby also modifying the nomenclature to New Premium; major markets for High Value tyres: Europe, NAFTA and > Specialties and Super Specialties: tyres with a high technological content for vehicles of every class, which meet the needs APAC (which at December 31, 2017 accounted for 75% of total of specific applications (for example Runflat or Self Sealing) or customisations for the end consumer (for example, the Colour Below is a summary of the Company description and strategic revenues and 92% of High Value revenues). Edition tyres), regardless of the size of the rim diameter; guidelines underlying the 2017-2020 Industrial Plan as > Premium Motorcycle: tyres for high-end motorcycles that ensure high performance. contained in the documentation published for the IPO. The Group also boasts a geographically diversified production These categories will be joined by the products and services for connected vehicles and for the Velo world, activities which were 1. COMPANY PROFILE structure with 19 plants in 13 countries and a total capacity launched in 2017. at the end of 2017 of approximately 76 million car tyres, of which more than half (55%) was suited to the manufacture of High Value tyres. At December 31, 2017, 78% of the productive NEW FOCUS ON "HIGH VALUE" Pirelli is one of the world’s leading tyre producers and provider capacity of Consumer Activities for Automotive and of ancillary services, and the only producer in the industry Motorcycle radials were concentrated in countries with low to exclusively focus on the Consumer business (tyres for production costs. cars, motorcycles and bicycles). Pirelli counts on its globally recognised brand and its distinctive positioning in the High At December 31, 2017, the Company employed 30,189 people Value segment, namely products created to provide the (29,787 at the end of 2016). highest levels in terms of performance, safety, quietness and grip on the road surface. Just two years after the Public Offer promoted by ChemChina together with Camfin shareholders, Pirelli returned to the Pirelli has a distinctive industrial tradition of more than stock market on October 4, 2017, following a reorganisation 140 years, characterised by a sustainable management process which led to the separation of the Industrial business 4 2 model, which has always been associated with its capacity and to the focus on the Consumer business, enriched with new for innovation, product quality and brand strength, which proficiencies also through the creation of new departments is also recognised outside the world of Automobiles and and business (Consumer Marketing, Digital, Data Science, Motorcycles. Cyber and Velo). FROM FOCUS ON PREMIUM ... ... TO A NARROWER FOCUS ON “HIGH VALUE” 100% % of 2016A total revenues CAR MOTORCYCLE CYBER VELO Old Premium (≥17”) Prestige 65% ≤16” 35% ≥18” 55% New Premium ( ≥18”) Premium 18” 17” Specialties ≤17” HIGH VALUE (~100 millions customers) Specialities & Super Specialties Start-up In 2017 2016 Current 45% STANDARD ≤17” excluding Specialties Non Premium THE ONLY TYRE COMPANY FOCUSED ON SERVING CONSUMERS ONLY % of Total Revenues 2017A 2020E 58% ~63% 42% ~37% 3 4 Present in sports competitions since 1907, Pirelli has been the exclusive supplier for Formula 1® World Championships since 2011, which represents a constant challenge in terms of technological innovation and is an important driving force in 2. FOCUS ON THE HIGH VALUE SEGMENT For the 2017 financial year, revenues for the Group from sales and services amounted to euro 5,352 million for the Company, while the EBIT adjusted without pre-start-up-costs3, amounted to euro 927 million, the equivalent of 17.3% of revenues. During the same year, Pirelli generated 57.5% of its turnover (euro 3.1 billion euro out of euro 5.4 billion), and approximately 83% of its EBIT adjusted without start-up costs, from within the High Value segment. For 2020 Pirelli expects to increase the High Value share of its turnover the enhancement of the Pirelli brand. Pirelli is also present in Pirelli focuses on the most technologically demanding to up to 63%, and its turnover share of the EBIT adjusted to up to 85%. over 460 automotive and motorcycle championships. segments, which are considered high growth and high profitability. Pirelli invests in research and development mainly for High The High Value segment can be identified through the Value products. In 2017, over 90% of the total research and following categories: development costs were addressed on High Value products, > Prestige: tyres designed and developed in partnership approximately 6.5% of the related revenues, being one of the with car manufacturers belonging to the Prestige Car highest levels amongst the world’s leading tyre producers. segment (which traditionally includes producers such as The Company can also count on a portfolio of approximately Ferrari, Lamborghini, Maserati, Bentley, Bugatti, Rolls 6,100 active patents grouped into 715 families, each on average Royce, Porsche, Aston Martin, McLaren and Pagani) extended across 8-9 countries. which are subject to specific homologations; > New Premium: tyres with a rim diameter ≥18 inches, aimed Through their strong partnerships with the most prestigious primarily but not exclusively at motor vehicles belonging car manufacturers, Pirelli offers the widest range of High Value to the Auto Prestige and Auto Premium segments (which tyres, which - at December 31, 2017 - counted more than 2,160 traditionally includes car manufacturers such as BMW, homologations (of over 2,740 in total), of which 88% carry Mercedes, Audi, Alfa Romeo, Jaguar, Land Rover, Infiniti, original markings, 34% are Prestige and 29% winter tyres. Lexus, Lincoln, Acura, Cadillac and Volvo). Until the end of Pirelli counts on its vast commercial presence, with a network as Premium tyres. As of the first half-year of 2017, Pirelli of approximately 14,600 points of sale at December 31, 2017 in has redefined the scope of Premium tyres as tyres with a 2016 Pirelli identified tyres with a rim diameter ≥17 inches 3 This refers to costs of euro 50.2 million incurred during the 2017 financial year for the start-up phase of programs which intercept the new needs of the end customer, such as connectivity (the Cyber activity), return to the bicycle business (the Velo project), the activities for the digital transformation of the Company and the activities for the reconversion of the Aeolus manufacturing plant for Car. For more information on the EBIT adjusted, reference should be made to Chapter IX, Paragraph 9.1.2 of the Registration Document. ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operations3. BUSINESS MODEL Through the homologations and the analysis of these trends, growth strategy, and focused on efficient organisation, Pirelli is able to obtain medium-long term visibility both on business ethics, the enhancement of diversity, shared The wide range of products offered by Pirelli is conceived, created, checked and commercialised for sale by following an organisational the production expected in the Original Equipment market as objectives, a healthy and safe working environments, integrated supply-chain model which goes from product development, to commercialisation for sale and finally to marketing. well as in the Replacement market. The latter can in turn be training in support of an increasingly digital-oriented Registrations O. E. Tyres Market Homologations 4 4 Product Development Car Parc Replacement Market S A L E S P L A N S D E M A N D P L A N N I N G F A B B R I C H E S U P P L Y C H A I N T R A D E E N G A G E M E N T C O N S U M E R E N G A G E M E N T Pull through demand Push through demand Company activities along the supply chain... analysed as follows: cultural evolution, welfare and engagement;  > a “potential” pull-through market, i.e. the potential  > a proactive dialogue with the financial market on replacement generated by vehicles equipped with Pirelli sustainability planning and performances achieved; tyres as Original Equipment;  > active presence in the international committees which  > a “potential” push-through market, which derives from are the amongst the most relevant for the definition the replacements for cars for which Pirelli does not have and implementation of strategies for sustainable homologations. development (UN Global Compact LEAD, World Business The sales plans, through the Demand Planning process, are Council for Sustainable Development); allocated to the productive structure, which operates in close  > constant attention to relational capital. From its dialogue coordination with the purchasing function. with stakeholders and the understanding of their The tyres produced are subsequently distributed through the mitigation and the seizing of opportunities, as well as the Supply Chain until they reach the distribution networks, or strengthening of its license to operate (globally and locally); distributed directly to the retailer points of sale (approximately  > support for the development of local communities and the 14,600 at the end of 2017) which allows Pirelli to serve an ever acceleration of the spread of a Culture of Road Safety. expectations, the Company benefits both in terms of risk more geo-localised car market. Further down the distribution chain Pirelli also carries out a series of initiatives which accompany the consumer from brand consideration up until the purchase, during which digital and physical reference material at their disposition is made available to the customer. 3.1 Globally recognised integrated sustainable management Pirelli is the Global Leader in sustainable management for the Auto Components sector, according to 4. PIRELLI STRENGTHS 5 4 4.1 Strategic positioning in a profitable and growing segment, located within a resilient industry The distinctive positioning in the profitable High Value segment, which is expected to grow and is to a large extent located within a resilient industry such as the RobecoSAM’s Sustainability Yearbook 2018. Replacement sector, is a significant competitive advantage for Pirelli. Pirelli’s business model starts from the development of tyres in partnership with Premium and Prestige car manufacturers which The main areas of development where the Company is are developed along an integrated process which arrives at the end consumer. The purpose of this integration is to obtain products involved include: In particular, the High Value tyre segment generates higher which satisfy the needs and tastes of the most demanding users.  > the reduction of environmental impacts along the life cycle of profit margins because the products included therein are These partnerships allow Pirelli to enjoy high visibility on the technological innovations that the car manufacturers intend to to the use and end-of-life phase. Pirelli develops products associated with performance, advanced technology, safety introduce, and are the starting point in ensuring the successful positioning in the market for High Value, Original Equipment tyres, and production processes aimed at minimising polluting and sustainability. Because of these characteristics, Pirelli is as well as in the Replacement channel. At the level of automotive brands, the Company’s client base is particularly diversified. At emissions, waste production and increasing the recycling of able to put in practice a pricing policy located at the upper- December 31, 2017, Pirelli was supplying 44 brands of car manufacturers with Original Equipment. materials, the use of natural resources. To this end, research end of the market for high-end tyres for Automobiles and the product, from raw materials to the production process, recognised by the consumer as high value-added and are This joint development, together with the homologations, guarantees the perfect match of tyres with the dynamic characteristics primarily those focused on innovative materials; and electronics of the car (reaching the so called “Perfect fit”) which encourages loyalty, and the retention of the end consumer  > sustainable management of the supply chain along all The New Premium tyre market segment, which is a (generally higher in the High Value segment), thereby impacting directly on the Replacement channel. Pirelli estimates that over phases of the relationship with the Supplier, from the significant part of the High Value market for motor vehicles, the three-year period 2018-2020, over 60% of the High Value Replacement sales volumes, and over 50% of the High Value sales of selection to the contract, from the monitoring and is characterised by a higher growth than that of the standard Original Equipment will be generated by the homologations in the portfolio during the 2017 financial year. prevention of risks through to third-party on-site audits, up segment, considering: In addition to the product development activities with the car manufacturers, Pirelli closely monitors the trends in the global the development of projects reaching down to the origins of Prestige and Premium segments for 2014 was 9.9%, automotive and motorcycle market, and, in particular, trends for new vehicle registrations and cars on the road, where the latter of the value chain, such as in the case of natural rubber; 10.8% for 2017, 11.3% for 2020); forms the reference base for the Replacement market.  > an employment governance inspired by the best  > the growing number of car models which are accompanied until the engagement of the company which will share in  > the evolution of the circulating car market mix (the share international practices, adjusted to support the Company’s by the diversification of the characteristics of the tyres and development activities constitute an essential lever, Motorcycles. ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operations approved for each individual car model;  > the growing demand for Specialties and Super Specialties tyres;  > the increasing market share of SUVs (14% of global registrations in 2010, 29% in 2016, 34% in 2020);  > the evolution of automobile design towards higher tyre rim diameters. CAR PARC (in millions of vehicles) 1,108 0.2% 9.7% 1,372 0.3% 11.0% 1,200 0.2% 10.5% +3.6% +8.3% +4.6% +3.5% 1,244 0.2% 10.6% CAGR 14A-16A CAGR 16A-20E +4.1% +3.4% Total +12.5% +7.8% Prestige +8.2% +4.5% Premium +3.6% +3.3% Standard 2014A 2016A 2017A 2020E TYRE MARKET (in millions of units) +3.0% 1,530 1,575 13% +10.5% 14% 1,719 16% CAGR 14A-16A CAGR 16A-20E +3.3% +3.0% Total 87% 86% 84% +13.6% +9.1% +1.9% +2.0% +1.9% ≥18" New Premium >4x ≤17" Standard 2016A 2017A 2020E 1,435 11% 89% 89% 2014A 4 6 Source: Prepared by the Company based on studies by a leading research firm on the Automotive market and on data supplied by regional associations fortyre producers, as well as internal data. The 2016 tyre market data has been uptdated with regard to what is contained in the Registration Document. EUROPE NAFTA APAC LATAM PRESTIGE GLAOBAL LEADER NEW PREMIUM1 REPLACEMENTS LEADER4 AMONGST TOP 4 IN THE USA Leader for Market Tyres LEADER IN CHINA LEADER IN BRAZIL RADIAL TYRES2 FOR MOTORBIKE GLOBAL LEADER PREMIUM TYRES3 FOR MOTORBIKES2 LEADER4 THIRD LEADER LEADER Note: 1. Car tyres with a rim diamter ≥18, 2. Data refers to Pirelli and Metzeler brands jointly, 3. Radial, Custom Touring, Off Road eSport Touring X-ply with a speed rating of ≥H, 4. Area scope includes Italy, Spain, France, UK and Germany. Source: Pirelli estimates based on third-part data. 4.3 Pirelli is an iconic Brand capable of engaging consumers even beyond the limits of the tyre market The Pirelli brand is internationally recognised as an iconic brand associated with technology and Italian excellence in the automotive and motorcycle field, and beyond. The Pirelli Brand and the “P lunga” logo, which has represented it for over a century, are associated with exclusivity and high value, and convey Pirelli’s mission to bring technology, creativity and driving pleasure to the consumers. The Pirelli brand holds a position of primary importance amongst tyre brands in Italy and Brazil in terms of brand awareness, while at the same time positioning itself, in several other countries (for example the United Kingdom, Germany and China), amongst the 7 4 95% of the New Premium market is concentrated in Europe, Apac and NAFTA4. three best-known tyre brands7. In 2017 the New Premium segment recorded a growth of +10.5%, which is over 5 times higher than that of the standard market5. The reputation of the Pirelli name and the Pirelli brand is linked, in addition to the excellence and quality of Pirelli products, to decades of successes in automobile racing and to the distinctive position of the Company as supplier to luxury car manufacturers. The Replacement market, which accounted for 74% of the Group’s revenues for 2017, has historically proved to be a resilient market as it is tied to the number of cars in use, and is capable of producing high revenues and high profit margins which are not influenced Even outside the world of engines, the reputation and strength of the brand are constantly fuelled by Pirelli through the continuous by economic cycles. 4.2 Leadership position in the high value markets6 Over the years, Pirelli has achieved a distinctive position with regard to High Value tyres and today holds a leadership position in the Prestige tyre segment, with a share of more than one third of the association of the logo with events and major projects. The Pirelli brand is in fact an icon in sport, design, lifestyle, in initiatives for the community, and in art and culture in general. Pirelli’s sponsorship of numerous sports associations, such as the Football Club Internazionale Milano, Infront Sports and Media for the FIS Alpine Ski World Championships, the Ice Hockey World Championships8, and, more recently the vessel Emirates Team New Zealand in the America’s Cup, bears testimony to this affinity. Pirelli is also present in the field of design and culture with projects such as the Pirelli Calendar, and through the activities carried out with the support of global market in terms of sales volumes, and in the radial sector of the market for motorcycle Replacement tyres. Pirelli is also a the Pirelli Foundation and Pirelli Hangar-Bicocca™. leader in Europe, China and Brazil, in the New Premium car and Premium motorcycle tyre market. The high visibility of the Pirelli Brand translates into the strong engagement of consumers through digital communication channels, which also include, in addition to the pirelli.com website, other websites devoted to individual products in 43 countries, in 25 languages, while also being present on major social networks where it reached over 340 million users during 2017. 4 Source: Prepared by the Company based on studies by a research firm on the Automotive market and on data supplied by regional associations for tyre producers. 5 Source: Prepared by the Company based on studies by a research firm on the Automotive market and on data supplied by regional associations for tyre producers. 6 The data regarding the Company’s competitive positioning included in this paragraph has been prepared by the Company based on third-party sources including research studies carried out regarding the automotive and motorcycle industry, on regional tyre manufacturer associations, and information collected locally by the Pirelli sales force. 7 Source: Prepared by the Company also based on third-party sources including brand tracking studies relative to the tyre market as edited by third-party sources. 8 Organised respectively by the International Ski Federation (FIS) and the International Ice Hockey Federation (IIHF). ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operations AWARENESS CONSIDERATION CONVERSION PURCHASE POST-PURCHASE PIRELLI HOMOLOGATIONS ~2.5x SPONSORS MOTORSPORT COMPETITIONS INNOVATIONS FOCUSED ON THE CONSUMER FLAGSHIP STORES DIGITAL PUBLISHING CONTENT L.A. Dodgers #1 in the world in terms of presence F1 1.8 billions spectators 380,000 people engaged through Velo content 55K sellers included in the dealer locator 5 million sessions on the corporate website in 2017 CULTURE AND LIFESTYLE Pirelli.com visitors 2x during Pirelli Calendar launch 4 8 4.4 Solid commercial relationships with the producers of Prestige and Premium vehicles Over time, Pirelli has developed close relationships with the most eminent Prestige car manufacturers (such as Ferrari, Maserati, Lamborghini, Porsche, 402 324 327 284 315 288 281 247 34 2014A 43 2015A 27 2016A 78 2017A 9 4 207 176 31 2013A 165 139 26 2012A New Premium products Standard products Bentley, Aston Martin, Bugatti, Rolls Royce, Pagani and McLaren), Premium car manufacturers (such as Audi, Mercedes, BMW, At the end of 2017 Pirelli had a portfolio of over 2,160 High Value homologations (of over 2,740 in total), of which 88% carry original Jaguar, Land Rover and Volvo) and motorcycles (such as Ducati, BMW, MV Agusta, Triumph and KTM), relying on the strength of the markings, 34% are Prestige and 29% winter tyres. brand, its reputation, the technological skills acquired and the ability to understand the needs of end consumers. As December 31, 2017, Pirelli was involved in over 100 collaborations with producers belonging to the Premium segment, in projects  > they allow for the prediction of long-term demand for tyres; Pirelli believes that these partnerships are highly strategic in that: for the development of innovative technology.  > they strengthen the competitive positioning and the predictability of short-term demand in the Replacement channel, thanks to the carry-over impact. Moreover, in the case of Prestige and Premium Cars, customers tend to re-purchase Replacement Their collaboration with car manufacturers allows Pirelli to develop tyres made to measure for different types of vehicles which can tyres of the same brand supplied as Original Equipment, which translates into both customer loyalty and greater predictability be clearly identified with special markings (so-called marked tyres), which meet the needs of consumers and ensure the perfect of demand for Replacement tyres; functioning of all the components in the latest generation of cars (all-wheel drive, hybrid systems, driver assistance systems).  > This allows Pirelli to strengthen its knowledge of the tastes and needs of its end customers, thanks to the co-operations between For the 2014-2016 period over 300 new homologations were obtained per year, after an average development of approximately Pirelli and car manufacturers in conjunction with joint marketing activities, events and Motorsport competitions. 24 months, adding to the aforementioned portfolio of homologations and markings. The pace of homologations increased during Over the years Pirelli has also developed expertise and a highly qualified know-how concerning the specific requirements of car 2017: 402 homologations including 324 New Premium. producers which are difficult to replicate. 4.5 Capacity for continuous technological innovation Technological innovation is an essential element of Pirelli strategy and plays a central role in the Company’s business model, especially with reference to High Value products. For many years Pirelli has been conducting research and development in accordance with the “Open Innovation” model: co-operating with research centres, suppliers and universities. Pirelli develops distinctive solutions which are only accessible internally, creating a leverage effect with respect to their skills. As December 31, 2017, there were 31 collaboration projects in place with partner universities, 20 JDAs and 50 NDAs9 with suppliers and universities, and over 100 collaboration agreements with Premium Car manufacturers. 9 Respectively, Joint Development Agreements (JDA) and Non-Disclosure Agreements (NDA). ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operations REGULATIONS REPLACEMENT MARKET PIRELLI R&D T N E M E P O L E V E D N O I T I N I F E D T C U D O R P Pirelli also commercialises its products for sale (Super Specialties products) in 9 countries through an on-line sales network managed by Pirelli (Shop.pirelli.com) and aimed at the end-consumer (so-called e-commerce). I N N O V A T I O N O.E. CUSTOMERS On the production front, Pirelli operates through 19 factories located close to their sales markets, consistent with the local-for- local strategy, with a productive capacity for car tyres amounting to approximately 76 million tyres at December 31, 2017, of which more than half (55%) was suited to the manufacture of High Value products. At December 31, 2017, more than two-thirds (78%) of Consumer production activities for Automotive and Motorcycle Radials was carried out in countries with competitive industrial costs such as Mexico, Brazil, Argentina, Romania, Russia and China. SUPPLIERS The production map is completed by the plants in Italy, the United Kingdom, Germany and the United States, where the very high level of automation compensates for the higher cost of labour. This production structure is the result of a process initiated in 2008, which led to a review of the production sites map, resulting in the creation of plants perfectly suited to the manufacture of High Value products in Romania, China and Mexico to substitute part of the production in the mature markets UNIVERSITIES (Italy and Spain). During 2017, Pirelli made investments of euro 489 million (9.2% of turnover) aimed at: UK GERMANY ITALY Burton - Car Carlisle - Car Breuberg - Car/Motorcycle Bollate - Car Settimo Torinese - Car ROMANIA Slatina - Car 5 0 These research and development activities allow Pirelli to be amongst the market leaders with its range of innovative, technologically superior tyres, which are technically complex and highly prized by specialised magazines in the automotive and motorcycle industry. The high level of skills necessary for the development of these tyres is one of the competitive and strategic advantages of the Company and represents an effective barrier to entry into the High Value tyre market. Pirelli’s commitment in the field of sports competitions (in particular Formula 1® and Superbike World) has allowed for the development of new tyre models, the improvement of the quality of road product projects, and the improvement in the understanding of tyre dynamics in relation to temperatures when functioning, and material behaviour. The research and development activities and the know-how gained through the design, development and production of tyres for the Formula 1® World Championship have allowed Pirelli to accelerate the design and development of new products, and to implement a series of cutting-edge innovations in order to offer maximum levels in terms of performance and safety. USA Rome - Car MEXICO Silao - Car VENEZUELA Guacara - Car(*) 4.6 Production and global sales structure focused on High Value Pirelli, one of the first multinational companies in the world with a solid international presence from the early twentieth century, served over 160 markets grouped into 6 regions in 2017: Europa, NAFTA, APAC, LATAM, MEAI, Russia and CIS. BRAZIL Campinas - Car Feira de Santana - Car Gravatal - Motorcycle (offtake) 1 5 RUSSIA Kirov - Car Voronezh - Car CHINA Yanzhou - Car/Moto Jiaozuo - Car INDONESIA Subang - Motorcycle (JV)(**) Pirelli has a widespread sales network with over 250,000 points of sale, including:  > retail points of sale (approximately 14,600 at December 31, 2017, compared to 12,500 at the end of 2016), mainly concentrated in the three Premium geographical areas - Europe, Apac and NAFTA (75% for 2017, 75% for 2016). These points of sale are linked to Pirelli by loyalty formulas that result in the significant presence of Pirelli products at the points of sale;  > Automobile and Motorcycle dealerships (Pirelli sells to manufacturer houses such as BMW, Mercedes, Audi and Porsche, which in turn distribute to their dealerships) estimated at approximately 10,000 locations;  > points of sale (other than Pirelli retail points of sale) served through Tier 110 distributors, estimated at approximately 10,000 locations; ARGENTINA Merlo - Car TURKEY Izimit - Car Countries with rapidly growing economies Notes: (*) Non-consolidated subsidiary since 2016 (**) JV consolidated using the equity method  > points of sale (other than Pirelli retail outlets) served directly by Pirelli, stores owned by the competition and all the rest of the  > the increase of the High Value production capacity (+3.3 million units) mainly in Europe, Apac and NAFTA; distribution network served by distributors other than Tier 1 distributors, wholesalers and large retail chains, for the remaining part.  > promoting the upgrade of the standard capacity into High Value in the factories in Brazil and China (former Aeolus factory);  > improving quality and mix, as well as production processes and equipment. 10 Tyre distributors with whom the Group has defined special partnerships based on the following key factors: sharing the strategic and financial value of the Pirelli brand, sharing marketing plans, sharing inventory and sales data to allow for better planning and predictability of demand, privileged access to product availability, dedicated supply chain.) ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operations 4.7 Expert management with proven ability to achieve results Pirelli senior management is made up of professionals with consolidated technical skills and many years of experience in the tyre industry (on average 16 years). The aspects that differentiate Tier 1 compared to the rest of tyre conditions (including wear and tear), via the the tyre industry are the following: car’s electronics or a smartphone;  > strong brand with the highest value amongst those in the > > Velo to intercept the future mobility needs of a The Company is also equipped with an operating model which recognises the professional excellence of the individual specialist industry; customer base which is on average younger and functions, with particular attention to attracting and enhancing young talents. In particular, Pirelli is engaged in training employees  > high investments in technology (R&D costs were on more balanced regarding the male and female and management, coming from over 26 countries, through multiple initiatives. average 7.3% of Pirelli’s High Value revenues during the segments. 5. PIRELLI COMPETITIVE ARENA last 4 years), in order to be able to offer cutting-edge and highly customised solutions, both for car manufacturers and for end consumers;  > reduced risks for excess capacity for the High Value 6. STRATEGY Within the industry, three main competitive clusters can be identified, for strategy, price positioning and product characteristics: segment, with the demand for 2020 equal to 278 million Pirelli aims to consolidate and maximize returns for > Tier 1: six producers (Pirelli, Nokian, Bridgestone, Michelin, Continental, and Goodyear) accounting for approximately 50% of the units, where 90% of the capacity is for tyres with a rim shareholders and to manifest increasing levels of turnover and turnover for the tyre industry11; they have a higher than average price positioning, a wide range of products and dedicated diameter ≥18 inches. The latter is estimated on the basis profitability over time. regional lines. Among these, Pirelli and Nokian are distinguished for their profitability, characterised by two different business of announcements by Tier 1 players, assuming that these models: Pirelli, pure Consumer, with a distinctive focus on the High Value segment and Nokian, whose speciality is winter increases are destined only for the High Value segment. The main strategic orientation is to allocate investments, Replacement tyres. The remaining four Tier 1 operators can be called Full-Liners in consideration of their presence in different A balanced relationship between supply and demand develop innovations, achieve operational improvements businesses (Consumer, Truck, Agro, OTR and Aviation). reduces the risks of price pressure. By contrast, within in the High Value businesses and to reduce presence in the > Tier 2: 14 producers (Sumitomo, Yokohama, Hankook, Cheng Shin, Cooper, Kumho, Toyo, MRF, Apollo, Nexen, Titan, Brisa, the Standard segment, the risks of overcapacity are so called Standard segments by limiting exposure in those Trelleborg, Petlas), approximately 24% of the tyre industry12. The group is characterised by a price positioning that is lower instead present; markets where Standard is still predominant (such as, for than for Tier 1, by a moderately broad range of products (generally focused on medium-range products) and by sales that are  > an active presence within new trends in the Automotive example, Brazil). sufficiently diversified at a geographical level. In many cases these players implement strategies aimed at improving their industry (Connected, Autonomous, Shared, Electric) positioning through new homologations with vehicle manufacturers (mainly entry level models), at capacity increases, at thanks to investments in technology and innovation in The second orientation is to cultivate all businesses which 5 2 productive efficiency, and at marketing operations aimed at increasing the global visibility of the brand. order to seize all new opportunities; are of relevance to the consumer, not just Automotive 3 5 > Tier 3: over 150 small producers, approximately 26% of the global tyre industry turnover13. They have a generally low price  > the ability to directly engage the end consumer, and and Motorcycles, but also bicycles (the so called Velo), and positioning, and a productive and commercial structure focused on specific geographical areas. The operators in this category especially new consumers (Millennials are already the solutions and services for connected vehicles aimed at Prestige mainly focus on products with lower added value and are frequently imbalanced regarding supply and demand for industrial largest generation in the world). and Premium consumers (Cyber™). business sector (tyres for buses and trucks), adopting a volume / organic growth strategy. Pirelli, within the Tier 1 cluster, is distinguished by: 2017 INDUSTRY SALES4 ∆ vs 2013 TIER 11 50% +1pp 2 players 4 players TIER 22 24% = 14 players ~18% EBIT Margin4 11% EBIT Margin4 ~10% EBIT Margin4 “Global High Value” “Core business in winter” “Full-Liners”  > exposure to High Value (57.5% of revenues for 2017), more The third is to achieve an efficiency plan equal to 1% of revenues than any other market player; which is linked to industrial and product activities (such as  > a brand that is internationally recognised as an icon the optimisation of raw materials costs, the simplification associated with technology and Italian excellence in the of products and the reduction of tyre weights), thanks to the automotive and motorcycle field, and not only; growth of production in countries with low industrial costs,  > solid business relationships, developed and consolidated to improved productivity and the simplification of processes, over time, with the Prestige and Premium vehicle plus the optimisation of costs, starting from energy costs. manufacturers. These collaborations have allowed Pirelli to expand its portfolio of homologations to over 2,160 for the High Value segment (out of a total of over 2,740);  > cutting-edge technological innovation, especially with 6.1 Main actions for High Value The 2020 Plan aims to improve performance through the following levers: “Mainly Mass-Marker” reference to High Value products (over 90% of Pirelli R&D > acceleration of the homologation program with the TIER 33 26% -1pp >150 players mid/high-single digit EBIT Margin4 “Low-cost players” Note: 1. Tier 1 panel: Bridgestone, Michelin, Goodyear, Continental, Pirelli, Nokian. 2. Tier 2 panel: Sumitomo, Yokohama, Hankook, Cheng Shin, Cooper, Kumho, Toyo, MRF, Apollo, Nexen, Titan, Brisa, Mitas, Trelleborg 3. Tier 3 panel: remaining companies 4. 2017E Group financial (consensus estimates) expenses); Prestige and Premium car manufacturers, which provides  > a portfolio of innovative solutions, which are able to meet Pirelli with visibility on future demand and certainty of the needs of the cars and consumers of the future, and market shares in the car dealership channels. In 2017 above all able to intercept the new Automotive trends Pirelli obtained 402 homologations, of which 324 were such as Connected, Autonomous, Shared and Electric. New Premium; As to these trends, Pirelli has already responded with a > development of an unprecedented product innovation wide range of products and services: program that strengthens the Specialties and Super > > from “green” tyres, designed specifically for electric Specialties range, and which captures the needs for cars, to tyres which reduce the noise generated by regional diversification. Between 2017 and 2020 Pirelli the tyre rolling (Pirelli Noise Canceling System); intends to launch up to 18 new product lines with global 11 12 13 Source: August 2017 update of a study by an analysis company for the tyre sector. > > the Cyber™ and Connesso™ solutions for monitoring and regional coverage, including winter products, ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operations summer and four seasons, specialties/super specialties motorcycle segment, where it confirmed its position as plus traditional products. During 2017 Pirelli expanded its a global leader and on the Premium motorcycle segment portfolio with 4 new New Premium products (2 regional with an increase in share in Europe and South America. In products specific for NAFTA and LatAm, 2 all-season Apac, the region with the highest growth, the presence products) and introduced Pirelli Connesso (Connected) in the radial business was extended through partnerships and the Colorate (coloured Edition) as part of the Super with the main Original Equipment Manufacturers OEMs Specialties range; (QJ Benelli in China, Kymko in Taiwan and Triumph and > expansion of the High Value production capacity from 38 Ducati in Thailand); million units in 2016 to 53 million in 2020 with a share of total > launch of the two new Velo and Cyber™ businesses: car capacity of 67% (54% for 2016). This increase will be the Pirelli intends to consolidate its leadership in the markets result of the conversion of the standard into High Value in which it currently operates and expand its presence by capacity (3 million units) and of the further increase of the attacking new high potential segments. High Value capacity (over 11.0 million units). During 2017 The return to Velo, which belongs to the Pirelli tradition, not Pirelli increased its High Value capacity by 3.3 million units, only takes place through innovative products but also through reaching a capacity for high-end products of approximately an approach focused on the Consumer and aimed closing in on 42 million units (55% of the total car capacity); the fundamental Consumer brand targets for the future, such as > increase in distribution coverage through channels and the new generations (the so called Millennials and Generation points of sale where Pirelli exercises greater control Z), women, and consumers attentive to sustainability and and records higher sales. In particular, Pirelli intends smart mobility. In May 2017 Pirelli announced the launch of the to increase the sales generated by car dealers, Tier 1 new line of tyres dedicated to road racing bikes, the P Zero™ distributors, retailers (the so-called retail points of sale or Velo. The commercialisation of the range (in Europe, North Pirelli Retail) and Pirelli e-commerce, from 41% (in 2016) America and Apac) began in August 2017 in three versions: P to 66% in 2020. For 2017 the share of sales generated by Zero™ Velo, P Zero™ Velo TT and P Zero™ Velo 4S. these channels reached 48%; 5 4 PIRELLI READY FOR THE EVOLUTION OF THE CAR MARKET PRESTIGE & PREMIUM CAR EVOLVES IN FOUR MAIN DIRECTIONS PIRELLI IS RESPONDING WITH SPECIFIC SOLUTIONS Connected Electric Share of cars in circulation Share of registrations Share of cars in circulation Share of registrations 2020E 2025E 30% 52% 71% 99% 3% 8% 12% 20% Monitoring of tyres conditions, including wear and load, via smartphone or car electronics Homologation of “Green” tyres (A-label RR),specifically designed for electric cars Shared Share of miles driven 3% 5% Cloud based solutions for fleets, enabling TCO1 reduction and higher uptime of vehicles Autonomous2 Share of cars in circulation Share of registrations 1% 3% 8% 30% Integrated real-time analysis of tyres and car performance, for the safest autonomous drive 1. Total Cost of Ownership. 2. Figures refers to autonomous driving levels 3, 4, 5. Note: “Connected” refers to cars with mobile data connection (e.g 2G,3G,LTE), which might be provided by either embedded car systems or car hardware paired with external devices (e.g smartphone). All data refers to Prestige & Premium cars. Source: company analysis on consulting and investment banks research reports 6.2 Strategic re-conversion of Pirelli Standard capacity Pirelli intends to continue to reduce its exposure to the Standard segment which is characterised by a profitability of one third of the High Value segment. Between 2016 and 2020 a 5 5 > enrichment of the Pirelli DNA with a strong Consumer With regard to innovations for solutions and services for new standard capacity reduction of about 7 million units is foreseen, three of which have been converted into High Value (e.g.: LatAm), “gene”, as evidenced by the creation of the new Consumer generation vehicles, Pirelli intends to exploit the data of the allowing Pirelli to serve the growing regions (e.g.: NAFTA) pending a recovery in the markets characterised by higher levels of Marketing function. Thanks to the digital channels and only component in contact with the road - the tyre - to provide uncertainty. In 2017, the project to convert the Standard capacity to High Value in Brazil began. the exploitation of the brand’s strength, the new function consumers, the sales network and the car manufacturers will profile consumers in collaboration with the sales with solutions and services which maximise the safety, department, and will ensure a more personalised consumer minimise the operating costs and inventories in the supply engagement through a service which is assured by the chain, make the most of vehicle performance, and ultimately points of sale network, which is becoming increasingly shorten vehicle development times. On the occasion of the 6.3 Transformation program Pirelli intends to pursue the implementation of a transversal transformation and renewal program aimed at digitising the planning, production, distribution and consumer profiling processes. more qualified, more widespread and capable of serving Geneva Motor Show in March 2017, Pirelli Connesso™ was Four inter-functional programs: Prestige and Premium consumers. Digital capabilities presented, a platform integrated with the P Zero™ or Winter > Integrated forecasting program, which applies Data Science in order to provide greater predictability for short, medium and were expanded in 2017 to better profile customers in Sottozero™ tyres which, thanks to a sensor and an application long-term demand; order to provide - in addition to a tailor-made product/ for Smartphones, is able to communicate with the motorist > Smart Manufacturing and Flexible Factory program, which responds to the need to meet the demands of consumers, car service - relevant content for each customer segment at and provide information on certain fundamental parameters companies and partner points of sale in an ever faster and more flexible way; the right time during their Consumer Journey; concerning the functioning of the tyre, and a range of other > Supply Chain Program, which aims to get closer and closer to consumers and to offer a personalised and contextualised service; > strengthening of the Motorcycle business by leveraging customised services. > Prestige program, which aims to get to know the end consumer more closely (manufacturers and owners of Prestige cars) to the distinctive characteristics of two brands, Pirelli and fully understand their needs in order to identify new opportunities for Pirelli. Metzeler, to occupy complementary market segments Thanks to these solutions, Pirelli is ready to seize the growth Thanks to the implementation of these interdepartmental programs, Pirelli will be able to anticipate the needs of the market, to and forge commercial relationships with a large number opportunities linked to the technological trends of the future manage the growing complexity of the business, to increase the level of service offered to its customers and to increasingly engage of motorcycle manufacturers. Pirelli also intends to and is ready and able to keep up with the evolution of the the final consumer. continue the development of specific products for new Prestige and Premium cars along the trajectory of the C.A.S.E. motorcycles, and the development of partnerships (Connectivity, Autonomous, Shared, Electric). with manufacturers in order to launch new products. In 2017 Pirelli strengthened its position both on the radial ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operations7. TARGET 2020 Based on these actions, the company expects to reach:  > an average annual growth of ≥ + 9.0% for the 2016-2020 period;  > a 63% High Value share of total revenues by the end of 2020;  > an adjusted EBIT Margin of between ~18.5%/ ~19.5% by the end of 2020;  > an 85% High Value share of the total EBIT adjusted by the end of 2020; MACROECONOMIC AND MARKET SCENARIO MACROECONOMIC SCENARIO The year 2017 was characterised by a recovery in economic activity which was supported by private consumption and by investments,  > an efficiencies plan accumulated during the 2017-2020 period of 1% of revenues; as well as the strong performance in global trade. The growth rate of global GDP exceeded +3.0% (+2.5% in 2016).  > an investments forecast for the 2017-2020 period for an average equal to approximately 7% of annual revenues, 82% of which are earmarked for the High Value segment;  > indebtedness on the decrease with a Net Financial Position / EBITDA adjusted ratio lower than 2. The results for 2017 demonstrate how the Company is in line with the projected path and objectives of the 2016-20 Industrial Plan. €Mln 2016A 2017A 2020E REVENUES % High Value share of Total Revenues 4,976 55.3% +8% YoY 5,352 57.5% ≥9% CAGR 16-20 ~63% EBITDA Adj. Margin without start-up costs 21.7% 22.0% ~23% ÷ 24% 5 6 EBIT Adj. without start-up costs1 Margin % High Value 844 17.0% 81% 927 17.3% ~83% ~18.5% ÷ 19.5% ~85% CAPEX TO REVENUE RATIO ~6.8% 9.1% ~7.0% average for 17-20 GLOBAL GDP GROWTH (ANNUAL CHANGE IN %) 3,2 3.2 2.6 2.3 1.3 2.0 2.2 5.0 5 4 3 2 1 0 -1 -2 -3 World Europe NAFTA Latam CIS MEA APAC 7 5 2015 2016 2017 Source: IHS Markit, January 2018: growths shown for 2017 are estimates. The European Union recorded an increase of +2.6% in 2017, the highest rate of growth in the past ten years. Positive economic performances distinguished all European Union countries, including the peripheral countries most affected by the global crisis of 2008-2009, with the sole exception of the United Kingdom (+1.8%), negatively affected by the uncertainties linked to negotiations for its exit from the European Union. The performance of the United States also improved in 2017 with GDP growth of +2.3% (compared to +1.5% for 2016), thanks to the NFP/EBITDA Adj.without start-up costs 4.6X 2.7X <2.0X recovery in investment in the the oil sector. The reduction in the unemployment rate, together with the expectation of a gradual ROI2 27% 28% ~35% Note: 1. Impact of start-up costs on EBIT: 1% in 2017 and 2018; 2. ROI: EBIT Adjusted without start-up costs/Average Net Invested Capital excluding financial assents and intangible fixed assets from PPA recovery in inflation, drove the Federal Reserve to adopt a more resctrictive monetary policy with three interest rate hikes. Argentina, Brazil and Russia were amongst the emerging economies to exit recession during the course of 2017. China’s economic growth exceeded expectations at +6.9% for 2017 (+6.7% for 2016), despite measures to reduce the use of credit. On the exchange rate front, the acceleration of economic activity in Europe during 2017 was accompanied by the slight appreciation of the Euro despite the stability of interest rates set by the European Central Bank and the continuation of the quantitative easing program. Against the US Dollar, the European currency rose from an average of 1.06 in the first quarter to 1.18 in the fourth quarter, leaving the average for the year at 1.13 US Dollars (+2.0% compared to 2016). The US Dollar declined not only against the Euro but also against the currencies of various emerging countries, for example Brazil and Russia. The Brazilian Real went from an average of 3.38 against the US Dollar for 2016, to 3.19 for 2017, an appreciation of +9.0%. Similarly thanks to the economic recovery, the Rouble recorded an average exchange rate of 58.4 Roubles per US Dollar during the course of 2017 with an appreciation of +15.0%, compared to an average exchange rate of 67.0 Roubles per US Dollar for 2016. The Renminbi depreciated slightly during 2017 against the US Dollar, with an annual average of 6.75 per US Dollar (versus an average exchange rate of 6.64 for 2016). Volatility was elevated with the currency reversing trend during the course of the year, with the currency moving from 6.89 in the first quarter of 2017 to 6.62 in the fourth quarter following three years of gradual depreciation. ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operationsEXCHANGE RATES: US DOLLAR PER EURO EXCHANGE RATE: BRAZILIAN REAL PER USD 2014 average: 1.33 2015 average: 1.11 2016 average: 1.11 2017 average: 1.13 2014 average: 2015 average: 2016 average: 2017 average: 2.35 3.34 3.48 3.19 1.5 1.4 1.3 1.2 1.1 1.0 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 2014 2015 2016 2017 2014 2015 2016 2017 Source: European Central Bank monthly figures up until December 31, 2017 Raw Materials The year 2017 was distinguished by high volatility in raw materials prices. After a fall during the summer months, the price of oil (Brent) went from USD 50 to USD 64 per barrel, driven by the recovery in the global demand and by an agreement to cut oil production by the main crude oil producing countries. Brent recorded an average price for the year of USD 55 per barrel, 5 8 +22.0% compared to the average price for 2016. The volatility of the price of natural rubber was more pronounced due to strong demand during the first part of the year. Following a first quarter of strong growth with prices reaching USD 2,095 per ton, the price of natural rubber declined during the following months to average USD 1,437 per ton in the fourth quarter, with an average annual price of USD 1,651 per ton, +20.0% compared to that of 2016. Automotive markets The global car market registered a new record for registrations in 2017, which for the first time touched 94.5 million units sold, an increase of +2.5% compared to the previousyear, with sustained growth in emerging countries (+12.7% for LatAm, +12.1% for Russia) according to IHS Markit. The only exception was North America which, after seven years of growth, recorded a decline of -1.5% in registrations. The Premium and Prestige segments which represented 12.5% of all vehicles sold recorded growth of +5.1% which was double that of the total market. This trend, which translates into the continued improvement of its share of the overall car parc, was sustained in particular by Apac (+10.6%). Europe confirmed itself as being the region with the highest share of Premium and Prestige sales (21%). Thanks to growth of +3.6%, the car parc reached 1.24 billion automobiles with a share of the Premium and Prestige segment of +10.8% (+10.7% for 2016) equal to 135 million vehicles in circulation (129 million for 2016). Europe, NAFTA and Apac represent 93% of the Premium and Prestige. CAR PARK (in millions of vehicles) 1,200 0.2% 10.5% +3.6% +3.0% +8.3% +4.6% +3.5% 1,244 0.2% 10.6% 1,108 0.2% 9.7% 1,372 0.3% 11.0% 2014A 2016A 2017A 2020E CAGR 14A-16A CAGR 16A-20E +4.1% +3.4% Total +12.5% +7.8% Prestige +8.2% +4.5% Premium +3.6% +3.3% Standard 9 5 PRICE OF RAW MATERIALS BRENT US$/barrel Natural Rubber TSR20 US$/Metric Ton Butadiene EURO/Metric Ton CARS IN CIRCULATION PRESTIGE & PREMIUM (in millions of vehicles) 160 140 120 100 80 60 40 20 0 5000 4000 3000 2000 1000 0 3000 2500 2500 2000 1500 1000 500 0 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 +4.7% CAGR 14A-16A CAGR 16A-20E Other Regions 110 129 135 154 +8.3% +4.6% Total EU, APAC, NAFTA +5% 93% 93% 93% 93% +8.5% +4.5% Prestige & Premium Source: IHS Markit 2014A 2016A 2017A 2020E The average price of butadiene, the main raw material for the production of synthetic rubber, averaged Euro 1,112 per ton in 2017, an increase of +73% compared to the average price in 2016. Butadiene prices were sustained during the first half-year of the by a strong increase in demand from Asia during the first quarter, also due to the effect of re-stocking, and then plummeted during the third quarter due to an increase in supply and a normalisation of demand. From a price of Euro 1,500 per ton during the second quarter, butadiene prices returned to Euro 800 per ton during the fourth quarter, +3.0% compared to the corresponding quarter of 2016. ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operationsTyre markets As regards the development of demand in the Car tyre market, a very positive trend was confirmed for the New Premium segment (car or light truck tyres with a rim diameter of ≥18 inches). This segment, on which Pirelli has focused its leadership For the NAFTA area, sales of New Premium Car tyres were equal focusing on High Value products and of expanding its range to +6.4% (11.0% for the Replacement channel, -0.7% for the of services for the consumer: position, recorded growth of +10.5% for 2017 equivalent to over five times the growth rate for the tyre segment with lower rim Original Equipment channel) compared to the decline of 3.6%  > the coloured editions of the P Zero™ and the Winter diameters (+1.9%). The New Premium segment reached a 14% share of the total market (13% for 2016). for the non New Premium segment (-3.0% for the Replacement Sottozero™ tyres, for which Pirelli’s engineers have TYRE SALES, CONSUMER MARKET BY GEOGRAPHICAL AREA (ANNUAL CHANGE IN %) TYRE MARKET TOTALS PER RI DIAMETER-HISTORICAL DATA 6 0 In millions of units Total 1,435 ≥18” ≤17” 11% 89% 2014A TYRE MARKET TOTALS PER REGION Total 346 EUROPE Total NAFTA ≥18” ≤17” ≥18” ≤17” 360 Total 468 APAC ≥18” ≤17” Total 115 MEAI Total LATAM Total RUSSIA >=18 <=17 >=18 <=17 >=18 <=17 86 60 10% 90% 22% 78% 7% 93% 4% 96% 2% 98% 4% 96% 1,476 12% 88% 2015A 11% 89% 24% 76% 8% 92% 4% 96% 2% 98% 6% 94% 368 366 480 129 87 46 CAGR ‘14-’16 YoY% ‘16-’17 1,530 +3.3% 1,575 +3.0% 13% 87% +13.6% +2.0% 14% 86% +10.5% +1.9% channel, -6.3% for the Original Equipment channel). developed innovative materials and protective finishes For the Apac area sales of New Premium Car tyres were equal thanks to Pirelli’s experience with F1®; to +17.5% (14.0% for the Replacement channel, +19.2% for the  > Pirelli Connesso™, a digital platform which is integrated Original Equipment channel) compared to a growth of +2.4% into the P Zero and Winter Sottozero tyres, which thanks for the non New Premium segment (+4.7% for the Replacement to a sensor connected to an App, is able to communicate channel, -0.8% for the Original Equipment channel). with the motorist and provide information on certain capable of ensuring brilliant and long lasting colours, also Finally, recovery was seen for markets in Latin America, of the rubber, concerning safety, and a range of other fundamental parameters concerning the functioning with a growth of +12.0% for the total market (Original personalised services. Equipment+Replacement); +10.5% for the Replacement channel while Original Equipment grew by +19.9%. During the month of March 2017, for the purpose of ensuring 2016A 2017A autonomous growth paths and independent development In Russia the market recovered recording growth of strategies, the two business areas - Consumer and Industrial +17.3% with the Replacment channel at +16.7% and Original - were definitively separated as a result of the assignment to 384 374 508 135 85 45 12% 88% 25% 75% 9% 91% 4% 96% 3% 97% 7% 93% 5.3% 16.0% 4.0% 1.9% 10.5% -0.6% 4.2% 18.0% 3.1% 8.3% 12.5% 8.1% -0.9% 24.1% -1.4% -13% 8.6% -14% 389 370 527 141 95 53 53 13% 87% 27% 73% 10% 90% 4% 96% 3% 97% 6% 94% 1.4% 10.7% 0.1% -1.1% 6.4% -3.6% 3.8% 17.5% 2.4% 5.1% 10.1% 4.9% 12% 31.2% 11.5% 17.3% 10.5% 17.8% Equipment at +21.0%. SIGNIFICANT EVENTS OF 2017 the sole shareholder Marco Polo International Holding Italy S.p.A., of all TP Industrial Holding S.p.A. shares previously held by Pirelli & C. S.p.A.. TP Industrial Holding S.p.A., the company which holds 52% of the share capital of Pirelli Industrial S.r.l. (today called Prometeon Tyre Group S.r.l.), is the company that owns Pirelli’s Industrial assets. On April 27, 2017 the Board of Directors of the Company decided to accelerate the listing process in order to take advantage of the market opportunities of the fourth quarter of 2017. This 1 6 On January 13, 2017, - the disposal to Cinda of 38% of the decision was made in the light of the positive results which capital of Pirelli Industrial S.r.l. was finalised - as part of the had been achieved by the Company, the implemented focus on wider reorganisation and integration project of the Industrial the Consumer business which had led Pirelli to becoming the business. (today known as the Prometeon Tyre Group S.r.l.) sole “pure consumer tyre player” in the sector, and the favourable pursuant to the agreement signed on December 28, 2016 dynamics of the markets. In context of the listing, the CNRC between Pirelli Tyre S.p.A. and Cinda. The sale took place at a confirmed its willingness to lower its share in Pirelli to below value of approximately 266 million euro. 50% of the capital, this without prejudicing the requisite On February 9, 2017 Pirelli announced a price increase - as of April 1, 2017 - of up to 9% for all European and North American On May 11, 2017 Pirelli announced its return to the world of markets for car, light truck and motorcycle tyres of all product cycling with a range of high performance tyres, dedicated to conditions for the continued consolidation of Pirelli. 2014A 2015A 2016A CAGR ‘14-’16 2017A YoY% ‘16-’17 ranges (summer, all-season and winter) and brands. racing bikes. Source: Pirelli internal estimates On February 14, 2017 on the occasion of its 110th Year At the end of June 2017, Marco Polo International Italy S.p.A. Anniversary in Motorsports, at the Turin Automobile Museum, - a direct shareholder of Pirelli following the incorporation Pirelli presented its Motorsport season which saw the company by merger of Marco Polo International Holding Italy S.p.A. – In Europe, sales of New Premium Car tyres recorded growth of +10.7% in 2017, compared to the more modest trend (+0.1%) recorded committed - in addition to the Formula 1® World Championship underwrote capital increase, which including the premium for the segment for tyres with a rim diameter of ≤17 inches. On the Original Equipment channel, New Premium sales grew by +10% - to over 460 championships for cars and motorcycles. amounted to approximately euro 1.2 billion. It is also to be compared to a decline in sales for non New Premium segment tyres (-2.0%). In the Replacement channel sales recorded a growth of noted is that on June 27, 2017 (with a closing date of June 29), +11.5% compared to +0.7% for tyres with a rim diameter ≤17 inches. On March 7, 2017 Pirelli presented two new products at Pirelli & C. S.p.A. and Pirelli International Plc underwrote a new the Geneva Motor Show, consistent with its strategy of unsecured refinancing contract for a total amount of euro 4.2 ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operationsbillion with a pool of leading international banks, whose first on July 28, 2017 by the China National Chemical Corporation, On September 15, 2017, in context of the listing process, drawdowns were used, together with the proceeds from the the China National Tire & Rubber Corporation, Ltd., the Silk CONSOB approved the registration document, the disclosure aforementioned capital increase, to repay in full, on June 29, Road Fund Co.,Ltd., the CNRC International Limited (HK), the notes for the financial instruments and the related summary 2017, the financing underwritten in 2016 for the amount of CNRC International Holding (HK) Limited, Fourteen Sundew note for the offer of sale and admission to the listing on the euro 6.4 billion, and thus cancelling all collateral securities S.à.r.l., Camfin S.p.A., Long-Term Investments Luxembourg Mercato Telematico Azionario (screen-based stock exchange), GROUP PERFORMANCE AND RESULTS issued under this new financing. The refinancing operation S.A. and Marco Tronchetti Provera & C. S.p.A.. The Board of organised and managed by Borsa Italiana S.p.A., of the Pirelli In this document, in addition to the financial figures as provided was completed with improved conditions compared to the Directors is currently composed of: Ren Jianxin (Chairman), shares offered by Marco Polo International Italy S.p.A.. The for by the International Financial Reporting Standards (IFRS), previous financing completed in 2016, particularly through the Marco Tronchetti Provera (Executive Vice Chairman and Chief offer of sale was carried out from September 18, 2017 to alternative performance indicators derived from IFRS were used reduction of the all-in cost but also thanks to the lengthening Executive Officer), Yang Xingqiang, Bai Xinping, Giorgio Luca September 28, 2017. in order to allow for a better assessment of the of the Group’s of its average life, thus contributing to the improvement of Bruno, Ze’ev Goldberg and Giovanni Tronchetti Provera, as well operating and financial performance. These indicators are: Pirelli’s financial profile. as Independent Directors Laura Cioli, Domenico De Sole, Fan On October 4, 2017 Pirelli & C. S.p.A. shares were launched on  > Gross Operating Margin adjusted (EBITDA adjusted); Xiaohua, Marisa Pappalardo, Cristina Scocchia, Tao Haisu and the Milan Stock Exchange on the Mercato Telematico Azionario  > Gross Operating Margin adjusted without start-up costs At the end of July 2017, Burlington Loan Management DAC, Wei Yintao. The same aforesaid Shareholders’ Meeting also: (MTA or screen-based stock exchange) which is organised and (EBITDA adjusted without start-up costs); an Irish investment vehicle managed by Davidson Kempner  > appointed Antonella Carù as the new Statutory Auditor of managed by Borsa Italiana S.p.A. With the start of trading  > Operating Income (loss) (EBIT); Capital Management LP, signed a purchase contract with the Company, replacing Fabrizio Acerbis, and; all management and coordination activities by Marco Polo  > Operating Income (loss) adjusted (EBIT adjusted); Pirelli, Intesa Sanpaolo S.p.A., UniCredit S.p.A. and Fenice S.r.l.  > conferred the role for the statutory audit of accounts for International Italy S.p.A. ceased. As part of the Global Sales  > Operating Income (loss) adjusted without start-up costs for the acquisition of 44.86% of the capital of Prelios S.p.A. the nine-year period from 2017 to 2025 to the independent Offer, 350 million ordinary shares, were offered at a price of (EBIT adjusted without start-up costs); amounting to 611,910,548 shares in total. The trade was set at auditing firm PricewaterhouseCoopers S.p.A.. euro 6.5 per share for a capitalisation of euro 6.5 billion. The  > Net Income (loss) related to continuing operations euro 0.116 per share, which equalled a total of approximately Greenshoe Option, granted as part of the transaction by Marco (Consumer) adjusted; euro 70.9 million, of which approximately euro 17.2 million was On August 31, 2017 Pirelli’s Board of Directors deliberated Polo International Italy S.p.A. to the placement consortium  > Fixed Assets related to continuing operations; due to Pirelli, approximately euro 24.5 million euro to Fenice on the governance structure of the Company, and approved, for 50 million shares, was partially exercised on November  > Provisions; S.r.l, the vehicle invested in by Pirelli, and the remainder - in in particular, the constitution of the Board Committees and 2, 2017 for a total of 18,904,836 shares. With the inclusion of  > Operating Working Capital related to continuing 6 2 proportion to the investment held – due to Intesa Sanpaolo the establishment of procedures in view of the listing of the the Greenshoe Option, the Offer of Sale therefore concerned operations; 3 6 and Unicredit. The closing of the operation - with simultaneous Company on the stock exchange. In addition, the Board of 368,904,836 ordinary Pirelli shares and, consequently, the total  > Net Working Capital related to continuing operations; collection - was finalised on December 28, 2017. Directors appointed Marco Tronchetti Provera as Executive proceeds deriving from the Sales Offer which were exclusively  > Net Financial (liquidity)/debt Position. On August 1, 2017 the Shareholders’ Meeting of Pirelli approved the same powers of management of the Company, consistent approximately euro 2.4 billion. As a result of the partial exercise Indicators” for a more detailed description of these indicators. Vice Chairman and Chief Executive Officer, conferring to him due to Marco Polo International Italy S.p.A. amounted to Reference should be made to the paragraph “Alternative Performance a number of resolutions aimed at implementing the previously with those of the previous mandate and with the Shareholders’ of the Greenshoe Option, Marco Polo International Italy S.p.A. announced process of listing the Company shares on the stock Agreements signed on 28 July 2017. holds 631,095,164 ordinary Pirelli shares which correspond to *** exchange. Amongst other things, the adoption of a new text approximately 63.11% of the share capital. for the Articles of Association was approved (effective as of On September 1, 2017, as part of the preparatory process for Also, as a result of the assignment by Pirelli & C. S.p.A of the shares the listing date) which expressly provides for, amongst other re-listing the Company, Pirelli’s announced its new strategy of On December 21, 2017 the Board of Directors of Pirelli approved of TP Industrial Holding S.p.A. (company that owned almost all things, a “corporate governance based on best international focusing on the High Value segment (Prestige, New Premium, an EMTN (Euro Medium Term Note) for the issuance of senior of Pirelli’s Industrial assets) to Marco Polo International Holding practice”. In order to protect shareholders, specific provisions Specialties and Super Specialties, and Premium Moto), as well unsecured non-convertible bonds for an amount equal to Italy S.p.A., the Industrial business qualified as a “discontinued of the Articles of Association address the issue of the long term as released the forecast data for the new 2017-2020 Industrial a maximum of euro 2.0 billion. The adoption of the EMTN operation”. The results for the period for the “discontinued preservation of Pirelli’s constitutive and intrinsic elements Plan, carve-out consolidated Interim Financial Statements program responds the objective of the constant optimisation operation” were reclassified to the Income Statement as a such the localisation in Italy of its registered headquarters and at June 30, 2017 and a carve-out consolidated Financial of the Pirelli financial structure, and allows for the favourable single item, “net income (loss) related to discontinued operations”, the Group’s management centre, as well as the control of its Statements for 2016, 2015 and 2014. and timely seizure of windows of opportunity available on the and includes the financial data for the first quarter of 2017 for technological know-how (including Pirelli brands). For such bond market. As part of this program, the Board of Directors the Industrial Business, which no longer comes under the scope elements in particular, the Articles of Association provide (i) On September 5, 2017, the Shareholders’ Meeting appointed authorised the issue, to be executed by January 31, 2019, of one of the Group as a result of the assignment, as well as the twelve that Pirelli’s technological know-how shall remain under Pirelli Luca Nicodemi and Alberto Villani as Statutory Auditors for or more bonds, to be placed with institutional investors, for a month results for some of the residual Industrial activities ownership and shall not be transferred to third parties, except the Company, replacing Giovanni Bandera and David Reali, total maximum amount of up to euro 1.0 billion. currently in the process of being separated. In accordance with where provided for in the same Articles of Association, and (ii) who had resigned from the role for professional reasons. the relevant accounting standard, the comparable financial that the operating and administrative headquarters of Pirelli On December 28, 2017, the acquisition of the investment in data for 2016 was subjected to restatement. shall remain in Milan. Such provisions may be derogated only On September 12, 2017, Pirelli, consistent with focusing its Prelios S.p.A. by Lavaredo S.p.A., a newly established joint stock through a prior resolution adopted by a Pirelli Shareholders’ activities on its core business, notified the Chairman of the company designated by Burlington, was finalised, pursuant to *** Meeting where at least 90% of the share capital is represented Agreement to invest in the capital of Mediobanca S.p.A., the purchase contract signed in July. as being in favour. Also on August 1, 2017 (effective as of August the decision to exercise the right of cancellation from the 31, 2017), the Shareholders Meeting renewed the Board of agreement for all shares held and conferred to the Agreement Directors, pursuant to the new Shareholders’ Agreement signed itself, approximately 1.8% of Mediobanca’s share capital. Pirelli closed the 2017 financial year with results which were consistent with the 2016-2020 Industrial Plan. In particular, the results reflect the implementation of the ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operationsHigh Value strategy, and the development of new activities mix improvement, and to the price increases put in place The Group’s Consolidated Financial Statements are summarised as follows: (in milioni di euro) aimed at capturing emerging new trends in mobility, as well as of April 1, 2017. as the reduction of exposure on the Standard segment. In particular, at the level of the more specific programs, it The results are characterised by: > strengthening of the partnership with the main Prestige  > Revenues which grew by +7.6% to euro 5,352.3 million, and Premium car manufacturers with a high-end +11.8% for the High Value segment which represented portfolio of approximately 2,160 homologations capable 57.5% of the total revenues (55.3% for 2016); of providing insight into future demand; should be noted: Net sales EBITDA adjusted without start-up costs % of net sales EBITDA adjusted % of net sales  > an EBIT adjusted without start-up costs which amounted > expansion of High Value production capacity mainly in EBIT adjusted without start-up costs to euro 926.6 million, representing a growth of +9.7%, Europe, NAFTA and Apac by reconverting in-part the thanks to the High Value segment which contributed a capacity of the Standard segment, preparing processes share of approximately 83% of the EBIT (81% for 2016); and organising the factories to handle the growing  > an EBIT margin adjusted without start-up costs at 17.3% complexity and ever increasing rim diameters. The total (17.0% for 2016), 18.7% for the fourth quarter (17.6% for 2016); capacity at the end of 2017 was approximately equal to 76  > Net income related to continuing operations (Consumer) million tyres (71 million for 2016), of which 55% were High which grew to euro 263.3 million (euro 164.0 million for 2016); Value (54% for 2016);  > A net financial (liquidity)/debt position of euro 3,218.5 > increased distribution coverage in Europe, NAFTA, million, (euro 4,912.8 million at December 31, 2016 being Apac and LatAm with an increased presence on the car % of net sales EBIT adjusted % of net sales Adjustment: - amortisation of intangible assets included in PPA - non-recurring and restructuring expenses EBIT % of net sales Net income (loss) from equity investments Financial income/(expenses) Net income (loss) before tax data that was reported and also included in the Industrial dealer channels, on retail and on client Tier 1, where Pirelli Tax expenses business activities) and an NFP / EBITDA adjusted exercises greater control and records higher sales. In Tax rate % on net income (loss) before tax without start-up costs ratio equal to 2.7x for 2017 (4.6x at particular, for 2017 the share of sales generated by these December 31, 201614). channels reached 48% (41% for 2016); 6 4 The main actions underlying these results and, more generally, > the continued development of business programs that actions relative to the implementation of the 2017-2020 intercept new end-customer needs (such as Cyber™ Industrial Plan, can be summarised as follows: and Velo), projects for the digital transformation of the > strengthening of the High Value segment with a growth Company and the conversion of Aeolus brand production in volumes of +12.5% and an improvement in the market into Pirelli brand production in the manufacturing plant share for the Prestige and Car New Premium segments (a in Jiaozuo for the Car sector acquired from Aeolus. These growth of +15.4% for tyres with a rim diameter ≥18 inches activities were reflected in the sustainment of start- Net income (loss) related continuing operations (Consumer) Eanings/(loss) per share related to continuing operations (in euro per share) Net income (loss) related to continuing operations (Consumer) adjusted Net income (loss) related to discontinued operations (Industrial) Total net income (loss) Net income attributable to the Parent Company Fixed assets related to continuing operations Inventories Trade receivables Trade payables compared to the +10.5% of the market) mainly in Europe, up costs of approximately euro 50 million for the 2017 Operating working capital related to continuing operations North America and Apac; financial year; > progressive reduction of exposure in the standard > consequent efficiencies equal to approximately 1.0% % of net sales Other receivables/other payables segment with a -5.3% decrease in volumes mainly in of revenues for 2017 linked to industrial and product Net working capital related to continuing operations Russia, MEAI, and in Europe with the reduction in sales of activities such as the optimisation of raw materials less profitable products. As a result of this impact the total costs, the simplification of products and the reduction growth in volumes (cars and motorbikes) stood at +1.0%; of tyre weights, the growth of production in countries > consequent improvement in the price/mix component, with low industrial costs, improved productivity and which once again asserted itself at the highest level the simplification of processes, plus the optimisation of amongst peers: +6.9% for the total financial year, +7.8% energy and other costs. for the fourth quarter, due to the effect of the progressive % of net sales Net invested capital held for sale Net invested capital Equity Provisions Net financial (liquidity)/debt position Equity attributable to the Parent Company Investments in property, plant and equipment and intangible assets Research and development expenses % of net sales Research and development expenses - High Value % on sales Premium Employees (headcount at end of period) Industrial sites (number) 31/12/2017 31/12/2016* 31/12/2016 Carve out (**) 5,352.3 1,175.1 22.0% 1,137.7 21.3% 926.6 17.3% 876.4 16.4% (109.6) (93.2) 673.6 12.6% (6.9) (362.6) 304.1 (40.8) (13.4%) 263.3 0.31 386.8 (87.6) 175.7 176.4 9,121.0 940.7 652.5 4,976.4 1,082.3 21.7% 1,082.3 21.7% 844.3 17.0% 844.3 17.0% (104.6) (53.2) 686.5 13.8% (20.0) (427.3) 239.2 (75.2) (31.4%) 164.0 0.22 296.6 (16.4) 147.6 135.1 10,299.2 1,055.6 679.3 4,976.4 1,082.3 21.7% 1,082.3 21.7% 844.3 17.0% 844.3 17.0% (104.6) (53.2) 686.5 13.8% (20.0) (427.3) 239.2 (75.2) (31.4%) 164.0 0.22 296.6 9,167.6 874.0 680.1 (1,673.6) (1,498.5) (1,280.5) (80.4) (1.5%) (42.2) (122.6) (2.3%) 236.4 n.a. (310.7) (74.3) n.a. 60.7 - 273.6 5.5% 19.0 292.6 5.9% - 9,059.1 10,224.9 9,460.2 4,177.0 1,663.6 3,218.5 3,274.9 2,037.2 4,912.8 4,116.7 3,134.1 489.4 221.5 4.1% 199.9 6.5% 30,189 19 2,633.4 1,866.1 4,960.7 372.2 208.6 4.2% 191.0 6.9% 29,787 19 5 6 14 In order to make the comparison homogeneous, the adjusted net financial position / EBITDA indicator without start-up costs was calculated by comparing the EBITDA adjusted without start-up costs for 2016 restated (therefore only related to the Consumer activity) to the net financial (liquidity)/debt position of the sole Consumer Activity equal to euro 4,960.7 million. (*) On the basis of IFRS 5 accounting principle: a) the economic comparative figures at 12/31/2016 related to the Industrial business have been reclassified in the item “Net income (loss) related to discontinued operations”; b) balance sheet comparative figures at 12/31/2016 have not been restated and consequently include the figures related to the Industrial business. (**) The figures refer to the “Carve out” Consolidated Financial Statements at 12.31.2016 of the Consumer Business included in the Registration Document, prepared for the listing of Pirelli Group and released on 09.15.2017 ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operations For a better understanding of the Group’s performance, the following quarterly performance information is provided. The performance for total sales volumes for 2017 resulted in a total growth of +1.0% and reflected the diverse dynamics within the (In millions of euro) different segments and markets. 1 Q 2 Q 3 Q 4 Q TOTAL The growth in volumes which was supported by the strengthening on the High Value segment (+12.5%, +15.4% for Car tyres with 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 a rim diameter ≥18 inches) while the Car Standard segment (-5.6%) was impacted by the reduction in lower profitability volumes, Net sales yoy organic yoy * EBITDA adjusted without start-up costs 1,339.3 1,180.9 1,346.0 1,246.0 1,353.2 1,279.6 1,313.8 1,269.9 5,352.3 4,976.4 13.4% 8.4% 8.0% 6.2% 5.8% 8.3% 3.5% 8.3% 7.6% 7.9% 281.7 261.5 285.1 268.4 298.9 271.5 309.4 280.9 1,175.1 1,082.3 % of net sales 21.0% 22.1% 21.2% 21.5% 22.1% 21.2% 23.5% 22.1% 22.0% 21.7% particularly in Russia (with a sharp contraction in local sales for the Amtel brand), which had positive effects on the results. The strong price/mix improvement (+6.9%) reflects the continuation of the Pirelli value strategy and was supported by the success of high-end products, and from the progressive increase in prices implemented as of April 1, 2017 to counter the increase in raw materials costs (an increase of +5.5 for the price/mix during the first quarter +5.5%, +6.5% for the second quarter, +7.3% for the third quarter, and +7.8% for the fourth quarter). EBITDA adjusted 270.4 261.5 276.0 268.4 289.9 271.5 301.4 280.9 1,137.7 1,082.3 The apportionment of net sales by geographical area is reported in the following table: % of net sales 20.2% 22.1% 20.5% 21.5% 21.4% 21.2% 22.9% 22.1% 21.3% 21.7% EBIT adjusted without start-up costs 219.5 203.6 223.5 209.6 238.2 207.5 245.4 223.6 926.6 844.3 % of net sales EBIT adjusted % of net sales 16.4% 17.2% 16.6% 16.8% 17.6% 16.2% 18.7% 17.6% 17.3% 17.0% 205.0 203.6 211.2 209.6 226.0 207.5 234.2 223.6 876.4 844.3 15.3% 17.2% 15.7% 16.8% 16.7% 16.2% 17.8% 17.6% 16.4% 17.0% Adjustment: - amortisation of intangible assets included in PPA - non-recurring and restructuring expenses (26.2) (26.2) (26.1) (26.1) (28.6) (26.1) (28.7) (26.2) (109.6) (104.6) (10.1) (11.3) (35.6) (8.1) 25.5 (9.2) (73.0) (24.6) (93.2) (53.2) EBIT 168.7 166.1 149.5 175.4 222.9 172.2 132.5 172.8 673.6 686.5 % of net sales 12.6% 14.1% 11.1% 14.1% 16.5% 13.5% 10.1% 13.6% 12.6% 13.8% * before exchange rate effect and changes in scope of consolidation 6 6 Geographilcal area 2017 Euro\mln % yoy Organic Yoy* Europe Russia and CIS NAFTA South America Asia\Pacific (APAC) Middle East\Africa\India (MEAI) 2,238.0 159.6 983.9 915.7 806.2 248.9 41.7% 3.0% 18.4% 17.1% 15.1% 4.7% Total 5,352.3 100.0% * before exchange rate effect and changes in scope of consolidation 6.9% -2.1% 5.3% 11.1% 13.1% -0.1% 7.6% 7.6% -14.6% 7.3% 7.4% 14.3% 5.6% 7.9% (In millions of euro) 2016 % 42.0% 3.3% 18.8% 16.6% 14.3% 5.0% 100.0% 7 6 Group net sales amounted to euro 5,352.3 million, which represented a growth of +7.6%, +7.9% in organic terms, or rather net of the impact of the exchange rate effect (-0.7%), and for the consolidation of the Aeolus Car business (+0.4%). Organic growth for the Europe (41.7% of sales) ended the 2017 financial year with an organic growth of +7.5% (+6.9% including the exchange rate effect and fourth quarter was equal to +8.3%. the change in the scope of consolidation) supported by the strengthening on the High Value segment (a +12.8% organic growth in revenues) with an increase in the market share of tyres with a rim diameter ≥18 inches both on the Original Equipment channel as well High Value revenues amounted to euro 3,078.1 million for 2017, which represented an organic growth of +13.4% (+11.8% net of the as the Replacement channel. On the Standard segment, the reduction of exposure to products with lower profitability continued, exchange rate effect) and whose contribution amounted to 57.5% of revenues (+2.2% compared to 2016). with an acceleration in the second half-year. Profitability was in the mid-teens range, impacted by start-up costs, but which steadily The following table shows the drivers for the net sales performance: 1 Q 2017 2 Q 2017 3 Q 2017 4 Q 2017 Cumulative at 12/31 2017 Volume Price/mix Change on a like-for-like basis Translation effect Change in scope of consolidation - Aeolus car Total change 2.9% 5.5% 8.4% 4.0% 1.0% 13.4% -0.3% 6.5% 6.2% 1.2% 0.6% 8.0% 1.0% 7.3% 8.3% -3.1% 0.6% 5.8% 0.5% 7.8% 8.3% -4.5% -0.3% 3.5% 1.0% 6.9% 7.9% -0.7% 0.4% 7.6% increased during the second half-year (high teens range) as a result of the improved mix and the implementation of price increases. NAFTA (18.4% of sales) recorded an organic growth in revenues of +7.4% (+5.3% including the exchange rate effect), with an organic growth of +7.8% for the High Value segment. This revenue performance reflected the positive trend in volumes and, in particular for the High Value segment on the Replacement channel, thanks to the introduction of all-season products and the greater penetration of the retail channel, while the trend for High Value Original Equipment was affected by the market slowdown in the second half of the year (-3.6% for the second half-year, -0.6% for 2017). In 2017 Pirelli consolidated its marked tyre leadership with an increase to the market share of approximately +1.5%; with improvement also in the market share for Replacement tyres with a rim diameter ≥18 inches. Profitability (EBIT margin) was in the twenties range. Apac (15.1% of sales) along with NAFTA were the regions with the highest revenue growth and profitability (an EBIT margin in the twenties range). There was improvement in the performance of total revenues by +14.3%, net of the exchange rate effect and in the change in the scope of consolidation (a total growth of +13.1%), supported by the High Value segment (an organic growth of +21.4%, +18.3% net of the exchange rate effect). In particular, Pirelli strengthened its positioning in the high-end products range both in the Original Equipment channel (which counted new homologations with European and local car brands) and in the Replacement ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operationschannel, which increased its market share by approximately South America (17.1% of sales) recorded a total revenue growth The details were as follows: 2%, thanks also to the expansion of commercial presence of +11.1%, and +7.4% in organic terms (excluding the exchange which now counts approximately 4,000 points of sale. The rate effect on a like-for-like basis). This performance reflected: activities for the conversion of Aeolus brand production into  > the continuing focus on the mix, with the progressive Pirelli brand production in the Aeolus Car tyre manufacturing reduction in sales of the less profitable products within plant acquired on October 1, 2016, were also continued in the Standard segment; support of future growth in the area.  > the destination of a portion of production for export to MEAI (4.7% of sales) recorded a growth in revenues of +5.6% Premium products; (-0.1% net of the exchange rate effect on a like-for-like basis)  > the contraction of the car market in Argentina. with profitability in the mid-teens range which represented a Profitability was in the high single-digits range which slight increase compared to the corresponding period of 2016, represented a growth compared to 2016, also due to the despite the impact of the impairment of currencies particularly continued actions aimed at the improvement and conversion North America in view of the growing demand for Pirelli in Turkey. The focus on High Value continued with an organic of the mix. revenue growth of +23.3% (a total growth of +19.3%) driven by the strengthening in the Replacement channel for tyres with The EBIT adjusted for the Group without start-up costs a rim diameter ≥18 inches by approximately +2.0%, especially amounted to euro 926.6 million, a growth of +9.7%, being euro in the Gulf area. +82.3 million in absolute values compared to the previous financial year (euro 844.3 million for 2016), thanks to the High 2016 EBIT Adjusted Internal levers: Volumes Price/mix (In millions of euro) 1 Q 2 Q 3 Q 4 Q Total 203.6 209.6 207.5 223.6 844.3 16.4 39.6 (1.9) 71.0 5.2 90.8 3.5 23.2 76.1 277.5 Amortisation, depreciation and other costs related to the development of High Value (23.6) 5.3 (12.4) (9.2) (39.9) Efficiencies External levers: 7.4 17.4 9.2 12.6 46.6 Cost of prodution factors: (commodities) (17.5) (63.1) (51.0) (33.2) (164.8) Cost of prodution factors (labour/energy/others) (10.1) (12.9) (11.4) (19.2) (53.6) Differences from foreign currency translation from consolidation 3.7 (1.9) 0.3 (8.8) (6.7) Change without start-up costs 15.9 13.9 30.7 21.8 82.3 2017 EBIT adjusted without start-up costs 219.5 223.5 238.2 245.4 926.6 In Russia (3.0% of sales) the strategy of focusing on the more Value segment which achieved a share of approximately 83% profitable segments - with the progressive reduction in the of the EBIT (81% for 2016). The EBIT adjusted without start-up production and sales of non-Pirelli brand products - impacted costs attested itself at 17.3%, a growth of +0.3% compared to Start-up costs 2017 EBIT adjusted (14.5) (12.3) (12.2) (11.2) (50.2) 205.0 211.2 226.0 234.2 876.4 6 8 positively on the results for the 2017 financial year, with a the previous financial year. strong improvement in profitability (an EBIT margin in the 9 6 low-teens, which had been in the low single-digit range for the Start-up costs amounted to euro 50.2 million and refer to: The improvement in the results is linked to the effect of internal levers such as price/mix, volumes and efficiencies, which more than corresponding period of 2016). Revenues recorded a contraction  > programs which intercept the new needs of the end offset the rise in the cost of raw materials, costs inflation (particularly in emerging markets), higher amortisation and depreciation, of -2.1% (-14.6% including the exchange rate effect). The decline customer such as connectivity (Cyber™) and the return to and other costs related to business development. in High Value revenues (-4.0% YoY) reflected the Company’s the bicycle business (Velo project); In particular: decision to reduce exports of high-end products to Russia,  > activities aimed at the Company’s digital transformation;  > the growth in volumes (euro +23.2 million); especially during the fourth quarter, in consideration of the  > activities for the the conversion of Aeolus brand production  > the improvement of the price/mix component (euro +277.5 million); contraction of the local market (-5.0% for the second half-year into Pirelli brand production in the Aeolus manufacturing  > efficiencies (euro +46.6 million); for the total market for tyres with a rim diameter ≥18inches, plant for the Car sector acquired on October 1, 2016. which more than offset: -11% for the fourth quarter), by allocating production mainly to  > the increase in the cost of raw materials (euro -164.8 million) and costs inflation particularly in the emerging markets (euro -53.6 Europe where demand was stronger. The EBIT adjusted for the Group amounted to euro 876.4 million); million which represented a growth of euro 32.1 million  > higher amortisation, depreciation and other costs linked, in particular, to the development of the High Value segment and the compared to the previous financial year. expansion of territorial coverage (euro -39.9 million) and to translation differences (euro -6.7 million);  > the aforementioned start-up costs to the amount of euro 50.2 million. The EBIT which amounted to euro 673.6 million (compared to euro 686.5 million for 2016) was impacted by:  > non-recurring and restructuring expenses to the amount of euro 93.2 million (euro 53.2 million for 2016) for structural rationalisation activities, for activities relative to the separation of Pirelli’s Industrial business which took place in the first quarter of 2017, and for advisory costs and fees relative to the IPO process (euro 61.9 million). It should be noted that in the first half-year of 2017 that euro 37.4 million had been provisioned for the extraordinary incentive plan called “Special Award” in favour of a selected panel of high level executives and senior managers. This provision was released with a positive impact on the Income Statement during the third quarter of 2017, in that that the goal of Equity Value to which the payment of the related incentive was conditional had not been achieved;  > euro 109.6 million relative to the amortisation of the intangible fixed assets identified during the Purchase Price Allocation (euro 104.6 million for 2016). ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operationsThe item income (loss) from equity investments was for 2017 compared to euro 427.3 million for 2016). The reduction This change is analytically shown in the table below: negative to the amount of euro 6.9 million (euro 20.0 million in financial expenses was mainly attributable to the decrease for 2016) and mainly refers: of the cost of debt (5.36% at December 31, 2017 compared with  > to the negative pro-rata share of the results for the 5.82% for 2016) resulted from the capital increase subscribed 2017 financial year for the Indonesian Joint Venture PT to by Marco Polo in June 2017 and the refinancing of the debt Evoluzione Tyres (negative to the amount of euro 9.6 carried out at the end of the first half-year. Tax expenses for Equity at 12/31/2016 million) and the pro-rata negative result for the fourth 2017 amounted to euro 40.8 million against pre-tax earnings of Translation differences quarter of 2016 and the first nine months of 2017 by Prelios euro 304.1 million with a tax rate which attested itself at 13.4%. S.p.A. (negative at euro 3.1 million). These negative results The tax rate for 2017 was positively impacted by the detection were partially offset by the positive pro-rata result of of deferred tax assets on tax losses and other temporary Fenice S.r.l. (positive at euro 5.0 million) which indirectly differences recognised in the period (surplus gross operating includes the result deriving from the disposal by Fenice income for the share of interest payables which were not Share capital increase Net income (loss) Dividends approved Disposal of 38% Pirelli Industrial to Cinda fund S.r.l. of the investment in Prelios S.p.A.; deducted and the ACE - tax concession Economic Growth Aid), Assignment of the Industrial business to Marco Polo  > to the impairment of the investment in the company Pirelli pertinent to the Italian companies of the Group. Acquisition of minority interests (Brazil) de Venezuela C.A. (negative to the amount of euro 7.6 million euro) whose residual value at December 31, 2017 The net income (loss) related to continuing operations was equal to euro 2.6 million; (Consumer) adjusted amounted to euro 386.8 million (7.2%  > to the capital gain realised by effect of the disposal on of revenues) compared to euro 296.6 million for the previous Other Total changes Equity at 12/31/2017 December 28, 2017 of the total investment in Prelios financial year (6.0% of revenues). S.p.A. (a capital gain net of the cost of the sale of euro 5.8 Group Non-controlling interests Total (In millions of euro) 3,134.1 (86.2) 1,189.4 176.4 - 1.5 (289.4) (12.8) 3.7 982.6 4,116.7 140.8 (0.4) - (0.7) (7.4) 264.5 (326.7) (9.6) (0.2) (80.5) 3,274.9 (86.6) 1,189.4 175.7 (7.4) 266.0 (616.1) (22.4) 3.5 902.1 60.3 4,177.0 million); The net income (loss) related to discontinued operations The table shows the reconciliation between the equity of the Parent Company and the consolidated equity attributable to  > to dividends received from Mediobanca S.p.A. (euro 5.8 includes the financial data for the first quarter of 2017 for the Shareholders of the Parent Company: 7 0 million) and Fin. Priv. S.r.l. (euro 0.8 million). Industrial business, which no longer came under the scope of The loss recorded for 2016 which amounted to a total of euro the Group due to the assignment, as well as the results for the 20.0 million was mainly attributable to the impairment of the twelve months, of some residual Industrial activities currently investment in Prelios S.p.A. (a negative impact of euro 28.7 undergoing separation, and which were negative to the total Share Capital Treasury reserves Net income (loss) Total (In millions of euro) 1 7 million), to the pro-rata losses of the vehicle Fenice S.r.l. (a amount of euro 87.6 million, mainly attributable the reversal Equity of Pirelli & C. S.p.A. at 12/31/2017 1,904.4 2,163.1 170.9 4,238.4 negative impact of euro 21.9 million), to the pro-rata result of to the Income Statement of translation losses matured at the Indonesian Joint Venture PT Evoluzione Tyres (a negative the date of the assignment of the Industrial perimetre to impact of euro 8.5 million), and to the impairment of the the amount of euro 80.2 million, mainly attributable to the investment in Pirelli de Venezuela C.A. (a negative impact of Egyptian subsidiary. euro 8.7 million euros), which was partially offset by the positive pro-rata result of the associate company Eurostazioni S.p.A. (a The net income attributable to Pirelli & C. S.p.A. was positive positive impact of euro 46.1 million) mainly attributable to the to the amount of euro 176.4 million compared to the positive capital gain deriving from the disposal of the investment held amount of euro 135.1 million for the previous financial year. by Eurostazioni S.p.A. in Grandi Stazioni Retail S.p.A.. Net income (loss) of consolidated companies (before consolidation adjustments) Share capital and reserves of consolidated companies (before consolidation adjustments) Consolidation adjustments: - carrying amount of equity investments in consolidated companies - intercompany dividends - others 202.6 202.6 4,260.8 4,260.8 (4,571.4) (4,571.4) 200.3 (200.3) - (16.9) 3.2 (13.7) Equity went from euro 3,274.9 million at December 31, 2016 to Consolidated equity of Group at 12/31/2017 1,904.4 2,035.9 176.4 4,116.7 Net income (loss) related to continuing operations euro 4,177.0 million at December 31, 2017. (Consumer) at December 31, 2017 amounted to euro 263.3 million, compared to earnings of euro 164.0 million for 2016. Equity attributable to Pirelli & C. S.p.A. at December 31, 2017 The net financial (liquidity)/debt position was negative to the amount of euro 3,218.5 million compared to euro 4,912.8 million at This result also reflected, in addition to the improvement in the amounted to euro 4,116.7 million compared to euro 3,134.1 December 31, 2016. operating income and the results from investments, the lower million at December 31, 2016. net financial expenses of euro 64.7 million (euro 362.6 million ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operationsIt was composed as follows: The performance for cash flows for the period was as follows: Current borrowings from banks and other financial institutions Current derivative financial instruments (In millions of euro) 12/31/2017 12/31/2016 559.2 11.2 642.1 35.7 1 Q 2 Q 3 Q 4 Q Cumulative at 12/31 2017 2016 Restated 2017 2016 Restated 2017 2016 Restated 2017 2016 Restated 2017 2016 Restated Adjusted operating income (loss) 205.0 203.6 211.2 209.6 226.0 207.5 234.2 223.6 876.4 844.3 (In millions of euro) Non-Current borrowings from banks and other financial institutions 3,897.1 5,946.0 Amortisation and depreciation 65.4 57.9 64.8 58.8 63.9 64.0 67.2 57.3 261.3 238.0 Non-Current derivative financial instruments 55.0 - Investments in property, plant and equipment and intangible (98.3) (70.0) (117.4) (77.8) (111.9) (74.1) (161.8) (120.4) (489.4) (342.3) 4,522.5 6,623.8 assets Total net financial (liquidity)/debt position 3,218.5 4,912.8 Partial acquisition of minotiry Total gross debt Cash and cash equivalents Securities held for trading Current financial receivables and other assets Current derivative financial instruments Net financial debt* Non-current financial receivables and other assets (1,118.5) (1,533.0) (33.0) (36.5) (21.4) (48.6) (30.0) (3.7) 3,313.1 5,008.5 (94.6) (95.7) (In millions of euro) 2022 and beyond 1,650.1 - - - - - * 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”. 7 2 The structure of the gross financial debt, which amounted to euro 4,522.5 million, was as follows: 12/31/2017 2018 2019 2020 2021 Maturity date Use of senior facilities 3,277.5 Bond 1,750% - 2014/2019 EIB loans Other loans 596.3 30.0 618.7 - - 20.0 550.4 - 1,627.4 - - 596.3 10.0 29.0 Total gross debt 4,522.5 570.4 635.3 1,636.8 1.8 1,678.2 12.7% 14.0% 36.2% 0.0% 37.1% At December 31, 2017, the Group had a liquidity margin equal to euro 1,851.5 million composed of euro 700.0 million in the form of a non-utilised nominal credit facility, and euro 1,151.5 million in cash and cash equivalents in addition to securities held for trading. It is to be noted that on January 22, 2018, as part of the EMTN (Euro Medium Term Note) program approved at the end of 2017, Change in working capital/other (892.2) (783.8) 123.9 70.1 (131.8) (63.8) 1,023.9 809.0 123.8 31.5 Operating net cash flow (720.1) (592.3) 282.5 260.7 46.2 133.6 1,163.5 969.5 772.1 771.5 Financial income/(expenses) (77.0) (133.7) (149.4) (118.7) (63.5) (99.2) (72.7) (75.7) (362.6) (427.3) Taxes paid (45.7) (26.7) (6.1) (33.2) (65.1) (35.6) (18.6) (8.9) (135.5) (104.4) Financial (investments) / disinvestments Disposal of real estate Disposal of investments interest Pneuac - Brazil Dividends approved to non-controlling interests Cash Out for non-recurring and restructuring expenses Disposal of minority equity investments Financial expenses included in the acquisition debt Reversal of Bidco Facility costs post-merger / other adjustments of refinancing included in financial expenses/income Differences from foreign currency translation/other Net cash flow before extraordinary transactions (1.7) (5.2) (0.8) 11.1 - - - - - - - - - - - - - - - - (12.6) (2.5) (6.7) 16.1 - 75.0 - 91.1 - 25.7 109.0 25.7 109.0 - (15.4) - - - (15.4) - - - - (12.9) - - - (12.9) - - (11.9) (17.7) (4.6) (9.4) (6.8) (8.3) (40.5) (13.9) (63.8) (49.3) (5.5) - - - - - - - (5.5) - 3 7 - - - 122.2 - - - - - 122.2 - - - - - - - 23.0 - 23.0 (19.8) (62.7) 2.4 (25.7) 6.3 (1.1) 11.8 (103.4) 0.7 (192.9) (881.7) (838.3) 124.0 207.0 (111.2) 5.5 1,069.2 962.0 200.3 336.2 Industrial reorganization 269.3 59.3 35.3 37.9 - 21.5 - (71.8) 304.6 46.9 05/31 Proceeds from the disposal of 38% Pirelli Industrial to Cinda Bidco Facility costs post-merger / adjustments of refinancing Share capital increase subscribed by Marco Polo Aeolus Car NFP impact - - - (134.3) - - - - - (134.3) - - - - - - - 266.0 - 266.0 - - - - - - - (23.0) - (23.0) - - - 1,189.4 - - - - - - - - - - 1,189.4 - - (73.6) - (73.6) Net cash flow (612.4) (779.0) 1,348.7 110.6 (111.2) 27.0 1,069.2 1,059.6 1,694.3 418.2 9.4 1.8 28.1 Change NFP Bidco from 01/01 to Pirelli placed a bond loan with international institutional investors for a nominal amount of euro 600 million with a 5 year More specifically, the operating net cash flow for the 2017 financial year was positive to the amount of euro 772.1 million (positive duration at a fixed rate. The issue, with a yield of 110 basis points on the benchmark rate, allowed for the debt to be optimised by at euro 771.5 million for 2016), and reflected the higher investments of euro 147.1 million (euro 489.4 million compared to euro 342.3 lengthening maturities and reducing its cost. The effective yield at maturity is equal to 1.479%. The securities have been listed on million for 2016), which were offset by the improvement in the operating performance and by the careful management of the net the Luxembourg Stock Exchange. working capital. Investments were primarily aimed at increasing the capacity of the High Value segment in Europe and the NAFTA area, as well as at the strategic reconversion of the capacity of the Standard segment into High-Value in Brazil (Bahia and Campinas), at the transformation of the production of Aeolus brand products into Pirelli brand products in the new manufacturing plant in Jiaozuo for the Car sector, and at the continuous improvement of the quality and mix in all manufacturing plants. ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operationsNet cash flow before extraordinary transactions was the Prestige segment with a market share which aproximated association, who called it “an extremely balanced summer tyre, whose tread is silver for Road Racing, red for the Crono tyre positive to the amount of euro 200.3 million compared to the 50% in the Original Equipment channel. Amongst the models particularly reliable in the wet, wear-resistant and with a low and blue for the Four Seasons. “Perfect balance” is one of positive result of euro 336.2 million recorded for 2016. which chose Pirelli for Orginal Equipment, there were many noise impact on the inside of the passenger compartment.” the key characteristics of the new Pirelli bicycle tyres: tyres new announcements made at the last Frankfurt Motor Show: Thanks to its consistently high level of performance, the Pirelli with optimum performance and balanced, in terms of rolling Net cash flow was positive to the amount of euro 1,694.3 such as the Bentley Continental GT, the Audi RS5 Coupé and Cinturato P1 Verde received a “good” rating and was ranked first. resistance, with grip on wet and grip on dry, handling, puncture million (positive to the amount of euro 418.2 million for 2016), RS4 Avant, the new Porsche Cayenne (which for the winter resistance and durability (understood not only as a duration and included the effect (euro +304.6 million) resulting from the season is fitted with Scorpion Winter tyres), the Lamborghini The Cinturato P7™ Blue, Pirelli’s champion of sustainability time, but above all as a consistent performance over time). In continuation of the reorganisation of the Industrial business Aventador S Roadster and the McLaren 570s Spider. Also part renews and extends the double A European rating to all the order to satisfy similar project requirements, Pirelli researchers and the capital increase of euro 1,189.4 million subscribed to by of the record 110 August homologations were the Audi A8, the newly available sizes, thus marking a new record. This important worked on three fronts - the shape and construction of the Marco Polo International Italy S.p.A. in June 2017. BMW X3, the BMW 6 Series Gran Turismo, the Jaguar eTrophy result was achieved thanks to the technological evolution tyre, the tread pattern and the compound, the development RESEARCH AND DEVELOPMENT ACTIVITIES (the electric racing version of the I-Pace). which in recent years render Pirelli the lead actor. The new and patenting of new technologies deriving from F1® and the generation Cinturato P7™ Blue has a very low rolling resistance, world of Superbike, as well as new compounds. Pirelli’s model for research and development implemented in accordance with the “Open Innovation” model, is completed with consequent savings in fuel costs and a reduction of CO2 emissions, all to the benefit of the environment. At the origin with a series of collaborations with operators external to the of this improvement is the Low Rolling Technology Package, Group, such as suppliers, universities and car manufacturers, which combines new construction processes especially in the NEW MATERIALS in order to pre-empt technological innovations in the sector area of the belt plus the use of the latest internal materials. In the field of materials, the Group is active in the development and to direct research and development activities towards The adoption of the new technology has led to an increase in of new polymers in order to improve the characteristics of tyres meeting the needs of the final consumer. mileage of approximately 10%. in terms of rolling resistance, low temperature performance, mileage and grip on the road. In addition, the Group’s business The research and development activities carried out by and development activities with ever greater attention off-road product, the MC360™, the ideal equipment for the such as high dispersion silica for wet grip, rolling resistance, Furthermore, the Group accompanies its traditional research In the field of motorcycles, Metzeler introduced its latest focuses on the development of other non-polymeric materials, 7 4 Pirelli constitute a central phase for the development of towards reducing the environmental impact of its activities motorcycles of professional and amateur drivers alike who mileage; biomaterials such as silica from renewable sources, 5 7 new products. Consequently, Pirelli dedicates a strong focus and products. Pirelli is actively involved in the development take part in various off-road disciplines. biofillers such as lignin and plasticisers/resins of vegetable on technological innovation and continuously carries out of tyres with low environmental impact (safe for the planet), origin; nanofillers for more stable compounds, lighter research and development activities in relation to materials, high performance (safe for people), which includes the so The METZELER ROADTEC™ 01 was confirmed as the best Sport structures and linings with elevated waterproof qualities; products and production processes. called Self-Sealing and Runflat tyres which incorporate Touring tyre by the authoritative English magazine MCN, new silica surfactants to ensure performance stability and electronic sensors and are able to interact with the vehicle’s which decreed it the winner for 2017. processability; and, vulcanisers and stabilisers that allow for Research and development expenses for the 2017 financial control systems for increased safety and reduction of fuel the development of tyres with low environmental impact and year totalled euro 221.5 million, (4.1% of sales) of which euro consumption (Cyber Tyre™). There were two new comers for motorcycle Pirelli brand: high performance. 199.9 million was destined for High Value activites (6.5% of High Value revenues). PRODUCT INNOVATION  > The DIABLO™ SUPERCORSA SP, now in its third generation The Group has entered into cooperation agreements with and developed together with the Supersport and various international and national institutions and universities. Superstock class of riders of the Motul FIM (International These agreements include numerous research projects with The Research and Development department counts Motorcycling Federation) Superbike World Championship, the University of Milano-Bicocca, as part of the Consortium approximately 1,800 personnel (equal to 5.9% of the Group’s At the Geneva Motor Show in 2017, Pirelli presented two new it represents the homologated solution for the highest for Advanced Materials Research (CORIMAV), and through human resources) located at the Milan headquarters and products: performance road use ever designed by Pirelli. Thanks the Silvio Tronchetti Provera Foundation which allows for in their 12 technology centres, which allows for a direct  > the coloured editions of the P Zero™ and the Winter to its innovative features, it has already been chosen by the development of innovative materials and solutions which relationship with the major car manufacturers, facilitates Sottozero™ tyres, for which Pirelli engineers developed Ducati as Original Equipment of the new Panigale V4. are fundamental to the realisation of tyres with reduced the understanding of the needs of their markets, and helps innovative materials and finishes capable of ensuring  > The DIABLO ROSSO™ CORSA exploits the experience environmental impact and high performance, and the Joint to adapt the innovations and improvements gained at the brilliant and long lasting colours; gained over 15 years as the Official Tyre Supplier for the Labs agreement between Pirelli and the Politecnico di Milano Milan centre.  > Pirelli Connesso™ offers a digital platform which is MOTUL FIM Superbike World Championship which offers formulated in 2011 and aimed at research and training in In order to develop new products specifically designed to meet available in black or coloured, which thanks to the sensor a grip that sets a new benchmark on both wet and dry innovative materials and technologies for sustainable and the needs and technical specifications of customers, the Group fixed to the inner wall of the tyre itself is connected to an surfaces. has established long-lasting relationships with major Prestige App which is able to communicate with the motorist and increasingly safe mobility. The new phase of the agreement, with a three year duration, focuses on two main areas of and Premium car manufacturers. The development of the provide information on certain fundamental parameters After decades of collaboration, Pirelli has been selected by MV research: the area of design for innovative materials and the product together with these car manufacturers, supported by concerning the functioning of the tyre, and a range of Agusta to be the sole supplier of tyres. area for product development and Cyber development. integrated into the P Zero™ and Winter Sottozero™ tyres, the best combination of performance and versatility, with the tyre sector, in particular through the development of the testing and approval phases, is aimed at producing tyres other personalised services. that match the dynamic characteristics and electronics of the In January, the Pirelli Cinturato P1™ Verde received the praises As part of the Velo range, Pirelli launched a new line of tyres car (the so called “perfect fit”). Pirelli is the absolute leader of of the curators of the ADAC Award, the German motoring dedicated to bicycle racing on the road: the PZero™ Velo, ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operationsPROCESS AND PRODUCTIVITY INNOVATION compared to previous years, with the aim of optimising the footprint on the ground, and thus favouring a strong increase in cornering speed. During the course of 2017, pole position PARENT COMPANY HIGHLIGHTS In order to allow for the effective management of the variety was on average 2.450 seconds faster than for 2016, while the The table below shows a summary of the main Income Statement and Statement of Financial Position figures. of products in the factories, the Group has launched the “Smart fastest lap in the race was on average faster by 2.968 seconds. Manufacturing” program. This program is based on the use of “data” For 2018 an even faster tyre has been developed, the Pink through “Big Data analytics” techniques that flank the consolidated hypersoft. Each compound will be one grade softer than for Lean Manufacturing programs to improve production and the previous year. In the future this should help to increase Operating income (loss) maintenance processes, machine productivity and product quality, speed and performance even further. also from a predictive perspective, despite a significant reduction in the size of production batches. In 2017 Pirelli celebrated 110 years of commitment to Motorsports, COMMITTENT TO MOTORSPORTS which began in 1907 with the victory in the Beijing to Paris race. In the automotive field, in addition to F1®, Pirelli is now engaged in over 460 championships across all five continents. The different programs range from open competitions, in some cases with over Pirelli has been the sole official supplier of the Formula 1™® 20 manufacturers represented, to the single brand trophies of World Championship since the 2011 season, and renewed its world brands such as the Ferrari Challenge and the Lamborghini three-year contract for the third time on June 17, 2016, until Super Trofeo. In order to understand the enormous commitment Financial income/(expenses) Net income (loss) from equity investments Income taxes Net profit/(loss) Financial assets Net Equity Net financial position (In millions of euro) 12/31/2017 12/31/2016 (50.9) 63.2 (123.4) (236.9) 204.4 140.8 170.9 172.5 69.7 68.5 4,803.1 5,146.3 4,238.4 3,206.2 2,363.0 3,658.6 the 2019 season. This experience with the Formula 1™® World of Pirelli to Motorsport, just think that all these events translate The operating income (loss) which was negative at euro 50.9 million compared to the positive result of euro 63.2 million for the previous Championship has allowed Pirelli to develop new simulation into 1,170 races per year, all over the world, which employs financial year, and was impacted by non-recurring and restructuring expenses to the amount of euro 64.1 million mainly due to costs models which allow for the further reduction of the time approximately 1,000 people between engineers, track technicians for advisors and fees relative to the IPO process, and lesser royalties paid by the Group’s companies for the use of the Pirelli trademark. it takes to launch a product on the market, and to improve and other personnel dedicated to Research and Development. The operating result of the previous financial year included gains on the disposal of buildings (euro 29.4 million) in Milan, Italy used 7 6 the quality of road product projects, rendering them better Overall, in 2017 Pirelli was the protagonist of the most important for R&D of euro 27.2 million, and in San Donato Milanese, Italy of euro 2.2 million. 7 7 performing and compliant with the highest of requirements, international and national two-wheeled competitions, taking as well as allowing for a better understanding of the behavior part in a total of 119 motorcycle championships across five The reduction in financial expenses was mainly due to the decrease in the cost of debt resulting from the capital increase subscribed of materials according to temperatures when in use. In this continents, for some of them, as the sole tyre supplier and for to by Marco Polo International Italy S.p.A. in June 2017, and the refinancing of the debt carried out at the end of the first half-year. context, the FIA and Pirelli, in collaboration with their teams, others, in open competition with other tyre manufacturers. In reached a major agreement resulting in changes to the the European Championships which foresees the participation The item net income (loss) from equity investments mainly includes: technical regulations. In 2017 in fact, new technical regulations of several tyre producers, Pirelli on average equips 70% of the  > dividends on the part of Pirelli Tyre S.p.A. (euro 200 million compared to euro 169 million for 2016); will enter into force which will include significant modifications motorcycles deployed on the grid, thereby confirming the  > the capital gain on the disposal of the investment in Prelios S.p.A (euro 2.5 million). to the chassis, with a significant increase in the aerodynamic excellent appreciation demonstrated by motorcycle riders around load, and an increase in the tyre width of approximately 25% the world for the Pirelli brand. Income taxes for the 2017 financial year mainly included corporate income tax (IRES) from the consolidated Financial Statement which was positive to the amount of euro 72.1 million, compared to euro 54.4 million for 2016, and benefited from the recognition of deferred tax assets on previous tax losses and other temporary differences for a total of euro 76.8 million, and was directly attributable to the revision of forecasts for the future taxable income of the companies participating in Italian tax consolidation. ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operationsThe following is a summary of the values of the main financial assets: The table below shows the composition of equity at December 31, 2017 and the comparison with the previous financial year: (In millions of euro) (In millions of euro) Investments in subsidiaries - Pirelli Tyre S.p.A. - Pirelli Ltda - Pirelli & C. Ambiente S.r.l. - TP Industrial S.p.A. (formerly Pirelli Labs S.p.A.) - Pirelli UK Ltd. - Pirelli Group Reinsurance Company S.A. - Pirelli Servizi Amministrazione e Tesoreria S.p.A. - Other 12/31/2017 12/31/2016 4,521.8 4,521.8 9.7 2.0 - 21.9 6.3 3.2 3.4 9.7 - 364.3 21.9 6.3 3.2 3.5 Total equity investments in subsidiaries 4,568.3 4,930.7 Share capital Legal reserve Reserve premium Concentration reserve Other reserves IAS Reserve Reserve for cash flow hedges and relative tax effects Retained earnings Merger Reserves Net income (loss) for the financial year Total Equity 12/31/2017 12/31/2016 1,904.4 1,342.3 380.9 152.1 630.4 12.4 92.5 29.4 - 12.4 92.5 (12.6) (5.4) 0.3 - 305.4 1,022.9 1,245.3 170.9 68.5 4,238.4 3,206.2 7 8 Investments in associates and other financial assets - Eurostazioni S.p.A. - Rome - Prelios S.p.A. - Fenice S.r.l. - Focus Investments S.p.A. - Mediobanca S.p.A. - Milan - RCS Mediagroup S.p.A. - Milan - Fin. Priv S.r.l. - Real Estate Investment Fund - Anastasia - Istituto Europeo di Oncologia S.r.l. - Other Total investments in associates and other financial assets Total financial assets 6.3 - 2.5 1.4 6.3 13.6 9.1 4.0 149.0 122.2 30.2 19.9 15.3 6.6 3.6 19.3 16.5 14.6 6.2 3.8 234.8 215.6 4,803.1 5,146.3 RISK FACTORS AND UNCERTAINTY 9 7 The volatility of the macroeconomic environment, the instability of the financial markets, the complexity of management processes and the continuous legislative and regulatory changes demands the capacity to protect and maximise the tangible and intangible sources of value that characterise the corporate business model. Pirelli has adopted a proactive risk governance model, which through the systematic identification, analysis and assessment of risk areas is able to provide the Board of Directors and Management with the instruments needed to anticipate and manage the effects of these risks. The Pirelli Risk Model systematically assesses three categories of risk: 1. External risks Equity increased from euro 3,206.2 million to euro 4,238.4 million due to the impacts of the following: trends, to changes in demand, to competitor strategies, to technological innovation, to the introduction of new rules and (In millions of euro) regulations, and to country-specific risks (financial, security related, political and environmental risks) as well as the impacts These are risks which occur outside the sphere of influence of the company. This category includes risks related to macroeconomic Equity at 12/31/2016 Net income (loss) for the financial year Distribution of reserves assigned to TP Industrial Share capital increase Gains/(losses) recognised directly in Equity Equity at 12/31/2017 3,206.2 170.9 (364.3) 1,189.4 36.2 4,238.4 linked to climate change. 2. Strategic Risks These are risks which are typical for a specific business sector of which the proper management is a source of competitive advantage, or on the contrary, the cause for the failure to achieve financial objectives. This category includes risks linked to markets, product innovation and development, human resources, raw material costs, production processes, financial risks and risks connected to merger and acquisition operations. 3. Operational Risks These are risks generated by the organisation and by corporate processes, whose occurrence does not necessarily result in any kind of competitive advantage. These types of risks include Information Technology, Business Interruption, Legal & Compliance, Health, Safety & Environment, and Security related risks. At cross roads to the aforesaid risks are corporate social responsibility risks, environmental and business ethics risks. ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operations These are risks associated with the non-compliance with local regimes may prove unstable in the future. For example, and international regulations and corporate policies regarding structural elements of political instability persist in the Latin Risks related to climate change In the short-medium term, there were no significant risks in relation to production to transaction risk (mainly represented by receivables and payables in foreign currency). Coverage is then provided in the respect for human and labour rights, and environmental American area (with particular reference to Brazil), which processes or the markets where Pirelli operates. On the other the form of forward contracts which are entered into where and business ethics, and can be generated by the organisation could lead to an alteration of the normal market dynamics hand, as regards a medium-long term scenario, the tyre possible with the Group’s Treasury. either as part of the relative value chain or as part of the and, more generally, of business operating conditions. To sector could be subject to a number of risks both of a physical The positions subject to exchange rate risk are mainly supply chain. These risks in turn can lead to reputational risks. this scenario of uncertainty, there is the added recent socio- nature (such as the increase in average temperatures and the represented by receivables and payables in foreign currency. Reputational risks are related to actions or events that could political instability in the Middle East where the medium-long more frequently occurring extreme weather events) as well The Group’s Treasury is responsible for hedging the resulting cause a negative perception of the company on the part of its term implications remain uncertain. The Group constantly as of a regulatory nature. Pirelli monitors these elements of net position for each currency and, in accordance with the major stakeholders. The main areas of risk in this category are, monitors the changes in risks (political, economic/financial and uncertainty through sensitivity analyses. On the other hand, established guidelines and restrictions, it in turn provides for in addition to the aforementioned risks related to corporate security related) relative to the countries in which it operates the situation also represents growth opportunities in sales for the closure of all risk positions by trading derivative hedging social-environmental responsibility and to business ethics, as in order to continue to adopt timely (and if possible advance) both Pirelli Green Performance tyres as well as products with contracts on the market, typically forward contracts. well as to the inherent risks of leadership, and the quality and measures to mitigate the potential impacts of changes arising a lower environmental impact. Furthermore, as part of the one year and three year planning level of product innovation. at local level. Moreover, in situations of under-utilisation of the capacity of some factories, the reallocation of production between Group plants is possible. EXTERNAL RISKS Risks related to price trends and the availability of raw materials Natural rubber, synthetic rubber and raw materials related to oil (in particular chemicals and process, the Group formulates exchange rate forecasts on the basis of the best available information on the market. Any fluctuation in an exchange rate between the time of planning and the time when a commercial or financial transaction originates, results in a translation risk on future transactions. From time to Risks associated with general economic conditions and changing demand in the medium term Pirelli expects an improvement in the growth prospects of the Risks related to changes in demand in the long term Over the last few decades, certain social and technological trends have emerged that might potentially carbon black) will continue to be a factor of uncertainty time the Group assesses the opportunity to engage in currency within the Group’s cost structure, given the strong volatility hedging on future transactions for which it typically makes use recorded in recent years and their impact on the cost of the of either forward buy or sell operations, or optional operations have a material impact in the medium-long term on the finished product. such as risk reversal (for example; zero cost collars). global economy during the course of 2018, in the wake of a automotive sector, and indirectly on the tyre market. On the For the main raw materials purchased by the Group, possible Pirelli owns controlling interests in companies that prepare 8 0 probable consolidation of the current expansionary phase one hand, these are represented by the growing phenomena of price scenarios are constantly simulated in relation to the their Financial Statements in currencies other than the 1 8 of the European and Chinese economies together with an urbanisation (according to the latest United Nation estimates, historical volatility and/or the best information available on Euro which is the currency used to prepare the consolidated acceleration of the US economy. Global growth should also approximately 70% of the global population will live in urban the market (e.g. forward prices). On the basis of the different Financial Statements. This exposes the Group to currency show itself to be more balanced thanks to a contribution areas by 2050) and on the other hand, by changes in the values scenarios, increases in sales prices and/or the different translation risk, due to the conversion into Euro of the assets of growth from the main emerging markets which should and behaviour of younger generations (increase in the average internal actions, for the recovery of cost efficiencies (use of and liabilities of subsidiaries operating in other currencies. The benefit from a more stable currency market. Despite this age when a driver’s license is obtained, loss of importance of alternative raw materials, reduction of the weight of the main exposures to currency translation risk are constantly favourable macroeconomic environment, there still persist owning a car, increased use of various types of car sharing). product, improvement of the processing quality and reduction monitored and at present it has been decided not to adopt however, elements of both a political risk nature (amongst Added to these factors is the increasing spread of information of the levels of waste), necessary to guarantee the expected specific hedging policies for these exposures. The 2017 financial others Brexit, the Italian parliamentary elections, the technologies which increasingly encourages the use of levels of profitability are identified. year saw the US Dollar decline against the Euro as well as both Brazilian presidential elections and the Catalan crisis) as well e-commerce and/or telecommuting along with frequent as macroeconomic risks. The latter are mainly linked to the regulatory interventions, both in the mature as well as current uncertainty that characterises the North American emerging economies, aimed at limiting the presence of free trade area (NAFTA) as well as the possible increase in the polluting vehicles within and near metropolitan areas. These volatility of the financial markets. dynamics may give rise to a change in automotive sector STRATEGIC RISKS Country risk Where appropriate, Pirelli has adopted a local-for-local strategy, creating a productive presence in demand (from changes to vehicle dimensions/engines which take different types of fuel/power supply, to the possible Exchange rate risk The diverse geographical distribution of Pirelli’s productive and commercial activities entails the resizing of the car in accordance with the transportation exposure to exchange rate risks such as transaction risk and preferences of citizens), with a potential impact on the translation risk. the Brazilian Real and Russian Rouble. As regards instead the Chinese Renminbi, there was a partial reversal of direction (at least at a quarterly granularity level) during the course of 2017 with respect to the depreciation trend in evidence since 2013. According to the currently available forecasts, the 2018 financial year should repeat, at least in terms of annual trends, that which was seen during the previous financial year. rapidly developing countries in order to respond to the local dynamics of the tyre sector. Transaction risk is generated by transactions of a commercial demand with competitive industrial and logistical costs. This Pirelli constantly monitors the evolutionary changes in and financial nature carried out in individual companies Liquidity risk The principal instruments used by the Group to manage the risk of insufficient available financial resources strategy is aimed at increasing the competitiveness of the automotive sector demand by actively participating in in currencies other than the functional currency, due to to meet the financial and commercial obligations within the Group, as well as allowing the Group to overcome potential working groups at international level, such as the SiMPlify and fluctuations in exchange rates between the time when the terms and deadlines established, are its one year and three protectionist measures (customs barriers or other measures Future of Mobility projects sponsored by the World Business commercial/financial relationship originates and the time year financial plans and its treasury plans, in order to allow such as technical prerequisites, product certification, and Council for Sustainable Development (WBCSD). The principal when the transaction is settled (collection/payment). for the complete and correct detection and measurement of administrative costs related to import procedures, etc.) In aim of such projects is in fact to study the possible long-term The Group’s policy is to minimise the impact of transaction risk incoming and outgoing cash flows. The differences between the context of this strategy, Pirelli operates in countries evolution of urban mobility and to promote solutions that linked to volatility, and for this reason the Group’s procedures the plans and the final data are constantly analysed. (Argentina, Brazil, Mexico, Russia, China, Egypt, and Turkey) might improve the social, environmental and financial well- provide that the Operating Units are responsible for collecting The Group has implemented a centralised system for the where the general economic and political situation and tax being of the urban population. all the relevant information pertaining to positions subject management of collections and payments in compliance ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operationswith various local currency and tax regulations. Banking issued by parties of the highest credit or personal standing. relationships are negotiated and managed centrally, in order Less frequently, mortgage guarantees may be requested. Employee health and safety risks The Pirelli Group, in carrying out its activities, incurs expenses and costs for the security systems against unauthorised access, as well as of the business data management solutions. to ensure coverage for short and medium-term financial needs Other instruments used for commercial credit risk the actions necessary to ensure full compliance with the Particular attention has been paid to the renewal of at the lowest possible cost. Even the procurement of medium management is the taking out of insurance policies. As of obligations provided for by the regulations regarding health infrastructural componentry characterised by technological and long-term resources on the capital market is optimised January 2012, the company signed a master agreement which and safety in the workplace. Particularly in Italy the law obsolescence which could entail a greater risk of breakdowns through centralised management. expired in December 2017, with a leading insurance company relating to health and safety at work (Legislative Decree no. and incidents which could impact on the Group’s activities. The prudent management of the aforementioned risk for worldwide coverage for credit risk mainly related to sales 81/08) and subsequent amendments (Legislative Decree no. In particular: requires the maintenance of an adequate level of cash or on the Replacement channel (with an approximate 68% 106/09) have introduced new obligations that have impacted  > High reliability solutions have been implemented for cash equivalents and/or highly liquid short-term securities, acceptance rate at December 2017). on the management of activities at Pirelli sites, and on the the data network, renewing the central devices which plus the availability of funds obtainable through an adequate The insurance coverage has been extended to also cover models for allocating liabilities. manage communications within the Company and the amount of committed credit facilities and/or recourse to the 2018. During the course of 2017, the general situation for Failure to comply with current health and safety regulations access to Internet services, in order to reduce the risk of capital market. trade receivables remained essentially consistent with entails criminal and/or civil penalties at the expense of those possible disservices and to increase perimeter security. In addition to the available portion of the committed credit that at the closing of the previous financial year. The Group responsible, and in some cases, the penalties for the violation  > the work to bring the Server and Client environments into facility (the Revolving Credit Facility) for a total of euro 700 operates only with highly rated financial counterparties of regulations are borne by the Companies themselves in compliance continued with the progressive updating million which at December 31, 2017 resulted as being completely for the management of its temporary cash surpluses or for accordance with a European model of objective liability for of the operating systems in order to reduce their unused, the Pirelli Group has resorted to the capital market to trading in derivative instruments. Pirelli does not hold public companies incorporated in Italy (Legislative Decree no. 231/01). vulnerabilities. diversify both products and maturities in order to seize the best debt instruments from any European country, and constantly opportunities available from time to time. monitors its net credit exposure to the banking system, and does not show significant concentrations of credit risk. Interest rate risk Interest rate risk is represented by exposure to the variability of the fair value or of the future cash flows of financial assets or liabilities due to changes in Risks associated with human resources The Group is exposed to the risk of loss of resources in key positions or 8 2  > the new Disaster Recovery solution was activated, which substantially reduces recovery times and limits any loss of Defective product risk As with all manufacturers of goods for sale to the public, Pirelli is subject to potential data to a minimum.  > the central infrastructure of storage systems was liability claims related to any alleged defects of the materials strengthened with a view to Business Continuity, in sold or may be required to launch recall campaigns for compliance with the Group’s architectural standards and products. Although in recent years there have been no security regulations. 3 8 market interest rates. in possession of “critical know how”. To address this risk, the significant cases and such events are however covered by an  > the infrastructures for saving corporate data resident on Group adopts remuneration policies periodically updated also insurance point of view, any occurrence could have a negative user PCs and on central systems were enhanced to reduce The group assesses, on the basis of the market circumstances, based on changes in the general macroeconomic scenario impact on the reputation of the Pirelli brand. For this reason, the risk of information loss. whether to enter into derivative contracts, typically interest as well as on the basis of salary benchmarks. Also planned the tyres manufactured by Pirelli are undergo a careful  > work continued on the segregation of the factory networks rate swaps, for hedging purposes for which hedge accounting are long-term incentive plans and specific non-competition quality analysis before being placed on the market. The entire within the various locations of the Group, and with the is activated when the conditions set forth in the IAS 39 are met. agreements (also with retention effect) designed amongst production process is subject to specific quality assurance implementation of protective solutions to the level of other things, to fit the risk profiles of the activities related to procedures aimed at safety, as well as at constantly elevated individual machinery. Price risk associated with financial assets The Group is exposed to price risk only regarding the volatility of financial assets such as listed and unlisted stocks and bonds, accounting for 2.1% of total assets of the Group. Derivatives are not normally set up to limit the volatility of these assets. OPERATIONAL RISKS the business. Finally, specific management policies have been performance. adopted to motivate and retain talent. Credit risk Credit risk represents the Group’s exposure to potential losses resulting from the non-fulfilment of Risks related to environmental issues The activities and products of the Pirelli Group are subject to numerous environmental laws that vary between the countries where the commercial and financial obligations undertaken by the Group operates. These regulations have in common their counterparties. As regards these commercial counterparties, tendency to evolve in an ever more restrictive manner, also Litigation risks In carrying out its activities, Pirelli may become involved in legal, fiscal, trade or labour law disputes. Business Interruption risks The territorial fragmentation of the operating activities of the Group and their interconnection, expose it to risk scenarios that could cause the interruption of The Group adopts the necessary measures to prevent and business operations for more or less prolonged periods, with the mitigate any penalties that may result from such proceedings. consequent impact on the operational capabilities and results of Risks related to information systems and network infrastructure The supporting role of ICT (Information for business and communication technology) systems the Group itself. Risk scenarios related to natural events or accidents (fires, floods, earthquakes, etc.), to wilful misconduct (vandalism, sabotage, etc.), to breakdowns of the auxiliary plants or to the interruption of the supply of utilities can, in fact, cause in order to limit this risk, Pirelli has implemented procedures to due to the growing concern of the international community processes, their evolution and development, and for the significant property damage, and the reduction and/or evaluate customer potential and financial creditworthiness, to over the issue of environmental sustainability. Pirelli expects Group’s operating activities was also confirmed during the interruption of production, particularly if the event concerns monitor expected collection flows and to take credit recovery the gradual introduction of ever stricter laws in relation to course of the 2017 financial year as being fundamental to the high volume or specific product (high-end) production sites. action if and when necessary. The aim of these procedures the various environmental aspects on which companies may achieving of results. Pirelli monitors their vulnerability to catastrophic natural is to define customer credit limits, whereby in the event impact (atmospheric emissions, waste generation, impacts on Pirelli has mainly worked towards the prevention and events (in particular flood, hurricane and earthquake) with that those limits are exceeded, the rule to withhold further soil and water use, etc.), by virtue of which the Group expects mitigation of risks connected to possible system malfunctions estimates of any potential damage (based on the given supplies is activated. In some cases customers are asked to to have to continue to make investments and/or incur costs through high reliability solutions for the protection of the probability of occurrence) for all the Group’s production sites. provide guarantees. These mainly consist of bank guarantees that may be significant. corporate information assets, through the enhancement of The analyses confirm the adequate monitoring of business ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operationsinterruption risks, thanks to a complex series of security measures, systems of prevention of harmful events and the mitigation of potential impacts on the business, also in light of the current business continuity plans as well as the insurance Risks in terms of corporate social and environmental responsibility, business ethics, and third-party audits. Risk management at Pirelli is enterprise-wide and includes Statements/consolidated Financial Statements) their adequacy and effective application. In order to enable the attestation by the Chief Financial Officer, the companies and the relevant processes that feed and generate the data for the Income Statement, the Statement of Financial Position or the Financial Statements have been mapped. The identification of companies that belong to the Group and the relevant processes is carried out annually on the basis of quantitative policies in place to cover property damage and business the identification, analysis and monitoring of environmental, and qualitative criteria. The quantitative criteria involves the identification of the Group companies which, in relation to the selected interruption. Regarding earthquake risk, and specifically the social, economic/financial and business ethics risks that are processes, represent an aggregate value which exceeds a certain threshold of materiality. facility in Turkey, any particularly significant seismic events directly or indirectly attributable to the company, through The qualitative criteria involve the examination of processes and companies which, in the opinion of the Chief Executive Officer may could result in losses exceeding the insured limits resulting Pirelli affiliates or from within relations with them, such as the present potential areas of risk despite not falling within the aforesaid quantitative parameters. in a negative impact on the operating results. Even Pirelli’s sustainability of the supply chain. For each selected process, the risk/control objectives associated with the preparation of the Financial Statements and any related supply chain is subject to regular assessment concerning the Before entering a specific market, ad hoc assessments disclosures, as well as to the effectiveness/efficiency of the internal control system in general, have been identified. potential risk of business interruption in the qualification are carried out in order to assess any political, financial, For each control objective, specific verification procedures have been implemented and specific responsibilities have been assigned. phase of new Tier-1 suppliers. environmental and social risks, including those connected with A supervisory system has been implemented on the controls carried out by way of a mechanism of chain attestations. Any problems Reputational risk and corporate social - environmental responsibility Reputational risks Pirelli has developed an ad hoc digital tool for the identification, human and labour rights. Together with constant centralised that emerge within the evaluation process are subject to action plans whose implementation is verified in subsequent closings. co-ordination and monitoring, the ongoing verification of The quarterly issue of a declaration of the reliability and accuracy of the data supplied for the purposes of preparing the Group’s consolidated the application of Pirelli’s requirements regarding financial, Financial Statements is also ultimately provided by the Chief Executive Officer and the Chief Financial Officer of each subsidiary. social (especially human and labour rights) and environmental In the lead up to the dates of the Board of Directors’ Meeting which approve the consolidated data at June 30 and December 31st, the sustainability and business ethics, occurs through periodic results of the verification procedures are discussed by the Chief Financial Officer of the Group companies and the Chief Financial Officer. audits commissioned by Pirelli from specialised independent The Internal Audit Department performs regular audits aimed at verifying the adequacy of the design and effectiveness of the firms, and through extensive internal audit activities. controls on the subsidiaries, as well as the sampling procedures, selected on the basis of materiality criteria. measurement and management of reputational risk, which is Particular attention is dedicated to the sustainability of both measured in terms of the probability of occurrence and impact Pirelli sites and sites belonging to suppliers operating in on reputation. Reputational risk is understood as a current or emerging countries. During 2017 Pirelli again commissioned 8 4 prospective risk that might result in a loss in gains and affect third-party audits of its suppliers, in addition to continuing the propensity to buy due to a negative perception of the the internal monitoring through the activities of the Internal Company by one or more stakeholders. While on the one hand, Audit Department. reputational risk is construed as a possible consequence of the occurrence of an adverse event related to one of the three aforementioned macro-risk families, on the other hand it is managed as an independent event precisely because its scope depends on the expectations of the stakeholders concerned, as well as the impact of the negative event. The chosen SYSTEMS FOR RISK MANAGEMENT AND INTERNAL CONTROL RELATIVE TO THE FINANCIAL REPORTING PROCESS OUTLOOK FOR 2018 The forecast data for 2018 are in line with the path of growth outlined in the 2017-2020 industrial plan, with a strategy centered on the further reinforcement of High Value and confirm the expected operational performances notwithstanding greater forex volatility. 5 8 methodology has led to the identification of a specific set of Pirelli has also implemented a specific and articulated reputational risks. This mapping derives from an analysis of system of risk management and internal control, supported Revenues a series of internal and external drivers including: negative by a dedicated information technology application, with events with an impact on reputation which have occurred in regard to the process of preparing the the half-year, annual, Weight of High Value on revenues the sector worldwide over the last ten years; interviews with separate and consolidated Financial Statements, in order to external Key Opinion Leaders on sector trends, especially on safeguard the company’s assets, its compliance with laws aspects of mobility and sustainability; interviews with internal and regulations, the efficiency and effectiveness of corporate Adjusted ebit before non-recurring and restructuring charges and start-up costs Weight of High Value on Adjusted Ebit Key Opinion Leaders with particular reference to the analysis operations, as well as the reliability, accuracy and timeliness of Start-up costs of the probability of the occurrence of the risks identified. financial reporting. The risk events identified were then subjected to the In particular, the process of preparing financial reports takes qualitative-quantitative assessments of a sample place through the appropriate administrative and accounting representative of the general public in the five key Pirelli procedures that have been drawn up in accordance with countries, which led to the definition of the governance and criteria established in Internal Control - Integrated Framework management structures and the preparation of mitigation issued by the Committee of Sponsoring Organisations of the and/or crisis management plans. Tradeway Commission. The administrative/accounting procedures for the preparation Adjusted Ebit before non-recurring and restructuring charges and PPA amortization Net financial position / Adjusted Ebitda before non-recurring and restructuring charges and before start-up costs CapEx on revenues 2017 5,352.30 57.50% 926.6 ~83% 50 876.4 2.7X 9.10% (In millions of euro) 2018 ≥+6% (a/a) ~+10% net forex ~60% >1.000 ≥83% ~40 ~1.000 ~2,3X ~8% of Financial Statements and all other financial reports are On the basis of 2017 data, Pirelli expects for the end of 2018 the following forecast data: prepared under the responsibility of the Chief Financial Officer,  > revenue growth equal to or higher than 6% compared with 5.352.3 billion euro in 2017, equal to about +10% excluding the effect of forex who periodically attests to (in any case, in the Financial volatility, mainly in the euro-dollar exchange; ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operations  > growing weight of the High Value component, which will debt to be optimised by lengthening maturities and reducing the below 2 times on 31 December 2020) and the following targets: be equal to about 60% of total revenues at the end of 2108 cost of the debt. As evidence of investor confidence towards Pirelli,  > Group Return on Sales (ROS), with a weight at target of 30% of (57.5% in 2017); at closing, the loan saw the collection of orders amounting to euro the LTI premium;  > adjusted Ebit before non-recurring and restructuring charges 2.4 billion on the part of 280 international investors. The effective  > Group “absolute” Total Shareholder Return, with a weight at and before start-up costs expected to be above 1 billion euro, yield at maturity is set as equal to 1.479%. The securities have target of 40% of the LTI premium; compared with 926.6 million euro in 2017, with the High Value been listed on the Luxembourg Stock Exchange. Furthermore,  > Group “relative” Total Shareholder Return compared with a accounting for 83% or above (about 83% in 2017); during the course of the first weeks of January, Pirelli initiated an selected panel of peers, with a weight at target of 20% of the ALTERNATIVE PERFORMANCE INDICATORS  > start-up costs declining to about 40 million euro (50 million operation to ammend the financial terms and conditions of the LTI premium; This document, in addition to the financial measures as in 2017); Group’s main banking facilities - regarding a total notional amount  > position of Pirelli on the Dow Jones Sustainability World Index ATX provided for by the International Financial Reporting  > adjusted Ebit before non-recurring and restructuring charges of euro 4.2 billion which includes a revolving credit facility of euro Auto Components sector, with a weight at target of 10% of Standards (IFRS), also includes measures derived from the and amortizations identified in the context of PPA expected 700 million - which will see an applied reduction to the interest the LTI premium. latter even though not provided for by the IFRS (Non-GAAP at about 1 billion euro, compared with 876.4 million euro at margin of 30 basis points. The LTI Plan terminates on 31 December 2020 and sets in the Measures). These measures are presented in order to allow the end of 2017; second quarter of 2021 the date of the eventual payment of the for a better assessment of the results of Group operations  > ratio between net financial position and Adjusted Ebitda before On February 23, 2018 Pirelli International Plc (a subsidiary of medium/long term incentive matured, on condition that, on 31 and must not be considered as alternatives to those required non-recurring and restructuring charges and before start-up Pirelli) decided to exercise the option of early repayment and December 2020, the relationship as an employee of the participant by IFRS. costs at about 2.3 times, compared with 2.7 times in 2017; the subsequent cancellation of the “Pirelli International Plc Euro has not ended. The participants in the LTI plan include, among In particular, the Non-GAAP Measures used are as follows:  > capEx at about 8% of revenues (9.1% in 2017). 600,000,000 1.750 per cent. Guaranteed Notes due November 18, others, the Executive Vice Chairman and Chief Executive Officer of Pirelli > EBITDA adjusted: is equal to the EBIT and excludes the 8 6 SIGNIFICANT EVENTS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR 2019”, listed on the Luxembourg Stock Exchange and maturing & C., Marco Tronchetti Provera, the Executive Vice President and Chief amortisation of intangible and depreciation of tangible on November 18, 2019 (the “Notes 2019”). The early repayment, Financial Officer, Francesco Tanzi; the Executive Vice President and assets as well as non-recurring and restructuring which will cover all of the 2019 Notes, and which responds to Chief Planning and Controlling Officer, Maurizio Sala; the Executive expenses; the objective announced for the constant optimisation of the Vice President and Strategic Advisor Technology, Maurizio Boiocchi; > EBITDA adjusted without start-up costs: is equal to Group’s financial structure, will take place through the exercise the Executive Vice President and Chief Commercial Officer Roberto the EBITDA adjusted but excludes the contribution of of the “Make Whole Issuer Call” which is provided for by the current Righi; the Senior Vice President Manufacturing, Francesco Sala; the the start-up costs (equal to a total amount of euro 37.4 Terms and Conditions of the loan. The operation is expected to be Executive Vice President Business Unit Prestige & Motorsport & COO million) represented by the Cyber™ and Velo activities, and 7 8 finalised by March 31, 2018. Region Europe, Andrea Casaluci and the Executive Vice President Pirelli by costs for the conversion of Aeolus brand Car products, On February 26, 2018 the Board of Directors of Pirelli, in line with and Executives of the Group (including board member Giovanni the Company; that which was announced during the IPO, approved the adoption Tronchetti Provera) and can be also extended to those who, during > EBIT: is an intermediate measure, which is derived from the Digital, Luigi Staccoli. The LTI plan also applies to senior managers as well as costs sustained for the digital transformation of On January 10, 2018 Pirelli launched the sale of the ordinary shares of a new 3-year 2018-2020 monetary incentive plan (LTI Plan) – the course of the 3-year period, assume, either through internal net income but which excludes taxes, financial income, held in Mediobanca S.p.A. and reserved for “qualified investors” in destined to all management (about 290 people) – correlated to career growth or new hiring, an Executive position. financial expenses and the results from investments; Italy and institutional investors abroad, pursuant to Regulation the targets for the period 2018/2020 contained in the 2017/2020 The LTI Plan is also aimed at retention. In the event that the > EBIT adjusted: is an intermediate measure, which is derived S of the United States Securities Act of 1933 as subsequently industrial plan. employee relationship ends before the end of the 3-year period, from the EBIT and which excludes the amortisation amended, and in the United States of America limited to “Qualified with the exception of natural circumstances, the recipient’s ceases of intangible assets relative to assets recognised as Institutional Buyers” pursuant to Rule 144 A of the United States The LTI (Long Term Incentive) Plan was approved – also in to participate in the LTI Plan and as a consequence the LTI premium a consequence of Business Combinations, as well as Securities Act of 1933, through an accelerated book-building accordance with article 2389 of the civil code – at the proposal of will not be provided, not even pro-quota. In the case of Board operational costs attributable to non-recurring and procedure. On January 11, 2018 Pirelli announced that it had the Remuneration Committee and with the favourable opinion Members holding particular roles to whom specific attributions restructuring expenses; successfully completed the disposal – through the aforesaid of the Board of Statutory Auditors, in relation to the subjects are delegated (it is the case of the Executive Vice Chairman and > EBIT adjusted without start-up costs: is equal to the procedure - of 15,753,367 ordinary shares held in Mediobanca - for whom this opinion is requested. In the part linked to Total Chief Executive Officer Mr. Marco Tronchetti Provera) who cease EBIT adjusted but excludes the contribution to the start- which corresponded to approximately 1.8% of the share capital Shareholder Return, the LTI Plan will be submitted for approval at in the role because their mandate has been completed and are not up costs (equal to the total amount of euro 50.2 million) with voting rights, and which represented the entire investment the Shareholders’ meeting called to approve results for the 12 subsequently nominated, not even as board members, pro-quota represented of the Cyber and Velo activities, and by the held directly by Pirelli in Mediobanca. The total net income for months ended on 31 December 2017. payment of the LTI premium is foreseen. costs for the conversion of Aeolus brand Car products, as Pirelli derived from the operation amounted to approximately The LTI Plan, in line with the mechanisms of variable retribution For further information on the functioning of the LTI Plan, well as the costs sustained for the digital transformation euro 152.8 million. adopted at the international level, is also based on the performance one may refer to the Remuneration Report which will be of the Company; of Pirelli shares (Total Shareholder Return) allowing in this way the submitted (for the part relative to Policy in relation to > Net income (loss) related to continuing operations On January 22, 2018 as part of the EMTN (Euro Medium Term alignment of management and shareholder interests. Pirelli remuneration for 2017) for a consultative vote of the (Consumer) adjusted: the adjusted net income related Note) program approved at the end of 2017 and subscribed to The LTI Plan – as in the past totally self-financed, in so far as Shareholders’ meeting called to approve results for the year to continuing operations is calculated by adjusting the on January 10, 2018, Pirelli placed a bond loan with international the relative charges are included in the economic figures of the ended 31 December 2017, as well as the illustrative report and net income (loss) related to assets in operation for the institutional investors for a nominal amount of euro 600 million industrial plan – includes an on/off condition, represented by the the information document relative to the LTI Plan which will following items: with a five-year duration at a fixed rate. The issue, with a yield of company’s deleveraging (Net Financial Position/Ebitda Adjusted ratio be made available to the public, under the conditions and > > the amortisation of intangible assets related to 110 basis points based on the official reference rate, allowed for the modes called for by prevailing law, and also regulation. assets detected as a consequence of Business ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operationsCombinations, and operational costs due to non-recurring and restructuring expenses; The Board has internally instituted the following Committees C. S.p.A. which are of relevance pursuant to Article 15 of the > > non-recurring costs/income recognised under financial income and expenses; with advisory tasks: Markets Regulation are: > > non-recurring costs/income recognised under taxes, as well as the tax impact related to the adjustments referred to in the  > Audit, Risk, Sustainability and Corporate Governance Limited Liability Company Pirelli Tyre Russia (Russia); Pirelli previous points. Committee Pneus Ltda (Brazil); Pirelli Comercial de Pneus Brasil Ltda  > Remuneration Committee (Brazil); Pirelli Tire LLC (USA); Pirelli Tyre Co. Ltd (China); Pirelli The following table shows the calculation of the net income (loss) related to continuing operations (Consumer) adjusted:  > Committee for Related Party Transactions Otomobil Lastikleri A.S. (Turkey); Pirelli Neumaticos S.A.I.C. (In millions of euro)  > Nominations and Successions Committee (Argentina); Pirelli Neumaticos S.A. de C.V. (Mexico); and Net income (loss) related to continuing operations Amortisation of intangible assets included in PPA Non-recurring and restructuring expenses Net financial expenses Tax 2017 263.3 109.6 93.2 61.2 2016 164.0 104.6 53.2 25.4 (140.5) (50.6) Net income (loss) related to continuing operations adjusted 386.8 296.6  > Strategies Committee Pirelli Asia Pte Ltd (Singapore). For more details reference should be made to the section of Also pursuant to the same regulations, the Company has put this present Report titled “Report on Corporate Governance and in place a specific and appropriate “Group Operating Regulation” Ownership Structure”, included in the Financial Stataments which ensures immediate, constant and full compliance and published in the Governance section of the Company’s with the provisions contained in the aforementioned website (www.pirelli.com). CONSOB regulation. In particular, the competent company INFORMATION ON THE SHARE CAPITAL AND OWNERSHIP STRUCTURE departments ensure the timely and regular identification and disclosure of the Extra-EU Companies of relevance to the provisions of the Markets Regulation, and - with the necessary and appropriate collaboration of the companies involved - guarantee the collection of data and information The information referred to in Article 123 bis of Legislative and the assessment of the circumstances referred to in the > Fixed assets related to continuing operations: this measure is constituted by the sum of the items “Property, plant and equipment”, Decree 24 February 1998 n. 58 are reported in the specific aforementioned Article 15, thus ensuring the availability of “Intangible fixed assets”, “Investments in associates and joint ventures” and “Other financial assets”; section of this present Report titled “Report on Corporate the information and data supplied by the subsidiaries in the > Provisions: this measure is constituted by the sum of “Provisions for liabilities and charges (current and non-current)”, “Employee benefit Governance and Ownership Structure”, included in the Financial event of a request by CONSOB. A regular flow of information 8 8 obligations” and “Provisions for deferred taxes”; Stataments and published in the Governance section of the is also required to ensure that the Board of Statutory Auditors 9 8 > Operating working capital related to continuing operations: this measure is constituted by the sum of “Inventory”, “Trade Company’s website (www.pirelli.com). of the Company carry out the requisite and appropriate receivables” and “Trade payables”; > Net working capital related to continuing operations: this measure consists of the operating working capital and other receivables and payables not included in the “Net financial liquidity/(debt) position”; > Net financial (liquidity)/debt position: this measure is represented by the gross financial debt less cash and cash equivalents as well as financial receivables. OTHER INFORMATION ROLE OF THE BOARD OF DIRECTORS The Board of Directors is responsible for the strategic guidance and supervision of the overall business activities, has the power to address the administration as a whole, and is empowered in the undertaking of the most important financial/strategic decisions and decisions which have a structural impact on operations, or are functional decisions, as well as to exercise the control and direction of Pirelli. DEROGATION OF THE PUBLICATION OF INFORMATION verifications. Finally, the aforesaid “Operating Regulation”, consistent with the regulatory provisions, governs the making available to the public of the financial statements (Statement of Financial Position and Income Statement) of the significant Extra-EU Companies, prepared for the The Board of Directors, taking into account the simplification purposes of compiling the consolidated Financial Statements of regulatory requirements introduced by CONSOB in the of Pirelli & C. S.p.A. Issuer’s Regulation no. 11971/99, resolved to exercise the power It shall therefore be noted that the Company is fully compliant to derogate, pursuant to the provisions of Article 70, paragraph with the provisions of Article 15 of the aforementioned 8, and of Article 71, paragraph 1-bis of the aforesaid Regulation, CONSOB Regulation no. 20249 of December 28, 2017 and the the obligations to publish the disclosure documents required at subsistence of the conditions required by the same. the time of significant mergers, de-mergers, capital increase by contributions in kind, acquisitions and disposals. FOREIGN SUBSIDIARIES NOT BELONGING TO THE EUROPEAN UNION (NON-EU COMPANIES) RELATED-PARTY TRANSACTIONS As part of the new listing process initiated and completed in 2017, the Company’s Board of Directors again approved the Procedure for Related Party Transactions (“OPC Procedure”). Subsequently, following the renewal of the administrative The Chairman is endowed with the legal representation of the Company including in the legal proceedings of the Company, as well Pirelli & C. S.p.A. directly or indirectly controls some companies body and the constitution of the Committee for Related Party as all other powers attributable to the Chairman in accordance with the Articles of Association. based in countries which do not belong to the European Transactions (“OPC Committee”), the Procedure for Related The Executive Vice Chairman and CEO are exclusively delegated powers for the ordinary management of the Company and the Community (Extra-EU Companies) which hold particular Party Transactions was adopted, without any modification, Group, as well as the power to propose business and industrial plans and budgets to the Board of Directors, as well as any resolutions significance pursuant to Article 15 of CONSOB Regulation no. and, following the unanimous favourable opinion expressed concerning any strategic industrial partnerships and joint ventures of which Pirelli is a part. 20249 of December 28th 2017 concerning markets. by the members of the OPC Committee, also by the Board of With reference to the data at December 31, 2017, the Extra- Directors currently in office. EU Companies controlled, directly or indirectly, by Pirelli & The OPC Procedure can be consulted, together with the ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operationsother corporate governance procedures, in the section of the It is to be noted that in the course of the 2010 financial website www.pirelli.com dedicated to corporate governance. year, the Board of Directors for the first time approved for the Procedure for Related Party Transactions, also in order For more details on the Procedure for Related Party to implement the aforementioned CONSOB Regulation. Transactions (“OPC Procedure”), reference should be made to In addition, on November 6, 2017 on the occasion of the the sections named “Directors’ Interests” and “Related Party admission to trading of the ordinary shares of the Company Transactions” included in the “Annual Report on Corporate on the Mercato Telematico Azionario (screen-based stock Governance and Ownership Structure” contained in the exchange), organised and managed by Borsa Italiana S.p.A. Financial Statements. - as confirmation of the resolutions adopted on August 31, 2017- the Board of Directors approved the adoption of the *** Procedure for Related Party Transactions (“OPC Procedure”), following the unanimous favourable opinion expressed by the Pursuant to Article 5 paragraph 8 of CONSOB Regulation no. members of the Committee for Related Party Transactions 17221 of March 12, 2010 on Related Party Transactions, and the (“OPC Committee”). subsequent CONSOB Resolution no. 17389 of June 23, 2010, it shall be noted that during the 2017 financial year, that no transaction of significant importance as defined by article 3 paragraph 1, letter a) of the aforementioned Regulation was submitted to the the Board of Directors of Pirelli & C. S.p.A. for approval. UNUSUAL AND/OR ATYPICAL TRANSACTIONS Moreover, there were no Related Party Transactions that Pursuant to CONSOB Notice no. 6064293 of July 28, 2006, it significantly affected the financial position or results of the should be noted that during 2017 the Company did not carry Group. For information purposes, it is to be noted that during the out any atypical and / or unusual transactions, as defined in 9 0 month of March 2017, the two business areas of Consumer and the aforesaid communication. Industrial, were definitively separated through the assignment to sole shareholder Marco Polo International Italy S.p.A., of all the TP Industrial Holding S.p.A. shares previously held by Pirelli & C. S.p.A. TP Industrial Holding S.p.A. the company which holds SAFETY POLICY DOCUMENT 52% of the share capital of Pirelli Industrial S.r.l. (today called Although the Decree Law of February 9, 2012, No. 5 (containing Pmrometeon Tyre Group S.p.l.), is the company into which the “Urgent Provisions on Simplification and Development”) Pirelli’s Industrial assets were merged. converted with amendments by Law April 4, 2012, No. 35, The information on related party transactions required by repealed the obligation to prepare/update the Security Policy CONSOB Communication no. DEM/6064293 of July 28, 2006 is Document, it is to be noted that Pirelli & C. S.p.A. did however presented in the Financial Statements, and in the Note titled update the aforesaid document for the year 2017, in order “Related Party Transactions” in the Annual Financial Statements to allow for the efficient monitoring of the adoption and at December 31, 2017. compliance of the safety measures. Related party transactions, are neither unusual nor exceptional, but are part of the ordinary course of business for the Group companies and are carried out in the interest of the individual companies. Such transactions, when not settled under standard conditions, or dictated by specific regulatory conditions, are in any case regulated by conditions consistent with those of the market. In addition, their execution was carried out in compliance with the Procedure for Related The Board of Directors Party Transactions (“OPC Procedure”). Milan, February 26, 2018 1 9 ANNUAL REPORT 2017ANNUAL REPORT 2017 Directors’ report on operationsDirectors’ report on operationsRICCARDO BALZARETTI NICCOLÒ CALANDRI and 3BEE An electronic engineer, a biologist and a food technologist teamed up to create Hive- Tech, a technological beehive in which the entire production cycle can be monitored remotely by means of sensors. STAYING IN ITALY TO CARE FOR BEES WITH AN APP Riccardo Balzaretti (biologist), have resisted the allure of the “brain drain” to H aving originally embarked on academic careers, Niccolò Calandri (engineer) and a vet with a mission to prevent diseases in beehives. It seems that the two of them were struck by the take a risk, focusing their efforts on developing an idea entirely their own and they’ve invented a unique new profession: a cross between an IT specialist and applying it in the place they love most: the Italian countryside. In so doing famous warning attributed to Einstein: «If the bee disappeared from the surface of the earth, man would have no more than four years to live». The beehive has been exalted as a model of the perfect society since the times of the ancient Romans, and Pliny the Elder praised the perfect organisation of that humming factory. Only in the seventeenth century, however, was the discovery made that the boss of the beehive is the queen bee, and this mythologised bees still further as the symbol not only of hard work but also of a matriarchal society. The post-industrial world has somewhat lost this fascination for bees and everything they represent. As a result the work of the beekeeper has been undervalued , and the fact that honey is seen as a luxury product has also not helped. In the past twenty years the health of bees has also declined as a result of diseases linked to intensive pesticide use, and the dramatic condition of the species is now leading them to take on a new symbolic role: not so much as hard-working citizens of an ideal community but as the guardians of the world, whose work is channelled not just into productivity but above all into protecting the environment. For many years beekeepers limited the problem using antibiotics, but fortunately these are now illegal in Europe. Without antibiotics the only way to save the bees is through preventative measures. And this is where 3Bee enters the scene. The electronic IoT device produced by the startup is a system for optimising the welfare of bees: it's like having somebody watching over your beehives day and night, monitoring pa- rameters like the temperature, the humidity and the vibration of the hive, which is rather like a human cough: if the bees are not well the beat of their wings changes. Through the Hive-Tech platform the be- ekeeper is constantly kept up-to-date on any abnormalities that might disturb the peace within the hive. 3Bee began to distribute its technology on an experimental basis a few months before its official market launch in March 2018. As many as 500 devices have already been sold in Italy in the first days since the launch, coinciding with the start of the beekeeping season. The startup now forecasts a distribution rate of around 100 to 200 devices a month until October, when a new peak in demand will occur. Italy is the main theatre of activity for the two young partners who, having abandoned their scientific careers, have also made the emotional decision to remain in their country of origin. But they are also already exporting to Moldova, Romania, Russia, Germany and South America, and all with a staff of only four. The words of the poet Franco Marcoaldi, dedicated to a child beekeeper, spontaneously come to mind: every beehive / is clear proof / of the supremacy of insects. METHODOLOGICAL NOTE The information systems that contribute to collect the data For any clarifications and further information on the content supervision of the Board of Statutory Auditors within the terms accounted in the Report are: CSR-DM (Corporate Social of the Report, reference is made to the “Contacts” page of the established by legislative decree December 30, 2016, no. 254. Responsibility Data Management), HSE-DM (Health, Safety section “Sustainability” of the website www.pirelli.com. This section of the Annual Report 2017, entitled “Report on and Environment Data Management), SAP HR (SAP Human Responsible Management of the Value Chain” (hereinafter Resources) and HFM (Hyperion Financial Management). “the Report”), constitutes the “Non Financial Statement” of the Company pursuant Legislative Decree of December The sustainability performance and GHG Emissions data MANAGEMENT MODEL The strategic evolution of Group Sustainability is entrusted to the Sustainability Steering Committee, a body appointed in 2004, chaired by the CEO and composed of the Company’s Top Management representing all the organizational and 30, 2016, no. 254 and explores the Sustainable Management accounted in the Report are subject to limited assurance by an The Sustainability Model adopted by Pirelli is inspired by the functional responsibilities. The Committee meets ordinarily at Model adopted by Pirelli, the governance tools to support independent firm (PWC S.p.A.) in accordance with the criteria United Nations’ Global Compact, the principles of Stakeholder least once a year. maintenance and creation of values, relationships with indicated in the principle International Standard on Assurance Engagement set forth by the AA1000 and the Guidelines of Stakeholders and related connection with the development of Engagements 3000 - Assurance Engagements other than Audits or ISO 26000. financial, productive, intellectual, human, natural, social and Reviews of Historical Financial Information (ISAE 3000), issued The organisational structure is thus made up of Group Sustainability and Risk Governance Department that has relational capitals, which was mentioned in the “Presentation by the International Auditing and Assurance Standards Board. Responsible management by Pirelli runs through the entire oversight of the management at a Group level and proposes of 2017 Pirelli Integrated Report”. For further information, reference is made to the related value chain. Every operating unit integrates economic, social plans for sustainable development to the Sustainability The Report reflects the integrated Business model adopted Report. Data on GHG emissions have also been subjected to cooperating constantly with the other units, implementing support from the Country Sustainability Managers for by the Group, inspired by the United Nations’ Global Compact, a specific limited assurance as part of the communication the Group strategic guidelines. overseeing activities covering all affiliates of the Group. The the principles of Stakeholder Engagement set forth by the process to the Carbon Disclosure Project (CDP). role of the Country Sustainability Manager is currently held by AA1000, and the Guidelines of ISO 26000. The content of The main management systems adopted by Pirelli include country CEOs, who are supported by their direct subordinates the report is prepared in accordance with the Guidelines The Report is structured into four main areas: ISO 9001, IATF 16949, ISO/IEC 17025 in terms of Quality in operational management of country plans. Indipendent Auditor's Report provided at the end of the Annual and environmental responsibility in its own activity, while Steering Committee. Sustainability Department receives of the Global Reporting Initiative (GRI) in the Standards  > an introductory section related to the sustainable Management, SA8000® for the management of Social version, Comprehensive option, following the process management Model adopted by the Company, related Responsibility at its subsidiaries and along the supply chain, 1 0 2 suggested by AA1000 APS principles (materiality, inclusivity and Policies and activities of Governance and Compliance, OHSAS 18001 for the management of Occupational Health responsiveness), and considering the principles of integrated Stakeholder Engagement, long-term planning; and Safety, ISO 14001 for environmental management, ISO SUSTAINABILITY PLANNING 3 0 1 reporting contained in the Framework of the International  > an “Economic Dimension”, in which the distribution of 14064 for the quantification and reporting of greenhouse Specific operational steps aimed at continuous improvement in Integrated Reporting Council (IIRC). added value is detailed along with the management and gas emissions (GHG), the ISO 14040 family rules for the performance characterise the process of sustainable planning: The set of indicators covered by the Report is wider than the list  > an “Environmental Dimension”, which describes the the product and the Organization and specifically, ISO-TS 14067 stakeholders, needs raised by internal functions, identification of specific material issues indicated in the materiality matrix, management of environmental aspects and impacts and ISO 14046 for the determination of the carbon footprint of risks and opportunities for growth, definition of projects this in order to provide a more complete and transversal throughout the entire product cycle; and water resources (Carbon Footprint and Water Footprint). and targets, implementation, monitoring and reporting. view on the Company’s performance, for the benefit of all  > a “Social Dimension”, which brings together the paragraphs In February 2018 the Company has also obtained independent stakeholders. dedicated to: governance of human rights, the internal certification (from SGS Italia S.p.A.) regarding the compliance The long-term sustainability objectives integrate the Industrial performance relating to customers and suppliers; methodology for calculating the environmental footprint of evaluation of the context by benchmarks, dialogue with community and the external community. of its Sustainable Purchasing Management Model based on the Plan and support the sustainable development thereof. The report shows the sustainability performance of the ISO 20400 Standard and the independent certification (from Group in 2017 compared to 2016 and 2015, with respect to the At the end of the Annual Report 2017, before the third-party RINA Services S.p.A.) of its system of rules and controls aimed The Pirelli Sustainability Plan was updated in 2017, in full targets set for 2018 and/or long-term targets envisaged in the Audit Report mentioned above, the following summary Tables at preventing corruption based on the ISO 37001. alignment with the Company’s evolution and the related Sustainability Plan. are available: “High Value” development strategy (for further details, refer  > a GRI Content Index, which shows the full list of indicators Details on the coverage of these certifications and to the Investor Relations section of the Pirelli website). Following the change in the industrial scope that took place accounted based on the comprehensive GRI Standards methodological reference tools have been given in the in 2017, which saw the exit of the Industrial Business, the option, indicating the relative page in the Annual Report 2017; “Customers”, “Suppliers”, “Environmental Dimension”, The new 2017-2020 with selected targets for 2025 Plan replaces historical values of the indicators were recalculated following  > a table of correlation between indicators accounted based “Industrial Relations” and “Occupational Health, Safety and the 2013-2017 Plan with selected targets for 2020. In order to the principles set out by the GRI, in order to guarantee the on the comprehensive GRI Standards option and the Hygiene” sections of this report. allow the appreciation of numerical trends in the long term, comparability of the same on the previous two years, or in United Nations’ Global Compact Principles; the base reference year for the environmental quantitative respect to 2016.  > a table of correlation between the performance/targets With reference to the Group Sustainability Governance, the targets continues to be 2009 also in the new Plan. The Report is published annually (the previous Pirelli Annual the United Nations that the aforementioned performance by the Audit, Risks, Sustainability and Corporate Governance The Plan has been developed in accordance with the “Value Report was published in March 2017 with reference to the and Targets impact on; Committee, approves the objectives and targets for sustainable Driver” model drawn up by the UN PRI (United Nations year 2016) and is approved by the Group Board of Directors.  > a table of correlation between the information reported management integrated in the Company Plan. The Board Principles for Responsible Investment) and UN Global It covers the entire perimeter of the Group Consolidated in the Annual Report and the topics indicated by the of Directors also approves Pirelli’s Annual Report, including Compact and sets targets that combine growth, productivity, Financial Statements. legislative decree no.254/2016. the Non-Financial Statement, which is in turn subject to the governance and risk management. of the Group and the Sustainable Development Goals of Board of Directors of Pirelli & C. S.p.A., supported in its activities ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainThe targets and related performance (for extensive discussion frequency index, the specific reduction (weighted on the It is noted that the sub-paragraphs relating to “Corporate continue in 2018 in order to draw up the Policy Implementation of which reference is made to the related sections in this total finished product) in energy consumption and water Initiatives for the External Community” indicate from time to Manual (for more details on the sustainable management of report) foresee, among other things: withdrawal, the increase in waste recovery, control of the time the main SDGs that the projects and initiatives described natural rubber refer to the dedicated paragraph in this report).  > growth in Green Performance tyre revenues with 2020 sustainability of the supply chain, dissemination and local impact directly. target >50% of total sales and >65% of High Value implementation of Group Policies and engagement with products’ sales; stakeholders.  > improvement of product performances in 2020: > > car products (compared with 2009): reduction of The performance of the Sustainability Plan of each Country is STAKEHOLDER ENGAGEMENT Again in 2017, consultation meetings were held for the relevant national and regional Stakeholders in Russia and Argentina, in order to share the results and objectives of the sustainability plans of the affiliates and listened the expectations of average rolling resistance by 20% and by 14% for included in the Performance Management objectives of the The role of Pirelli in an economic and social context is tied stakeholders on the management of issues deemed relevant High Value products; improved of performance on related CEOs. to its capacity to create value through a multi-stakeholder for the development of the Affiliate in the medium to long wet surfaces by 15% and noise reduction by 15%; > > moto products (compared with 2009): reduction of average rolling resistance by 10%, improved of 40% of performance on wet surfaces and 30% for mileage; > > velo products (compared with 2017 - year of product UNITED NATIONS SUSTAINABLE DEVELOPMENT GOALS (SDGs) approach, i.e. by sustainable and lasting growth that can term. Similarly, in 2016 meetings were held with the relevant reconcile the interests and expectations of all those with Stakeholders in Romania, Mexico and Germany. Among whom the Company interacts and especially; the issues discussed in the various countries are energy  > customers, since the Pirelli way of doing business is based management, technical training and the availability of on customer satisfaction; adequate skills in the population, road safety, circular economy, launch): braking performance +5% and on wet The targets of the Sustainability Plan 2017-2020 with selected  > employees, who make up the knowledge asset and driving models of engagement of human capital, the environmental surfaces +10%; targets for 2025 contribute to the global effort to achieve force of the Group; sustainability of cities, water and waste management.  > process and product digital innovation; the Sustainable Development Goals (SDGs) presented by the  > shareholders, investors and the financial community;  > research and development of raw materials with low United Nations in September 2015 and intended to accompany  > suppliers, with which it shares a responsible approach to The consultation of national and regional stakeholders will environmental impact: for specific product segments it is the activities of sustainable companies until 2030. business; continue in 2018 in other countries where Pirelli operates. foreseen, by 2025 and compared with 2017, the doubling of  > competitors, because improved customer service and 1 0 4 the weight of renewable materials used and the reduction In particular, it is possible to note the strong connection market position depend on fair competition; Local feedback received from stakeholders contributed to the by 30% of raw materials derived from fossils; between the targets mentioned in the previous paragraph and  > the environment, institutions, government and non- corporate evaluation of the priorities for action by influencing  > reduction in the accident frequency index by 87% by 2020 the following SDGs: government bodies; the development strategy set out in the Corporate Plan and 5 0 1 compared to 2009;  > reduction of 17% in CO2 specific emissions of 19% in specific energy consumption and 66% in specific water withdrawal by 2020 compared to the 2009 figure;  > 3 - Good Health and Well-being;  > 4 - Quality Education;  > 6 - Clean Water and Sanitation;  > 7 - Affordable and Clean Energy;  > the communities of the various Countries where the Group in the Group materiality mapping, already the subject of the operates on a stable basis, while being aware of its global Global Stakeholder Dialogue held by Pirelli in Brussels in 2016. responsibilities as a Corporate Global Citizen. On that occasion, Pirelli consulted international Stakeholders To the stakeholders mentioned, a paragraph is devoted within of the Company including Suppliers, Customers, leaders of  > zero waste to landfill;  > 9 - Industry, Innovation and Infrastructure; this report, to which reference is made for further qualitative the economic and financial, academic, institutional and non-  > investment in employee training of at least an average of  > 12 - Responsible Consumption and Production; and quantitative study. governmental world. 7 man days;  > 13 - Climate Action  > strengthening digital and cross-functional culture within The interactions that take place between stakeholders are the Company; The Sustainable Objectives listed above are not the only ones informed by the AA1000 Model adopted by the Company and  > adopting models that are ever more advanced for managing in which the Company is engaged; in addition to the above, are analysed in detail in order to manage relations with them MATERIALITY ANALYSIS AND MAPPING economic, social and environmental responsibility of the this Report describes initiatives and activities that refer to effectively and create sustainable and shared value. In 2016, Pirelli initiated and completed the process of updating supply chain with particular attention to the indirect other SDGs: the materiality mapping elaborated in 2013. supply chain;  > 1 - No Poverty, in the paragraphs on “Company Initiatives Dialogue, interaction and involvement are calibrated to  > implementation of the new Pirelli Policy on sustainable for the External Community”; meet the needs for consultation with the various types of The materiality mapping stems from thorough Stakeholder management of the natural rubber supply chain.  > 8 - Decent Work and Economic Growth, in the paragraphs stakeholder and include meetings, interviews, surveys, joint Engagement activities that in 2016 led to compare the A presentation published on the Company’s website (www. dedicated to the Internal Community and in the paragraph analyses, roadshows and focus groups. expectations of key stakeholders on a panel of sustainability pirelli.com) is dedicated to the new Pirelli Sustainability Plan. “Our Suppliers”; issues with the importance that they play in the success of the  > 10 - Reduced Inequalities, in the paragraph “Diversity During 2017, particular importance was given to the business depending on the experience and expectations of the All Countries where the Group is present with commercial Management”; consultation of the relevant Stakeholders in order to issue the Top Management and Sustainability Managers that support the and industrial affiliates also have a Country Sustainability  > 11 - Sustainable Cities and Communities, in the paragraph Pirelli Policy on the sustainable management of natural rubber. Top Management in the various Countries where Pirelli operates. Plan with specific targets identified to align to the Group’s “WBCSD” with reference to the “SiMPlify project”; The draft version of the Policy was presented to stakeholders sustainability objectives.  > 17 - Partnerships for the Goals, in the paragraphs “Road in a consultation session held in Milan in September 2017, Given the complexity and the international extent of corporate The targets of the Country Plans, transversal to management, “Sustainability of the natural rubber supply chain”, with suppliers, traders and farmers in the supply chain, automotive of stakeholders of the Company from which feedback was include the constant monitoring of Compliance with the reference to the partnership with Kirana Megatara, and customers, international multilateral organizations. The requested included: SA8000® Standard, the specific reduction in the accident “WBCSD”, with reference to the “SiMPlify project”. Policy was then issued and the dialogue and consultation will  > the biggest original equipment customers; Safety”, with reference to the partnership with FIA, attended by international NGOs, Pirelli’s main natural rubber stakeholders and the variety of their expectations, the panel ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chain > 1,800 end customers belonging to the most representative the aim of maximising a safe reuse and recycling; Lastly, it shall be specified that consolidation of the materiality matrix at a Group level tends by its very nature to vary strongly from markets; > Disclosure and transparency: company transparency the materiality matrix made at single country level. Sustainability elements located in an area of low materiality in the Group level  > the most important dealers; in reporting economic, social and environmental matrix may be found to be highly material for a number of Countries and specific stakeholders who are more directly involved.  > numerous employees in the various countries where the performances, goals and challenges; Group is present;  > several Group suppliers;  > the leading financial analysts; > Business integrity: company compliance with local and The reporting of material issues, related risks and opportunities to these topics and the methods for managing them are outlined in international laws, regulations, universal principles of this Report, in the paragraph “Operational Risks” (Directors’ Report on Operations), as well as in the dedicated paragraphs below. fairness, morality and justice;  > national and supranational institutions and public > Responsible use of natural resources: commitment to The expectations expressed by the stakeholders involved in defining the materiality matrix have been considered in the definition administrations; protect biodiversity and natural capital along the product of the Group Sustainability Plan.  > journalists from domestic and international newspapers; life cycle, reducing water withdrawal, energy consumption,  > international and local NGOs present in the various air and water emissions and increasing waste recovery; Countries in which Pirelli has production activities; > Road safety: commitment to spread road safety culture  > universities that have collaborations with the Group. through training, awareness-raising campaigns and innovative technological solutions for sustainable The stakeholders were involved through a request, in local mobility; language, for attribution of priorities for action on a selection > Employment governance and responsibility: commitment of ESG (Environmental, Social, Governance) issues relevant to to safeguard and continuously improve workplace the global and sustainable development of the automotive environment, with a strong focus on health and safety, and auto components sectors. The issues were pre-selected employees’ welfare & work-life balance, training & considering the risks and opportunities arising from regulatory development, engagement and adequate remuneration, developments, the expectations of the communities, ensuring equal opportunities in the workplace while government and other institutions, and financial markets. For exploiting diversity as a business asset; 1 0 6 this reason it shall be underlined that all the ESG elements pre- > Future mobility: company capability to setting a long- identified through the aforementioned analysis are relevant term vision, anticipating market expectations and for the development of Pirelli, with higher or lower priority adapting its business model to contribute to sustainable (evident from the position of the different elements inside the mobility evolution; matrix), defined considering the results of the interviews to > Stakeholder dialogue: engage in a pro-active dialogue with the Stakeholders and Management. company Stakeholders, from employees to communities, clients, end-consumers, suppliers, institutions and The topics submitted for evaluation by stakeholders are the non-governmental organizations, to integrate their following: expectations into Company development Strategy; > Product eco-innovation: research & innovation > Financial health: ensure economic and financial stability in commitment to improve product impact on the the medium-long term; environment (e.g. by reducing the tyre rolling resistance > Corporate governance: ensure a solid, sound governance in the use phase allowing for fuel saving and thus CO2 emissions reduction, more mileage); aligned with international best practices; > Sustainable procurement: align group supply chain to > Product performance & safety innovation: research Pirelli’s social, economic and environmental responsibility & innovation commitment to improve product expectations, with a partnership approach aimed at performance/safety for the driver (e.g. tyre performance creating shared innovation and value. in wet conditions, reduction of braking distance.); > Service to customers: grant full “customer delight” with The priorities expressed by Pirelli and stakeholders on the the most qualitative and innovative services, offer “the aforementioned topics have been represented in a materiality future” to today’s customers; matrix setting out, on the vertical axis, the expectations > Raw materials eco and safety innovation: research & of several external and internal stakeholders, while on innovation commitment to identify new materials that, the horizontal one, the importance that the Management compared to traditional ones, are impacting less on the attributes to individual business success factors. The result environment while increasing safety during product of such consolidation was presented and approved at the manufacturing, use and disposal; Sustainability Steering Committee held in January 2017 and is > Circular economy/end of life tyres (ELT): commitment to outlined below. responsibly manage resources and end of life tyres with S N O I T A T C E P X E R E D L O H E K A T S e c n a t r o p m I h g i H y r e V e c n a t r o p m I h g i H Product Performance & Safety Innovation Responsabile Use of Natural Resources Sustainable Procurement Raw Materials Eco and Safety Innovation Future Mobility Financial Health Product Eco-Innovation Business Integrity Employement Governance and Responsibility Corporate Governance Service to Customers Circular Economy/ELT Road Safety Disclosure and Transparency Stakeholder Dialogue 7 0 1 High Importance Very High Importance IMPORTANCE FOR THE BUSINESS ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chain 1 0 8 MAIN POLICIES In August 2017, in response to the new types of crime More especially, the analysis of risk profiles is implemented by action against the company concerning corruption practices. introduced by the legislator and the organizational changes Pirelli considering: During the course of 2017, implementing also proceeded of the The Sustainable Management Model throughout the value that have occurred, the risk analysis and the 231 Organizational  > the perceived risks deriving from a combination of a Functional Segregation model (so-called Segregation of Duties) chain is reflected in the main Group Policies, published on Model were updated in order to guarantee the respect of level of perceived corruption, associated with the aimed at strengthening the system of internal controls and Pirelli’s website in multiple languages and communicated to the reference framework. Similarly, during 2017, training Corruption Perception Index calculated by Transparency preventing the committing of fraud. all employees in their local language. and communication activities on the current Organizational International, with the perception of Management as to Model were completed for the entire population of the Group’s the level of risk in each country; Also in 2017, Pirelli supported the activities of Transparency In particular, the following Policies are recalled: Italian companies.  > the adequacy of safeguards against vulnerability derived International, and which Pirelli subscribes to as a supporter in the  > the “Ethical Code”;  > the “Code of Conduct”; The process of analyzing and implementing the Group Anti- deemed to be exposed to contingent corruption risks an active role of civic and moral education in strengthening civil from combination of the guaranteed protection in areas areas of projects in the matter of education aimed at promoting  > the “Anti-Corruption” Program; Corruption Program continued in 2017 in the main countries associated with the benchmark provided by the Internal society against crime and corruption, believing that it is only  > the “Global Antitrust and fair competition” Policy; in which Pirelli operates. The Program, available in twenty- Audit Function on the Internal Control System. through proactive and firm actions of value promotion can a  > the Group “Equal Opportunities Statement”; two different languages on the Pirelli website, is the corporate general improvement in the quality of life be achieved.  > the “Health, Safety and Environment” Policy; reference for the prevention of corruptive practices and In 2018, the extension of the control activities on anti-corruption  > the “Global Human Rights” Policy;  > the “Product Stewardship” Policy;  > the “Global Quality” Policy;  > the “Green Sourcing” Policy; represents a collection of principles and rules aimed at aspects will continue, as well as the implementation of specific With reference to Privacy and protection of personal data, in preventing or reducing the risk of corruption. training activities, with regard to some of the Pirelli Group’s 2017 and in compliance with the new EU Regulation 2016/679 most important countries, considered priority in receiving on personal data protection (“GDPR”), Pirelli initiated In the document, the Pirelli principles already set out in such training due to the specificities of local regulations. the necessary adaptation activities required by the new  > the “Social Responsibility for Occupational Health, Safety the Ethical Code and the Code of Conduct, including zero regulatory requirements, governing the model of personal and Rights, and Environment” Policy; tolerance of “will not tolerate corruption of public officials, or any Referring to the contribution made to the External Community, data management at Group level and coordinating the  > the “Global Tax” Policy; other party, in any guise or form, or in any jurisdiction, or even in Pirelli has for many years adopted internal procedures defining development of activities in the individual European countries  > the “Institutional Relations - Corporate Lobbying” Policy; places where such activity is admissible in practice, tolerated, or not the roles and responsibilities of the function involved, and the in which it operates.  > the “Global Personal Data Protection” Policy; challenged in the courts” are restated. Among the provisions operational process of planning, achieving, monitoring and  > the “Group Whistleblowing - Group Reporting Procedure” of the Group Anti-Corruption Program are a prohibition in control of results of initiatives supported. The Pirelli procedure In line with the provisions of its Global Antitrust and Fair Policy; respect of recipients of the Ethical Code from offering gifts specifies that initiatives may not be promoted for the benefit Competition Policy, Pirelli operates in accordance with fair  > the “Sustainable Natural Rubber Policy”; and other utilities that might meet conditions of a breach of of beneficiaries in respect of whom there is direct or indirect and proper competition for the purpose of development of the  > the “Pirelli Intellectual Property (or IPR)” Policy. rules, or which are in conflict with the Ethical Code, or may, evidence of failure to abide by the human rights, workers, the company and at the same time, the market. In this context, The contents of the aforementioned Policies and the related of Pirelli. Additionally, “defends and protects its corporate assets, Code” set forth in their turn that the Company “does not provide line with international best practices. methods for implementation are addressed in the sections of and shall procure the means for preventing acts of embezzlement, contributions, advantages, or other benefits to political parties or this report that deal with the related issues. theft, and fraud against the Group” and “condemns the pursuit of trade union organizations, or to their representatives or candidates, In 2017, Pirelli continued to implement the Antitrust Program if made public, constitute prejudice even only to the image environment, or business ethics. The “Pirelli Values and Ethical Pirelli constantly updates the Group’s Antitrust Program in A focus on programs of Compliance “231”, “Anti-corruption”, social interests”. “Privacy”, “Antitrust” and on the “Whistleblowing Policy” Concerning institutional relations of the Group, and especially assistance activities to facilitate the management of antitrust activities were carried out, as well as continuous business follows. The quality of the system of rules and controls aimed at activities of corporate lobbying, Pirelli has adopted a Corporate issues in the daily conduct of business activities or relations personal interest and/or that of third parties to the detriment of this without prejudice to its compliance with any relevant legislation”. in the various countries in which it operates: online training preventing corruption was confirmed by the obtainment Lobbying Policy for ensuring this is done in abidance with with other operators. of the ISO 37001 Certification on the Anti-Corruption principles ratified by the Ethical Code and the Group Anti- Programs of Compliance 231, Anti-corruption, Privacy and Antitrust With regard to the administrative responsibility of companies and bodies as provided for by Management System of Pirelli & C. S.p.A and Pirelli Tyre corruption Program, in line with the principles of the International In 2017, Pirelli was not involved in any antitrust proceedings S.p.A, developed through the Group “Compliance Program- Corporate Governance Network and in compliance with laws or investigations as participants in anti-competitive conduct. Anti Corruption” and integrated in the Organizational and regulations current in countries where Pirelli operates. Legislative Decree 231/2001 (hereinafter also the “Decree”), Model 231. Pirelli has adopted an Organization and Management Model In terms of prevention and control, the audits carried out structured in a General Part, which includes a review of the Pirelli analyses profiles of corruption risk in the main by Internal Audit Department at Group affiliates include Focus: Reporting Procedure - Whistleblowing Policy The Group Whistleblowing Policy, supporting the Group regulations contained in the Decree, of the relevant crimes Countries where it is present (Italy and the Countries where monitoring of crime risks, among which also the risk of internal compliance and control systems, was revised in 2017. It for the Italian companies of the Group and of the methods it has an industrial presence), assessing compliance with corruption and fraud figure. is directed both towards employees and external stakeholders. for adoption and implementation of the Model, and in a local laws in force, verifying the adequacy of corporate Notified to all employees in local language and made available Special Part, which indicates the company processes and oversight updating the risk analysis where there is a change In this regard, it should be noted that, with reference to 2017, to the External Community on the Pirelli Internet website, the the corresponding sensitive activities for the Group’s Italian in the perimeter due to the “entry” of Countries of “high risk” on the basis of the reports received via the whistleblowing Policy governs the manner of reporting breaches, suspected companies pursuant to the Decree, as well as the internal (on the basis of the Transparency International index) and reporting channel, 4 cases of fraud to the detriment of the breaches and inducement to breaches in the matter of law and control principles and schemes to oversee these activities. defining training and awareness programs where fitting. company were ascertained. There were no cases of public legal regulations, principles ratified by the Ethical Code, including, 9 0 1 ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainobviously, equal opportunities, principles of internal auditing, rules, corporate policies and procedures, and any other behaviour of During the course of 2017 the Whistleblowing procedure was of verification involving, where necessary, the corporate commission or omission that might directly or indirectly lead to economic-equity detriment, or even one of image, for the Group activated 34 times. In particular: functions concerned were conducted. and/or its companies.  > the 34 reports were from 10 different Countries (Brazil, The Whistleblowing reporting channel is also expressly referred to by the Sustainability Clauses included in each order/supply South Africa, United States and UK); completed, based on the analyzes carried out and the contract as well as by the Group Policies published on the Company’s website.  > 76% of the reports (26 cases) were forwarded using the documentation made available during the assessment, it Italy, Argentina, Chile, Russia, Turkey, Germany, Spain, With regard to the 27 reports for which the checks were email address ethics@pirelli.com provided, whereas emerged that: Reports may be made also in an anonymous form and protection of utmost confidentiality is at all times restated, as too is zero 24% (8 cases) by sending a letter to management which  > in 18 cases objective corroborating evidence was detected tolerance in respect of acts of reprisal of any kind with respect to those who report or who are the subject of reporting. dealt with informing Internal Audit Department as per such as to hold the facts contended in the reports received Reports may concern directors, auditors, management, employees of the Company and, in general, anyone operating in Italy or abroad corporate rules; to be true; for Pirelli or engaging in business relations with the Group, including partners, customers, suppliers, consultants, collaborators,  > 79% of the reports (27 cases) were signed whereas the  > in the remaining 9 cases, the substantial truthfulness of auditing companies, institutions and public entities. remaining 21% (7 cases) were received in anonymous form; the facts attributed was found, in particular, 4 cases  > among the reports signed, 9 were activated by external concerned fraud to the detriment of the Company, 2 The e-mail ethics@pirelli.com is made available to anyone wishing to proceed with reporting, which is valid for all Group affiliates, as stakeholders, 5 are related to violations of the Ethical cases were related to discriminatory attitudes, 2 cases well as for the External Community, and is centrally managed by the Group Internal Audit function which at the Pirelli organization, Code and/or company procedures, 3 cases attributable were related to claims by employees and 1 case was functionally reports to the Audit, Risks, Sustainability and Corporate Governance Committee, composed of only independent to fraud to the detriment of the Company, 1 case relating concerning violations of the Ethical Code and/or company directors, and to the Board of Statutory Auditors of Pirelli & C. S.p.A.. to reports on product quality. It is objectively impossible procedures. The Company has taken action for all cases, Internal Audit Department has the task of analysing all reports received, even involving corporate functions felt to be concerned for reports from external stakeholders received as a number or dismissals) and with actions aimed at removing the the activities necessary of verification, in addition to scheduling a specific action plans. In the event of a report being found to be of reports were, as specified, anonymous. causes of the complaints and/or aimed at improving the grounded, adopting fitting disciplinary and/or legal actions is foreseen for the protection of the Company. internal control system. to confirm that there were, in absolute terms, no further intervening with disciplinary sanctions (warnings and/ Of the 34 reports received during the 2017 year, at the 1 1 0 In respect of reports received in the 2017, 2016 and 2015 years, here below is a summary table and then a further study of reports from 201715. beginning of 2018, 7 were found to be at the verification and The Internal Audit Department periodically reported the 1 1 1 in-depth investigation stage, whereas 27 were found to have reports received and the progress of the analyses carried out been concluded. In respect of these latter, specific activities to the competent corporate bodies of Pirelli & C. S.p.A.. 2017 2016 2015 Total reports Of which anonymous Of which filed closed being absolutely generic. Of which grounded 34 7 1 9 38 7 5 23 17 4 1 4 Countries of provenance of the reports ascertained Brazil, Chile, Spain, Brazil, Italy, Argentina, Brazil, Argentina, United States and UK Chile, Saudi Arabia, India Peru, Germany Matter alleged in the reports ascertained Outcome of cases investigated Violation of the Ethical employees, cases of poor Irregular conduct of Code and/or company service to customers and Irregular behaviour procedures, fraud to the challenges with suppliers of employees, one detriment of the Company, claims by employees, (a case of late payment and a case of non-payment case of inefficiency towards customers discrimination. of services not requested by the company). Review and process Review and integration integration where deemed of processes where fitting, orders by the deemed fitting, orders functions concerned by the functions concerned and Human and Human Resources Department, actions Resources Department. to satisfy customers and suppliers. Review and integration of processes where deemed fitting, orders by the functions concerned and Human Resources Department, actions to satisfy customers. 15 The data reported is related only to the consolidated scope of the Consumer business. Furthermore, with regard to the 4 reports that were still underway at the reporting date of the 2016 Annual Report, it should be noted that following the conclusion of the verification activities, 2 cases were filed for absolute generality and for the remaining 2 cases there were no objective elements of a finding such as to consider the facts alleged to be truthful. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainECONOMIC DIMENSION SHARING OF ADDED VALUE For further study of the main initiatives supported by the grants indicated above and relating to the model of RELATIONS WITH INVESTORS governance, please refer to the paragraphs in this report Pirelli considers financial communication to be of strategic devoted to “Company Initiatives for the External Community”. importance as a fundamental tool for building relations of trust In line with what is set forth in the Ethical Code, Pirelli “does out in the Values and Ethical Code of the Group, Pirelli keeps with the financial community. In accordance with what is set The Values and Ethical Code of Pirelli ratify the undertaking of the Company to operate to ensure responsible development over not provide contributions, advantages, or other benefits to political a constant dialogue going with Shareholders, Bondholders, the long term, while being aware the bonds and interactions that apply between economic, social and environmental dimensions. parties or trade union organizations, or to their representatives or Institutional and individual investors, Analysts via the Investor This is to wed the creation of value, progress of the company, the attention given to stakeholders and raising standards of living candidates, this without prejudice to its compliance with any relevant Relations function and Group Top Management in order to and quality of the environment. legislation”. promote communication that is between equals transparent, 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. Distribution of added value among stakeholders allows the relations there are between Pirelli and its main stakeholders to be expressed by focusing attention on the socio-economic system in which the Group operates. LOANS AND CONTRIBUTIONS RECEIVED FROM THE PUBLIC ADMINISTRATION The company returned to the stock market on October 4, 2017, just two years after the public tender offer promoted by ChemChina with Camfin shareholders, following a timely and accurate. DISTRIBUTION OF ADDED VALUE (in thousands of Euro) disbursed Euro 10 million to Pirelli Tyres Romania S.r.l. as last Industrial business and the focus on the Consumer business, Romania. In March 2012 the European Investment Bank (EIB) reorganization process that led to the separation of the 1 1 2 2017 2016 GROSS GLOBAL ADDED VALUE 2,079,628 2,002,436 Remuneration of personnel (1,034,647) 49.8% (986,308) Remuneration of Public Administration (40,848) 2.0% (75,256) Remuneration of borrowed capital (362,610) 17.4% (427,190) Remuneration of risk capital - 0.0% - Remuneration of the company (634,727) 30.5% (506,571) Contributions for the benefit of the external community (6,796) 0.3% (7,111) A B C D E F 49.3% 3.8% 21.3% 0.0% 25.3% 0.4% tranche of a financing agreement for a total of Euro 50 million enriched with new skills also through the creation of new signed in 2009, granted to expand the Pirelli plant in Slatina, business functions (Consumer Marketing, Digital, Data Romania, for the production of car tyres and light commercial Science, Cyber™ and Bike). vehicles. This financing sits alongside a similar one granted in 2007 and fully reimbursed at the end of the 2013 accounting During these 2 years, the company, although not listed, has period and received to support the construction of the same kept the dialogue open with the financial market through a production site. The first tranche of the financing signed in continuous update on the transformation process, on the 2009, amounting to Euro 20 million, was repaid in May 2017. evolution of the business, on the financial results and related Also reported is: S.C. Pirelli Tyres Romania S.r.l. received Euro to sustainable performance, on the occasion of the publication 54.8 million in the aggregate from the Romanian state by way of annual and infra-annual financial results. of incentive for local investment and of which 8.7 million was in 2017. The Financial Communication activity intensified during 2017 in view of the company’s return to the stock market. 3 1 1 The added value created in 2017 recorded an increase of 3.9% over 2016. In particular, the change was affected by the reduction of Italy. In 2017, Pirelli Tyre S.p.A. received from the M.I.U.R. – There have been numerous opportunities to meet with the remuneration of credit capital and the reduction of the remuneration of Public Administration. Trends in the items determining Ministry of Education, University and Research - a contribution the main institutional investors in Europe (Milan, London, gross global added value as shown above, are set out in the Consolidated Financial statements of this report, to which reference is of Euro 1 million as an incentive for the development of an R&D Paris, Frankfurt) and in North America (New York, Boston, made for further fitting study. project for the development of innovative materials in the tyre San Francisco, Los Angeles, Toronto). Moreover, particular Contributions to the external community The impact of expenses for corporate initiatives in 2017 for the external community on the net result of the Group amounted to 3.9% (4.8% in 2016). Below are the expenses incurred in 2017 and 2016. construction process. importance was attributed to digital communication with the enrichment of the “Investors” section of the website of more Mexico. Since 2012 Pirelli Neumaticos S.A. de C.V. (Mexico) information on business positioning and on Pirelli’s strategy has received grant contributions from the Government of the compared to its competitors. State of Guanajuato (Mexico) for investments and generation of employment for Euro 12.5 million in the aggregate The The success of the IPO is evidenced by the high demand from CONTRIBUTIONS FOR THE EXTERNAL COMMUNITY (in thousands of Euro) company also received grant contributions from the Mexican investors: Training and research Social-cultural initiatives Sports and solidarity Total contributions for the external community 2017 2016 877 4,877 1,042 6,796 806 4,859 1,446 7,111 Federal Government for investments and generation of  > 2.4 times the maximum amount reserved for the employment related to the ProMéxico project totalling Euro Institutional Placement (90% of the Sale Offer); 8.8 million, of which 0.7 million received during 2016 (the  > 1.4 times the amount allocated to Individual investors. incentives were paid starting 2012). During the course of 2017 no further government contributions were received. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chain Following the IPO, the Pirelli float is equal to 37%, divided as shown in the following table. 3,50% Retail investors 33,39% Institutional Investor 63,11% Marco Polo 36,89% Free Float OUR CUSTOMERS High Value approach to future mobility Pirelli carefully monitors the evolution of the automotive market and more Pirelli is the only global tyre manufacturer entirely dedicated generally the evolution of mobility. Future mobility trends to the Consumer market, which includes tyres for cars, such as digitization, electrification, management of shared motorcycles and bikes. The company is focused on the High transport and driving automation, are gaining more and more Value market and engaged in the development of innovative momentum and will lead to an evolution of the mobility sector tyres and Specialties and Superspecialties at the service of an whose speed is unprecedented in the sector. extensive product portfolio. Sales channels include: for Pirelli, follows the future trends and sees the Company enrich  > Original Equipment, addressed directly to the world’s its product offer in line with its High Value development strategy. The centrality of the Customer, historically fundamental value leading car makers;  > Replacement, for the replacement of tyres on vehicles This is the case of the launch, in 2017, of the PIRELLI The interest of the financial community towards Pirelli is proven by the broad coverage of the stock by 15 of the main national and already in circulation. CONNESSO™ concept, the sensorized tyre able to update international investment banks and by the inclusion of the company in the FTSE MIB, Dow Jones 600 A&P indices and in the most the user in real time on the wear, pressure and temperature recent FTSE Italian Brands index. The assessment (Target Price) and analysts’ estimates (Consensus) are published on the company Within Original Equipment for Cars, SUV and light commercial conditions and to enable services, whose commercialization is website and updated periodically. vehicles, in Europe Pirelli can count on a market share of expected in 2018 (starting from the United States and followed Pirelli closed 2017 with a market value of Euro 7.13 billion (average market capitalization in December), increasing its value by more In Original Equipment, Prestige segment, which is the Pirelli has also returned to the cycling world, thanks to the than 12% from its listing, outperforming the Italian stock market index (FTSE MIB -2.7%), the sector (EU A&P 1.9%) and peers in the highest of the range, Pirelli exceeds 45%, an increase launch in 2017 of the new line of tyres dedicated to road Premium customers of 23%. by the main European countries). 1 1 4 same period. 115,00 110,00 105,00 100,00 95,00 compared to 39% in 2011. racing bikes: PZero™ Velo™ (available from September 2017) As part of Replacement, there are two broad types of and with CYCL-e™, the urban tyre from 2018. In addition to customers: Specialised Resellers and Distributors. Specialised the traditional distribution channel and specialized dealers, Resellers are tyre specialists operating on the market in the Pirelli immediately oriented itself to the online channel, in role of independent businesses; specialised dealers constitute line with the strong propensity to purchase online by end 5 1 1 a fundamental point of contact between the Group and the consumers. In addition to the presence on the main sales end consumer. Particular attention is devoted to specialised platforms for cycling products, Pirelli created its own dealers in terms of shared development to enhance the eCommerce channel international from the outset and product offering integrated with a high quality level of dedicated to bike tyres, to offer its own range of products 3-Oct 10-Oct 17-Oct 24-Oct 31-Oct 7-Nov 14-Nov 21-Nov 28-Nov 5-Dec 12-Dec 19-Dec 26-Dec service, in compliance with Pirelli values and consumer and exclusive editions beyond the tyre. Pirelli Nokian Michelin FTSE Mib Continental Stoxx 600 A&P Source: Bloomberg expectations. In 2017, Pirelli can count on about 14,600 Loyal In January 2018, Pirelli was declared the world’s Sustainability Leader in the Auto Components sector, and Gold Class Company in the the market and the very presence of Pirelli, ranging from a Edition offers the exclusive ability to customize tyres to prestigious Sustainability Yearbook 2018 published by RobecoSAM, the Company responsible for assessments for inclusion in the softer loyalty (fidelity Club), which has as main objective for make your car unique by choosing from hundreds of colors. Dow Jones Sustainability Index. Pirelli obtained Auto Components worldwide leadership, with a score of 83 vs. industry average of Pirelli territorial coverage and for the dealer sales support; Thanks to the experience gained in F1® competitions, Pirelli 42. The RobecoSAM analysis was conducted in 2017 and involved 2,479 companies belonging to 60 different industrial sectors. to franchise programs, in which through the exclusive of the has developed an innovative labelling process that guarantees Resellers globally, with a particular concentration in Europe, Pirelli also innovates in terms of product customization. Asia-Pacific and South America (about 75% of the total In 2017, Pirelli presented the concept of colored tyres, in points of sale). The degree of affiliation varies according to anticipation of sales that will take place in 2018. Pirelli Color For further information, reference is made to the Investors section of the Pirelli website, which offers a comprehensive and constantly offering local delivery and distribution services throughout terms of how tyres are purchased. A B2B approach is now updated source of information on matters of interest to shareholders and the financial community. the entire territory. accompanied by a B2C approach, with the possibility for the end customer to purchase colored tyres directly from the consumer platform created for this purpose. The range partnership there is strong focus on business development quality, resistance and stability of the color applied to the side. point of sale overall; up to the maximum degree of affiliation, The colored tyres also present innovative technologies with represented by the presence of points of sale owned by Pirelli dedicated compounds, combining not only high performance (303 points of sale worldwide). but also style and design, to enhance the sporty character and “Distributors” are partners who are fundamental to guaranteeing continuity in the supply of tyres to other Pirelli Color Edition marks a turning point not only in specialised and non-specialised resellers. They do so by terms of the product customization offer, but also in uniqueness of each tyre. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainavailable initially covers the main models of Prestige car in the case of promotional activities managed centrally and by information distributed in hard copy format, as well as the different languages. The new site currently includes about 11,800 manufacturers, and interested users have the opportunity locally with central supervision. range of off-line and online training activities. In the general points of sale registered for a total of over 12,000 active users. to enter pre-orders pending the official opening of sales scenario, online is confirmed as a key touchpoint in the Product training is provided in an engaging and customized that will take place in 2018. In terms of production of advertising campaigns and media process of searching and buying tyres. There are 43 product manner on the various types of distribution channel, however planning, Pirelli uses specific auditing and certification sites located by language (25 different languages), offer and maintaining a homogeneous approach; thus, no longer a single The centrality of future mobility in the High Value strategy structures that place the Company at the highest levels in promotional activities, which aim to inform and direct the path that leads to the final objective of certification, but several saw the introduction in 2017 of a specific figure in this sense in terms of transparency and traceability in its advertising consumer to the points of sale (about 63,500 dealers inside the paths linked to individual product families. the company organizational framework, the Future Mobility investment strategies. dealer locator) where to buy the tyres, in all the countries in Manager, which has the task, within the Sustainability and which Pirelli commercializes its products. In 2017, these sites In order to support the product trainers, a library of Risk Management Department, to monitor these trends in The Pirelli Group endorses the IAB (Interactive Advertising attracted 8.5 million users over 11 million sessions, for a total technical content was developed for classroom courses and the sector and to coordinate the related business activities Bureau) and is associated with the UPA (Associated of about 37 million pages visited. the instrument “TYRE CAMPUS™ Houses”, which aims to accordingly. Advertising Users), among other things dedicating ongoing concretely demonstrate the characteristics of Pirelli tyres, Customer Focus Customer focus is a central element of the Group “Values” and “Ethical Code” and the Quality Policy and member of the World Federation of Advertisers (WFA), which is to provide an additional means of communication and Pirelli trainers around the world have concrete and innovative commits participating firms to pursue honest, truthful and contact with the trade, consisting of an international edition, support that allows customers to personally understand and Product Stewardship Policy of Pirelli. These documents outline fair competition and communication in compliance with the coordinated centrally from the headquarters, and local- verify the key characteristics and advanced technology of commitment to support the Advertising Code of Corporate In 2017, Pirelli continued to inform its customers with a digital the raw materials used for their manufacturing and the Governance of the association. Through the UPA, Pirelli is a newsletter, Paddock News, the main objective of which differences between the different tread. With these tools, the company positioning and are therefore communicated to code of conduct and self-regulation to which they adhere. language edition for each market in which Pirelli operates. Pirelli products. all employees in the local language and are available in many Consumer protection is also guaranteed by the choice of Paddock News features a gallery of new products and news 1 1 6 languages on the Pirelli website. suppliers in the communication sector (creative agencies, from the Company and its Business Units: Car, Motorcycle, Pirelli also continues to certify all its dealers who complete the media centres, production companies) that in turn belong to Motorsport and Bike. In terms of paper publications, the product training successfully. The certificate is then indicated Among the essential elements of the Pirelli approach, the business and professional associations governed by ethical company magazines “Pirelli World” and, for Brazil, “Giro”, in the dealer locator with a plaque placed at the point of sale. following are highlighted: codes regarding communication. continue to play a key role. This way, consumers can recognize which dealers are the most 7 1 1  > consideration of the impact of its actions and behaviour on the customer;  > exploitation of every opportunity offered by doing business to satisfy the customer’s needs;  > anticipation of customer needs; Compliance Also in 2017:  > no cases emerged of non-compliance with regulations Of particular relevance in terms of communication on product of all the products of the Pirelli range. The launch project in the developments is participation in the main Autoshow events. various markets of the new platform is at an advanced stage, At the Geneva Motor Show 2017, Pirelli launched the Colored during 2018, it is planned to complete the launch. specialized and qualified on the technical features and benefits or voluntary codes concerning marketing activities, Edition tyres in addition to the PIRELLI CONNESSO™ concept.  > safety, reliability, high performance of products and services including advertising, promotion and sponsorship; Also in 2017, Pirelli took part in the most important events and offered, in accordance with local regulations and more  > no significant final penalties were levied and/or paid Consumer Prestige, such as the Salon Privé (England) and the developed national and international standards applicable, relating to infringement of laws or regulations, including Pebble Beach Concours D’elegance (California). as well as excellence of production systems and processes; those relating to the supply and use of the Group’s Listening and exchanging ideas with Customers as sources for continual improvement Customer relationships are managed by Pirelli principally through two  > information to customers and end users to guarantee an products and/or services; Again in 2017, by officially introducing its entry into the world channels: adequate understanding of the environmental impacts  > no cases emerged of non-compliance with regulations or of bikes, Pirelli took part in Eurobike, the main international  > the local sales organization, which has direct contact with and safety features of Pirelli products, as well as of the voluntary codes concerning information and labelling of cycle fair, where it presented the newest range of Road Racing the customer network and which, thanks to advanced safest ways of using the product. products/services; PZero™ Velo products.  > no cases of non-compliance with regulations or voluntary information management systems, is able to process and respond to all information requirements of the Pirelli also adopted a clear procedure to grant a feedback to codes concerning health and safety impacts of products/ The training of customers on the product even in 2017 was interlocutor on site; any customer claim, which involves immediate intervention services during their life cycle; intense in all markets, both at the points of sale and at the  > the Pirelli Tyre Contact Centers, about 30 worldwide with respect to the interlocutor.  > there were no documented complaints concerning both Pirelli sites with visits to the factory, R&D laboratories, and with more than 150 employees, performing business violation of privacy and/or the loss of consumers’ data; simulations of tyre performance. During the year, more operations in IT support and order management The “General Conditions of Supply” applied by the Group  > no sales of any of the products sold by Pirelli were not than 18,000 dealers of the 22 main markets participated in (inbound), telemarketing and teleselling (outbound). companies are informed in accordance with the principles banned or disputed. classroom training courses on Pirelli products, technology and mentioned above. Transparency in communication to the customer In the context of advertising communication, Pirelli has defined Information to Customers Pirelli provides information to customer-distributors and end customers on a continual basis. This information concerns both the product and tyre sales; some course included visits to the plants in Settimo In 2017, all the major social media channels of Pirelli have seen Torinese (Italy) and Izmit (Turkey) in addition to the circuit in a significant increase in the fan-base. Pirelli’s presence on Vizzola (Italy) and the R&D Center in Milan. Information and Facebook has reached over 2.2 million followers, with a growth training are therefore conducted with a 360º approach. of 11% over the previous year. Also on Twitter, Pirelli accounts saw an increase in followers, reaching over 240,000 people, a traceable and transparent process for all decisions relating related initiatives, and is disseminated in a variety of ways, In 2017, the new online training site TYRE-CAMPUS™ “The road over 13% more than in 2016. The leap forward on Instagram to advertising campaigns and related media planning, both including online communication, and this is complemented to Success” was launched, which now covers 23 markets in 16 is very important, where Pirelli channels reach over 371,000 ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chain1 1 8 followers, with an increase, year on year, of 42%. Finally, Pirelli insights into the brand role, image profile and characteristics 9001:2015, while the remaining 25% is certified according to The aforementioned assessment is only performed on a has more than 14,550 followers on the leading online video of the different touchpoints that influence the end customer’s ISO 9001:2008. platform, YouTube. purchase decision. centralised basis and the results are extended to all Countries where Pirelli operates, taking account not only of the ISO/TS 16949:2009 – IATF 16949:2016: In 1999, the Group requirements imposed by restrictive European regulations The success is also confirmed of the www.pirelli.com In terms of monitoring its competitive positioning and its obtained certification for its Quality Management System concerning the management of hazardous substances, but also website, the digital Pirelli magazine launched in late 2015. brand image among end consumers, there are two reference in compliance with ISO/TS 16949 and it has since maintained standards and know-how currently available internationally In 2017, on the new digital communication platform, Pirelli documents for brand positioning. One is the Brand Pyramid, compliance with the standard as currently applicable. (specifications, databases, etc.), thereby fully implementing as has published more than 400 articles - regarding product, which summarises the values, personality and distinctive Following the evolution of the ISO 9001:2015 standard and stated in the specific Health, Safety and Environment Policy. motorsport, culture and sustainability -, with nearly 5 million features of the Brand. The other is the Brand Key, a work the new IATF 16949:2016 (Automotive Scheme that became visits, of which nearly half attracted through social networks scheme created with the aim of giving unity to product private), Pirelli has achieved the certification of the Quality In 2017, the monitoring of the producers and suppliers of raw and about 3.3 million unique users, with an increase of 48% communication in terms of emotional benefits, functional Management System in 75% of its Plants, which are eligible as materials used by the Group continued, above all with a view compared to 2016. benefits, reason to believe, differential elements, target of of 31/12/2017, while the remaining 25% is certified according to to the activities specifically envisaged by Regulation (EC) no. reference. In terms of performance indicators, Pirelli considers ISO/TS 16949:2009. The completion of the transition plan is 1907/2006, also known as “REACH Regulation”. As for the Motorcycle world, the digital projects of the Top of Mind, Brand Awareness and Brand Consideration. expected by May 2018. Metzeler and Pirelli brands are especially important. For Metzeler, in addition to the website present in 10 countries The analysis carried out in 2017 saw Pirelli position itself in the ISO/IEC 17025: Since 1993 the Materials and Experimentation worldwide since 2012, a page with about 386,600 fans is active European Top Three of the most popular tyre brands: in first Laboratory of the Group and since 1996 the Experimentation Product safety, performance and eco-sustainability Safety combined with environmental efficiency of the Pirelli on Facebook, which since 2015 has been converted into a place for Top of Mind and Brand Awareness in Italy, second Laboratory of Pirelli Pneus (Latin America) hold the Quality product are key features of the product portfolio offered. In this Global Page comprising 11 local pages dedicated to the various in the United Kingdom and in Spain, third in Germany, and Management System, and have been accredited under the ISO/ regard, in 2017, the company has taken important steps forward: countries with contents in the relevant local languages. To in France it ranked fifth for Top of Mind and third for Brand IEC 17025 standard. This system is maintained in accordance with new compounds, new processes, new tread patterns that keep relations with consumers active, the @metzelermoto Awareness. With regard to the Brand Consideration indicator, with the standard in force and the ability of the laboratories have made it possible to record a general improvement in the channels on Twitter, Instagram and Youtube have been active i.e. consideration of the brand for the purchase, Pirelli is in to perform accredited tests is evaluated annually. The labs values of rolling resistance, wet braking and noise. for years, as well as Facebook, with more than 886,700 fans second place in the ranking in Italy and Spain, third in the participate in proficiency tests organised by the International connected to the Global Page, which includes 11 local pages. United Kingdom and fourth in Germany. Standard Organisation, by ETRTO or by international circuits These innovations have a direct impact in terms of lower fuel Special attention is given to the Asian countries in which Pirelli Outside Europe, Pirelli in Brazil confirms its first place for organised by auto manufacturers. Specifically in regard to car is developing its presence on social media. The Diablo Super every KPI brand, while it is third in China. In the USA, there are tyres, the focus on quality is confirmed by Pirelli’s supremacy consumption, which means lower CO2 emissions, greater road safety thanks to the reduced braking distance required Biker mobile application is also of great importance, currently growing trends especially for Brand Consideration. In Russia, in numerous product tests. It is also guaranteed by its in unfavourable weather conditions, and reduction of accounting for more than 502,000 downloads, and is greatly Pirelli maintains its fourth position for Top of Mind and Brand collaboration on product development and experimentation noise pollution due to tyre contact with asphalt, thanks to appreciated by the biker community. Awareness, while in Turkey it is ranked fifth in all KPIs. with the most prestigious partners (auto manufacturers, innovative tread design solutions. specialised magazines, driving schools, etc.). The CRM project, in turn, has a priority position considering Pirelli performance is even more positive – in line with the In mid-2017, Pirelli presented a new generation of CINTURATO the passion for the Pirelli product of the community of High Value positioning of the product - at the Key Target 18” The Product Certifications, which allow the commercialization P7™ Blue, a sustainability champion touring tyre, which has registered motorcyclists: about 316,000 for Pirelli Motorcycle Up represented by car owners who can mount tyres with rim of the same in the various markets in accordance with the been renewed and has extended the double A of the European and about 53,800 for Metzeler. equal to or greater than 18 inches. For these target consumers, regulations laid down by the different countries, are regularly label (in rolling resistance and wet braking) to all new sizes, thus the values of Brand Awareness and Brand Consideration are managed by a department dedicated to the area of Research marking a new record, boasting the greatest tyre with double-A Pirelli Velo has inaugurated its entry into the bike market higher, with: particularly significant increases for both KPIs & Development. The prevailing certifications, obtained in the measures. Already in 2012, in fact, just launched on the market, with a dedicated web magazine named Velo World, which in Italy, Germany, France, China, Russia and Turkey and, for Pirelli Group, concern the markets of Europe, NAFTA (North the P7™ Blue was the first tyre in the world to get top marks on constitutes inspirational source of information and stories Brand Consideration, in the USA. America Free Trade Agreement), South America, China, Gulf the label for energy efficiency and safety on some measures. about cycling and new trends. Immediately active on Instagram and Facebook, Pirelli Velo bases its communication on digital activation in line with the propensities of its target consumer. In 2018, specific digital channels will be activated to Quality and product certification ISO 9001: since 1970, the Group has had its own Quality Management System Countries, India, Taiwan, Indonesia, South Korea, Japan and Australia, and involve all Pirelli plants. These Certifications Also in 2017, Pirelli introduced the CINTURATO™ All periodically require factory audits by ministerial bodies of the Season Plus on the European market, an evolution of the countries concerned or bodies delegated by them, with the aim CINTURATO™ All Season, a product mainly dedicated to further share the cycling passion with users. introduced gradually at all Plants and, since 1993, Pirelli has of verifying product compliance at the Pirelli production sites. drivers in urban areas and is looking for an innovative Also in 2017, the end customer direct listening activity was the ISO 9001 standard in force. Starting from May 2017, Pirelli performed through the Brand Tracking survey in the Top has been implementing the transition plan of its Plants and Ten Markets of Pirelli (Italy, Germany, Spain, France, United the Headquarters to certification according to the new ISO obtained and maintained certification of said system under Focus on human health and the environment Also in 2017, the evaluation continued of new raw materials and new to an improvement in performance in both winter and summer conditions, with special attention to snow and and alternative mobility solution. The CINTURATO™ All Season Plus presents a new tread compound that leads Kingdom, Brazil, China, United States, Turkey and Russia). The 9001:2015, which will end in March 2018. At the end of 2017, auxiliary products prior to their use by the operating units of wet conditions, increasing driving safety, any road surface ongoing changes made to this study over the years have made the Headquarters and 75% of the Pirelli plants achieved the the Group, in order to identify potentially critical issues for conditions occur along the way. The main measures are it possible to refine and improve the precision of business Quality Management System certification according to ISO human health of workers and/or the environment. characterized by the presence of Seal Inside, a Pirelli 9 1 1 ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chaintechnology that allows continuing driving without air loss vehicle in case of puncture as if nothing had happened and, covered, Pirelli undertakes to establish and maintain the although in different ways among them, consistently with even if a tyre has been punctured, covering almost 85% of at the same time, avoid dangerous roadside stops to replace procedures necessary to evaluate and select its suppliers on the the intensity of the interactions characterising the specific possible accidental causes of pressure loss. the tyre. It is no coincidence that sales of Pirelli products basis of their level of social and environmental responsibility, procedural instances. with seal inside technology have increased by 30% between as well as to request their suppliers to implement a similar During the year, Pirelli also developed the CINTURATO P7™ 2016 and 2017. management model, in order to strengthen responsible During a first phase of selection (or sourcing), and thus (KS), an evolution of the CINTURATO P7™, for mid-segment cars and sedans on the Chinese market. The new KS marked CINTURATO P7™ measures have an improvement in terms of external noise, rolling resistance and therefore environmental Road safety culture and international initiatives International initiatives and commitments are discussed in the management in the supply chain that extends beyond its assessment of possible offers for good or services in the direct supplier. marketplace, a buyer who has been adequately trained is able to gain a first impression of possible abidance or otherwise The Policies mentioned are available in many languages on the by the requirements of the product and ESG by the potential efficiency, and road safety, thanks to greater wet grip and paragraphs “Company Initiatives for the External Community”. Pirelli website, Sustainability Section, to which reference is supplier. This allows any who are clearly in possible breach external noise. here made for full details. of Pirelli expectations to be eliminated from the roster of Product safety, performance and eco-sustainability are also key elements of the development partnerships between Pirelli and prestigious car manufacturers. Pirelli meets the challenge of customization required by car manufacturers by investing resources in research and development, in order OUR SUPPLIERS Supply chain sustainable management system The management model of the supply chain adopted by Pirelli fully In line with its “High Value” development strategy, Pirelli does potential suppliers. not limit its assessments of products and services offered to the Pirelli asks suppliers who gain access to the qualification (or mere cost proposed, paying utmost attention instead to the on-boarding) phase to use the portal available in local language. value proposed, thereby including innovation, internationality, By accessing it, the supplier views and simultaneously accepts flexibility, economic, social and environmental responsibility Pirelli’s requests in terms of economic, social, environment and to offer more innovative products in terms of materials, complies with the provisions of the international guidelines and business ethics. technologies and processes, for a perfect synergy between for sustainable procurement ISO 20400, as certified at the business ethics responsibilities (in case of non-acceptance, the qualification process cannot initiate), to then proceed to fill tyres and vehicle. This led, in 2017, to the launch of the new beginning of 2018 by a third party (SGS Italia S.p.A.) following The social, environmental and business ethics responsibilities multiple questionnaire concerning respect for fundamental SCORPION ZERO™ All Season, an Ultra High Performance All a thorough evaluation. The analysis embraced the entire of Pirelli suppliers are assessed together with the economic Human and Labour Rights, considered key by the Company Season product developed for premium and prestige SUV purchasing function of Pirelli, confirming that the requirements and product or service quality to be supplied, right from the and such that the absence of just one of them will not allow 1 2 0 manufacturers created in response to the market demand of the ISO standard were fully satisfied, both in terms of company selection as potential supplier stage. the continuation of the qualification process. These questions for a new high-performance all-season product that could policies and strategies, and regarding the management of the require the potential supplier to attest that its company: 1 2 1 be mounted on modern SUVs. The tyre SCORPION ZERO™ internal processes necessary to implement the sustainability Analysis of ESG performance (Environment, Social, Governance) checks workers’ ages before hiring them, and it ascertains All Season is characterized by a reduced rolling resistance, requirements in the dynamics of procurement, and at a more continues through the qualification stage of the future supplier that all of its employees satisfy the minimum legal working improved thanks to the new compound and the new operational level in the direct management of suppliers’ pre-analysed at the assessment phase, and then is “contract age; uses workers provided with a written labour contract and mixing process, and excellent performance in terms of ethical performance. The ISO 20400 document “Sustainable bound” though the Sustainability and business ethics Clauses who work on a voluntary basis exclusively; abides by workers’ dry and wet grip. This product, which boasts a constantly Procurement Guidance”, officially announced in April 2017, is an included in every contract/purchase order. rights of freedom of association and participation in trade- expanding range of approvals, will equip car manufacturers innovative tool that aims to promote sustainable purchasing union activities; pays wages that meet the minimum legal like Jaguar, Land Rover, Volvo and Volkswagen. It is also practices within any public or private organization, regardless After the supply agreement has been made, the sustainability standards; manages disciplinary practices, if any, abiding by available for some sizes in the Pirelli Noise Canceling System of size or geographical location, including through the performance of the supplier is audited by an independent the law; abides by and applies at least legislative/contract (PNCS™) version. integration of the sustainability principles enshrined in the ISO third party. 26000 social responsibility guidelines. provisions in the matter of work schedules, overtime and rest periods. The process continues with the request to include The Pirelli Noise Canceling System innovation is decisive for The aforementioned Management Model and the related quality, environmental and health and safety certifications; reducing the noise inside the passenger compartment, caused The Group’s relations with suppliers and external collaborators documentation are available on the institutional Pirelli website, to document their approach to responsible management by by the rolling of the tyres on the asphalt. The reduction in are based on loyalty, impartiality and respect for equal in the “Suppliers Area” (Pirelli.com/suppliers), section devoted attaching their Policies and Codes; to provide data in respect noise pollution guaranteed by Pirelli PNCS™ technology opportunities for all the subjects involved in the purchasing to the world of supply and accessible to current and potential of the rate of accidents at work; to attest to compliance with substantially improves driving comfort and this has been processes, as required by the Group Ethical Code. Pirelli suppliers, as well as anyone with an interest in knowing labour laws as set forth above and an litigation there may decidedly appreciated by the market, so much so that the the approach and procedures adopted by the Company in the be. Information is also requested relating to loss prevention, number of Pirelli products with PNCS™ technology, doubled There are also many policies adopted by Pirelli, which highlight areas of purchases of good and service around the world. The key elements not only to prevent future cases of “business between 2016 and 2017, has resulted in tripled sales between the full integration of the sustainable supply chain. communication channel is aimed at the utmost clarity and interruption”, but also closely related to the safety of workers original equipment and spare parts channel within a year. The sustainable management of the supply chain is also the sharing of Values, Guidelines, documentation and standards employed at the supplier’s site. subject of the Green Sourcing Policy as well as an integral part of adopted by the Company in relations with suppliers, in terms of Determinants for customer safety are also the tread the “Social Responsibility for Occupational Health, Safety and the web also in the individual Countries in which Pirelli operates. For all potential new suppliers and/or facilities of raw technologies, which see Pirelli in the forefront with the Rights and Environment” Policy, the Global Health, Safety and Seal Inside technology. Seal Inside prevents air from leaking Environment Policy, the Global Human Rights Policy, the Quality when punctured, allowing continued mobility despite the Policy, the Product Stewardship Policy, the Group’s “Sustainable loss of air pressure. This, in terms of road safety, results in Natural Rubber” Policy. In all the documents cited, with ESG elements analysed in the purchasing process Pirelli uses the same ESG performance assessment approach material and/or high value added (HVA) Parts, which by their nature can become development or however long-term partners for the Company, and which are also attributed much of the spending of purchases, Pirelli conducts a third-party two substantial benefits for the driver, who can control the reference to the specific social and environmental issues throughout the entire process of interactions with a supplier, preliminary audit from the qualification phase to verify the ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainlevel of compliance of the potential supplier with respect to to social and environmental responsibility, regular or natural rubber processing plants. Pirelli intends to play During 2018, the Company will draw up a Policy Implementation the principal national and international regulations on Work, overseeing compliance with this obligation on the an active role in the aforementioned context, contributing Manual, which will again see the involvement and consultation Environment and business ethics. The non-acceptance of the part of the same; to the efforts that are globally dedicated to the sustainable of stakeholders as essential elements for the best definition of audit and/or not entering into a reinstatement plan of any  > specifying that Pirelli reserves the right to verify at any management of natural rubber. content, as well as the applicability of the manual itself. non-compliance shall block the supplier’s qualification. time through activities of audit, either directly or through At the same time, Pirelli will continue the mapping and third parties, that fulfilment of the duties taken on by a In October 2017, Pirelli issued its Policy on Sustainable traceability of the supply chain, through partnerships with With regard to the contractual stage, for ten years now, the supplier has been achieved (see further details in the next Natural Rubber, after a long elaboration process based on its suppliers and with the aid of advanced mapping systems Sustainability and Business Ethics Clauses (including anti- paragraph). consultation with key stakeholders and companies that have (including digital). The results of on-site audits carried out by corruption) have been included systematically in contracts The Sustainability Clauses have been translated into 21 historical experience in terms of sustainable procurement third parties at the suppliers’ sites (natural rubber processors) and orders for the purchase of goods and/or services and/ languages to ensure maximum clarity and transparency vis- of materials. The draft of the Policy was presented and will also be capitalized in 2016 and 2017, aimed at assessing or works, both with private suppliers and with the Public à-vis a supplier in the matter of the contract duties that they discussed with key stakeholders in a consultation session the level of sustainable performance at the transformation Administration (or institutes/enterprises under public assume, not only in respect of the Company itself, but also at held in September 2017, attended by international NGOs, sites, and at understanding the capacity of Suppliers in terms control), and in agreements with NGOs, worldwide. their own site in relations with their own suppliers. Pirelli’s main natural rubber suppliers, traders and farmers of direct/indirect control of their supply chain, up to the in the supply chain, automotive customers, international identification of the supplying plantations. In particular, the clauses: From the standpoint of utmost assurance suppliers of the organizations multilateral.  > require awareness on the part of suppliers of the Pirelli Group have available the Whistleblowing Reporting In 2017, the partnership that has tied Pirelli to Kirana Megatara principles, commitments and values contained in Pirelli’s Procedure (ethics@pirelli.com), which has been indicated As stated in the Policy, Pirelli undertakes to promote, develop and since 2014 continued. Kirana Megatara, among the largest Sustainability documents, being “Values and the Ethical expressly in the clauses and by means of which any breach implement sustainable and responsible procurement and use of natural rubber processors in Indonesia, is one of the leading Code”; the “Code of Conduct”, the “Global Human Rights or suspected breach they discern in relations with Pirelli natural rubber throughout its entire value chain. In particular, suppliers of natural rubber of Pirelli. Policy”, the “Health, Safety and Environment Policy”, the referring to the contents of the following can be reported in the Policy explodes the positioning of the Company in terms of: “Anti-Corruption Program” and the “Product Stewardship total confidentiality: “Values and Ethical Code“, the “Code of  > defence of Human Rights and promotion of decent working The Project of Kirana and Pirelli aims to support small local 1 2 2 Policy”, published and accessible on the web and which Conduct“, the Group policies “Global Human Rights“, “Health, conditions; producers in Indonesia through training on the most effective ratify the principles that inform the management of Safety and Environment“, “Anti-Corruption Program“ and  > promotion of the development of local communities and methods to improve the productivity of plantations and Pirelli in its activities and relations with third parties, “Product Stewardship“. prevention of conflicts related to land ownership; through scholarships for their children. This will be in addition contractually and otherwise;  > protection of ecosystems, flora and fauna; to, starting from 2018, support to the activities of replanting 3 2 1  > require that Suppliers confirm their commitment to: In 2017, among the reports signed, none were sent by Suppliers.  > no to deforestation, no to the exploitation of the peat bogs, no rubber trees to further strengthen the development of > > not using or supporting the use of child labour and It is objectively impossible to confirm that there were, in to the use of fire, and adoption of the methodologies “High plantations on territories already dedicated to natural rubber forced labour; absolute terms, no further reports from suppliers received Conservation Value (HCV)” and “High Carbon Stock (HCS)”; without putting and avoiding risks of deforestation. > > ensuring equal opportunity, freedom of association as a number of reports were, as specified, anonymous, as  > efficient use of resources; and promotion of the development of each is specified in the paragraph “Focus: Reporting Procedure -  > ethics and anti-corruption; Increasing the productivity of plantations is in fact a key individual; Whistleblowing Policy”, to which reference is made for further  > traceability and mapping of social-environmental risks factor: it allows farmers to increase their income while > > opposing the use of corporal punishment, mental or details. along the supply chain (risk-based approach); decreasing the risk of deforestation resulting from the physical coercion, or verbal abuse; > > complying with the laws and industry standards concerning working hours and ensuring that waves are sufficient to cover the basic needs of personnel; Sustainability of the natural rubber supply chain With global demand for natural rubber expected to increase,  > clear indication of the governance model envisaged by abandonment of unproductive plantations. Training on the policy, and consideration of the risks identified in the production quality, including the provision of origin plants definition of the purchasing strategies; controlled by agronomist specialists, takes place constantly  > encouragement of its suppliers and sub-suppliers to the throughout the year at the farmer communities involved in > > not tolerating any type or bribery in any form or sustainable management of the related supply chain is essential adoption of solid certification systems, internationally the project, 110 stably and continuously. manner and in any legal jurisdiction, even where to preserve forests, biodiversity and to enable sustainable recognized and verified by third parties, at all levels of the such practices are effectively permitted, tolerated, development for local communities and economies. supply chain; Each year, Pirelli and Kirana Megatara organize an event or not subject to prosecution;  > promotion, support for the Company’s active participation called tapping competition, which sees the best “carvers” of > > assessing and reducing the environmental impact of The economic, social and environmental sustainability of the in cooperation initiatives at sector level and among the place in a friendly challenge on the best carving methods their own products and services throughout their natural rubber supply chain is among the priorities of Pirelli, stakeholders that play an important role in the value in a day of celebration for the community that is also an entire life cycle; with the full awareness that the origins of its rubber supply chain, in the belief that, in addition to the individual important opportunity for training and spreading awareness > > using resources responsibly with the aim of achieving chain impact in forestry terms. commitment of companies, a shared effort can among farmers present regarding the best growing and sustainable development in compliance with the accelerate and strengthen the path towards sustainable carving techniques, necessary to obtain an increasingly purer principles of respect for the environment and the The natural rubber supply chain – from the upstream development of the global natural rubber supply chain; product, free from contamination and therefore characterized rights of future generations; to the downstream level - includes producers/growers,  > activities aimed at the implementation of the Policy; by its high level of quality, necessary to increase the earnings > > establishing and maintaining the necessary traders, processing plants, distribution companies and  > commitment to reporting on the results achieved; of families and simultaneously reduce the impacts of procedures to evaluate and select suppliers and manufacturing facilities. Pirelli is at the end of the chain, as  > making available the Reporting Procedure for any violations deforestation. In the evening, the three best tappers are then sub-suppliers on the basis of their commitments a tyre manufacturer that does not own its own plantations of the Policy. chosen who, thanks to perfect carving, are awarded prizes for ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chain1 2 4 themselves and their families. Even in 2017, about 298 farmers Therefore, the Green Sourcing Manual is a unique document for many years. Under Conflict Mineral Rules, listed of the volume of raw materials used annually by the Company and their families attended the event, which was held in the that contains: companies in the United States are required to perform and which is equally distributed among most of the tyres south of the island of Sumatra.  > the general part on Green Sourcing issues; reasonable due diligence in tracing the provenance of produced. To give an example, a tyre weighing 10 kg contains  > the Green Engineering Guidelines (Materials, Capex); these materials and reporting the findings to the SEC and about 10 mg (milligrams) equivalent of tin, in the extremely Also in 2017 was the award ceremony of scholarships by Pirelli  > the Green Operating Guidelines (Opex, Logistics). publishing them on their website, with the first report to low concertation of 1ppm (one part per million). and Kirana Megatara in favour of the children of local producers. The Green Sourcing Manual will also be adopted by the Pirelli be published by 31 May 2014 (in respect of 2013) and updated With a view to procurement covering only minerals that The ceremony was held in Muara Enim Regency in the South Training Academy for training purposes by the functions subsequently each year. are “conflict free”, Pirelli has conducted a comprehensive of Sumatra Island and 65 scholarships were awarded, with the involved in the process of Green Sourcing. investigation on its supply chain, in order to have full visibility aim of trying to ensure adequate education, in the belief that In turn, in May 2017, the European institutions approved the up to the mines or foundries in order to identify the existence the future sustainability of the natural rubber business cannot In 2014, and on the basis of the Guide Lines of the Green 2017/821 Regulation “establishing obligations regarding due of any “conflict minerals”. The Company has asked its suppliers absolutely disregard the adequate training and development Sourcing Manual, the Pirelli Green Purchasing Guidelines diligence in the supply chain for EU importers of tin, tantalum to complete the CFSI-CMRT (Conflict-Free Sourcing Initiative of the new generations, and their right to study. were published on the website www.pirelli.com thus and tungsten, their minerals and gold, originating from areas – Conflict Minerals Reporting Template), developed by EICC The “Green Sourcing” Policy As at December 2012 Pirelli drew up and issued the “Green Sourcing” Policy with making them available both to Pirelli suppliers and to of conflict or at high-risk”. The new provisions will apply from (Electronic Industry Citizenship Coalition) and GeSI (Global other stakeholders in China, Mexico, the United States, January 2021. e-Sustainability Initiative). Russia and Italy, by-invitation seminars have been held at Pirelli offices on the Green Sourcing Guidelines for local Pirelli expresses its position on the management of the issue The suppliers polled cover 100% of the “conflict minerals” risk the aim of stimulating and incentivising an environmental suppliers so as to inform and receive direct feedback on the in a paragraph dedicated to it in its Global Human Rights tied to Group products. More than 90% of suppliers polled conscience along the entire supply chain and encouraging way they work. Policy, where it is stated that the Company “requires that its have already given precise indications concerning the source choices that might reduce the impact on the environment suppliers conduct proper due diligence within their supply chain in of the materials in question and listing foundries as required of provisioning activity by Pirelli of goods and services. The In 2015, Pirelli also developed an IT platform to support the order to certify that the products and materials supplied to Pirelli are by the procedure and there was no evidence of the presence Green Sourcing Policy implementation system was defined launch of a campaign to measure the Green Performance of “conflict free” throughout the whole supply chain (i.e. not coming of conflict minerals. At the end of 2017, a minimum number in 2013, both inside Pirelli and in supplier relationships. It is Pirelli Suppliers through an electronic questionnaire that from mines or smelters operating in conflict zones identified as such of suppliers, corresponding to 0.01% of spending of Pirelli organised as follows: can be completed via the web, a campaign implemented in in the relevant conflict minerals regulations, unless they are certified purchasing, are still investigating their chain.  > Pirelli Green Sourcing Manual, an internal document April 2016 and which saw high participation by Suppliers of as “conflict free”). Pirelli reserves the right to terminate relations with containing operating Guidelines, intended to guide the Raw Materials (Response Rate equal to 77%) justified by the suppliers in cases where there is clear evidence of supplying conflict activities of the Pirelli functions involved in the Green “engagement” activities of these Suppliers by R&D, Quality minerals and however in case of any violation of Human Rights”. Sourcing process; and Sustainability, actively involved in the supply chain and Monitoring of ESG performance Supplier performance is monitored by using the Vendor Rating system, aimed  > Pirelli Green Purchasing Guidelines, a document intended tyre innovation. The Policy is published in multiple foreign languages in the at defining the quality level of supplies, the quality of for Pirelli suppliers as part of the Contract for supply and Sustainability section of the pirelli.com website. the commercial relationship, the technical-scientific based on the Green Sourcing Manual containing the KPIs In 2017, Pirelli updated the IT platform to support the collaboration and, through on-site audits by third parties, (Key Performance Indicators) for assessing the Green measurement of the Green Performance of Pirelli Suppliers In 2017, Pirelli also strengthened its management model, verifying performance in relation to human and labour Performance of these suppliers; with the aim of including the Logistics Services Providers. introducing the request for the following documentation rights, health and safety, environmental management and  > integration of Green Performance in the traditional process among the qualification requirements of suppliers that can be business ethics, followed by the periodic monitoring of of measuring supplier performance (vendor rating). In December 2017, a campaign was launched to measure the associated with the possible use of conflict minerals: the progress of the actions set down in any improvement The Pirelli Green Sourcing Manual defines four areas of available from the first quarter of 2018.  > policy on Conflict Minerals if present; monitoring of sustainability of suppliers cover all the goods Green Performance of these Suppliers, whose results will be  > conflict Minerals Reporting Template (CMRT); plans signed with the supplier. The Vendor Rating and 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 Policy on Conflict Minerals The concept of Conflict Minerals was introduced by Section 1502 of the Dodd-Frank  > description of the “Due Diligence” system to identify and and geographical purchasing areas and utilized as an integral trace the presence of 3T+G minerals. part of commercial negotiations. The management model then extends to the contractual phase, The results of the Audits are analyzed by the Purchasing falling within the four areas mentioned above. Green Act, a federal United Sates law, in 2010. By “conflict minerals” through the inclusion of a Conflict Minerals clause that recalls Department and the Sustainability and Risk Governance Engineering Guidelines were also defined for the Materials and is meant gold, columbite-tantalite (conltan) cassiterite, the supplier’s commitment to providing the Conflict Minerals Department, commented and discussed to identify eventual Capex areas, where the design component (what is conceived wolframite and their derivates like tantalum, tin and tungsten Reporting Template on an annual basis and to maintain the corrective actions or to improve performance along with in-house) is material to the Pirelli core business. that come from (or are extracted in) the Democratic Republic results achieved in terms of chain transparency, in addition to suppliers. For the Opex and Logistic areas characterised by goods At methodological level, the Purchasing Department and categories in respect of which the design component is not The objective of the rules in respect of Conflict Minerals To give an idea of the scale of the phenomenon for Pirelli, it the Sustainability and Risk Governance Department of the equally significant, Green Operating Guidelines have in any (Conflict Mineral Rules) is to discourage the use of minerals is worthwhile stating that the impact is very limited: the Group define the Guidelines for the selection of suppliers vent been defined by referring to internationally recognised whose sale might finance violent conflicts in Central Africa volume of minerals (3T+G) used by Pirelli Tyre in one year in to be audited, supporting the Purchasing Managers and best practices. where grave violations of human rights have been recorded fact weighs less than a ton, a quantity less than one millionth Sustainability Managers that locally coordinate the auditing of Congo and/or bordering Countries. reporting the further progress pursued and expected. 5 2 1 ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainactivities. Since 2009, in fact, Buyers and local Sustainability Mangers are asked to identify a roster of suppliers who, on the basis On the basis of audit findings, where necessary and fitting respect of suppliers operating in Countries considered to be more of the findings of proper Risk Assessment, they feel to be worthwhile submitting to audit by a third party at the time of the Annual and given also the specific actions to remedy suggested by greatly at risk as compared to others from the standpoint of Audit Campaign. The risk assessment and thus the “criticality” of suppliers envisage an assessment based on the following guiding the independent Auditor, the supplier signs off on a plan for compliance with domestic and international labour legislation. parameters:  > the supplier is bound to Pirelli by multi-year contracts;  > the replacement of the supplier and/or related product may be complex; righting aimed at preventing, mitigating or remedying any non-compliances detected. The plan foresees specific actions Pirelli mitigates the risks mentioned through the management to be implemented by precise deadlines in addition to clear model adopted and described so far, which is completed with  > the economic burden of the purchase is significant and for this reason it is felt that verification in loco of the compliance of the identification of the responsibilities for the action at the the engagement activities of suppliers outlined below. supplier with Pirelli ESG expectations, and that the supplier sign up to at the contract stage, is worthwhile via an audit by a third supplier company and the method of follow-up (documentary party commissioned by Pirelli;  > the supplier operates in a Country at ESG risk; or new audit in situ) that will be followed by the auditor to verify resolution taking place of the non-compliances detected Engagement Pirelli believes that activities involving suppliers are essential from  > the supplier has not yet undergone an ESG audit by Pirelli or special criticalities have been detected in previous audits; during the audit. The process of monitoring the implementation the viewpoint of creating environmental and social value, and are  > there is information, a perception or doubt concerning possible breaches on the part of the supplier in the matter of social, status of plans of righting of suppliers, especially, is a dual one; inseparably tied to the creation of shared economic value. environmental and/or business ethics responsibilities. on the one hand the third-party auditor verifies the status There are many activities operated by the Company to that effect. The external auditors carry out verification on the basis of a checklist of parameters of sustainability deriving from the Pirelli Internal Audit Management of the Group verifies the adequacy Ethical Code, the SA8000® standard (a tool of reference officially adopted by the Group for managing social responsibility since of management and alignment on the part of local functions R&D Partnerships Pirelli has established several partnerships with strategic 2004) and the “Social Responsibility Policy for Occupational Health, Safety and Rights, and Environment” of the Pirelli Group (in its dealing with this (Sustainability and Purchasing). suppliers and universities for the development of innovative turn consistently with the areas of social, environmental and governance sustainability dictated by Global Compact of the United materials with low environmental impact (materials Nations), the “Social Responsibility for Occupational Health, Safety and Rights, and Environment” Policy, the Global Health, Safety The results of the audits carried out during the 2017 annual described in the paragraphs dedicated to environmental and Environment Policy and the Global Human Rights Policy. campaign include: management of products of this report). As part of the of implementation of the plan of righting, and on the other  > 38% of suppliers without non-conformities; development of new nanofillers, for example, pursued since 1 2 6 Third-party audits concern suppliers belonging to all product categories such as raw materials, machinery, logistics services,  > a total number of non-conformities found on-site industrial services, general services and components. Each audit has an average duration of two days on-site and includes a factory decreased by 16% compared to 2016. the early 2000s through research contracts with universities and collaborations with suppliers, Pirelli has started to 7 2 1 visit, interviews with workers, management and trade union representatives. The non-conformities registered in 2017 are substantially industrially introduce materials of mineral origin in partial External audits have been carried out since 2009 and continued in 2017, specifically: overtime and the correct implementation of environmental Compared to the production processes of the raw materials linked to health and safety management processes, the use of replacement of precipitated Silica and Carbon Black. Year 2009-2010 2010-2011 2012-2013 2014 2015 2016 2017 Number of Audits In 2017, following the permanence of non-conformities found in water savings, as well as a reduction of CO2 emissions of more than 75%, saving respectively 1,000 tons of water and management systems. replaced, the aforementioned innovations have guaranteed 72 56 62 78 93 6416 8317 the audits of the previous campaign, processes were initiated 450 tons of CO2. for the disqualification of Suppliers deemed not appropriate for the continuation of the relationship with Pirelli. This innovation results in economic benefits related directly Materiality of ESG impacts along the supply chain Considering the life cycle of the Pirelli Product (which is to the material for about Euro 150,000 per year, although the real sustainable business driver is the performance that the product acquires, thus becoming more competitive. specified in the “Environmental Dimension” chapter of this report), the environmental impacts of the supply chain are CDP Supply Chain For years, Pirelli has participated in Climate Change and found prevalently in the category of raw materials, in terms of Water programs promoted by the Carbon Disclosure Project direct emissions and impact on indirect emissions of Pirelli, as (CDP). Implementing its Green Sourcing Policy since 2014 In 2017, in most cases audits involved suppliers of Pirelli operating in Countries where the company is present at an industrial level, well as on the capacity of the material to affect the emission Pirelli has in its turn decided to extend the request for CDP i.e. Argentina, Brazil, China, Germany, Indonesia, Italy, Mexico, United Kingdom, Romania, Russia, United States, Turkey or suppliers impact of the production process and the energy efficiency of assessment to its own key suppliers at a Group level, identified in countries from which Pirelli buys raw materials, such as Japan, Malaysia, Singapore, Thailand and Vietnam, Brazil. the Pirelli product. With reference to the water footprint along in accordance with criteria of environmental and economic 16 of which 9 on potential new suppliers of raw materials 17 of which 14 on potential new suppliers of raw materials the life cycle of the Pirelli product, the impacts are prevalent materiality. In 2017, the selection concerned the suppliers in the natural rubber processing activity. Downstream of the with the most impact on the Carbon Footprint of the Group natural rubber supply chain is also the risk of deforestation in the Raw Materials, Logistics and Energy categories. and damage to biodiversity. Social type impact (human and labour rights in particular) are 3 emissions from its supply chain and ensures adequate evidenced on the other hand in all categories of purchases in awareness of suppliers in matters relating to climate change The CDP Supply Chain supports Pirelli in monitoring Scope ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainso as to identify and activate all possible opportunities for and participate in training activities at any time. The course reducing emissions of climate-altering gases. In 2017, all the included many practical examples and allowed participants to emission reduction actions implemented by Pirelli suppliers verify the levels of compliance by their own organisations with the VALUE OF PURCHASES BY GEOGRAPHIC AREA made it possible to avoid the global emission of about 77 various elements of ESG. To verify the clarity and effectiveness of Europe million tons of CO2 equivalent in the atmosphere, combined with estimated savings of 2.3 billion dollars. out at the end of the training session. e-learning, a questionnaire was prepared that participants filled OECD COUNTRIES North America First company among tyre manufacturers to have globally introduced the CDP Supply Chain in its own supply chain, Supplier Award The Pirelli Supplier Award, which is assigned each year to Pirelli aims to increase the response rate of suppliers of Raw suppliers of excellence, aims to constantly improve relations Materials, from 71% in 2017 to 90% in 2020. with parties from the standpoint of shared development. NON-OECD COUNTRIES Others Latin America Asia Africa Others Training of suppliers on sustainability issues Since 2012, Pirelli has provided training on issues of The 2017 edition of the Supplier Award a was held at the Pirelli headquarters at the Bicocca with the Pirelli CEO present and who environmental and social responsibility and business ethics gave the prizes to nine suppliers operating in China, Germany, to its suppliers, identifying from year to year the reference Japan, Italy, Romania, United States and Thailand, which participants based on strategic issues, spending value, had distinguished themselves in quality, innovation, speed, operations of suppliers in countries considered at risk. sustainable performance, global presence, and level of service. NUMBER OF SUPPLIERS BY GEOGRAPHIC AREA OECD COUNTRIES North America Europe 1 2 8 In 2017, e-learning training was provided to strategic suppliers of A specific accolade was granted to sustainable performance to auxiliary materials, raw materials, waste management, Facility acknowledge the importance of strategies of “responsibility” property management, industrial services, Utilities. The training that really make a difference, by bringing benefits to the entire activity aims to support suppliers in understanding the Pirelli value chain. In 2017, the Sustainability Award was awarded to a NON-OECD COUNTRIES sustainability model and the related social, environmental and mould supplier, which in recent years has shown a strong and business ethics requirements that must be respected in order to growing engagement on sustainability issues, with excellent guarantee a sustainable business relationship with the Company. results in terms of innovation and recycling of materials. Others Latin America Asia Africa Others 2017 2016 49% 4% 5% 16% 15% 0% 11% 2017 2016 56% 5% 4% 26% 5% 0% 4% 52% 5% 4% 15% 14% 0% 10% 55% 5% 4% 27% 4% 0% 5% 9 2 1 Specifically, training in 2017 focused on the following topics:  > Pirelli “Health, Safety and Environment” Policy;  > Safety and ergonomics management system; Trend of purchases The Pirelli Tyre Core Business in 2017 accounts for 96% of The following table shows the breakdown in percentage of the value of Pirelli Tyre purchases by type. It is clear that the most relevant and significant purchasing category concerns raw materials, with a weight equal to 46% of the total.  > Chemical substance management; Group purchases. The following tables show the value of  > Environmental management system. purchases made by Pirelli Tyre and the percentage of the Training involved 190 suppliers from Argentina, Brazil, China, relative suppliers divided by geographic area. These figures VALUE OF PURCHASES BY TYPE Germany, Indonesia, Italy, Mexico, United Kingdom, Romania, show that the value of purchases is slightly higher in OECD Russia, United States, Turkey, Venezuela, and was carried out area with respect to non-OECD areas, as well as the number in local language. of suppliers. 67% of suppliers (vs. 65% in 2016) (excluding Raw Materials suppliers of raw materials as they generally operate where Consumable Materials The tool used for training was a platform specifically developed for Pirelli does not have facilities), operate locally with respect to this purpose by the Pirelli Group. After receiving a personal ID and the Pirelli Tyre affiliates supplied, according to a logic of local- password, the supplier could connect with the online platform for-local supply. Services Capital goods Total 2017 2016 46% 5% 36% 13% 46% 5% 38% 11% 100% 100% ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainWith reference to the percentage of Pirelli Tyre suppliers by type in the table below, it is noted that suppliers of consumables and services weigh more than 80% of total suppliers despite the weight on the total value of purchases is lower with respect, for example, to that of the purchases of raw materials that see, on the contrary a substantial concentration on a few operators. NUMBER OF SUPPLIERS Raw Materials Consumable Materials Services Capital goods Total 2017 2016 3% 23% 64% 10% 3% 25% 62% 10% 100% 100% The following table represents the percentage composition in the value of the mix of raw materials purchased by Pirelli Tyre in 2017 and 2016. The volume of raw materials utilised for the production of tyres in 2017 amounted to approximately 900 thousand tons, of which approximately 4% derives from recycled materials, in line with the previous year. MIX OF RAW MATERIALS PURCHASED (VALUE) 1 3 0 Natural Rubber Synthetic Rubber Carbon black Chemicals Textile Steel Objectives 2018: 2017 2016 15% 29% 9% 21% 16% 10% 13% 28% 8% 22% 18% 11%  > Sustainability of the Natural Rubber supply chain: consultation of the relevant stakeholders in the value chain to support the drafting of the Pirelli Policy Implementation Manual; start of training activities on the implementation of the manual;  > new version of the sustainability contract clause for natural rubber Suppliers;  > new training campaign dedicated to the ISO 20400 standard. 2020:  > CDP Supply Chain: increase in the response rate of suppliers of Raw Materials from 71% in 2017 to 90% in 2020. 1 3 1 ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainENVIRONMENTAL DIMENSION recycling or re-use where possible; related to it as objectively as possible. Moreover, reporting of Primary Energy Demand refers to the quantity of renewable  > empower and train its workers in order to extend the emissions impacts also complies with the provisions of the or non-renewable energy that is taken directly from the adequate culture of environmental capital conservation. GHG Protocol and GRI Standards Guidelines. All impacts listed hydrosphere, the atmosphere or the geosphere. by the standards that are not mentioned, both upstream The Pirelli Group considers environmental protection as a Group’s employees in the local language and published in the not apply or are not significant. The values are shown as a the climate of anthropic activities and is calculated, as All the documents mentioned above are communicated to the and downstream of the industrial activity of Pirelli, either do The Global Warming Potential concerns the effect on fundamental value in the exercise and development of its Sustainability section of the pirelli.com website, available to percentage, as the objective of this infographic is to show the activities. the external community, in multiple languages. difference in materiality between the various life stages. To determine the Carbon Footprint and Water Footprint, Pirelli’s calculation model is respectively inspired by the technical specification ISO-TS 14067 and ISO 14046 standard. Water Depletion, based on the Swiss model for ecological The main environmental impacts are generated by various availability of water resources locally, with the aim of giving scarcity, represents the volume of water used, related to the mentioned, in tons of CO2 equivalent (the greenhouse effect potential of the gas considered is assessed in relation to CO2, considering a residence time in the atmosphere of 100 years). The Pirelli approach to environmental management is inspired by the United Nations Global Compact, in which Pirelli has participated since 2004 (in addition to having a seat on the Steering Committee of the LEAD Global Compact), and THE PIRELLI GROUP ENVIRONMENTAL STRATEGY the “Rio Declaration on Environment and Development”. Management of environmental issues has always played a activities related to the different stages of the Life Cycle. In greater weight to the volumes of water taken from areas key role in Pirelli business strategy. With a view to long-term the case of raw materials procurement, the main impact characterized by a greater scarcity of this resource. The Pirelli Values and Ethical Code states that “key consideration management, Pirelli monitors the Carbon Footprint and derives from the related production and distribution. In the in investment and business decisions is environmental sustainability, Water Footprint of its entire organisation and is committed to case of tyre production, the main impact is related to the Eutrophication Potential is the enrichment of nutrients in with the Group supporting eco-compatible growth, not least through the progressive reduction of the related impacts on resources, consumption of electricity and natural gas: in particular the a specific, aquatic or terrestrial ecosystem: air pollution, the adoption of special technologies and production methods (where climate and ecosystems. main pressure in terms of emissions into the atmosphere and emissions into water and agricultural fertilizers all this is operationally feasible and economically viable) that allow for water consumption is attributed to the production of the contribute to eutrophication. The result in aquatic systems the reduction of the environmental impact of Group operations, in The Group has set up a control and monitoring system that latter. In the case of the distribution of new tyres and their use is accelerated growth of algae, which does not allow sunlight some cases even below statutory limits”. allows the identification of the materiality of environmental by customers, the impact derives from the fuel consumption to penetrate the surface of the water basins. This reduces 1 3 2 The environmental management model adopted is detailed infographic on the following pages shows Pirelli’s approach absorbed by the rolling resistance of the tyres is allocated to Low concentrations of oxygen may cause mass death of fish impacts throughout the life cycle of the product: the of vehicles (only the fuel consumption related to the power photosynthesis and thus reduces the production of oxygen. 3 3 1 in the Group Policies: “Health, Safety and Environment” to environmental management and the specific long-term the customers). Finally, in the last phase of life considered, the and anaerobic decomposition of organic material, seriously Policy, “Product Stewardship” Policy, “Quality” Policy, “Social targets defined in the Sustainability Plan, the 2017 performance impact derives from the preparation of end-of-life products compromising the entire ecosystem. Responsibility Policy for Occupational Health, Safety and of which is reported below in this report. In 2017, following the for recovery thereof as energy or recycled raw material. With Rights, and Environment”, “Green Sourcing” Policy, based on change in the corporate scope, the Pirelli Group’s Footprint reference to the Carbon Footprint, the infographic (see the In terms of environmental materiality, the use phase of the which Pirelli undertakes to: was updated with respect to the new structure. “Driver” part) also includes a breakdown of emissions in the tyre is overall the most prevalent. In terms of economic  > assess and reduce the environmental impact of its own three Scope categories provided by the GHG Protocol. materiality, instead, the amount of corporate spending in products and services throughout their entire life cycle, As is readily apparent, the materiality of environmental the manufacturing phase is the most relevant, which results as of products and services purchased; impacts is concentrated in the use phase of the tyre. As part The central part of the infographic shows the actual in the opportunity to reduce impacts through investments  > develop products and production processes that are safe of the Carbon Footprint, the use phase weighs 91.5% of total quantification, in percentage terms, of the Carbon Footprint in energy efficiency. In its response strategy, which may and designed to minimize polluting emissions, waste impacts along the entire life cycle of the tyre, compared to a and Water Footprint. generation, consumption of natural resources available production phase that weighs 2.5% of total impacts. be consulted in the lower part of the infographic and corresponding to what is also stated in the Sustainability and the causes of climate change, in order to preserve These two aspects are summarised by four principal Plan, Pirelli has adopted adequate management models for the environment, biodiversity and ecosystems; With regard to the impact on the water sector, the production indicators: Primary Energy Demand (PED), Global Warming the monitoring and managing of environmental issues, and  > manage its environmental activities in full compliance phase of raw materials is the most relevant (46.8% of the Potential (GWP), Water Depletion (WD) and Eutrophication has also voluntarily adopted specific targets to reduce its with applicable laws and in compliance with the highest impact), followed by the product use phase (38.3% of the total). Potential (EP). The values are calculated in GJ of energy, tons impact in each phase of the product life cycle. international standards;  > monitor and communicate to its stakeholders the The graph can be read either horizontally, following the stages environmental performance associated with processes, of life of a tyre one by one, or vertically, thus being able to products and services throughout the entire life cycle, appreciate the objectives of reducing the impacts that the promoting its culture of environmental protection; Company has defined for each of the different stages of life,  > monitor the environmental impacts of its suppliers by which will be explored later in this chapter. requesting them to adopt the same business model along the related supply chain; From a methodological point of view, these life cycle phases  > support customers and end consumers in understanding have been analysed using the Life Cycle Assessment, as the environmental impacts of its products, informing defined by the ISO 14040 family of standards. This method them of the safest use and disposal methods, facilitating is capable of validating the results and strategic decisions of CO2 equivalent, cubic meters of water and kilograms of phosphate equivalents. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chain1 3 4 5 3 1 RAW MATERIALSMANUFACTURINGDISTRIBUTIONUSEEND OF LIFESTAGES OF LIFECYCLEDRIVERSIMPACT:CARBON & WATERFOOTPRINT*MATERIALITYRESPONSESTRATEGYSuppliersPirelliSuppliersCustomersWaste Recovery PlayersRaw materials production and transport: the impact is due to resources use by suppliers’ plantsTyre manufacturing: at Pirelli’s plants the impact comes mainly from electrici-ty and natural gas consumptionProduction and use of fuel by trucks and ships of logistics suppliers, delivering Pirelli tires worldwideProduction and consumption of the fuel of customers’ vehicles due to rolling resistance End of Life tyre management: old tyres are prepared by specialized companies to be reused as energy or as regenera-ted raw materialScope 3Scope 1+2+3Scope 3Scope 3Scope 3PED6.5GWP3.5WD46.8EP34.2PED3.0GWP2.5WD10.9EP1.9PED0.1GWP0.1WD<0.1EP<0.1PED89.9GWP91.5WD38.3EP63.7PED0.4GWP2.4WD3.9EP0.1EconomicHighEnvironmentalMediumEconomicHighEnvironmentalMediumEconomicMediumEnvironmentalLowEconomicHighEnvironmentalHighEconomicLOWEnvironmentalLowPRESENCE ON THE MAIN INTERNATIONALWORKING TABLES (WBCSD, ETRMA) to spread the culture of recoveryREGENERATED RAW MATERIALSResearch projects with universities in order to improve the quality of regenerated materials, with the aim of increasing their percentage portion of the new compoundsGREEN SOURCING POLICY-Green Logistic Procedure - Engagement to reduce Supply chain Carbon & Water FootprintRAW MATERIALS INNOVATION-Progressive introduction of new materials from renewable source- Biomaterials, such as high perfor-mance silica from renewable sources, biofillers such as lignin and plasticisers/resins of plant origin- Natural Rubber: search for alterna-tive sources- Functionalized Polymers: research on innovative polymers that guarantee reduced environmental impact, improved driving safety and improved production efficiencyGREEN PURCHASING GUIDELINES/GREEN SOURCING POLICYCDP SUPPLY CHAIN (2020 target: 90% response rate suppliers of Raw Materials)THIRD-PARTY AUDIT ON CRITICAL SUPPLIERSPRODUCT INNOVATIONTargets 2020 vs 2009:CYBER TECHNOLOGIES DEVELOPMENT - Pirelli ConnessoTM: an aftermarket platform that provides “connected” tyres to improve safety, monitor tyre status, create direct contact between Pirelli, the end user and the sales network, improving the quality of service.- OE platforms: thanks to the interaction with the car, the information that the tyre provides can influence its behaviour, improving safety and performance.- Cyber™ Fleet: modular solutions dedicated to fleet management.Rolling Resistance CAR -20%(-14% High Value Products*)Rolling Resistance MOTORCYCLE -10% GREEN PERFORMANCE REVENUESCar Products >50% of total revenues by 2020 (>65% High Value Products*) PROCESS EFFICIENCYTargets 2020 vs 2009:ISO 14001 AT ALL PRODUCTION PLANTSSCRAP REDUCTION PROGRAMSpecific withdrawal of water-66% Specific consumption of energy -19%Specific CO2 emissions-17% Waste Recovery>95% *High Value products are determined by rims equal or greater than 18 inches and, in addition, include all “Specialties” products (Run Flat, Self-Sealing, Noise Cancellation System)PED: Primary Energy DemandGWP: Global Warming PotentialWD: Water DepletionEP: Eutrophication Potential (Freshwater - Peq)**Values expressed as % of the impacts in the stages of the life cycleANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainRESEARCH AND DEVELOPMENT OF RAW MATERIALS The research and development of innovative materials are key performance silica from processes that start from rice husk as feedstock. The combustion of the carbonaceous part of husk allows a reduction of more than 90% of the quantity of CO2 emitted per kg of silica compared to the conventional process, to the design and fabrication of ever-more sustainable tyres which instead exploits fossil energy sources. that guarantee reduced environmental impact, during the use and end-of-life phases, greater driving safety and production Resins and plasticizers from renewable sources have been efficiency. introduced and the current grades are gradually extended to other segments of tyres while the search for new grades continues. Pirelli has activated several Joint Development Agreements with leading suppliers for the study of new polymers that Specific projects have been launched for the development are able to further improve the characteristics of tyres for of new materials from renewable sources focused mainly on rolling resistance, low temperature performance, mileage the use of waste feedstock as is done through the framework and road grip. agreement CORIMAV (Consortium for Research on Advanced Materials) signed with the Bicocca University, which allows In this regard, Pirelli Research & Development focuses, among the evaluation of new oils from waste biomass. other things, on:  > high-dispersion silica for wet grip, rolling resistance and As part of new nanofillers, Pirelli has started to industrially durability; introduce materials of mineral origin in partial replacement  > biomaterials, such as silica from renewable sources, biofillers of precipitated silica and carbon black. Compared to the such as lignin and plasticisers/resins of plant origin; production processes of the raw materials replaced, the  > textile reinforcements with fibres from renewable sources; aforementioned innovations have guaranteed water savings 1 3 6  > nanofillers for more stable compounds, lighter structures and highly impermeable liners;  > new silica surfactants to guarantee performance stability and more than 75% of reduction in CO2 emissions, saving respectively 1,000 tons of water and 450 tons of CO2. 7 3 1 and processability; In addition, in collaboration with Università degli Studi of  > vulcanisation agents and stabilisers with reduced Milan Bicocca and Politecnico of Milan, Pirelli is developing environmental impact. silica particles with an elongated shape that will allow to further reduce fuel consumption. The Joint Labs agreement (2017-2020) between Pirelli and Politecnico of Milan, aimed at research and training in the On research and development of raw materials with low tyre industry covers nanotechnology, the development of environmental impact, the Sustainability Plan foresees, for new synthetic polymers, new bifunctional chemicals and new specific product segments, the doubling of the weight of biopolymers. renewable materials used and the reduction by 30% of raw materials derived from fossils by 2025 and compared with 2017. Research continues aimed at diversifying the potential supply sources of natural rubber, to reduce pressure on biodiversity Further information on Pirelli’s Research & Development in producer Countries and allow the Company to manage the activities can be found in the “Directors’ Report on Operations” potential scarcity of raw materials with greater flexibility, of this Annual Report. with further focus on raw material sustainability certified by globally recognized organizations. Remaining in the field of biomaterials, Pirelli also focused on silica derived from rice husk. Rice husk is the outer shell PRODUCT AND USE PHASE: GREEN PERFORMANCE TARGETS of wheat and constitutes 20% of raw rice by weight, which In line with its position in the Premium and Prestige segments, is the main waste of this crop and is available in extremely Pirelli develops and introduces increasingly sophisticated important quantities in many areas of the world where it is products on the market, responding to a macroeconomic still not valued but burned in the open without exploiting its scenario in constant and rapid evolution. The major corporate full potential. Thanks to a partnership with various producers, investment in research and development on compounds, Pirelli is evaluating the diversified procurement of high structures and tread patterns allows Pirelli products to ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainachieve extremely high performance in terms of braking in dry and wet conditions and, at the same time, improved environmental MOTORCYCLE 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;  > reduced weight – less use of raw materials and lower impact on natural resources. Pirelli has adopted targets for improvement of the environmental performance of its products in an objective, measurable and transparent manner. In terms of materiality regarding the entire life cycle of the product, it was seen that the rolling resistance related to the use phase of the tyre constitutes by far the factor with most impact in environmental terms. In this regard, Pirelli has committed to reduce by 2020, compared to the 2009 average, the average weighted rolling resistance of its products by 20% with regard to Car tyres and 10% for Motorcycle products, as shown in the graphs below. At the end of 2017 the average rolling resistance of CAR products shows a reduction of 15% compared to the average 2009. CAR GREEN AREA SAFETY AREA GREEN AREA SAFETY AREA Rolling Resistance Reduction Wet Performance Weight Reduction Braking 1 3 8 Rolling Resistance Reduction Wet grip Mileage Predictability 9 3 1 Weight Reduction Dry grip 2009 2017 2020 Mileage Noise Reduction 2009 2017 2020 Green Performance18 products include the CINTURATO P7™ Blue, with this solution Pirelli was the first manufacturer in the world present on the market with a tyre that, in some measurements, boasts the double A in the Eurolabel scale. This product is available, depending on the measurements, both in double A class and in B class of rolling however always maintaining A for wet grip. On average, the CINTURATO P7™ Blue guarantees 23% less rolling resistance than the Pirelli reference (class C of rolling resistance) and therefore, lower fuel consumption and less harmful emissions. A vehicle with CINTURATO P7™ tyres that runs 15,000 km a year consumes 5.1% less fuel (equivalent to 52 litres), and reduces greenhouse gas emissions of 123.5 kilograms of CO2 and has a braking distance on wet 9% lower compared to Pirelli reference (class B of wet grip) of the same segment. Comparative tests of TÜV SÜD showed that, at a speed of 80 km/h on wet surface, the tyre CINTURATO P7TM Blue reduces braking by 2.6 meters compared to a tyre classified B. The CINTURATO P7™ Blue was developed for medium-high cylinder capacity cars, as a further evolution of the CINTURATO P7™, famous Pirelli Green Performance tyre presented in 2009. In 2017, Pirelli presented a new generation of CINTURATO P7™ Blue. Thanks to this evolution, the CINTURATO P7™ Blue is the world’s tyre with the highest number of measures that boast double A of the European label. 18 Green Performance products identify the tyres that Pirelli produces throughout the world and that fall exclusively under rolling resistance and wet skid resistance classes A, B, C according to the labelling parameters set by European legislation. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainThis important result was achieved thanks to the technological with respect to safety margins in emergency manoeuvring protective materials for the tyre; new materials with low the value is 92% (source: JATMA - Tyre Industry of Japan 2017), evolution that in recent years has seen it protagonist. In fact, such as panic braking. environmental impact; molecular dynamics; while in the US the amount of recovered tyres comes to 88% the new tyre CINTURATO P7™ Blue has the characteristics The internal tests indicated an improvement of up to 10% in low-  > Area of product development and CYBER™: noise; (source: RMA - 2015 US Scrap Tyre Management). of success of the previous generation and improves some grip braking spaces (friction coefficient less than 0.5) compared aquaplaning; aerodynamics of the tyre; development performance, in line also with the development of the car to the predecessor product ROADTEC™ Z8 INTERACT™. of mathematical models that allow the chip contained For years, Pirelli has been engaged in the management of ELTs. sector, increasingly sensitive to sustainability issues. The The main independent press tests confirmed the performance in the CYBER TYRE™ to extract useful information for The Company actively collaborates with the main reference new generation of the CINTURATO P7™ Blue has a very low leadership of the new product compared to its competitors. intelligent vehicle control and the development of value- entities at national and international level, promoting the Rolling Resistance, resulting in savings in fuel costs and reduced CO2 emissions, with benefit for the environment. At the origin of this improvement is the Low Rolling Technology Pirelli has also launched a new line of tyres dedicated to bikes: Even before its renewal, the agreement led to important promote the sustainable recovery of ELTs, shared with the PZero™ Velo. “Perfect balance” is one of the key characteristics results in terms of tyre performance, safety and sustainability, various stakeholders and based on the Circular Economy model. added services. identification and development of solutions to enhance and Package: a package that combines new construction of the new tyres, characterized by optimal and balanced thanks to the use of advanced materials. Research over the In particular, Pirelli is active in the Tyre Industry Project processes in the area especially of the belt and the use of the performance, in terms of rolling resistance and wet grip, past three years has focused mainly on the production and (TIPG) of the World Business Council for Sustainable latest internal materials. This package, developed at Pirelli’s dry grip, manageability, puncture resistance and durability functionalisation of carbonaceous fillers (from graphene, to Development (WBCSD), in the ELT working group of ETRMA most technologically advanced plant of Settimo Torinese, is (intended not only as time durability, but above all as constant nanotubes to carbon black); on the preparation of modified (European Tyres and Rubber Manufacturers’ Association) mainly based on a new control system for the various phases performance over time). To meet similar design requirements, silicate fibers; on the study of alternative natural rubber and, at national and local level, it interacts directly with of vulcanization, which allows measuring the ideal thermal Pirelli researchers worked on three fronts - the shape and sources up to the synthesis of innovative polymers and self- leading organisations active in the recovery and recycling input for the different materials, and on optimization of the construction of the tyre, the tread pattern and the compound repairing materials. Attention has also been paid to the of ELTs. area of 0 degrees and of the belt, for a better distribution of - developing F1® and Superbike derivation technologies disciplinary field of mechanics, where, since 2011, 12 research As a member of TIPG, Pirelli Tyre has collaborated on the pressure, which guarantees high performance and braking as in the case of the design, or elaborating exclusive and contracts have been activated in the CYBER TYRE™ and in publication of a report on the management of ELTs, taking safety in all conditions. One of the great results achieved by innovative patents, as in the case of the compound. Pirelli has the F1® field, with the study of tyre-asphalt interaction. One a proactive approach to raising the awareness both within Pirelli engineers was to reduce Rolling Resistance, through in fact developed a new patent dedicated to the bike world: area of particular interest was the study of low-noise tyres emerging Countries and those that do not yet have a system the adoption of a new generation of patented internal SMARTNET™ Silica, a hi-tech molecule that allows maximum (Silent Tyre project). In fact, innovative test methods have for recycling ELTs, in order to promote their recycling and materials, while maintaining high performance in terms of performance, balanced on all fronts. It has been developed by been applied for the indoor measurement of the acoustic field reuse according to defined management models, which have dry and wet grip and ensuring a high level of driving safety. Pirelli chemical laboratories for exclusive cycling use. generated by the rolling tyre. already been launched successfully. 1 4 1 1 4 0 The previous generation of the tyre CINTURATO P7™ Blue has become a reference point for mid-high cylinder capacity In 2017, Pirelli reorganized its CYBER™ technologies which, sedan and coupè owners, earning 11 podiums in 14 tests in the based on the introduction of sensors inside the tyre, will international press (including 3 first places). contribute in the future to providing information aimed at MANAGEMENT OF END-OF-LIFE TYRES The tyre is a mixture of many valuable materials that at end- of-life allow two paths of recovery: recovery of material or energy. In the recovery of material, the reclaimed rubber is The year 2017 also saw the approval for the new electric monitoring the state of health of the tyre which, if maintained has a low proportion of the total impact of the tyre on the contributing to the reduction of the related environmental SUV Jaguar e-Trophy (electric racing version of the I-Pace) at the correct inflation pressure, can have a positive influence environment, as already highlighted in the infographic related impact. In order to increase this recovery rate, research presented at the last Frankfurt Motor Show. on fuel consumption and vehicle emissions. to the Group’s environmental strategy. activities continue aimed at improving the quality of recovered Also in the field of high performance cars, attention to the materials in terms of affinity with the other ingredients increasing the safety or performance of vehicles, including In terms of materiality, the end-of-life phase of the product already reused by Pirelli in the compounds for new tyres, thus environment has become a discriminating element with the CYBER™ technologies are divided into products dedicated In Europe, about 95% of end-of-life tyres (ELTs) are recovered present in the compounds. challenge of reducing Rolling Resistance while maintaining to replacement (PIRELLI CONNESSO™), original equipment (Source ETRMA 2015 ELT Management figures 2015), in Japan performance at the level expected for this segment. (CYBER CAR™ and CYBER TYRE™) as well as platforms developed for fleet management (CYBER™ Fleet); some of these As for motorcycles, we note the new METZELER ROADTEC™ solutions are expected to enter the market as early as 2018. 01 product line dedicated to the sport touring segment which, in the motorcycle market, is among the most significant Among the Open Innovation initiatives, we highlight the Joint and demanding in terms of sales volumes and performance Labs agreement between Pirelli and the Politecnico of Milan, expectations, based on a very wide range of use from created in 2011, aimed at research and training in the tyre commuting to long-distance tourist cruising to the most sector, in particular through the development of innovative sporty applications of users who wish to broaden the spectrum materials and technologies for sustainable and increasingly of seasonal and environmental use of their vehicle. safe mobility. The new phase of the three-year agreement (2017-2020) focuses on two research macro-areas: the area The focus of the new ROADTEC™ 01 product is mainly in the of design of innovative materials and the area of product drainage and wet grip areas, with important wet braking development and CYBER™. In particular, the following are the performance, especially on low grip surfaces: performance thematic areas on which researchers will focus: that we consider rewarding for its significant connotation  > New Materials: modification of polymers; nanofillers; ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainENVIRONMENTAL IMPACT OF PIRELLI’S PRODUCTION SYSTEM ENVIRONMENTAL MANAGEMENT SYSTEM AND FACTORY’S PERFORMANCE MONITORING SCOPE OF REPORTING The performances described concern the three years 2015- Energy Management Pirelli monitors, manages and reports its energy consumption on energy management and use, as well as possible tariff incentives. In this regard, there were no critical elements or 2016-2017 and cover the same scope of Group consolidation. through three main indicators: non-conformities.  > absolute consumption, measured in GJ, which includes the Actions and investments for energy efficiency are alongside Following the change in the industrial scope that took place total consumption of electrical energy, thermal energy, the assessment of environmental impacts to economic in 2017, which saw the exit of the Industrial Business Unit, the natural gas and petroleum derivatives (fuel oil, gasoline, sustainability criteria normally applied to all Pirelli projects. historical values of the environmental indicators reported diesel, and LPG); The areas for technical action both concern the traditional below for the years 2015 and 2016 were recalculated following  > specific consumption, measured in GJ per ton of finished themes applied to each industrial area, such as modernisation the principles set out by the GRI in order to guarantee the product, which indicates the energy used to produce one of thermal insulation, maintenance of distribution plants, use comparability of the data. ton of finished product; of technologies using inverters, and special projects assessed  > specific consumption, as measured in GJ per euro of according to the needs of each manufacturing site. The amount of finished product in 2017 was approximately Operating Income. All the production sites of Pirelli Tyre, except for the plant 786,700 tons. in Jiaozuo, and the tyre testing field in Vizzola Ticino have The Sustainability Plan provides for a reduction of 19% of installation continues of LED lighting systems (Light Emitting In 2017, various interventions were made. In particular, the Environmental Management Systems and are certified under As noted above, the performance reported below in this specific energy consumption by 2020 compared to 2009 values. Diode) to replace less efficient systems. To speed up the International Standard ISO 14001. The International Standard chapter include the impacts of all the units of the Pirelli Group: replacement plan, Pirelli also uses “Light Service” contracts, ISO 14001 was adopted by Pirelli as a reference in 1997, and since from industrial realities to commercial and administrative sites. In the course of 2017, the energy efficiency plan continued which guarantee both energy savings of more than 50% and 2014, all the certificates have been issued with international accreditation ANAB (ANSI-ASQ National Accreditation Board: accrediting entity of the United States). TREND IN ENVIRONMENTAL PERFORMANCE INDICES at all Group plants, already initiated in recent years and the quality of light achieved. Great attention was placed to characterised by actions aimed at: efficiency in the transformation of thermal energy and the  > improving energy management systems, through recovery of thermal waste for heating of premises. Excellent measurement consumption and a daily focus on results were achieved in reducing compressed air and steam 1 4 2 In 2017, the Pirelli Tyre production sites began the transition technical indicators; losses both on machinery and on distribution lines, also as a process of their Environmental Management System from In terms of materiality of environmental impacts (Carbon and  > optimizing the procurement of energy resources, direct or result of energy audit activities. In addition, the electrical ISO 14001:2004 to the 2015 version. In the same year, for the Water Footprint) of the tyre along the entire life cycle, the indirect; absorption measurements carried out on the individual Jiaozuo plant activities were started for the implementation production phase accounts for 2.5% of total emission impacts  > improving the quality of energy transformation; equipment have made it possible to correlate the specific and certification of the Environmental Management System and for 10.9% of total water consumption.  > improving the efficiency of distribution plants; consumption to production in greater detail, in order to 3 4 1 according to the aforementioned ISO standard.  > improving the efficiency of production plants; optimize the operating conditions. Group policy mandates implementation and certification in The year 2017 saw a growth in production volumes: tons of  > recovering energy for secondary uses; accordance with ISO 14001. As such, it is also applied to new finished product increased by around 4% compared to the  > applying targeted maintenance plans in order to reduce The year 2017 recorded an improvement in the specific energy facilities. The certification activity, together with control previous year (value calculated on a comparable basis). energy waste. and maintenance of previously implemented and certified index (weighted on tons of finished product) of about -4% compared to 2016 and over -15% compared to 2009, the year systems, is coordinated on a centralised basis by the Health, The 2017 environmental performance indicators, calculated With a view to Life Cycle Assessment, the specific consumption on which the 2020 target is based. Safety and Environment Department. on tons of finished product, show a general improvement of each production machinery is also mapped to increase the The environmental, health and safety performance of every recovery, water withdrawal and greenhouse gas emissions. families and assess in detail the energy content of the different of finished product volume compared to the previous year, in tyre manufacturing site is monitored with the web-based The same positive result of the indicators is also recorded for families of products and sub-products. 2017, saved about 177,365 GJ, a contribution scalable from the Health, Safety and Environment Data Management (HSE- the indices referring to the operating result (compared to the various energy sources used. This value was calculated for DM) system, which is processed and managed centrally by the value of EBIT Adjusted). In terms of “compliance”, every industrial facility completely each factory on the basis of the production volumes of the Health, Safety and Environment Department. Pirelli has also fulfils the indications of law regarding energy consumption and reporting year and the change in efficiencies achieved in 2017 of all specific indices reported: energy consumption, waste standard indicators of reference, compare similar machinery The energy efficiency plan applied to factories and the increase developed the CSR-DM (Corporate Social Responsibility Data It is noted that the trend of the above indices will be significantly management. The legislative situation affecting the Company from the previous year. Management), an IT system for managing Group Sustainability impacted by the production focus adopted. Pirelli production includes the introduction of periodic audit mechanisms information, which is used to consolidate the environmental is focused on Premium and Prestige tyres and production and social performance of all Group business units worldwide. processes are characterized by higher energy intensity, more Both systems support consolidation of the performance stringent quality specifications, more complex processing and accounted for in this report. smaller production batches compared to production processes for medium-low end tyres. In the aforementioned context, the reduction in indices is of strong environmental and economic value, in terms of consumption and emissions avoided, unused resources, and avoided costs. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainThe absolute and specific consumption data reported in the following table were calculated by using direct measurements according to procedure (GHG Corporate Standard) and were subsequently converted into GJ by using heating values from official IPCC sources. Absolute consumption Specific consumption GJ GJ/tonFP GJ/k€ 2015 2016 2017 10,340,097 10,604,897 10,591,117 13.79 13.45 14.00 12.57 13.46 12.08 The same 2017 figures, weighed in economic terms, show an improvement compared to the previous year. 11,000,000 10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 14.20 14.00 13.80 13.60 13.40 13.20 16.00 15.00 14.00 13.00 12.00 11.00 Management of Greenhouse Gas Emissions and Carbon Action Plan Pirelli monitors and reports its19 emissions of greenhouse gases through the calculation of CO2eq, which takes into account the contribution of carbon dioxide and of methane (CH4) and nitrous oxide (N2O). To quantify emissions, the energy consumption of local units > > Specific emission factors of suppliers where available; > > Residual-mix emission factors23 taken from RE-DISS AIB (EU)24 and Green-e (US)25; > > Emission factors used in the context of location- based if other sources of data are not available; and are reported according to the models proposed by: (under operational control) included in the scope of reporting  > GHG Protocol: A Corporate Accounting and Reporting are collected annually through the CSR-DM IT system. Standard;  > GHG Protocol Scope 2 Guidance. Greenhouse gases are generated by the combustion of hydrocarbons at production sites, mainly to operate heat Regarding Scope 2 CO2eq emissions, the national average coefficients are defined with respect to the last year available generators that power Group plants, and particularly those on the above reports. It must be pointed out that tyre that produce steam for vulcanisers, or by the consumption manufacturing industry is not carbon intensive: in fact, it of electrical or thermal energy. The first are called “direct is covered by the European Emission Trading Scheme only emissions”, or Scope 1 emissions, insofar as they are produced in reference to thermal plants having more than 20 MW of at Company production sites, while the emissions resulting installed power. The Company is not subject to other specific from electrical power or thermal energy consumption are regulations at the global level. 2015 2016 2017 2015 2016 2017 2015 2016 2017 defined as “indirect emissions”, or Scope 2 emissions insofar Absolute consumption GJ Specific consumption GJ/tonFP Specific consumption GJ/k€ as they are not produced within the perimeter of company As in the case of energy, Pirelli monitors and accounts for production sites but at the plants that generate the energy and steam purchased and consumed. The Scope 2 emissions are its direct CO2 (Scope 1) and indirect (Scope 2) by using three principal indicators: reported in two separate ways: location-based and market-  > absolute emissions, as measured in tons; 1 4 4 The graph below highlights the “Distribution of energy sources” used in Pirelli production process: among the direct sources, all of based (methodology introduced with the “GHG Protocol  > specific emissions, as measured in tons per ton of finished non-renewable origin, which account for 29% of the total, are natural gas and, to a lesser extent, other liquid fuels such as oil, LPG Scope 2 Guidance” guidelines). It is recalled that the Scope 3 product; 5 4 1 and diesel (classified as “other”); the remaining 71% is formed from indirect sources such as electrical energy and steam purchased. emissions, related to the specific activities of Pirelli Suppliers,  > specific emissions, as measured in tons per euro of Of the total electricity used by the Group, more than 43% derives from renewable sources (calculation based on IEA data) while for Chain”, to which reference is made for further information. steam, the portion generated by renewable sources corresponds to around 7% of the total. Instead, reference is made to the Group Footprint infographics The Pirelli management, calculation and reporting model of are discussed in the paragraph “Our Suppliers”/”CDP Supply Operating Income. DISTRIBUTION OF ENERGY SOURCES 28% Natural gas 42% Electricity 29% Steam purchased 1% Other for the representation of the impacts of Scope 3 of the various GHG emissions was defined according to the ISO 14064 Standard phases of the life cycle. and the related data were subjected to specific limited audit, by independent third party, according to ISAE 3000. Performance as measured by energy and greenhouse gas emissions is calculated on the basis of emission factors According to the Guidelines of the GHG Protocol Guide, the obtained from the following sources: level of inventory uncertainty was evaluated as “Good”.  > IPCC: Guidelines for National Greenhouse Gas Inventories (2006)20;  > Within Scope 2 location-based: > > National emission factors21 taken from IEA: CO2 The Sustainability Plan envisages a reduction in specific emissions (on tons of finished product) of CO2 equal to -17% by 2020 compared to 2009 values. At the time, the target was Emissions from Fuel Combustion22; developed according to the methodology in force, i.e. Scope 1  > Within Scope 2 market-based: and Scope 2 location-based. 19 GHG inventory perimeter as indicated in the paragraph “Scope of Reporting” 20 Emission factors expressed in CO2 equivalent, obtained by considering the GWP (Global Warming Potential coefficients based on 100 years of the IPCC Fifth Assessment Report, 2014 (AR5) 21 Emission factors expressed in CO2/kWh 22 2017 Publication with update to the 2015 figure 23 Emission factors expressed in CO2/kWh 24 2017 Publication with update to the 2016 figure 25 2017 Publication with update to the 2015 figure ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chain The following tables show the performance of the last three-year period. The improvement in 2017 performance related to greenhouse gas emissions is associated with the energy efficiency measures 900,000 850,000 800,000 750,000 700,000 650,000 1.150 1.120 1.090 1.060 1.030 1.000 1.50 1.30 1.10 0.90 0.70 0.50 described in the previous paragraph and is closely linked to the “Carbon Action Plan” developed by Pirelli with the aim of increasingly resorting to renewable energy sources through specific projects. These include:  > the cogeneration plant for the production of electricity, steam and hot water, present at the plant in Settimo Torinese (Italy). There are two cogeneration modules, for a total of nearly 6 MW of electricity: a 4.8 MW turbine unit powered by natural gas and a 1 MW internal combustion engine powered by vegetable oil, which ensures supply of thermal energy from renewable sources;  > the supply of steam generated by biomass plant, fuelled with waste wood from local supply chains, activated for the plant in 2015 2016 2017 2015 2016 2017 2015 2016 2017 Campinas (Brazil). In the year 2017, this initiative has allowed replacing more than 59 GWh of energy from fossil sources, for a Absolute emissions tonCO2 Specific emissions tonCO2/tonFP Specific emissions tonCO2/k€ savings in terms of CO2 emissions avoided of more than 11,000 tons (Scope 2). In consideration of the obvious environmental benefits of this technology, Pirelli is considering extending the project to other plants in Brazil;  > the procurement of electrical energy from renewable sources at the plant in Silao (Mexico). In 2017, the agreement continued In 2017, Pirelli recorded a reduction in specific emissions (weighted on tons of finished product) of more than -4% compared to 2016 for the dedicated supply of 3 MW electrical generated from wind sources, to cover nearly 30% of electrical consumption of the and more than -9% compared to 2009, the year on which the 2020 target is based. production unit, with economic advantages with respect to the purchase of energy from the national grid. The annual savings As regards biogenic CO2 generated from the small production facility of silica from rice husk, Pirelli emitted in 2017 about 1,388 tons of CO2eq. This quantity is not counted in the Group’s absolute emissions mentioned above, as originated from biogenic fuel.  > the procurement of electrical energy from renewable sources at the plant in Slatina (Romania). In the year 2017, the portion of electricity certified from renewable sources exceeded 75% of the electricity consumption of the production site, for an annual in terms of emissions of CO2 avoided was about 12,000 tons (Scope 2). savings in terms of CO2 emissions of about 48,000 tons (Scope 2). The portion of indirect emissions generated by the projects implemented in Silao (Mexico), Slatina (Romania) and Campinas (Brazil) - described below - was reported as prescribed by the Guidelines of the GHG Protocol, respectively for the procurement of electrical energy from renewable sources and steam from biomass. The following table reports absolute and specific emissions distinguishing between “location-based” and “market-based” 1 4 6 methodology for Scope 2. GHG EMISSIONS ACCORDING TO SCOPE 2015 2016 2017 Water Management Pirelli monitors the “Water Footprint” along the life cycle of the product (as extensively explained earlier in this chapter) and tyre manufacturing is the third most influential phase. In the aforementioned environmental strategy of Pirelli, the efficient and responsible use of water in production processes and at workplaces is addressed comprehensively, with actions to improve water efficiency in production processes, from design of the 7 4 1 machinery to Facility Management activities. Particular attention is paid to the local context of the use of this resource, with action plans identified also thanks to the use of specific analysis tools (such as the Global Water Tool of the World Business Council for Absolute emissions (Scope 1 and 2 location-based) Scope 1 Scope 2 (location-based) Scope 2 (market-based) Specific emissions (Scope 1 and 2 location-based) ton ton ton ton ton/tonFP ton/k€ 835,656 818,082 815,249 Sustainable Development). 180,633 171,281 175,347 655,023 646,801 639,902 733,262 719,396 659,145 1.115 1.09 1.080 0.97 1.036 0.93 The Sustainability Plan set a reduction target of specific withdrawal of water of -66% by 2020 compared to the 2009 value. The year 2017 recorded absolute withdrawal of about 8.3 million cubic meters, with a reduction of specific withdrawal of 14% compared to 2016 and of 62% compared to 2009. Thanks to the actions implemented, since 2009, Pirelli has saved about 60 million cubic meters of water: an amount equivalent to the absolute withdrawal of about seven years of the entire Group. The following infographic highlights the weight of direct emissions (Scope 1) and indirect emissions (Scope 2 location-based) of the To provide an overall view of the performance in terms of water withdrawal year on year, the following tables report the indicators: total absolute emissions of Pirelli.  > absolute withdrawal, measured in cubic metres, which indicates the total uptake of water by the Group; DISTRIBUTION OF GREENHOUSE GAS EMISSIONS ACCORDING TO SCOPE  > specific withdrawal, measured in cubic metres per ton of finished product, which indicates the withdrawal of water used to make one ton of finished product;  > specific withdrawal, as measured in cubic metres per euro of Operating Income. 22% Scope 1 78% Scope 2 Absolute Withdrawal Specific Withdrawal m3 m3/tonFP m3/k€ 2015 2016 2017 9,887,000 9,279,000 8,310,000 13.2 12.9 12.2 11.0 10.6 9.5 ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chain11,000,000 10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 14.0 13.0 12.0 11.0 10.0 9.0 8.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 2015 2016 2017 2015 2016 2017 2015 2016 2017 Absolute Withdrawal m3 Specific Withdrawal m3/tonFP Specific Withdrawal m3/k€ Waste Management The improvement of environmental performance deriving from the management of waste is achieved through: innovation of production processes, with the aim of preventing the production of waste at the source, progressively reducing the  > processing of rejects and replacing current raw materials with new materials 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. The Sustainability Plan requires more than 95% of waste produced to be sent for recovery by 2020, with Zero Waste to Landfill vision. All the figures reported in this section have been collected by taking direct or indirect measurements, and are communicated by In 2017, 93% of waste sent for recovery was reached, with an increase of one percentage point compared to the previous year and the local units. The following two graphs show the distribution of absolute withdrawals by type of use and water supply weight an increase of 24% compared to 2009, base year of reference. Specific waste production stood at 140 kg per ton of finished product. by type of source. Hazardous wastes represent 10% of total production and are sent in their entirety to plants located in the same Country where they are produced. DISTRIBUTION OF WITHDRAWALS BY USE TYPE OF WATER SUORCES WASTE BY TYPE OF TREATMENT WASTE BY TYPE - 2017 22% 100% 1 4 8 2% Offices 6% Other sites (warehouses,logistc,etc.) 92% Tyre production sites Type of Water Sources (m3) Public water supply system and other sources Surface water Internal wells Total Public water supply system and other sources 13% Surface water 65% Inside wells 1,819,000 1,047,000 5,444,000 8,310,000 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 8% 8% 7% 92% 92% 93% 2015 2016 2017 Landfill or incineration without energy recovery Recovery (including: material recovery, energy recovery, recycling and reuse) About 65% of the water withdrawn is pumped from wells inside the facilities and authorized by the competent authorities. Furthermore, Pirelli obtains 13% of its requirements from surface water, while dedicating special care to guaranteeing that this withdrawal is marginal in relation to the volume of the affected water bodies (always less than 5%). The volume of water emitted from water bodies located in protected areas is completely marginal, being equal to 2,300 cubic meters. Lastly, about 164,000 cubic metres of water used, equivalent to approximately 3% of total withdrawal, are obtained from the waste water treatment of its The graphs below detail waste production through three main indicators: production processes.  > absolute production, as measured in tons;  > specific production, as measured in kilograms per ton of finished product; A total of about 6.2 million cubic metres of domestic and industrial waste water were discharged, with 58% of this into surface  > specific production, as measured in kilograms per euro of Operating Income. water bodies, always in quantities that are marginal (less than 5%) in relation to the volume of the receiving bodies 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 substantial compliance with locally applicable statutory limits. In particular, as regards the quality of industrial effluents of the Absolute production production facilities, indicative average values are: 10 mg/l of BOD5 (Biochemical Oxygen Demand), 43 mg/l of COD (Chemical Oxygen Demand) and 13 mg/l of Total Suspended Solids. Specific production ton kg/tonFP kg/k€ 2015 2016 2017 98,800 102,000 110,100 132 128 135 121 140 126 2% Hazardous Waste Not Recovered 8% Hazardous Waste Recovered 5% Non-Hazardous Waste Not Recovered 85% Non-Hazardous Waste Recovered 9 4 1 ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chain120,000 110,000 100,000 90,000 80,000 70,000 150 145 140 135 130 125 200 180 160 140 120 100 environmental impact and support environmental protection projects. The cars of the Italian company’s fleet in 2016 issued 1,089 tons of CO2. In order to offset this impact on the climate, Pirelli purchased carbon credits through two projects: an international one related to the production of energy from renewable sources and an Italian one based on sustainable forest management. 2015 2016 2017 2015 2016 2017 2015 2016 2017 The first project, carried out in Turkey, consists in the construction and management of a wind farm of over 30 MWp, which allows Absolute Production ton Specific Production kg/tonFP Specific Production kg/k€ producing and feeding electricity from renewable sources, avoiding at the same time emission into the atmosphere of climate- altering gases generated by the use of fossil fuels. Other Environmental Aspects Solvents Solvents are used as ingredients in processing, mainly to reactivate vulcanised rubber, during the fabrication and finishing of tyres. The second project, carried out in collaboration with the Municipality of Passerano Marmorito, supports sustainable forest management activities on a wooded area of about 11 hectares in the province of Asti. The planned silviculture interventions, which affect about 17,000 plants, have the effect of removing carbon dioxide portions from the atmosphere. The activities financed with Pirelli’s contribution will be carried out in 2018. The union of the two projects has allowed the decrease of portion of about 150% Pirelli is committed to the progressive reduction of these substances, both by optimising their use, and by spreading solvent-free of emissions generated by company cars in 2016, thus going well beyond what is required by the policy with a view to increasing technologies for operations that may be performed even without their use. This resulted in a further reduction in the specific environmental responsibility. consumption of solvents of about 10% at the end of 2017 compared to the previous year and of about 60% compared to 2009, with related VOC (Volatile Organic Compound) emission slightly lower than total consumption. NOx emissions NOx emissions derive directly from the energy-generating processes used. In 2017, the index based on tons of finished product decreased by 9% compared to 2016. Emissions were calculated by applying the emission factors indicated by the EEA (European 2015 2016 2017 Environment Agency) to the energy consumption data. Absolute consumption Specific consumption tonSOLV kgSOLV/tonFP 1,183 1.6 1,087 1.4 1,018 1.3 1 5 0 1,300 1,200 1,100 1,000 900 800 700 1.7 1.6 1.5 1.4 1.3 1.2 1.1 2015 2016 2017 2015 2016 2017 Absolute consumption tonSOLV Specific consumption KgSOLV/tonFP Biodiversity Pirelli pays the utmost attention to ensuring that corporate activities do not interfere with the biodiversity characteristic of the contexts in which the Company operates. Currently, the only Pirelli facility located within a protected and high value area for Absolute emissions Specific emissions tonNOX kgNOX/tonFP 935 1.25 945 1.25 893 1.13 1 5 1 2015 2016 2017 960 940 920 900 880 860 1.30 1.25 1.20 1.15 1.10 1.05 2015 2016 2017 2015 2016 2017 Absolute emissions tonNOx Specific emissions kgNOx/tonFP biodiversity is the facility in Vizzola Ticino (Italy). The Vizzola Ticino site contains the tyre test track, has an area of 0.37 square The following graph shows the 2017 weight of direct and indirect NOX emissions out of total NOX emissions. kilometres and is part of the area of Parco del Ticino in Lombardy, UNESCO MAB area (Man and Biosphere, a collection of 669 biosphere reserves located in 120 countries around the world). It features 23 species included on the IUCN (International Union for the Conservation of Nature) Red List, of which: 17 are classified as “of least concern (LC)”, 1 as “near threatened (NT)”, 3 as “vulnerable (V)”, 1 as “endangered (EN)” and one as “Critically Endangered (CR)”. To ensure the utmost protection of the natural environment in which the Vizzola test track is located, Pirelli has implemented an ISO 14001 certified Environmental Management System in accordance with the Parco del Ticino. Environmental impact on biodiversity in the area are not significant; however, several interventions were carried out, both directly by the Company and by the Park Authority, to mitigate and improve the interactions of Pirelli’s activities with the natural environment, as stipulated in the agreement signed in 2001. In 2016, a campaign to monitor air quality was carried out, which highlighted the substantial negligence of the impacts of the activity compared to the context in which the Vizzola test track is inserted. In 2017, Pirelli continued in the compensation project of CO2 emissions produced the previous year by its fleet of company cars, by purchasing carbon credits. Direct result of the Pirelli car policy, this initiative aims to promote the choice of vehicles that have lower DISTRIBUTION OF NOx EMISSIONS 28% Direct 72% Indirect ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainOther emissions and environmental aspects The production process does not directly use substances that Expenses and Investments In the three-year period the 2015-2017, environmental expenditure related to are harmful to the ozone layer. These are instead contained production process exceeded Euro 35 million, of which about in certain closed circuits of the cooling and air conditioning 36% was allocated in 2017. Of this amount, 96% concerned plants. Therefore, except for accidental and unforeseeable normal management and administration of factories, while losses, there are no free emissions into the atmosphere that the remaining 4% was dedicated to preventive measures and SOCIAL DIMENSION HUMAN RIGHTS GOVERNANCE To identify, assess, prevent and mitigate the risks of violation of Human Rights, the Company:  > ensures awareness among its employees through information and training starting from the course for new recruits (in this regard, reference is made to the paragraph “Focus: Training on Sustainability and can be correlated with Pirelli manufacturing activities. In improvement in environmental management. Pirelli bases its activities on compliance with the universally Corporate Governance” in this report); 2017, direct emissions of SOX, caused by the combustion established Human Rights, as fundamental and indispensable  > manages its supply chain responsibly and specifically includes of diesel and fuel oil, was estimated to be about 19 tons Lastly, it is noted that, consistent with the materiality analysis values of its culture and business strategy, working to manage respect for human rights in the selection parameters of its (EEA - European Environment Agency emission factors). As at the beginning of this section of the report, the most and reduce potential risks of violations and in order to avoid suppliers, the contractual clauses and verifications carried regards the management of packaging, tyres are generally significant expenses that Pirelli dedicates to the environment causing – or contributing to causing – adverse impacts to out by third-party audits. Pirelli also requires its suppliers to sold without packaging. The environmental management are those relating to product Research & Development: in these rights in the international, multi-racial, socially and implement a similar business model on their supply chain, systems implemented at the production units have assured 2017, the Company invested Euro 221.5 million in research and economically diverse context in which it operates. including adequate due diligence aimed at certifying that constant and prompt monitoring and intervention regarding innovation of its products, with a constant focus on safety the products and materials provided to Pirelli are “conflict potential emergency situations that may arise, as well as performance and reduction of environmental impacts and, The Company promotes respect for Human Rights and free” throughout the supply chain. With specific reference the reports received from stakeholders. During 2017, 3 spills simultaneously, production efficiency. adherence to international standards applicable at its Partners to the natural rubber context, Pirelli promotes decent of hydrocarbons occurred at the sites of Merlo (Argentina), and Stakeholders and informs its governance to the Global working conditions, development of local communities Silao (Mexico) and Breuberg (Germany). All spills, of which no In addition to the above, during the year, the Company started Compact of the United Nations, to the ISO 26000 Guidelines, and prevention of conflicts related to land ownership; more than one cubic meter of spilled volume, were promptly a process to refine the methodologies to track the “green” to the dictates of the SA8000® Standard and underlying  > is open to cooperation with governmental and non- resolved in consultation with the competent authorities, portion of investments, in order to promote the choice of international standards, and the recommendations contained governmental, sectoral and academic entities in relation without entailing the payment of significant penalties. alternatives with lower environmental impact. In support of in the UN Guiding Principles for Business and Human Rights, to the development of global policies and principles aimed Furthermore, there were no significant complaints related to this activity, in 2017, a first Internal Carbon Price model was implementing the Protect, Respect and Remedy Framework. at protecting human rights; 1 5 2 environmental issues, nor any related sanctions. developed for the economic quantification of the impacts  > before investing in a specific market, conducts ad hoc 3 5 1 associated with GHG emissions for some selected projects The human rights management processes are handled by the assessments of any political, financial, environmental (currently being tested). Pirelli Sustainability & Risk Governance Department, which and social risks, including those related to the respect acts in concert with the affected and responsible functions, of human and labour rights. The internal and external central and in the various Countries, with reference to both context is monitored in those Countries where the the Internal and External Community. Company does operate, in view of preventing negative impacts on human rights in the ambit of the sphere of Pirelli’s commitment to human rights is covered extensively corporate influence, and if so, remedying them; in the Group “Global Human Rights” Policy, as well as in “The  > provides its Stakeholders with a dedicated channel for Values and Ethical Code”, in the “Social Responsibility Policy reports, also anonymous, of any situations that constitute for Occupational Health, Safety and Rights, and Environment”, or may constitute a risk of violation of Human Rights in the “Global Health, Safety and Environment” Policy, in the (“Whistleblowing Policy - Group Reporting Procedure” “Privacy” Policy, in the “Equal Opportunities Statement” and published on Pirelli’s website). A paragraph in this report in the “Sustainable Natural Rubber Policy”. These documents is dedicated to the “Whistleblowing Report Procedure”, were communicated to employees in the local language and to which reference is made for further information on are published on Pirelli’s website in multiple languages. reports received in the last three years. In particular, Pirelli’s “Global Human Rights” Policy describes In terms of materiality in the corporate value chain, the the management model adopted by the Company in respect of respect for human rights and labour rights assumes particular core Rights and Values such as occupational health and safety, importance in human resources and the supply chain non-discrimination, freedom of association, refusal of forced management. labour, guarantee of decent work conditions in economic and sustainable terms and in terms of working hours, protection The management of human and labour rights in the Internal of rights and values of local communities, refusal of any form Community at Pirelli is outlined in the paragraph on of corruption, protection of privacy. “Compliance with statutory and contractual obligations in terms of overtime, leave, association and bargaining, equal opportunities and non-discrimination, prohibition of child and forced labour”, to which reference is made for related details. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainThe management of human rights in the supply chain is and in the relative supply chain, the survey was submitted to the reported in the section “Our Suppliers” of this report, to which function managers and sustainability managers, while for the reference is made for more details. perception of risk in the external context of Pirelli, the survey INTERNAL COMMUNITY In 2017, with the support of the Sustainability Managers of the and to the local non-governmental organizations of reference. for years has been the reference tool for the Group’s social responsibility management, and the ISO 26000 Guidelines. This results Industrial Countries where Pirelli operates and the reference in Values and in the specific commitments that the Company states in the “Ethical Code”, in the “Global Human Rights” Policy, in local NGOs, Pirelli performed an analysis of the risk of violation The consolidation of the feedback received from the Pirelli the “Health, Safety and Environment” Policy, in the “Social Responsibility Policy for Occupational Health, Safety and Rights, and of human rights within Pirelli sites, in the related supply chain, operating sites, with reference to the internal risk of the Pirelli Environment” and in the “Equal Opportunities Statement”, communicated to all employees in the local language and made available and in the local context outside Pirelli. sites and in the related supply chain, did not reveal any significant to all stakeholders in the Sustainability section of the website www.pirelli.com. was submitted to both the aforementioned Pirelli functions The Human Capital Sustainable Management Model is inspired by the Global Compact principles, the SA8000® Standard, which The analysis was carried out through a survey that required to indicate a perceived risk value on a scale from 0 to 3 (0 The consolidation of the feedback received from the Non- = no risk, 1 = low risk, 2 = medium risk and 3 = high risk), all Governmental Organizations, with reference to the risk risks perceived (on average, a perception of less than 1). PIRELLI EMPLOYEES AROUND THE WORLD compared to 35 internationally recognized human rights, as perceived in the local context outside Pirelli, showed, on Pirelli employees at December 31, 2017 - expressed in Full Time Equivalent - amounted to 30,189 resources (vs. 29,787 in 2016) recording stemming from the United Nations Universal Convention average, risks between 0.08 and 1.85, with greater recurrence a net growth of 402 resources compared to the previous year. on Human Rights and the ILO Declaration on Fundamental within Countries, regarding the Right to equal pay for the Principles and Rights at Work. same work, Right to decent remuneration, Right to a safe With regard to the perception of internal risk at the Pirelli sites working environment and Freedom from discrimination. BREAKDOWN OF EMPLOYEES BY CATEGORY 1 5 4 2017 2016 2017 VS 2016 Executives White collars Blue collars Total 283 279 4 6,486 6,375 111 23,420 23,134 287 30,189 29,787 402 5 5 1 PERCENTAGE OF EMPLOYEES BY CATEGORY, GENDER AND AGE 2017 Executive Cadre Staff Blue Collar Total M 0% 50% 50% F tot 0% 66% 34% 0% 51% 49% M 3% 66% 31% F tot M F tot M F tot M F tot 3% 77% 19% 3% 68% 28% 24% 61% 15% 32% 54% 14% 27% 59% 15% 30% 57% 12% 31% 61% 8% 31% 58% 12% 28% 58% 14% 29% 60% 11% 28% 58% 14% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 2016 Executive Cadre Staff Blue Collar Total M 0% 52% 48% F tot 0% 59% 41% 0% 53% 47% M 3% 67% 30% F tot M F tot M F tot M F tot 3% 77% 20% 3% 69% 28% 24% 60% 16% 33% 53% 15% 27% 57% 15% 31% 56% 13% 29% 62% 8% 31% 57% 12% 28% 57% 14% 28% 60% 12% 28% 58% 14% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% <30 30 - 50 >50 Tot <30 30 - 50 >50 Tot ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chain BREAKDOWN OF EMPLOYEES BY GEOGRAPHIC AREA* AND GENDER % PART TIME, BY GENDER EUROPE NAFTA SOUTH AMERICA MEA ASIA PACIFIC TOTAL EUROPE NAFTA SOUTH AMERICA MEA ASIA PACIFIC TOTAL EUROPE NAFTA SOUTH AMERICA MEA ASIA PACIFIC TOTAL 1 5 6 2017 2016 Male Female Total Male 2017 Female Total Male 2016 Female Total 12,670 2,338 15,008 0.7% 3.9% 1.2% 0.8% 4.1% 1.3% 2,120 7,168 517 3,339 499 671 44 823 2,619 7,839 561 4,162 25,814 4,375 30,189 Male Female Total 12,416 2,341 14,757 1,744 6,870 529 3,913 334 627 52 961 2,078 7,497 581 4,874 25,472 4,315 29,787 *: Europe: Austria, Belgium, France, Germany, Greece, Italy, Netherlands, Poland, Czech Rep., United Kingdom, Romania, Russia, Slovakia, Spain, Sweden, Switzerland, Hungary. Nafta: Canada, Mexico, United States. South America: Argentina, Brazil, Chile, Colombia. MEA: South Africa, Turkey. Asia Pacific: Australia, China, Japan, Singapore, Taiwan. Employee flows by geographic area, gender and age 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* EUROPE NAFTA SOUTH AMERICA MEA ASIA PACIFIC TOTAL 2017 2016 Incoming Outgoing Incoming Outgoing 2,144 1,371 1,566 106 465 5,652 1,830 809 1,199 96 1,136 5,070 1,840 1,117 1,190 149 309 1,633 756 1,360 102 288 4,605 4,139 7 5 1 2017 vs 2016 Male Female Total 2017 EMPLOYEE FLOWS BY GEOGRAPHIC AREA*, GENDER AND AGE: TOTAL VALUES 254 376 298 -12 -574 342 -3 165 44 -8 -138 60 251 541 342 -20 -712 402 INCOMING OUTGOING <30 30 - 50 >50 Male Female <30 30 - 50 >50 Male Female EUROPE NAFTA SOUTH AMERICA MEA ASIA PACIFIC 1,196 934 702 80 296 822 420 836 26 164 126 1,773 17 28 0 5 1,044 1,369 103 391 371 327 197 3 74 580 555 397 61 497 822 243 680 32 628 428 11 122 3 11 1,433 655 1,053 92 931 397 154 146 4 205 906 BREAKDOWN OF EMPLOYEES BY GEOGRAPHIC AREA* AND BY CONTRACT TOTAL 3,208 2,268 176 4,680 972 2,090 2,405 575 4,164 2017 2016 Permanent Temporary Agency Total Permanent Temporary Agency Total EUROPE NAFTA SOUTH AMERICA MEA ASIA PACIFIC 13,999 2,599 7,469 560 4,138 990 0 370 1 24 20 20 1 0 0 15,008 13,577 1,153 2,619 7,839 561 2,055 7,225 574 4,162 4,867 0 257 7 7 TOTAL 28,765 1,384 41 30,189 28,298 1,424 27 23 16 0 0 66 14,757 2,078 7,498 581 4,874 29,787 ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chain 2017 EMPLOYEE FLOWS BY GEOGRAPHIC AREA*, GENDER AND AGE: PERCENTAGE VALUES INCOMING OUTGOING As for emerging markets (Countries where Pirelli operates, The survey is conducted as part of the annual “My Voice” internationally defined as “emerging”, namely Romania, climate survey, conducted in the local language at Group Russia, Argentina, Brazil, Chile, Colombia, Mexico, Venezuela, level (reference is made to the dedicated paragraph in <30 30 - 50 >50 Male Female <30 30 - 50 >50 Male Female Egypt, Turkey, China), in addition to the acquisition of the this report). The results of the survey, conducted in late EUROPE NAFTA SOUTH AMERICA MEA ASIA PACIFIC TOTAL 56% 68% 45% 75% 64% 57% 38% 31% 53% 25% 35% 40% 6% 1% 2% 0% 1% 3% 83% 76% 87% 97% 84% 83% 17% 24% 13% 3% 16% 17% 32% 69% 33% 64% 44% 41% 45% 30% 57% 33% 55% 47% 23% 1% 10% 3% 1% 11% 78% 81% 88% 96% 82% 82% 22% 19% 12% 4% 18% 18% 2016 EMPLOYEE FLOWS BY GEOGRAPHIC AREA*, GENDER AND AGE: TOTAL VALUES INCOMING OUTGOING <30 30 - 50 >50 Male Female <30 30 - 50 >50 Male Female EUROPE NAFTA SOUTH AMERICA MEA ASIA PACIFIC 1,095 829 630 102 211 688 283 546 43 98 58 5 14 4 0 1,543 939 1,102 121 255 297 178 88 28 54 618 563 476 66 169 670 191 774 31 116 346 1,296 2 630 110 1,208 5 3 99 213 337 126 152 3 75 TOTAL 2,867 1,658 81 3,960 645 1,891 1,782 466 3,446 692 1 5 8 2016 EMPLOYEE FLOWS BY GEOGRAPHIC AREA*, GENDER AND AGE: PERCENTAGE VALUES Chinese facility of Jiaozuo, the Company increased the number 2016, as every year have been particularly appreciable of employees mainly in Romania and Mexico, acting on the with regard to the perception of respect and management organisation and production processes in line with market of Diversities, which remains a distinctive feature of the requirements and in Brazil mainly at the Campinas plant for corporate culture of Pirelli. The results of the survey carried the change of work scheme. As for Brazil, the reorganization out at the end of 2016 were communicated to employees in process of the production structure continued and led to a the first half of 2017, the next survey will be carried out in downsizing of the workforce especially in the plants of Santo the spring of 2018. André and Bahia following the crisis situation of the country and the related negative impact in the Tyre sector. As for A functional tool for the management of equal opportunities China, in addition to the growth of Consumer activities was and the prevention of risk of breach thereof is the Group the deconsolidation of activities related to the production and Whistleblowing Procedure, through which employees, sale of Truck products in October 2017. suppliers and the External Community can anonymously report Pirelli does not employ anyone under the age of 15. There are for cases that could be linked to discriminatory attitudes, for 48 young people aged between 15 and 18 (13 in Brazil, 20 in which the Company took action intervening in one case with Germany, 1 in the UK, 11 in Switzerland and 3 in Sweden), each disciplinary sanction and in the other case with dismissal. any suspected violation. In 2017, 2 reports were ascertained for training and integration plans, in harmony with local laws. DIVERSITY MANAGEMENT For further information on reports received in 2017, 2016 and 2015, reference is made to the paragraph “Focus: Reporting Procedure – Whistleblowing Policy”. 9 5 1 Pirelli is characterised by a multinational context where Internationality and multiculturalism are the characteristic individuals manifest a great diversity, whose conscious elements of the Group: Pirelli operates in over 160 Countries management simultaneously creates a competitive advantage on five continents, and 89.5% of employees (at December 31, for the Company and a shared social value. Pirelli’s commitment 2017) worked outside of Italy. INCOMING OUTGOING to compliance with equal opportunities and the enhancement EUROPE NAFTA SOUTH AMERICA MEA ASIA PACIFIC TOTAL <30 30 - 50 >50 Male Female <30 30 - 50 >50 Male Female 59% 74% 53% 68% 68% 62% 37% 25% 46% 29% 32% 36% 3% 0% 1% 3% 0% 2% 84% 84% 93% 81% 83% 86% 16% 16% 7% 19% 17% 14% 38% 74% 35% 65% 59% 46% 41% 25% 57% 30% 40% 43% 21% 0% 8% 5% 1% 11% 79% 83% 89% 97% 74% 83% 21% 17% 11% 3% 26% 17% *: Europe: Austria, Belgium, France, Germany, Greece, Italy, Netherlands, Poland, Czech Rep., United Kingdom, Romania, Russia, Slovakia, Spain, Sweden, Switzerland, Hungary. Nafta: Canada, Mexico, United States. South America: Argentina, Brazil, Chile, Colombia. MEA: South Africa, Turkey. Asia Pacific: Australia, China, Japan, Singapore, Taiwan. of diversity in the workplace is expressed in the main Group Awareness of the cultural differences that create the identity Sustainability documents: the “Ethical Code” approved by of the Company entails displaying the utmost confidence in the Board of Directors, the “Social Responsibility Policy management of local origin: 79% of Senior Managers work for Occupational Health, Safety and Rights, Environment” in their country of origin, where Senior Managers are those and the “Equal Opportunities Statement”, both signed by reporting directly to the Chairman and CEO as at December the Chairman. These documents have been distributed to 31, 2017. In order to develop the innovative and managerial all employees in their local language and published on the potential inherent in multiculturalism and in dealings with institutional website www.pirelli.com/Sustainability. different professional environments, the Company promotes While respecting the cultural differences of the individual of active Senior Managers in 2017 have in fact experienced at Countries, what necessarily unites all Pirelli affiliates in the least one inter-company assignment during their professional same culture are its shared corporate values, policies and experience within the Pirelli Group. Moreover, at the end of rules, which are applied at Group level and communicated in 2017, 13% of managers on foreign assignment were women. the growth of its managers through international mobility: 53% the local language. During the year, the Company operated internationally to rebalance the employment level aligning it to the needs of volume related For the composition of the Corporate Bodies by gender and the to high market volatility, obtaining a positive occupational balance compared to 2016. The training course on Diversity has been part of the Group’s Diversity Policy reference is made to the “Report on Corporate training offer for years. Governance and Ownership Structure 2017” in this Annual In mature Countries (Countries where Pirelli operates, internationally defined as “mature” or “non-emerging” markets), in Italy, Report, paragraphs “Sustainability and Diversity Policies”, there was the strengthening of HQ structures mainly in the areas dedicated to research and development. Pirelli monitors the level of acceptance and appreciation of “Board of Directors - Composition” and “Board of Statutory diversity perceived by employees within their own reality. Auditors-Composition”. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chain Below is a breakdown of employees by gender, expressed as the percentage weight of women against the total number of The average of pay differentials between men and women differential between men and women has been calculated. employees in each job category, with reference to the two-year period 2016-2017, the data shown in the following table show recorded in these countries is equivalent to 3% in favour of The average, weighted by number of headcount, showed a substantial stability in 2017 compared to 2016, with a percentage of women of 14.5% of the total population. Instead, the percentage women for white collars, compared with 2% in 2016 and 1% in remuneration differential of 3% in favour of women. of women in relation to managerial positions rose from 20.6% in 2016 to 21.6% in 2017, mainly due to the growth recorded in the 2015 also in favour of women; instead, it is equal to 1% in favour population of middle management, an important element since the category constitutes an area for growth and development for of men for managers, in line with 2016 and compared with 5% In particular: managerial positions. in 2015 also in favour of men.  > China shows a 9% remuneration differential in favour of EMPLOYEES BY GENDER AND CATEGORY YEAR 2017 2016 EXECUTIVES CADRE EXECUTIVES+ CADRE (TOT MANAGERS) WHITE COLLARS BLUE COLLARS TOTAL 10.3% 10.0% 23.3% 22.3% 21.6% 20.6% 33.6% 33.8% 10.1% 10.1% 14.5% 14.5% A few examples: men, due to both organisational roles and professional seniority, at the moment on average in favour of the men  > Italy, which has an difference between average population; remuneration for men and average remuneration for  > in Italy there is 4% in favour of men; women of around 3% in favour of women for the category  > in Romania, instead, there is a 2% remuneration differential of white collars (compared to 1% in 2016 in favour of in favour of women. women and 13% in favour of men in 2015) and 1% also in In the various markets, the “professional seniority” factor, still favour of women for the category of managers (2% in 2016 on average of benefit of men, continues to have a strong impact and 1% in 2015); on the remuneration trend. On the other hand, the number  > Romania, where the category of white collars has equal of women who enter the labour market will contribute in the remuneration (compared to 1% in favour of men in 2016 medium term to an increasing balance between genders, also Analysing the breakdown of gender in terms of employment contract, the table below shows that also in 2017, a substantial balance and 5% in 2015 in favour of women) and for the category of in terms of professional seniority. was maintained between men and women. middle managers there is 3% in favour of men; EMPLOYEES BY GENDER AND BY CONTRACT 1 6 0 Male 95.2% 4.7% 0.1% 2017 Female 95.7% 4.1% 0.1% Total Male 95.3% 4.6% 0.1% 94.8% 5.0% 0.2% 2016 Female 96.3% 3.5% 0.2% Total 95.0% 4.8% 0.2% PERMANENT TEMPORARY AGENCY  > Brazil, where for the category of white collars there is In regard to the standard salary of new hires during their 1% in favour of men (compared to substantial equal first year of work at Pirelli, this is greater than the minimums remuneration in 2016 and 5% in favour of women in 2015) prescribed by local legislation and there are no differences and the same applies to the category of middle managers between men and women or related to other diversity 1 6 1 where there is 1% in favour of men (against substantial factors. equal remuneration in 2016 and 4% in favour of men in 2015); The inclusive culture by which Pirelli is guided in its way  > Germany, which showed a difference between average of doing business permeates corporate life even in the remuneration for men and average remuneration for case of disability, as explained in the Pirelli Policy on equal women of around 1% in favour of men for the category of opportunities, applied at all affiliates of the Group. Under white collars (3% in 2016 and 4% in 2015) and 6% also in applicable local laws, approximately 1.4% of total employees in favour of men for the category of managers (in line with 2017 (vs. 1.1% in 2016) have some form of disability, as in 2014, The rate of employee return to work after maternity/paternity leave at Pirelli in relation to its total workforce in all industrial 2016 and compared to 3% in 2015). however with the following considerations: the percentage Countries where the Company operates was positive. In particular: a year following the maternity and paternity event occurred in With reference to the population of executives, of which women measurement of disabled employees in the multinational 2016, 2017 saw 76% of women and 93% of men still employed by the Company. The difference in the data between genders should be account for 10% (figure up compared to 9% in 2015 and 2014), context of the company clashes with the objective difficulty considered natural in light of the different socio-cultural contexts in which Pirelli female workers are inserted. there is an average remuneration difference of 11% in favour of of measuring their number, both because in many countries women (in 2016, it was 8% in favour of men, and in 2015, it was 5% where the Group is present, there are no specific laws or In the context of gender diversity, Pirelli pays special attention to remuneration equality, constantly monitoring this issue. in favour of women). regulations promoting their employment and therefore disabilities are not automatically detected, and because in The countries considered significant in the analysis at the end of 2017 are Brazil, China, Germany, Italy, Romania, Mexico, Argentina, As for the population of blue collars, all industrial countries many countries this information is deemed confidential and the USA, Russia, France, Spain and the UK representing over 3/4 of the total workforce subject to the remuneration policy (executives, with a significant number of observations were analyzed: protected by privacy laws; it is therefore likely that the actual managers and white collar employees). At a methodological level, it should be noted that the remuneration differentials between Brazil, China, Germany, Italy, Mexico, Romania, Russia, Spain, percentage of disabled persons working at Pirelli might be men and women were calculated for each Country and at the same weight of positions held, cross-checking the “grade” (i.e. the Switzerland and the UK. For each country, the remuneration higher than the above figure. weight attributed to each position on the basis of various factors) with elements such as professional seniority. This valuation method allows objectivity and accuracy of the survey and evaluation: in fact, it should be noted that data calculated and/or reported only at Group level would be unable to pay due attention to the structural differences of the local markets, the different professional seniorities and the logic of remuneration markets with special features not comparable with each other. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainWith reference to the “age” factor of the company population, as can be seen from the table below, it is homogeneous between gender.  > welcome kits for those joining Pirelli at a facility in a country to the Triennial Incentive Plan (LTI) but includes a form of AVERAGE AGE BY CATEGORY AND GENDER 2017 other than their home country; deferred payment to the following year of a part (25%) of the  > welfare and work-life balance initiatives (in regard, refer annual incentive accrued subject to accrual of the MBO of the to the paragraph “Welfare and initiatives in favour of the following year. Payment of an additional amount equal to a Internal Community” in this report); variable percentage of the entire MBO accrued during the  > the presence, within the permanent training offer, of the previous year will be paid in line with the degree that the MBO EXECUTIVES CADRE WHITE COLLARS BLUE COLLARS MEDIUM “Intercultural Orientation” course, aimed at providing is achieved in the following year. Female Male Total Female Male Total 48 50 50 43 45 44 2016 37 38 38 36 37 37 EXECUTIVES CADRE WHITE COLLARS BLUE COLLARS MEDIUM 48 50 50 43 45 44 37 38 38 36 37 37 37 37 37 37 38 38 participants with tools and methodologies to train their ability to interact effectively in global and multicultural The return to the stock exchange at the beginning of October contexts. REMUNERATION AND SUSTAINABILITY 2017 meant that the Company’s long-term average targets should have been revised for the 2018-2020 three-year period. Consequently, by resolution of the Board of Directors of July 28, 2017, the 2016-2018 Long Term Incentive – LTI related to said three-year period was terminated early at the end of 2017 The remuneration policies adopted by Pirelli aim to ensure (a year before the natural expiry). The Board of Directors also fair remuneration in line with the individual’s contribution to approved the payment in 2018 in a single instalment on the the success of the Company, recognising the performance and basis of reporting the newly measured goals – even in terms of quality of the individual’s professional input, in a philosophy of percentage opportunities for each individual participant – on sustainable remuneration. the values for the two-year period (2016-2017). The purpose is twofold: on the one hand to attract, retain and At the beginning of 2018, a new three-year incentive plan (LTI Instead, the following table represents the average seniority of service per professional category and gender: also in 2017, there were motivate critical employees, while on the other to reward and 2018-2020) was launched and extended to the majority of 1 6 2 no significant differences between men and women. AVERAGE SENIORITY OF SERVICE BY CATEGORY AND GENDER 2017 promote conduct that is as far as possible consistent with Executives of the Group, in line with the variable remuneration the corporate culture and values. Compensation policies and mechanisms adopted at international level, totally self- 3 6 1 processes for Group management (intended as the overall financed as the related expenses are included in the economic executives) are managed by the central Human Resources and data of the Business Plan. The Plan, in line with international Organisation department, while for non-executive personnel best practices, includes a Sustainability objective common to they are handled on an individual Country basis. Once again in all Group Management. EXECUTIVES CADRE WHITE COLLARS BLUE COLLARS MEDIUM 2017, and in accordance with market best practices, the impact Female Male Total Female Male Total 13 15 15 9 9 9 13 15 15 2016 EXECUTIVES CADRE WHITE COLLARS BLUE COLLARS 13 15 14 13 14 14 8 9 9 7 9 9 7 9 9 8 9 9 8 9 9 MEDIUM of the (short-term and medium-term) variable component on The General Policy on Remuneration approved by the Board the aggregate remuneration of Group management remained of Directors of Pirelli, establishes principles and Guidelines very high, which means that there is a strict correlation to which Pirelli abides in order to determine and monitor the between remuneration and performance. application of remuneration practices related to Directors with special powers/offices, Executives with strategic Members of Management in general are connected to the responsibilities, Senior Managers and other Group Executives. Annual Incentive Plan (MBO) linked to the achievement of annual economic-financial objectives of the Group and/or Specifically, the Guide Lines of the remuneration for the above Business Unit and/or Region and the assessment resulting management figures also cover: from the Performance Management Tool, which allows  > fixed and variable remuneration, both short and medium- greater relevance to be attributed to organisational conduct long term (it is noted in this regard that Pirelli currently (how), and not simply the results achieved (how much). The has no existing forms of remuneration through equity); Performance Management of all Country CEOs includes  > compensation in case of dismissal; economic sustainability, social and environmental objectives.  > resignation and termination of employment; The following procedures and activities to promote equal opportunities have been well-established for years: For further details in this regard, reference is made to the  > clawback clauses for Top Management;  > the use, as far as possible, of candidate lists with a significant presence of women in recruitment processes; paragraph “Performance Management” of this report.  > introduction of the aforementioned sustainability target  > the use of training to promote cultural change connected with the promotion of diversity, with specific modules dedicated to common to all Group Management. “Diversity Management,” beginning with courses for new hires (e.g. Plunga); In 2014, some changes and improvements were made to the  > introduction of new initiatives aimed at respecting cultural and religious diversity (e.g. different and clearly marked diets in annual incentive system (MBO) which is no longer related canteens, kitchens typical of different cultures from that of the host country...);  > “multilingual” book stores at the factories; ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainINTERNATIONAL MOBILITY commercial leadership in the highest segment of the market, trying as much as possible to ensure that young people receive of people who belong to a specific organisational unit are the tension of the people towards results and the meritocracy the training needed to enter the new professions required by pooled with the objective of ensuring a shared and balanced The theme of international mobility has always been that always ensures the best growth for employees, both a labour market whose expectations are constantly evolving. distribution of the assessment, to ensure a process that is as important to Pirelli, with a view to achieving cultural and value locally and internationally. The official presentation of the results of the two-year project consistent, homogeneous and objective as possible. integration while still respecting diversity, an approach that took place in Brussels in November 2017, during the European the Company considers crucial to maintaining and creating In addition to disseminating the company principles, week of professional training, in the presence of the President The Performance Management of all Country CEOs includes value in the long term. Employer Branding is also a valuable tool to give visibility of the European Parliament. economic sustainability, social and environmental objectives. to job opportunities aimed at recent graduates and profiles In particular, the performance obtained regarding the The dissemination of the Pirelli industrial culture throughout with experience, not only in the Italian market but globally. Among the channels of Employer Branding used by Pirelli, the Sustainability Plan of the country is evaluated, which envisages the world and the transfer of valuable technical and managerial Considering the countries where Pirelli has a presence internet plays an important role: on its pirelli.com website, targets of compliance with the SA8000® Standard, reduction know-how to new start-ups is also a key instrument in support with one or more production plants in Europe, the United the Company provides a channel for those who wish to in injury frequency indices, reduction in energy consumption of the Group’s geographical expansion strategy. States, South America, the Middle East, Africa, Russia and submit their application for specific open positions, as well as and water withdrawal, increase in waste recovery, control In 2017, about 54 new inter-company expatriates were organised in 2017, where the Company promoted its own models adopted, objectives and results achieved; targeted implementation of Group Policies and engagement with recorded, compared with about 80 postings in 2016 and Employer Branding initiatives. These activities are carried channels are also used by Pirelli for the publication of its job stakeholders. Asia-Pacific, numerous events, projects and meetings were providing full disclosure on its corporate history, management of the sustainability of the supply chain, dissemination and about 90 in 2015. About a third of new postings were to major out also thanks to the network of contacts and partnerships offers, including LinkedIn where in the last year, Pirelli has industrial Countries, such as China and Germany, and mobility with some prestigious universities in the various countries, significantly increased its audience (in terms of engagement flows continued from emerging Countries to mature Countries. such as the Beijing University of Chemical Technology and views), remaining one of the most visited profiles among At the end of 2017, the expatriate population totalled about Nottingham Trent University in the United Kingdom, the 195 persons (vs. 227 in 2016 and 217 in 2015), belonging to 19 Politehnica University of Bucharest in Romania, the ESIC nationalities and who moved to 29 different Countries on - Business Marketing School in Spain, the Universidad de DEVELOPMENT in Beijing, the University of Munich in Germany, the tyre manufacturers. Talent review The Talent Review process aims to place “people in the right place”, or to ensure business continuity through the coverage of strategic positions with the best talents, both centrally and at each Affiliate. Key positions are those positions that have a direct impact on the strategic success and competitive advantage of the organisation. 5 6 1 1 6 4 five continents, of which 13% women. The overall expatriate Buenos Aires in Argentina, the Universidad Tecnológica del population consists in equal amounts (50%) of Italian and Centro in Venezuela, the Instituto Tecnológico de Estudios foreign citizens, demonstrating the concrete progress Superiores de México, the Keio University in Japan, the being made towards the goal of creating an increasingly American University of Cairo in Egypt. international management team. Performance Management Performance Management (PM) means the process whereby the contribution of each “Talents” are employees who, in addition to having demonstrated positive performance in the previous 2 years, employee in an organisation is defined, observed and assessed possess the potential to hold, immediately or within the The Pirelli International Mobility Policy has been standardised with Politecnico di Milano, Politecnico di Torino, Università development and orientation of each with respect to a series fact, they represent the future of the Company for the and shared within all the affiliates, with common treatment Bocconi, Università Cattolica and Università degli Studi di of predefined indicators that are critical to the success of the coverage of strategic positions. The focus on talents is also rules in order to enable uniform management of the expatriate Torino. The latter Universities are located close to the Pirelli Company and the employee. demonstrated by the various skills assessment projects personnel of the entire Group. offices in Italy and the Company has always considered them concluded in 2017, following increasing focus on the analysis Pirelli is also collaborating actively, at corporate level in Italy, at Pirelli, a unique and fundamental opportunity for the next two years, key positions within the organisation. In It includes a principle of fiscal neutrality pursued through of young people. With these institutions, Pirelli has organised of feedback, which provides a transparent and open dialogue The talent management process also includes meeting and the implementation of a so-called “tax equalisation” policy, Career Days, round tables, Job Fairs, as well as company between the manager and the employee, from the phase of discussion sessions between managers, which aim to share which allows neutralising of the tax differences that arise presentations and opportunities to meet with students defining the individual objectives to that of assessment of the and standardise the criteria for the definition of talent within in the destination country with respect to the country of directly at the company, aimed at “personally experiencing” results achieved. the organisation. to be a benchmark for economic and engineering education During the process, particular attention is given at the time of the talent of people to support the company strategy. origin, ensuring the application of equitable and appropriate the reality of the Group. Many presentations, in particular, remuneration principles, in addition to the assignment of concerned the Pirelli Sustainability Model. The Performance Management process involves all staff Pirelli confirms itself as a company with a strong predisposition certain benefits closely related to care for expatriates and worldwide (executives, managers and employees) and in 2017 to grow talent from within: the average corporate seniority of their accompanying families. The business-education partnerships described above are saw a “redemption” rate (2016 assessment sheets completed the talent pool is in fact about 12 years. EMPLOYER BRANDING placed within the context of the “European Pact for Youth” compared to the total of open sheets) equal to 98.5%, of which of which Pirelli is a co-initiator, a Youth Pact that was signed the completion rate by women involved in the process was The pipeline of talents has a strong international and during the last Enterprise 2020 Summit (held in November 97.5%, while completion by men reached 98.8%. multicultural connotation, as their origin includes as many as 2015 in Brussels) by the European Commission, CSR Europe and 17 different nationalities. Pirelli considers it crucial to enter the market by transmitting a group of companies. The Pact aims to promote the growth To support the quality of assessments, Pirelli has introduced the drivers that distinguish the group, that is, Business, People and of new generations through the promotion of partnerships so-called Calibration Meetings. These are meetings organised In 2018, the development process of talents within the Group Change, which include the cardinal principles on which the with Universities, training courses, internships and masters’ by the managers of the individual functions, Business Units will continue, also with a view to providing the means for Company bases its business approach, such as technological courses: the objective of reducing the skills gap between and countries, with their direct reports, and with the heads of structured growth within the organisation and mitigating the know-how and product innovation, technological and different countries and different cultures is fundamental, Human Resources of reference, during which the assessments retention risk of talents. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainTRAINING encourage cross-functional collaboration, ensure the exchange Finally, in 2017, three Group plants, Bahia, Bollate and Kirov, The School of Management also offers constantly updated of expertise and know-how among countries and support the were involved in a change management process. These online tools through the “Train your Brain” section, available All Pirelli affiliates have adopted the Training@Pirelli training implementation of tools and procedures within the organization. initiatives have accompanied the entire plant population to all managers on the LearningLab international platform. model, organized, structured and equipped system to respond in the important challenge of converting processes and to “Group” needs as well as any needs that may emerge locally The faculty of the Academy is mainly composed of internal production towards “High Value” products, i.e. with high As for the population of recent graduates, in 2017, the two- at any time. trainers, experts from the specific functions who, based on the added value. Workshops and training sessions were organized year course Warming Up@Pirelli continued; it was launched in training needs and logistical needs, act at central, regional and aimed at understanding the challenge and activating new 2013 at global level and in 2017, it was attended by about 200 The training offer is based on the strategic priorities of the local level, or through online seminars and webinar sessions. and more coherent conduct necessary for change that have young graduates from every country. organization and of the various functions, which are alongside The internal trainers are certified as such following adequate involved both the blue collar population and white collars. the needs that emerge annually from the Performance training, with homogeneous methods at all affiliates. The change management project for Kirov in particular will The program aims to provide a homogeneous view of the Pirelli Management process (evaluation and development tool Participation in the internal “Train the trainer” course is continue further in 2018. reality for all young new recruits in the different countries. based on dialogue between the manager and the employee, a fundamental requirement to ensure and align the skills specified in the dedicated paragraph). of all trainers regarding classroom management methods The three “pillars” on which Training@Pirelli is based are the is currently certifying 314 internal trainers in the world on and delivery of the technical content of the Academy. Pirelli School of Management The School of Management (SOM) is the training structure dedicated to the development The main themes include: the Sustainable Management Model adopted by the Company, the strategies, the product, processes, customers, markets and all other matters regarding basic skills that Pirelli considers important for a young person Professional Academy, the School of Management and the Local various disciplinary and professional subject areas. of the management culture within Pirelli. Its targets are the who wishes to become part of the company’s future. During the Education. The first two are designed centrally and according to populations of Executives, Global Talents, Middle Management/ two-year training course, participants have the opportunity the cases provided centrally or locally, while Local Education is The Academy model involves a significant figure from the Senior Professionals and Recent Graduates/Junior. to work on various company projects of interest proposed by managed and implemented directly in the individual countries function guiding each Academy, supported by one or more various functions, in order to apply innovative approaches and to meet the specific local needs. professionals from the same function and from the Group The focus of management training is calibrated and outlined develop cross-functional teamwork. The macro-structure of Training function, which ensures consistency in the methods every year based on the business challenges that the Company the course, defined centrally in terms of content and process The entire training offering is communicated and managed via of approach, delivery and evaluation of learning in addition to is required to face. 1 6 6 the online training portal called LearningLab. ensuring collaboration with the local training teams. steps, is organised in various countries with appropriate adjustments aimed at enhancing the local specificities. To the 7 6 1 The training aimed at executives is preferably provided aforementioned Warming Up training program, specific local Also in 2017, Pirelli was called in various international locations Every year, the Professional Academies meet both the Top centrally (Milan) in order to allow participants to discuss induction programs are added, including the Mexican one, to illustrate its Training Model, recognized as benchmark Management and the local training representatives, with the company strategies directly with Senior Management and which involved over 800 new employees in 2017. of quality and robustness, already awarded in 2015 with the objective of strategic alignment and sharing of the results share them at inter-departmental and geographical level. Silver Award by the Global Council of Corporate Universities, achieved. in the category “Best Corporate University embodying the The training model of managerial skills was revised and identity, the culture and the brand of the Organization in In 2017, the Professional Academies offered 248 courses modified in 2016 to make training topics even more consistent Local Education The training provided locally responds to the specific training needs of the local context and culture of its stakeholders”, award dedicated to the most important globally. We report two significant initiatives delivered during with the need to develop a skilled managerial class and able the country of reference and is for the entire local company Corporate Universities worldwide. the year: “Manufacturing to Digital” and “Shopfloor Manager to face the new challenges of the Company. In line with the population. Assessment and Development”. adoption of the Learning Agility model (subdivided into the Professional Academies The Pirelli Professional Academy is aimed at the entire company population and there are ten: The first is a training course dedicated to all plant managers, Agility, Mental Agility), also during 2017, 4 training courses improvement of interpersonal skills to stress management, aimed at disseminating knowledge and skills in factory 4.0 were designed for managerial training, aimed at strengthening from the development of IT, language and regulatory skills up to Product Academy, Manufacturing Academy, Commercial that can support the company in the digital transformation specific skills and related attitudes. With a view to the ever- seminars on issues of welfare and diversity at the Company. Some Academy, Quality Academy, Supply Chain Academy, process undertaken. increasing involvement of participants and the constant courses particularly appreciated and attended in 2017 were: Purchasing Academy, Finance and Administration Academy, updating of teaching methods, the training courses delivered  > “Presentation Skills”, dedicated to employees who need Planning & Control Academy, Human Resources Academy, The second one is instead an assessment and development have provided alternative and innovative methods of use in to refine their communication skills in public. The course Digital Academy. project that involved the heads of all the Pirelli factories, addition to the traditional one, offering participants moments makes use of numerous exercises and role play in which 4 main dimensions of People Agility, Change Agility, Results The seminars cover areas of expertise ranging from the Sustainable Management elements are throughout the environment and the managerial teams. These figures, line, often aimed at developing case studies and projects of food for thought; Academies, with focus for example on product life cycle (LCA precisely because of this role, are called “Capitani” (Captains) corporate interest. – Life Cycle Assessment), environmental efficiency of the internally (term maintained in Italian at a global level).  > “Problems, Decisions and Solutions”, support for employees who want to experiment with a methodological approach process, health and safety, sustainable management of the The activities carried out have allowed the analysis of the In 2017, 4 editions of the programs of the School of Management to problem solving in order to learn how to make decisions supply chain, risk management, diversity management. knowledge and skills of the population that currently holds the were delivered to Executives and Global Talents of the in a complex environment. Among the teaching tools fundamental figures in the relationship between the factory of interaction and collaboration, both in presence and on participants are involved in video shooting, later used as role, in order to plan effective and personalized development Group, and more than 100 courses were delivered to Middle used in the classroom was the mapping of non-rational The Academies cater to the entire corporate population and and training actions. During 2018, the training and follow-up Management and Senior Professionals, held in 12 countries of elements in order to reduce their impact in the decision- aim to provide continuous technical-professional training, actions established following the assessment will continue. the Group for a total attendance of about 1000 people. making phase and simulation exercises. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainFocus: Training on Sustainability and Corporate Governance Also in 2017, training continued on the Pirelli Sustainable Management Model, with update on the state training days, compared to the average 7.5 per capita days recorded for women; such difference is to be attributed to the LISTENING: GROUP OPINION SURVEY WELFARE AND INITIATIVES FOR THE INTERNAL COMMUNITY fact that the majority of the average training days per capita In 2013-2016, Pirelli consolidated the My Voice climate survey of the Company’s Sustainability Plan. Reference was already is related to blue collars and that the latter is represented for as a tool for active listening of its employees in the world, as a At organisational level, Pirelli for years, has had the figure made to training on specific sustainable management the 89.9% by men. basis for setting central and local improvement plans. of the “Group Welfare Manager”, who is entrusted with processes spanning all Group Academies and Local Education. the supervision of welfare activities, jointly with the many In addition, there is institutional training in the International the year) took part in at least one training day. strengthened over time the relationship of trust between Safety at Work, Industrial Relations, Sustainability and Equal 92% of total employees (considering the average employees of The annual recurrence of this listening moment has central and local functions concerned, including Health and Course “PLunga”, which presents the Group’s Sustainable employees and the company, laying the foundations for a Opportunity Managers of the Group. Management strategy to all new employees, starting from the The aforementioned performances, net of exceptional process of continuous improvement both in the organizational multi-stakeholder approach contextualized in the integrated increases over the years (due, for example, to the activities climate and in the workplace. The welfare initiatives that Pirelli offers to its employees vary economic, environmental and social management. Training of start-up plants - e.g. Mexico – to specific “re-skilling” from country to country, in accordance with the specific needs on the Pirelli Model also draws new employees’ attention campaigns following technological changes at some plants, From 2017, in line with Pirelli’s new strategic challenges, it identified in different social contexts in which the affiliates to the Group’s Sustainability Policies and the commitments etc.), are confirmed substantially in line with those of previous was decided to rethink also the strategies and methods for operate. In any case, they implement the guidelines shared at they involve, as detailed in the “Ethical Code”, the “Code years. of Conduct”, the “Equal Opportunities Policy”, the “Social listening and engaging people. Group level, so that all the sites worldwide are progressively committed to locally adopting activities, tools and welfare Responsibility Policy for Occupational Health, Safety and In 2017, Pirelli in fact exceeded the target set for several years in Therefore, the My Voice process will be renewed from 2018, processes aimed at creating collaborative environments and Rights and Environment”, the “Global Human Rights” Policy, its strategic plans, consisting of maintaining a global training from an annual frequency to a moment of listening that will ensuring adequate support for the needs of personal life, in addition to the requirements of the SA8000® Standard. level of at least 7 average days per capita, involving 90% of the occur approximately every year and a half, in order to guarantee respecting local regulatory, social and cultural specificities. The foregoing is also the subject of continuous training for all Group’s population in at least one average day of training. adequate time to define and implement specific action plans Group Sustainability Managers and Purchasing Managers. by country/function/Business Unit, responding to the needs Reflecting the Group guidelines, overall, welfare activities With regard to the contents addressed in training at global emerging from the survey, also with a view to promoting trust activated at Pirelli affiliates in the world are attributable to 1 6 8 Like every year, also in 2017, Pirelli dedicated a training session level, the issues of Health, Safety and the Environment and continuous dialogue with employees. This new approach in four macro areas of action: that brings together all the Group’s Sustainability Managers maintained a significant portion also in 2017, confirming its 2017 was communicated to all employees worldwide through a  > lifestyle (e.g. health care, information and awareness 9 6 1 for three days. The “Pirelli Sustainability Manager Workshop relative weight of 12% of the total training provided. dedicated information campaign, which illustrated the changes in campaigns); 2017” was held in Milan and in Germany in November. The event the process, methods and timing of listening of the Group Survey.  > family support (e.g. scholarships, summer camps for involved the active participation of the Top Management of In turn, “on-the-job” training activities provided to blue employees’ children, inter-company crèche); the Company, with strong cross-functional alignment with a collars represent 52% of the total training provided: through The next survey, scheduled for Spring 2018, will introduce a  > free time (e.g. open days, sporting and cultural activities); view to achieving the Group targets as well as demonstrating this training method, Pirelli focuses on continuous updating new measurement model for employee engagement based on  > work life and work environments (e.g. flexible working the fundamental teamwork that enables the Company to mechanisms that are guaranteed through the activity of the relative level of “sustainability over time”. hours, facility, individual development training, cultural create lasting and shared value. The 2017 workshop was “technical trainers” present at each plant, all now trained growth and group celebrations). completely focused on sharing the new “Pirelli High Value” and certified according to the Group standard. Finally, also As in previous years, the 2018 survey will also be sent to all Pirelli All Group affiliates have the opportunity to share local best strategy and on the dissemination and deployment actions at analyzing training at global level, the relative weight of the employees worldwide through an online questionnaire, while practices through a special section dedicated to welfare on local Stakeholders. Professional Academy is the second most relevant after “on for the first year it will also be accessible from mobile devices. the corporate Intranet. the job” training, with a prevalence of the training activities of The return of the results will follow, both through dedicated In June 2017, Pirelli launched an online training campaign the Manufacturing Academy and the Quality Academy. communications on the company Intranet and through Historically, Pirelli provides infirmaries at all its production on Law 231. The initiative involved the entire white collar meetings in presence, the definition and implementation of units where health operators and medical specialists are population operating on the Italian perimeter (about 1,600 Examining the thematic areas related to training of the staff specific action plans by country/function/Business Unit in the available to all employees during working hours. These people). The dissemination of the contents, the tracking population at global level, the Professional Academy represents remaining months, until the next survey. facilities provide counselling for health problems outside work of the training activities and the recording of the results 32% of the training provided. In turn, the Pirelli School of as well as first aid care and periodic health supervision. It of the learning tests were entirely managed through the Management represents 26% of the training provided. At the same time, in 2017, all Pirelli Affiliates activated their should be considered that the specialized services performed Learning Lab, the company’s learning management system. At improvement plans, as defined based on the outcome of the in the outpatient and nursing facilities of Pirelli in the world December 31, 2017, over 1,400 people successfully completed In turn, Local Education had a significant influence on the previous survey. compulsory training activities. training provided in each country (36%), including language were around 250,000 in 2017 alone. For example, at the historic headquarters of Milan Bicocca, in 2017, over 23,000 services Pirelli training Performance In 2017, the total training provided was equal to 8 days of average training per capita at Finally, in 2018, a considerable investment is expected in the company population, the Trust Index to the Company and prevention campaigns. training to support the digital transformation, both for staff in 2016, also at global level, was 64% overall. The 2016 Group level, with 9.3 average days per capita for blue collars and blue collars (refer also to the paragraph on Professional figures mentioned are substantially in line with those that For example, the following are some of the welfare activities and 4.3 for white collars. Men reached an average of 8.2 Academies). characterized the 2015 survey. activated at the various local affiliates. training that has increased significantly in recent years. With reference to the trends of the last two Group Opinion were provided to Pirelli employees, including specialist visits, Survey: the 2016 participation rate was equal to 74% of instrumental examinations, therapies and physiotherapies, ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainAfter the pilot phase started in September 2016, in 2017 the service for employees’ children of school age (5-10) during project called “Pirelli Smart Way” was extended to the entire staff school holidays. In 2017, the project doubled the number of INDUSTRIAL RELATIONS European Works Council (EWC) The Pirelli European Works Council (EWC), formed in 1998, holds its ordinary of Milan Bicocca. Adherence to the Project gives the opportunity children welcomed, thanks to the inclusion of additional The Industrial Relations policy adopted by the Group is based meeting once a year after presentation of the Group Annual to “smart working”, or to provide working activity partly even corporate sites in which to carry out activities with minors. on respect for constructive dialogue, fairness and roles. Financial Report, where it is informed about the operating outside the offices, subject to agreement with managers and in More than 230 children in 2017 alone were in fact hosted as Guaranteeing and respecting free trade union activities is performance, operating and financial forecasts, investments compliance with the rules defined by the Company. part of the “Bambini in Bicocca” project. one of the key values on which Pirelli bases its own Human made and planned, progress in research, and, as occurred The Pirelli Smart Way Project involved a population of about Similarly, in many of the Group’s sites, recreational events with trade unions are managed locally by each affiliate in Company’s Sustainability Plan. 1,100 people, whose duties were deemed compatible with this are organized periodically dedicated to the families of accordance with the laws, national and/or company-level new way of working. Of these, 84% have adhered to the project employees and also open to the local community; purely by collective bargaining agreements, and the prevailing customs The agreement establishing the CAE provides for the possibility and have been enabled for Smart Working after having carried way of example, think of the Children Day conducted in China and practices in each country. of holding other extraordinary meetings to fulfil the information out a specific training process. The Smart Workers of Bicocca at the primary school in Chongqing where over 700 people requirements of delegates, in light of transnational events in 2017 had a total of 6,761 days of Smart Working, seizing the including children, parents, educators and employees in 2017 At this local level, these activities are supported by the central concerning significant changes to the corporate structure: opportunity offered by the company to manage their work collaborated to spread the culture of road and workplace departments, which coordinate the activities and ensure that opening, restructuring or closing of premises, important and activities with greater autonomy, responsibility and flexibility, safety. Instead, the now traditional Diversity Day, now in its the aforementioned principles are observed throughout the widespread changes in work organisation. EWC delegates are saving commuting time and costs, while balancing company fifth edition in 2017, has been renewed at the Pirelli Germany Group. needs with personal needs. office: children and adults participate in a competition in provided with the IT tools they need to perform their duties and a connection to the corporate Intranet system, for the search of the differences in each of the participants, in the Industrial Relations also have an active role in the Group’s real-time communication of official Company press releases. Capital Management System. Relations and negotiations also at the annual meeting in 2017, about the progress of the Following the introduction of Smart Working at Bicocca, the machinery and in the factory processes. At the end of the commitment in terms of health and safety, characterised by Managers of the organizational units involved were invited to day, the plant hosted a vernissage of children’s paintings and active participation on the part of the union and workers. participate in a workshop aimed at analyzing the implications drawings, in memory of their experience. In fact, 76% of the Group’s employees are covered by of Smart Working on the role of manager and the style of representative bodies that periodically, with the Company, 1 7 0 leadership. There were multiple campaigns for prevention and to raise monitor and address the current issues and awareness and awareness for a healthy lifestyle, including the “Nutrition intervention plans/programs, aimed at the improvement Since the beginning of the project, 13 sessions of the workshop workshop” conducted in Romania, an important opportunity of activities and to safeguard the health and safety of have been provided, involving over 180 managers including to raise awareness for a healthy diet for the psychological and employees. executives, officials and middle managers. physical well-being of all employees. In turn, the “Faz Bem” and Compliance with contractual statutory obligations governing overtime, time off, association and negotiation, equal opportunities and non- discrimination, bans on child and forced labour The governance to protect Human and Labour Rights is the subject of Pirelli’s Ethical Code and specific Policies adopted by the Company, in particular the “Social Responsibility Policy 1 7 1 Taking into account that participation was on a voluntary life in particular through Sport, with various communication with employees, in any case of corporate reorganization the “Global Human Rights” Policy and the “Health, Safety and basis, these numbers and the lively involvement of Managers and involvement initiatives, like the Campaign “#sentirmibene” and restructuring, employees and their representatives are Environment” Policy. All the aforementioned Policies are public in the workshops are to be considered an excellent index of launched in Italy at the end of 2014 and which is divided into a informed in advance, with timing that varies from country and have been communicated in local language to employees. interest in the initiative. series of initiatives to promote healthy lifestyles and well-being. to country in full compliance with local laws, collective Moreover, since 2004, Pirelli has adopted the the requirements project in Brazil promotes the improvement of the quality of In respect of the principle of constructive and timely dialogue for Occupational Health, Safety and Rights and Environment”, During the first months of 2018, a new survey (already carried Moments of inclusiveness and sharing characterize the “Open managing social responsibility at its affiliates and in the supply agreements in force and trade union agreements. of International Standard SA8000® as a reference tool for out on the population of the pilot project) is scheduled to Days”, which take place at numerous affiliates in the world: these In 2017, the Industrial Relations activities reached important chain. be launched to detect and monitor the level of satisfaction are days dedicated to employees’ families, with educational negotiating results. Several collective agreements were and appreciation of the experience by both employees workshops, visits to departments, games and music. renewed, without any conflict, in the United Kingdom, The management of diversity and equal opportunities, and and managers, with a view to listening and continuous Argentina and Mexico. the responsible management of the supply chain in the field improvement. The well-being of workers also comes from a working of human and labour rights are subject to specific paragraphs environment that is psycho-socially adequate and stimulating, During the year, the Company also operated internationally in this report, to which reference is made for further details. Similar Smart Working Projects are being disseminated at where they feel valued and in which psychosocial risks and to rebalance the employment level aligning it to the needs of various Group locations, such as at the Pirelli offices in New work-related stress are effectively prevented and countered. volume related to the market, reporting a Group occupational Pirelli’s approach has always been characterised by compliance York (after a pilot phase in 2016) and in São Paulo in Brazil To this end, as part of the Company’s global program called balance up at the end of 2017 compared to 2016. with all legal and/or contractual requirements concerning (ongoing pilot phase). At the end of the pilot period, a survey “Excellence in Safety”, Pirelli performs in-depth analyses working hours, the use of overtime and the right to regular is always carried out between Smart Workers and their and acts on key areas and issues such as improvement Pirelli increased its workforce in Romania, Mexico and Brazil, days of rest. These requirements are often the subject of Managers to collect their feedback on the experience. of the organisational structure, clarity of tasks and roles, while in Italy the central functions related to Digital and to agreements with trade unions, in line with the regulatory empowerment of workers, improvement of communication product research, development and innovation were further context of each country. There are no restrictions on workers’ To support work – life balance and in particular family support, in the organisation, sharing of objectives and motivation strengthened. in Italy in 2017, the “Bambini in Bicocca” (Children at Bicocca) with respect to a common strategy, as key elements for the project continued, guaranteeing babysitting and kids club prevention and mitigation of occupational stress. right to use their total number of holidays and the period is generally agreed between the employee and the Company. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainIn addition to the trade union dialogue and coordination multinational companies operating there. Labour lawsuits or funds created ad hoc, in which the Company participates involving all levels of the organization in an ongoing between Headquarter and local functions, Pirelli verifies are generally initiated when an employment contract is by paying a fixed amount as is done in Italy, or an insurance program of training and information, aimed at promoting the application of the provisions on the respect of human terminated, and they usually involve the interpretation of premium as is done in Brazil and the United States. For a culture of safety at work; and labour rights at its affiliates through periodic audits regulatory, legal and contractual issues that have long been the economic-equity measurement of the above benefits,  > promote information and awareness-raising on health and performed by the Internal Audit Department, in compliance controversial. The Company has made a major commitment reference is made to the Consolidated Financial Statements, safety issues; with a three-year audit plan to cover all the Company’s sites. to prevent and resolve these conflicts – to the extent possible notes “Employee funds” and “Personnel Costs”.  > provide ongoing and concrete support aimed at facilitating Normally every audit is carried out by two auditors and takes – including through settlement procedures. the work-life balance; about three weeks on-site. The Internal Audit Team received training on the environmental, social, labour and business ethics elements of an audit from central function directors to enable them to carry out an effective, clear and structured Unionisation levels and industrial action impossible to measure exactly the consolidated percentage of It is The social benefits recognized by Pirelli for employees  > manage its supply chain responsibly by including issues of (including life insurance, invalidity/disability insurance health and safety at work in the supplier selection criteria, and additional parental leave) are generally recognized to the contractual clauses and the audit criteria, also all employees, regardless of the type of contract whether requiring suppliers to implement a similar management audit, granting Pirelli effective control over all aspects of union membership at Group companies, since this information permanent, temporary or part-time, in compliance with model in their supply chain (for an outline on responsible sustainability. If compliance violations are found during these is not legitimately available in all countries where Pirelli has a company policies and local trade union agreements. management of the supply chain, reference is made to the audits, an action plan is agreed between the local managers presence (on five continents). and central management, with precise implementation dates and responsibilities and verification follow-ups. However, it is estimated that over 40% of Pirelli employees are trade union members. As to the percentage of workers The auditors carry out verifications on the basis of a checklist of covered by collective agreement, in 2017 it stood at 76% (vs. sustainability parameters deriving from the SA8000® Standard 74% in 2016). This figure is associated with the historical, and the Pirelli Policies mentioned above. All managers from regulatory and cultural differences between each country. the affiliates involved in the audits are adequately trained and Collective agreements for renewal in 2017 were renewed OCCUPATIONAL HEALTH, SAFETY AND HYGIENE Management model and system Pirelli’s approach to responsible management of occupational health, safety paragraph “Our Suppliers”);  > make available to all its Stakeholders a channel (the “Whistleblowing Policy-Reporting Procedure” published on Pirelli’s website) dedicated to reporting, even anonymously, of any situations that constitute or may constitute a risk for the protection of the health, safety and well-being of people (reference is made to the Paragraph “Focus: Reporting Procedure -Whistleblowing Policy” of informed on the audit object and procedures by the applicable without any conflict and strikes. and hygiene is based on the principles and commitments this Report for an outline of reports received in the last 1 7 2 central functions, in particular Sustainability, Purchasing, Health and Safety, Industrial Relations. Considering the last four years, in 2014, the Internal Audit Department carried out audits in Italy, the United Kingdom Supplementary pension plans, supplementary health plans and other social benefits The Group has defined contribution and defined benefit funds, with a expressed in “The Values and Ethical Code” of the Group, three years, none of which regarding health and safety). in the “Health, Safety and Environment Policy” in the All the Documents mentioned above are communicated to “Global Human Rights Policy” and in the “Quality Policy”, Group employees in their local languages and are published in in accordance with the Sustainability Model envisaged the Sustainability section of the Pirelli website, which should by the Global Compact of the United Nations, with the be consulted for full display of the content. 3 7 1 and China; in 2015, in Mexico, Russia (Voronezh plant) and the substantial prevalence of the former kind over the latter. To “Declaration of the International Labour Organization on United Kingdom; in 2016, in Germany, Russia (Kirov plant) and date, the only defined benefit plans are: fundamental Principles and rights at Work” and with the The occupational safety management system was developed the United Kingdom (follow-up). In 2017, the audits concerned  > in the United Kingdom, where the fund relating to the tyre “Universal Declaration of Human Rights” of the United in compliance with procedures and guidelines elaborated the industrial sites in Argentina, Brazil (Campinas and Feira business has been closed to new employees since 2001 for Nations. Reference tool since 2004 has also been the centrally in order to consolidate a “common language” that de Santana plants), Mexico, Romania and the USA. The non- the introduction of a defined contribution scheme (and SA8000® standard. In particular, the “Health, Safety and guarantees sharing, alignment and effective management in conformities emerged as a result of the audits mentioned closed to future accumulations for all active employees Environment” Policy outlines Pirelli’s commitment to: the Group. above were the subject of the action plans agreed between the as of April 1, 2010), while the funds related to the cable  > manage its activities regarding health and safety local managers and central management, and will be subject business sold in 2005 were closed to future accumulations protection at work in compliance with the laws and all Pirelli adopts an occupational health and safety management to follow-ups in 2018 by the Internal Audit Department. in the same year; the commitments entered into, as well as according to system structured and certified according to OHSAS None of the audits revealed any breach of ILO Core Labour  > in the United States, where the fund was closed in 2001 the most qualified management international standards; 18001:2007. All certificates are issued with ANAB international Standards, with specific reference to forced labour or child (since 2003, it has not been tied to salary increases) for the  > pursue objectives of “no harm to people”, by implementing accreditation (ANSI-ASQ National Accreditation Board - US labour, freedom of association and collective bargaining, and introduction of a contribution scheme (and only applies to actions for early identification, assessment and accrediting body). Also in 2017, RINA Services S.p.A. was the non-discrimination. retired employees); prevention of risks for health and safety at work aimed evaluator of conformity of the health and safety management Labour and social security lawsuits In 2017, as in previous years, the level of work and social security litigation at Group level remained low. Just as in previous years, the level  > in Germany, where the fund was closed to new hires from at a continuous reduction in the number and severity systems of Pirelli. At the end of 2017, all the production 1982. of injuries and occupational illnesses, activating health facilities are certified according to OHSAS 18001:2007, with the Other defined benefit plans exist in Holland and Sweden, but surveillance plans in order to protect workers from exception of the facility in Jiaozuo that joined the Group in the they represent a relatively insignificant liability for the Group. specific risks associated with their business duties; last quarter of 2016, and the facility in Rome (United States),  > develop and implement emergency management programs where a management system is operative, applied under the of litigation remains high in Brazil, to the point of representing The Group also maintains various supplemental Company to prevent and avoid harm to persons; OSHA Standards, similar to the OHSAS 18001 Standard. about 90% of all the labour lawsuits currently pending against medical benefit plans at its affiliates according to local  > define, monitor and communicate to its Stakeholders the entire Group. Labour lawsuits are extremely common requirements. These healthcare schemes vary from country to specific objectives of continuous improvement of health At local level, in each productive unit are held periodical meeting in this country and depend on the peculiarities of the local country in terms of allocation levels and the types of coverage and safety at work; with employees’ representatives (Health&Safety Committee), culture. As such, they affect not only Pirelli but also the other provided. The plans are managed by insurance companies  > empower, train and motivate its employees to work safely with the aim of displaying, in respect of the Management ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainSystem, the activities done and those planned, and of sharing workers, improving communication within the organisation, to conduct an internal audit as to whether conditions similar to the ones that caused the injury or near miss also exist at their plants the results of the risk assessments on workplace risks. the sharing of objectives, motivation with respect to a common and to define any possible corrective measures. By using this system, every site is able to audit the solutions adopted by other plants strategy: all substantial issues for a work environment that in order to share the best choices. Safety culture “The Zero Accidents Target” is a precise and strong corporate position. workers feel valued and the psychosocial risks are effectively prevented and countered. Regarding this issue, during the Pirelli strongly believes that leaders play a strategic role in risk 2014-2015 two-year period, Pirelli adhered to the European is psycho-socially appropriate and stimulating, in which Performances The performances reported below concern the three years 2015-2016-2017 and cover the same scope of Group consolidation. It is noted that, in order to guarantee the same scope set out by the GRI principles, the exit of the industrial business prevention. Their behaviour must therefore be an example Agency Campaign for Occupational Health and Safety (EU- from the corporate scope in 2017 required a recalculation of the historical values reported below for the years 2015 and 2016. for all employees. From an industrial point of view, this OSHA) “Healthy Workplaces Manage Stress”. objective is pursued through investments aimed at technical improvement of work conditions, while constantly insisting on the cultural and behavioural aspect of all Company players. Safety training In addition to safety training offered locally at every Pirelli location (which is illustrated in The 2020 target of the Business Plan is for a reduction by 2020 in the Frequency Index of 87% compared to 2009. In 2017, Pirelli reached an injury Frequency Index (FI) of 0.27 with a reduction of 18% compared to 2016 and 83% compared to 2009. The Injury Frequency Index, analysed by gender, is also significantly lower for women in 2017, reflecting the fact that the female It is necessary to pursue the safety culture in accordance with the section of this report dedicated to training), special population is generally engaged in activities with lower risk than the male population. Below is a summary table of the FI values by the rules, while maintaining a very clear idea of everyone’s mention should be made of Group activities and projects, gender in the last three-year period: responsibilities to themselves, others, and their own family. which simultaneously target several countries by allowing This approach, together with the involvement and continuous an alignment of culture and vision, fully benefiting internal dialogue between management and workers, has pursuit of the Company’s own improvement targets. The allowed a sharp decline in historical injury indices. Manufacturing Academy merits a special mention. This is In 2013, the Company signed an agreement with DuPont factories, where health, safety and environment issues are Sustainable Solutions for the global implementation of the discussed in detail. It must be pointed out that 12% of the the Pirelli Professional Academy dedicated to the sphere of Frequency Index (FI) FI Men FI Women 2017 2016 2015 0.27 0.30 0.07 0.33 0.37 0.11 0.48 0.54 0.14 1 7 4 “Excellence in Safety” Program, in support of the management training provided by Pirelli in 2017 addressed occupational FI = number of injuries/number of hours actually worked x 100,000 5 7 1 model outlined above and with particular focus on the health and safety issues. implementation of a standard approach to behavioural safety in the Group. The Program began in 2014, extending gradually In 2017, the ninth edition of the Pirelli Health, Safety and The following table summarizes the distribution of the 2017 Frequency Index by geographic area: in 2016-2017 to all production sites of the Group. A specific Environment Global Meeting was also held. The annual Steering Committee, chaired by the Operations General meeting in 2017 took place at the Pirelli production site in Manager, monitors the progress of the program. Slatina, Romania. The purpose of this meeting, which brings Europe Nafta South America MEA Asia Pacific together all managers responsible for Health and Safety in Frequency Index (FI) 0.29 0.20 0.36 0.24 0.06 In particular, in addition to the strengthening and the Group, is to pool the best practices applied by the various consolidation of the safety culture concepts based on conduct, Pirelli sites in the world, with a view to promoting continuous the focus on Leading Indicators was further developed, namely improvement. The injury Severity Index (SI) in the Group in 2017 was 0.10, an improvement of over 16% compared to 2016. Below is a summary table 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. Monitoring of Performance Alongside establishing implementing specific guidelines and procedures for management systems, Pirelli uses the web-based Health, The sharing of the Safety Culture was also supported by the Safety and Environment Data Management (HSE-DM) system, monthly newsletters like the Safety Bulletin, and the periodic elaborated and managed centrally by the Health, Safety and publication of significant events through the traditional Environment Department. This system makes it possible to channels of internal communication. monitor HSE performance and prepare numerous types of reports as necessary for management or operating purposes. As part of the collaboration with DuPont Sustainable Solutions, in 2017, Pirelli continued to develop the theme of prevention of The HSE-DM system collects all the information on accidents psychosocial risks and work-related stress. occurred at the factories, Group fitting units, equities and Some of the most important areas of intervention of the logistics units managed directly by Pirelli (accident analysis, “Excellence in Safety” Program are in fact related to the corrective action taken...). If the dynamics of a particular case improvement of governance on safety, the organisational are significant, all the plants are not only provided with the structure, the clarity of the tasks and roles, empowering information via a system called Safety Alert, but are also urged of the SI values in the last three-year period: Severity Index (SI) 0.10 0.12 0.16 SI = number of days absence, starting from the first day following the injury, per injury/number of hours actually worked x 1,000 2017 2016 2015 ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainThe following tables summarize the distribution of the 2017 Severity Index by gender and geographic area. As part of the production process, there were no workers with high incidence or high risk of illnesses related to their occupation. Severity Index (SI) 0.11 0.06 Male Female the distribution of the 2017 injury frequency index by gender and geographic area: With regard to injuries of temporary workers, the following tables show the number of injuries recorded in the last three years and Severity Index (SI) 0.10 0.11 0.15 0.03 0.03 Europe Nafta South America MEA Asia Pacific Injuries involving temporary workers The most representative injuries concern events involving contusions, cuts and fractures of the upper limbs. FI temporary workers 2017 2016 2015 3 1 Total 11 23 Male Female 1.19 0.00 Both in the case of the Frequency Index and the Severity Index, Asia Pacific has a lower rate than the other geographical areas where Pirelli operates, which however have all been steadily declining for years. With reference to commuting accidents (not included in the calculation of the FI and SI mentioned above), the following tables show the total number registered by the Group in the last three years and the distribution by geographic area of the 2017 cases. Injuries involving temporary workers 1 0 2 0 0 Europe Nafta South America MEA Asia Pacific 1 7 6 Commuting accidents 108 137 139 7 7 1 Regarding the Frequency Index of injuries for employees of suppliers operating at Group sites, the rate was a total of 0.19. Below is 2017 2016 2015 FI temporary workers 2,85 0,00 2,54 0,00 0,00 Europe Nafta South America MEA Asia Pacific Commuting accidents 28 44 36 0 0 Europe Nafta South America MEA Asia Pacific the breakdown by Region: The Frequency Index for occupational illnesses in 2017 stood at 0.04. FI employees of suppliers operating at Pirelli 0.14 0.00 1.22 0.00 0.00 Europe Nafta South America MEA Asia Pacific FI Occupational illnesses 0.04 0.04 0.07 2017 2016 2015 FI = number of occupational illnesses/number of hours actually worked x 100,000 Fatalities  > 2017: a fatal accident occurred involving Pirelli Group employees at the Campneus Company (Brazil); no fatal accidents involving employees of external companies operating at the Group’s operating units;  > 2016: there was no fatal accident involving Group employees or employees of independent contractors working at the Group’s The following tables summarize the distribution of the 2017 occupational illnesses index by gender and geographic area: operating sites. FI Occupational illnesses Male Female 0.04 0.04 FI Occupational illnesses 0.04 0.00 0.09 0.00 0.00 Europe Nafta South America MEA Asia Pacific  > 2015: a+ fatal accident occurred involving Group employees at the Yanzhou (China) operating unit; no fatal accidents involving employees of external companies operating at the Group’s operating units. Best Practices 2017 Fifteen Pirelli manufacturing plants were “sites of excellence” in 2017, since no employees were injured there in the year:  > Manufacturing Units: Burton MIRS, Slatina Motorsport, Bicocca MIRS, Breuberg MIRS, CMP  > Fitted Units: Sorocaba, Hurligham, Sao Jose dos Pinhais, Goiana, Didcot  > Equities: Dackia, AGOM  > Logistics – TLM: Barueri, Campinas, Feira de Santana These results should be attributed to the constant focus on leading indicators, namely in terms of prevention. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainHealth and Safety Expenditure In the three-year period 2015-2017, expenditure for health and safety by the Group amounted to about Euro 30 million, of which about 10 million was invested in 2017. The expenditure made targeted improvements on machines and plant and, more in general, the workplace environment EXTERNAL COMMUNITY INSTITUTIONAL RELATIONS OF THE PIRELLI GROUP as a whole (ex. improvement of microclimate and lighting In all the countries where Pirelli operates, the aim of Institutional interests through a strategy based on a clear perception of the Foreign Policy Association. In October, on the occasion of the industrial objectives and business valorization. Moreover, the visit of the Governor of Georgia to Italy, Pirelli hosted the among the various tools of “economic diplomacy”, in addition Governor and related delegation at its headquarters to renew to the promotion of bilateral initiatives, Pirelli is particularly the relationship with the State in which it is present with an active in a number of Business Councils, including presidency industrial plant. of the Business Forum Italy China, where it has held presidency since 2016. Also in Brazil, Pirelli continued to celebrate the country’s strong link with Italy, promoting, among others, meetings conditions, changes in layout for ergonomic improvement Relations Management is directed towards creating corporate With reference to the most important international initiatives, with institutional representatives. In 2017, the Group met the of activities, measures to protect the healthfulness of value through managing structural relations with reference there is therefore that of the Italy China Business Forum, mayor of São Paulo on the occasion of his visit to Italy. Pirelli infrastructure...). stakeholders, ensuring adequacy of representation of the Company. a permanent forum of dialogue between the business also maintains relations with local institutions to protect its Health and Safety Targets  > 2020: reduction in the Accident Frequency Index of 87% The activities are based on the utmost transparency, of the Italian Ministry of Economic Development and the and Rio Grande do Sul, with which a series of initiatives are legitimacy and accountability, with respect to both the Chinese Ministry of Commerce (MOFCOM). During 2017, as also developed to raise awareness on issues such as road information disseminated in public venues, and to relations part of the Business Forum, of which Pirelli is co-chairman, safety, safeguarding the territory and promoting culture. compared to 2009 (underway); managed with institutional interlocutors, in line with a series of business sessions and meetings were organized,  > 2014-2020: global implementation of the “Excellence in the Group’s Ethical Code, Institutional Relations Policy - with the participation of institutional representatives, aimed In the European context, a significant activity also concerns Safety” program (underway); Corporate Lobbying and the Anti-corruption Compliance Program at strengthening bilateral relations between Italy and China. Romania, in which Pirelli maintains a constant dialogue with  > 2017-2020: completion of integration of Health, Safety and (documents published on the Company’s website) and in line These include the Italy China Financial Forum held at the Pirelli the main institutional interlocutors in order to accompany the Environment KPIs for the sale/commercial/equities areas with the principles of the International Corporate Governance Headquarters in February, in which some of the most important phases of industrial development at the Slatina site. Among (underway). Network (ICGN) and however in compliance with the laws and financial institutions of the two countries took part, in addition the activities carried out in 2017, during the visit of a Romanian communities of the two countries set up under the auspices industrial sites, distributed in the states of São Paulo, Bahia 1 7 8 regulations of the countries where Pirelli operates. to the Italian Minister of Economy and Finance; the fourth delegation led by the Secretary of State for Trade in November, plenary session of the Business Forum, organized in Beijing in Pirelli took part in the forum dedicated to the promotion of The geographical scope of the Pirelli Group’s industrial and the presence of the two Heads of State; the “China Italy SME bilateral economic relations. economic interests therefore calls for an extended and multi- Investment and Trade Forum”, held in May in China on the 9 7 1 level network of institutional relations on a national, European occasion of the presence of the Italian President of the Council As proof of the Group’s continuing commitment to and international level. in Beijing and dedicated to the promotion of collaboration strengthening relations with the countries in which it between small and medium enterprises; the Conference “Belt operates, in 2017, Pirelli took part in official visits with In the area of institutional relations, Pirelli acts above all via and Road: Building a Concrete Roadmap for Italy and China’s institutional representatives visiting Italy. In this context, active monitoring and in-depth analysis of the institutional Joint Growth” held in Milan in November to provide a concrete a series of bilateral meetings could thus be carried out, and legislative context and identification of stakeholders contribution to business communities for the implementation aimed at analyzing the Group’s industrial and commercial of reference. Institutional dialogue is further accompanied of joint projects within the Chinese development strategy. issues with significant institutional impacts. These include by projects and initiatives carried out in collaboration with Also in the context of relations with China, the Group has also representatives of the Mexican, US, Egyptian, British, Chinese institutional entities to promote and support issues of general developed more relationships at regional level as well. Government and of the Federal Republic of Tatarstan. interest on corporate matters. Activities concerning institutional relations also involved quite Relations with European Institutions also focus on The Institutional Business activity also includes the constant distribution of information relating to international consolidating relations with stakeholders of reference and analysis of global political-economic dynamics, linked to Pirelli initiatives towards qualified institutional interlocutors monitoring legislation. The ongoing dialogue and discussion the development of the main topics of corporate interest, as well as ongoing monitoring and analysis of the institutional with the Commission and the European Parliament concern and benefits from collaborations with selected think tanks and political dynamics. a wide range of matters of corporate interest: industrial of international prestige. These include among others the policy, research and innovation, energy and environmental collaborations with the Institute for International Policy As part of the enhancement of the historical relations between policies, mobility, technical regulations, domestic market and Studies, the International Affairs Institute, The Trilateral the Company and the United States of America, where Pirelli international trade. In line with Group standards, during the Commission, and the Aspen Institute. has industrial and commercial facilities, work continued various stages of processing and forming European regulation, At an international level, Pirelli interacts with the main and activities at the United States Council for International with an approach that is at all times directed towards utmost institutional interlocutors present in the countries where it Business, European American Chamber of Commerce and transparency and propriety. The Pirelli Group is enrolled with the operates with its production sites. When necessary, the Group Italian American Chamber of Commerce, Organization for European Registry for Transparency, which was instituted by an promotes initiatives directed towards mutual understanding International Investment, and the Eurogrowth initiative of the institutional agreement between the European Parliament and and with the purpose of promoting representation of its Atlantic Council. Pirelli also maintains its board membership in the European Commission. on a number of initiatives related to institutional projects Pirelli represents Group interests with community stakeholders ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chain1 8 0 Given its particular centrality, however underlined by the leadership guidelines envisaged in the Global Compact to inspire was completed, which saw ETRMA and Pirelli contribute statutory pacts of the new listing on the stock exchange that advanced and innovative sustainability performance in terms of significantly to the programmatic and strategic proposal on seal the Italian nature of the group, relations with national management capacity for the creation of sustainable value. the new challenges arising from technological changes on WBCSD – World Business Council for Sustainable Development For years, Pirelli has been a member of the WBCSD – World Business Council for Sustainable authorities continue to have particular importance. In fact, in connectivity & autonomous driving and new approaches to Development. This is a Geneva-based association of about Italy, the Group continues to interact with a system of relations In 2017, the Global Compact Lead activated a series of mobility, as well as from global trade, in particular with China. 200 multinational companies based in over 30 Countries that that involve the main institutional bodies, both central and local. initiatives to provide support in the definition of strategies Moreover, ETRMA continued to be heavily involved in the have made a voluntary commitment to link economic growth In government contexts, Pirelli maintains constant relations and partnerships for the pursuit of Sustainable Development implementation of the Emission Trading Scheme, with the aim to sustainable development. In particular, Pirelli endorses two with the main structures of reference and with the entities Goals (SDGs) launched in September 2015 in New York with the of reducing the economic impact for the sector of European projects: Tire Industry Project and SiMPlify project (former related to them. Relations with the Ministry of Foreign Affairs aim of accompanying the activities of sustainable companies energy policies and the European Innovation Partnership on Sustainable Mobility Project - SMP). and International Cooperation are particularly important, in both until 2030. Raw Materials and guaranteeing fair and unrestricted access the central and peripheral areas, with which the information to key raw materials for the sector. The Tire Industry Project (TIP), whose members account activity regarding the presence of Pirelli in the international This context includes Pirelli’s participation in the action for about 65% of global production capacity of tyres, area is constant, as well as support in the valorisation of platforms “Decent Work in Global Supply Chains”, “Financial Finally, the association supports the European Commission was founded in 2005 with the objective to seizing and system interest abroad. Relations are particularly important Innovation for the SDGs” and “Reporting on the SDGs”; the work in the definition of policies on the Circular Economy for the anticipating the challenges of sustainable development with the Directorate General for internationalization policies group of the latter presented to the public the report “Analysis sector and is successfully continuing in promoting sustainable through the assessment of the potential impact on health and and the promotion of exchanges of the Ministry of Economic of the Goals and Targets“ during the leader summit held in manufacturer responsibility practices for the management environment of tyres throughout their life cycle. The project Development, particularly aimed at coordinating the activities September in New York. of end-of-life tyres, thanks to which Europe maintains a extends its evaluation activities to raw materials, tyre debris, of the Italy China Business Forum. The Group also supported more than 95% recovery rate, through close collaboration with upcoming focus on India, and nano-materials. On the various initiatives of institutional importance, including events In 2016, Pirelli had already provided business cases for the SDGs with the various operating partnerships existing in European latter issue, in collaboration with the OECD (Organization for to raise awareness on issues of environmental protection, safety Industry Matrix of the Transportation sector, a publication countries. The good ETRMA (and European) practices remain Economic Co-Operation and Development), TIP has developed and territorial protection. In the diplomatic sphere, Pirelli also aimed at collecting examples of application of the SDGs to an international benchmark. a specific guide for the sector that contains best practices of hosted the XII Conference of Italian Ambassadors in the presence corporate activities. reference for research, development and industrialization of of the Italian Foreign Minister at Pirelli HANGARBICOCCA™. ETRMA maintains a proactive role in the development of new nano-materials, so as to ensure that the use of any nano- The Group is also engaged in customary in-depth analysis of Since 2014, Pirelli has been a Founding Participant of the cognitive studies regarding environmental issues, such as material is safe for people and the environment; the document institutional importance, concerning: questions relating to the SSE Corporate Working Group, the group of companies that microplastics, and health, for example the filling material is available at the Internet address. industrial presence of the Group; promoting and strengthening provide their own evaluations and indications as part of the obtained from end-of-life tyres for sports fields. h t t p : / / w w w . o e c d . o r g / c h e m i c a l s a f e t y / n a n o s a f e t y / international relations in countries where the Group is present Sustainable Stock Exchanges (SSE) initiative promoted by nanotechnology-and-tyres-9789264209152-en.htm. with industrial sites, analysing and studying in-depth impacts UNPRI, United Nations Conference on Trade and Development, relating to the regulatory governance of tyres and their entire United Nations Environment Program Finance initiative and life-cycle; matters relating to road safety and environmental the UN Global Compact. The initiative is based on a platform IRSG – International Rubber Study Group Pirelli, in representation of the European Commission, is a member TIP has also finalized the development of “product category rules” (PCR) necessary to carry out product life cycle sustainability, both as regards production processes and in for exchange of ideas and assessments, which aims to increase of the Industry Advisory Panel of the International Rubber assessments (LCAs), as well as to develop the “environmental respect of the product itself. the attention of world stock markets, investors, regulators Study Group (IRSG) based in Singapore, an intergovernmental product declarations (EPDs)” for tyres so that the results are and companies to the sustainable performance of companies. organisation that brings together producers and consumers comparable between the various producers. With reference MAIN INTERNATIONAL COMMITMENTS FOR SUSTAINABILITY The attention of Pirelli to sustainability is also expressed ETRMA – European Tyre and Rubber Manufacturers Association ETRMA is the main partner of the EU institutions for the sustainable development of new European of rubber (both natural and synthetic), acting as a valuable to the aggregated environmental reporting of the sector, TIP platform for discussion on issues regarding the supply and demand for natural and synthetic rubber. It is the principal has identified as relevant the data relating to CO2 emissions, energy consumption, water use and ISO 14001 certification. source of information and analysis on all aspects related to the rubber industry. Within IRSG, Pirelli participated in the Also in 2017, TIP worked on the international promotion of through participation in numerous projects and programs policies for the sector and for their proper implementation. Sustainable Natural Rubber Project, which resulted in the good practices on end-of-life tyre management in terms of promoted by international organisations and institutions in With the institutional support of the Pirelli Group, in 2017, management guidelines for the Sustainable Natural Rubber valorization of recovery and reuse as a second raw material. the area of social responsibility. The following are some of the association continued to raise awareness of the European Initiative (SNRi) launched in 2014, during the World Rubber the main commitments undertaken by the Group worldwide Commission and European Union Member Countries on Summit. (numerous activities and agreements existing locally at the the implementation of market surveillance for monitoring The next projects concern the analysis of existing best practices, and possible platforms, for the sustainable affiliated companies are not included). compliance with regulations on the general safety of vehicles The experience of Stakeholder engagement carried out management of natural rubber, and the assessment of the UN Global Compact Pirelli has been an active member of the Global Compact since 2004 and since 2011, it has been part of the partnership with the national associations of the sector the preparation of its Sustainable Management Policy for The SiMPlify Project, in which Pirelli has participated since 2013, of which Pirelli is an active member. At the end of 2017, the natural rubber, published in 2017 and to which a paragraph is has developed a vision linked to an idea of urban mobility that of the Global Compact Lead Companies. The Group endorses the European Commission’s program on Competitiveness and dedicated in this report. is universally accessible and with low environmental impact, for “Blueprint for Corporate Sustainability Leadership”, which offers Sustainable Growth of the Automotive Industry (GEAR 2030) the transport of both passengers and goods in an urban context. and tyres and on energy efficiency, as well as the labelling of within the Project, as well as the SNR-I Guidelines, are presence of microplastics in the marine environment. tyres in European Countries, and through the strengthening among the many references that Pirelli has considered for 1 8 1 ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainThe project (2013-2019) involves international companies in the automotive, auto parts, transportation, oil&gas, information CSR Europe Since 2010, Pirelli has been a member of the Board of CSR COP21 Initiative” (2015) and participated in several side events dialogue with locally operating NGOs. Priority is given to those organized during the “COP21” Climate Conference in Paris initiatives whose positive effects on the External Community and communication technology sectors. Europe, represented by the Sustainability and Risk Governance (2015). The project availed itself of the support of the University of Director. CSR Europe is a network of companies in Europe are tangible and measurable according to objective criteria. The internal procedure also specifies that no initiatives may Ghent and experts in the field and provides a tool based on that are leaders in the area of corporate social responsibility. Throughout 2014, the Group joined the “Road to Paris 2015” be taken in favour of beneficiaries for whom there is direct or numerical data normally available in the municipalities of Its members include more than forty-eight multinational project and signed three initiatives consistent with its indirect evidence of violation of human rights, worker rights, cities - such as, for example, the number of inhabitants, the companies and forty-one national partner organisations from sustainable development strategy: environmental protection or business ethics. number of cars, kilometres of cycle paths - which, together thirty-three European countries.  > Responsible Corporate Engagement in Climate Policy; with an online survey on citizenship, allow to calculate 19  > Put a Price on Carbon; The contributions to the External Community by Group indicators on the state of mobility of the city and therefore to In addition to several collaboration projects between  > Climate Change Information in Mainstream Filings of companies are part of a broader strategy to support the propose ad hoc solutions derived from best practices available companies for the improvement of corporate management Companies Communication. achievement of the Sustainable Development Goals of the worldwide. performance, in 2017, CSR Europe continued with the United Nations (SDGs), already mentioned above in the initiative “European Pact for Youth” launched in 2015 and Also in 2014, the Company signed the Trillion Tonne paragraphs “United Nations Sustainable Development Goals In a first phase, the project was implemented in six pilot cities “Sustainable Business Exchange”, launched in 2016 to support Communiqué, the document that requires global emissions (SDGs)” and “UN Global Compact”. such as Hamburg, Bangkok, Chengdu, Indore, Lisbon and also the achievement of the sustainable development goals of the over the next 30 years to remain below the trillion tonnes Campinas which, in addition to being home to an important United Nations. of greenhouse gases, avoiding a rise in average global At the end of each of the following paragraphs, the SDGs are Group plant, saw Pirelli as the project’s task force leader, temperature higher than 2 °C. indicated which are most directly impacted by the activities of helping the city authorities to redefine the urban mobility The Pact for Youth, supported by the European Commission the Company described therein. plan, and focusing on issues of sustainable mobility, road and aimed at supporting the increased employment of young Pirelli has also signed numerous international agreements safety and polluting emissions. In 2017, the project continued people through education and training as essential tools to such as “The Carbon Pricing Communiqué” (2012), the “2nd and Pirelli is leading its activities in Feira de Santana, home match the skills of young people to the new skills required by Challenge Communiqué” (2011), the “Cancún Communiqué” to another important Brazilian plant of the Group, and is the market, has seen Pirelli as a co-initiator of the initiative; (2010), the “Copenhagen Communiqué” and the “Bali Road safety Pirelli is synonymous worldwide not only with high performance, but also safety. Together with 1 8 2 laying the foundations in this direction for its adoption, in the results of the two-year project were presented in Communiqué” (2007), the first document for the development environmental protection, road safety is the key element of the course of 2018, also in Jiaozuo, important city in rapid November 2017 in Brussels, in the presence of the President of of concrete strategies for a global climate agreement to be the Green Performance strategy that inspires the Group’s 3 8 1 transformation located in the center of China, also a Pirelli the European Parliament. The Pirelli Group contributed to the implemented through a joint government intervention. industrial and commercial choices. Pirelli’s commitment to road production site. realization of these goals through a network of collaborations with high schools and universities in the various countries The effectiveness of the project and its tool is confirmed not in which it operates (reference is made to the paragraph only by the satisfaction of the cities where it has already been “Company Initiatives for the External Community”, sub- used, but also by the various acknowledgements received from paragraph “Training” for further details on the project COMPANY INITIATIVES FOR THE EXTERNAL COMMUNITY safety takes the form of numerous training and awareness- raising activities, but above all it translates into research and the ongoing application of innovative technological solutions for sustainable transport. various international organizations, including the European “Alternanza Scuola Lavoro” launched in Italy). As specified in the Group “Ethical Code”, Pirelli provides In 2017, Pirelli continued its commitment to the promotion of Commission, which decided to adopt the tool to support in support to educational, cultural, and social initiatives for road safety through adherence to the “Action for Road Safety this sense, 50 European cities. Pirelli has chosen CSR Europe for the organization of the promoting personal development and improving living Campaign” of FIA, developed in support of the decade of actions EU-OSHA – European Occupational Safety and Health Agency For the ninth consecutive year, Pirelli continued to be an official partner of the European Occupational Safety and Pirelli Global Stakeholder Dialogue 2016, of the Stakeholder standards. The Company does not provide contributions, for road safety organised by the United Nations in late 2011. consultations carried out in the same year in Romania, Mexico, advantages, or other benefits to political parties or trade The FIA campaign promotes initiatives and training and Germany and Turkey, and in 2017, in Russia and Argentina. union organisations, or to their representatives or candidates, information campaigns aimed at encouraging more responsible In 2017, CSR Europe also moderated the multi-stakeholder this without prejudice to its compliance with any relevant automotive behaviour and having safer roads and cars. consultation held by Pirelli and concerning the draft of the legislation. Since the founding in 1872, Pirelli has been aware As the Global Partner of this campaign, Pirelli has signed the Health Agency (EU-OSHA) in 2017. Every two years, the Agency Company Policy on the sustainable management of natural that an important role in the promotion of civil progress in “Ten Golden Rules” for road safety, committed to disseminating tackles a different issue. The 2016-2017 campaign “Healthy rubber (later published in October 2017). all the communities where it operates and, capitalising on it to its distribution network and has launched training Workplaces for All Ages” recognizes the need to prepare a sustainable working environment, which guarantees the health and safety of employees throughout their entire working life. In endorsing the Campaign, Pirelli launched a International commitments against climate change For years, Pirelli has been committed to the fight against the Company’s natural strengths, it has identified three focus programs and projects to raise awareness on safe driving areas: road safety, technical training and solidarity through during the course of 2017 in several countries where it operates. sporting activities for young people. Pirelli for some years has adopted an internal procedure to regulate the distribution of Regarding road safety, Pirelli is also a signatory of the European series of targeted initiatives, confirming its commitment to climate change, promoting the adoption of energy policies for gifts and contributions to the External Community by Group Road Safety Charter, through which it undertakes to: promoting a healthy work environment, where employees the reduction of CO2 emissions. companies, in relation to the roles and responsibilities of  > contribute to consumer knowledge about the feel valued and where dialogue and the sharing of know-how the functions involved, the operational process of planning, fundamentals of road safety, through experience and safe between different generations is encouraging. To this end, Pirelli has participated in numerous events and realising and monitoring the initiatives and the disclosures driving courses; projects such as the Climate Conferences “COP23” in Bonn regarding the same. Essential support in the identifying of the  > increase the awareness of young drivers on the causes of (2017) and “COP22” in Marrakesh (2016), the “Business for actions that best satisfy local requirements comes from the road accidents through specific initiatives; ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chain  > provide information material on winter road safety at the Breuberg factory area, supporting the “Scuola di Bicicletta” points of sale, with the support of the Pirelli website and (Bicycle School) project that teaches students how to react sites dedicated to information on winter ordinances; to traffic.  > organise training seminars, in collaboration with Training The promotion of technical education and training at all levels are very old values that are well-established in the history of Pirelli. The Group continues to benefit from use both virtual reality and physical warehouse simulators, service areas and offices. technical and research cooperation with various universities In Italy, in 2017, the Alternanza Scuola Lavoro project was associations, on issues of road safety related to the tyre There have been many activities offered in Russia; like every around the world, beginning with the Milan and Turin inaugurated, governed by the 2015 “Buona Scuola” law. The and its related uses; year, in August, the city of Kirov collaborated with Pirelli in Polytechnic Universities, the Milan Bicocca University and project, designed on a three-year basis, involves two classes  > train international dealers on the importance of the tyre the campaign “Kirov is for politeness on the road”. The slogan also the Qingdao University in China, the University of Craiova of chemical and technological institutes in the area and aims in road safety and the performance differences between of the event is “kindness deserves to be encouraged”; during in Romania and the Universities of Baden-Wuerttemberg, to accompany the children belonging to the classes involved winter, summer and all-season tyres; the activity has been the event the local police, together with some volunteers, Darmstadt and Aschaffenburg in Germany, among others. throughout the three-year period, in order to guide them to ongoing for over three years and has involved most of the observes drivers to evaluate respect of intersections and discover what a company is, to support them in understanding countries in which Pirelli has a direct presence; in 2017, distributes information leaflets. The best drivers were In Spain and China, Pirelli sponsored various scholarships. the main dynamics of company management and to help them there were more than 800 classroom training sessions awarded during the ceremony with Pirelli tyres. The theme of In China, Pirelli sponsored 36 scholarships for outstanding in the delicate phase of professional choice and orientation. for dealers from around the world with more than 18,000 the day was FIA’s “golden rules” on road safety. Also in Kirov, at students at the University of Qingdao for Science and Adhering to the Pirelli project therefore facilitates schools participants; the beginning of the school year, Pirelli distributed to students Technology, while in Spain the beneficiaries are students in the regulatory compliance of the provisions of the decree,  > actively participate in national programs on road safety, in reflective material to be attached to clothes and bags to be at the UAB (Universitat Autonoma de Barcelona) and FUB supports the territory in the promotion of school excellence agreement with associations, institutions, universities, seen by motorists at night. (Fundació Universitaria del Bages). and internally promotes the management of generational manufacturers of cars and motorcycles or collaborating diversity thanks to the involvement, within the project, of with law enforcement agencies for the preparation of a In the United States, Pirelli has collaborated with “Mothers In Germany, the company supported the universities and senior Pirelli employees in the role of mentors and guides of useful module for detection of the state of use of the tyre. Against Drunk Driving” in a marketing campaign, to raise schools of Hochschulen, Berufsschulen, DHBW Mannheim and the young students hosted. awareness and raise funds for the organization, which fights EGS Höchst Odenwald. Also at Group level, since 2013, Pirelli has participated in the drunk driving. In China, Pirelli collaborated with the NGO Training does not only concern the production process 1 8 4 WBCSD SiMPlify project that proposes solutions for the Shangri-la Institute for Sustainable Communities (“SISC”). SISC In Brazil, Pirelli supports Educandario Imaculado Coracao de at the factory; for Pirelli, the entire life cycle of the tyre is redefinition of urban mobility with a focus on the issues of is a non-governmental organization that promotes education Maria in Amélia Rodrigues, an elementary school run by Italian important. In fact, the Group focuses heavily on disseminating sustainable mobility and road safety. For further details on for sustainable development, by supporting projects with nuns and attended by 800 children. sustainable agriculture practices for raw materials such as Pirelli’s involvement in this project, reference is made to the schools and local communities. Pirelli also participated in a natural rubber. In Indonesia, in collaboration with the supplier paragraph “WBCSD” of this report. road safety education day at a school in Qiongqing, involving In the United Kingdom, Pirelli sponsors children’s projects, as Kirana Megatara, Pirelli continued the “Rubber Productivity 5 8 1 about 755 people. well as an important fair for employment. Enhancement Project” with three main objectives: In Italy, also in 2017, Assogomma activities continued: the  > educating natural rubber farmers by teaching the correct product trainers were directly involved in the provision of In Turkey, a Pirelli team had 5 days of “pit stops” in Istanbul, In Turkey Pirelli sponsors the “Innovative Thinking for High procedures for rubber extraction enabling the protection courses to the Traffic Police in the context of the “Estate in measuring the tread of 34,180 tyres for the safety of drivers. In Schools” project with various activities, training courses and of natural resources (maximizing productivity and Sicurezza” (Summer in Safety) activity. As in previous years, a Brazil, in 2017, Pirelli launched the support of a go-kart school workshops. section of the website was dedicated to driving tips, in summer for children aged between 6 and 16, with the aim of raise maintaining and extending the life of trees). Training is on three fronts: theory, extraction, and quality; and winter, highlighting the important role played by the tyre awareness among future drivers for respect of road rules and In Romania, Pirelli’s partnership with the University of Craiova  > distributing high quality natural rubber tree seeds to in the active safety of vehicles and its occupants. Training the regulation of track racing, encouraging them to do sports. concerns the Master’s programs in information technology farmers so that they can plant better trees with higher activities aimed at raising awareness on the issue of road There have been multiple initiatives in favour of road and engineering in the automotive field. Furthermore, in productivity; safety have also been carried out in relation to interlocutors safety education on two wheels. In 2017, Pirelli Motorcycle collaboration with local authorities, Pirelli participates in the  > giving scholarships to the children of natural rubber growers, other than the sales network and institutional interlocutors, has increased its collaboration with driving schools for START program, aimed at training the unemployed, which in to allow them to go to school and buy school books. such as students: Pirelli has managed a three-year training the development of practical and safe road and off-road 2017 certified the students as operators in the curing area. In course for students of the Don Orione di Fano and Orselli di experience. Among the various initiatives are Metzeler Off- Russia, Pirelli promoted a competition among students who SDGs - Reference Targets: Forlì professional institutes, in front of an audience of future road Park, Old School Racing by Alex Gramigni, GS Academy challenged themselves with projects in the field of chemistry. > 4.4, dedicated to increased technical training to youth operators in the automotive sector. in collaboration with BMW, Ducati Racing Experience in and adults, aimed at increasing manual skills and collaboration with Ducati and True Adventure Academy in Technical training has a fundamental role in the creation of entrepreneurship; There have been numerous road safety initiatives activated by collaboration with Honda. a skilled labour pool needed to maximise plant productivity. > 9.5, referring to support for scientific research and increased the other countries in which the Group operates: in the USA In Mexico, the Piero Pirelli Institute for technical training, technological capabilities of the industrial sectors. and Canada, the “Tire Safety Week” was organized, an initiative SDGs - Reference Targets: inaugurated in 2015, is equipped with the most advanced on safe driving that also involved other tyre manufacturers; in > 3.6, dedicated to reducing the number of deaths and learning tools (virtual simulator, automatic controls, Mexico, a series of messages on road safety to be aired in 2018 injuries due to road accidents; pneudraulic systems, electrical, electro-mechanical, mechanical in the State of Guanajuato is being developed and produced > 11.2, in support of safer, more accessible and sustainable and measurement systems). Within the institute, there are Sport and social responsibility There is a close link between solidarity and sport, in a virtuous circle where in collaboration with a local television channel. In Germany, transport systems, with particular attention to the needs numerous classrooms, a showroom on the process, materials commitment to sports becomes synonymous with the Pirelli supported the secondary school in Michelstadt, in the of the most vulnerable groups. and 3D models of the product, production workstations that commitment to promoting solidarity and ethics, especially ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chain1 8 6 amongst young people. Getting young people involved in sport a Pirelli team ran for the “Naked Hearts” foundation to raise In China, Pirelli supported orphans and poor people in Yanzhou. In many countries, Pirelli promotes a healthy and active is a way to teach the notion of integration to children from funds for disabled children. In the Netherlands, Pirelli sponsored “Amici di Sophia” (Friends lifestyle with various projects, both among its employees different social groups, and helps prevent negative situations of Sophia), projects for children at the Rotterdam hospital. and in the local community. In the United States, a “Wellness like isolation and solitude. Pirelli signed a global agreement SDGs - Reference Targets: In Belgium, the company made a donation to the “Pecheur Challenge” was organised. not only for the sponsorship of the professional football club > 3, dedicated to guaranteeing a healthy lifestyle and de Lune” foundation that organizes events for sick children. FC Internazionale Milano (“Inter”), but also as a partner of the promoting well-being for everyone, at all ages. In Greece, Pirelli accompanied a group of orphans to visit an In addition, in several countries, Pirelli makes donations to global social project Inter Campus. Since 1997, Inter Campus has developed social, flexible cooperation and long-term actions, in 29 countries around the Solidarity The responsible approach taken by Pirelli to involvement and inclusion takes the form of social solidarity automobile museum. In Switzerland, Pirelli donated tyres for scientific research, or collaborates with the volunteer projects transporting the disabled. In Mexico, Pirelli is contributing of employees for research fundraising. In the USA, a donation to the creation of a community center, “Centro Impulso” was made for breast cancer research; in the Netherlands, for (Impulse Center) that offers sports and cultural activities, as pancreatic cancer research; in Belgium, for a foundation that world with the support of 200 local operators, using football as activities worldwide. The Company supports educational and well as technical training. deals with pediatric oncology. In the UK, several donations an educational tool to offer needy boys and girls aged between didactic programs that are able to give less fortunate children were made for cancer research, to hospitals and hospices in 6 and 13 the right to play. Since 2008, Inter and Pirelli, along the tools to improve their condition; it contributes scholarships In the UK, Pirelli raised funds for the national autism society, the community and for individual cases of need. In one case in with a local partner, have been running the Inter Campus and research projects, firmly believing in training as vital to a trip of volunteers to Zambia for philanthropic activities, a particular, Pirelli collected money and made a donation to help social project in Slatina, Romania. The sports and recreational individual growth and the economic growth of a country. In visit of needy children to the circus, a project against online a sixteen-year-old boy victim of a car accident in Carlisle, to activities are organised for the entire year, involving over 100 Brazil, where Pirelli has been historically active in the local bullying, a football sponsorship for “Me & Dee”, which offers face medical expenses and buy a prosthetic leg. children from different social contexts who have been learning community with social projects, the Company provided for holidays to needy people, meals for the homeless, and toys for team spirit, social integration and the values of friendship children in the city of Feira de Santana, near the Pirelli factory, needy children at Christmas. In Spain, Pirelli participated in the Day of Solidarity Somos Uno, through football for years. Since 2012, Pirelli and Inter have in an after-school program with 15 different types of activities. raising funds for biomedical research for serious childhood replicated the experience of Inter Campus in Mexico: Inter A similar project is near the Gravataí factory, which is aimed Pirelli USA and Pirelli Mexico, in addition to Pirelli at Group illnesses and the prevention of Alzheimer’s. In Turkey, Pirelli Campus Silao, near the Pirelli factory, inaugurated by President at social inclusion and includes music and dance activities in level, have donated funds to the Red Cross to help the victims made an awareness campaign on the problem of breast cancer. Felipe Calderon, involves about 400 children in the area. In addition to more traditional educational activities. Also in of hurricanes in the USA and the earthquake in Mexico. the United States, the first Inter Campus was inaugurated in Brazil, Pirelli supports the kindergartens of Dr. Klaide in Santo SDGs - Reference Targets: 2014 by Pirelli and Inter in the community of Inwood, area of André and Escadinha do Tempo in Meleiros, which guarantee In Italy, the “Insieme per il Centro Italia” (Together for > 3, dedicated to guaranteeing a healthy lifestyle and New York City. Also in 2014, Pirelli and Inter launched an Inter not only educational activities but also medical, dental and Central Italy) fundraising campaign saw the Company promoting well-being for everyone, at all ages. Campus project together in Voronezh, Russia, involving two psychological visits, in addition to food, for 285 children. double the donations made by employees and intended for local orphanages with about 100 children. the construction of a “city of production activities” in the Pirelli supports the Fundació Mambre in Spain, a foundation Municipality of Arquata del Tronto, hit by the earthquake in In Brazil, Pirelli sponsors basketball, volleyball, football, judo, that operates as a facilitator in social inclusion processes, summer 2016. cycling and tennis activities. In the United States, Pirelli supporting homeless people on their individual growth paths. initiatives Many Pirelli employees Environmental around the world enthusiastically participate every year in environmental projects. Employees in France and Australia sponsored the local team Rome Braves in Georgia, as well as In addition, the Company supports programs providing food SDGs - Reference Targets: wanted to promote recycling initiatives. various sporting events related to philanthropy, including for needy families, and a warehouse for the storage of food for > 1, on the eradication of poverty in all its forms; the donation to R.A.C.E. (Racing Awareness Charity Events the poor. Pirelli collaborates with the AMPANS Association, > 2, related to the elimination of hunger in the world; In Romania and Russia, groups of employees have volunteered of Rome) and a donation to the YMCA. Even in the United dedicated to the cognitively disabled. Pirelli also contributed > 11, dedicated to the development of cities and social for local environmental clean-up projects. In Romania, more Kingdom, Pirelli sponsored various sporting events related to to a solidarity project aimed at facilitating the search for jobs environments that are inclusive, safe and sustainable. than 200 volunteers went to the Strehareti forest to collect philanthropic fundraising and contributed funds for a female for intellectually disabled people, and collecting toys for needy youth football team. children at Christmas. In Kirov, Russia, Pirelli sponsored the ice hockey “Pirelli Cup”, In Russia, Pirelli contributed to the “Chance” project, which Health Pirelli considers contributing to improving the health services of the communities where it operates to be important. waste. In Russia, 60 employees of the Voronezh plant collected waste in the biosphere nature reserve, interacting with the local beaver community. In Kirov, Pirelli participated in the “Giochi Puliti” (Clean Games) competition on waste collection. involving several youth teams (120 participants). provides private lessons to orphans, while in Kirov, Pirelli Since 2008, Pirelli Tyres Romania, in collaboration with the In Germany, Pirelli supported a football initiative for the of children and, with the support of the Arifmetika Dobra training of medical and nursing professionals and the donation State of Guanajuato on 40 hectares of land, while in Romania, disabled. foundation, organised a visit to a playground. Also in Kirov, of medical equipment and devices to Slatina Hospital. Over 270 in Slatina, about 100 employees planted around 80 trees. employees dedicated part of their time to entertainment Niguarda Hospital in Milan, has supported the professional In Mexico, Pirelli sponsored a reforestation project with the employees support two orphanages with visits and donations. professionals were trained in this program, and specifically in In Romania, Pirelli sponsored the “Io Tifo Positivo!” Project for oncology, paediatric care and emergency care. Pirelli Tyres A major project to preserve the forest areas was Kirana children aged between 7 and 14, to encourage fairness in sport, In Turkey, Pirelli hosted special students from the Kosekoy Romania has also provided dental treatment to around 300 Megatara in Indonesia, already described in this chapter in and organized a sports weekend for more than 100 local families. Youth Education and Rehabilitation Center for the children in Slatina through the project Overland for Smile. the section on training, aimed at maximizing productivity and In Turkey, a team of employees ran in the Istanbul marathon in employees cooked for the needy, and made a donation to the in Curitiba, the biggest paediatric hospital in Brazil. trees. On the subject, in October 2017, Pirelli published the the name of equal opportunities in education, while in Russia Le Garde-Manger philanthropic entity. Policy on the sustainability of natural rubber. international disabled day in December. In Canada, a group of Since 2010, Pirelli has supported the Pequeno Principe Hospital maintaining and extending the useful life of natural rubber 7 8 1 ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainSDGs - Reference Targets: In Italy, the commitment to activities that generate value for Accardo. The opera was presented in world premiere on visits to about 400 students from the main Italian > 12.5, aimed at reducing the generation of waste through the territory is evidenced by the numerous and consolidated 8/9/2017 (during the MITO SettembreMusica Festival) in and foreign universities (Università Cattolica, IULM, reduction, recycling and reuse; collaborations with prestigious national and international the Packaging Department of the Settimo Torinese plant, Università Bocconi and Università degli Studi di Milano > 15.2, related to the promotion of sustainable forest entities and institutions: in particular, in the art world, with in front of about 1,000 people (320 Pirelli employees and Bicocca, SAFM in Turin, Singapore University, University management, to reduce deforestation and increase the Fai (Italian Environment Fund), in the world of theatre with family members), after a general rehearsal at the Pirelli of Dublin, etc.); reforestation. the Piccolo Teatro di Milano and the Franco Parenti Theater, Headquarters of Bicocca (with more than 300 employees)  > Historical archive (processing): in 2017, the cataloguing Culture and social value The internationality of Pirelli also emerges from the love for culture, with initiatives in many in the music world, with the MITO SettembreMusica Festival, and a preview at the Piccolo Teatro Studio Melato in and digitization of materials continued, with the the Villa Arconati Festival, the Giuseppe Verdi Symphony Milan (350 people). The event at the factory was also processing of approximately 1,800 photographs and 500 Orchestra of Milan and the Teatro alla Scala Foundation. followed in direct streaming by over 300 people from the issues of company magazines (Fatti e Notizie, Noticias Biblioteca Comunale Archimede of Settimo Torinese and Pirelli and Paginas Pirelli). The digital inventory was also countries worldwide also in 2017. The attention to culture, SDGs - Reference Targets: made available also through the company Intranet; implemented on the Foundation’s website with the and even more the commitment to preserve it, spread it and > 4, aimed at promoting quality education and all forms of  > Exhibition “Pirelli in Cento immagini. La bellezza, publication of 3 new photographic sections (“Car racing” enhance it, are part of the DNA of the creation of social value. equitable and inclusive learning. l’innovazione, la produzione” (Pirelli in 100 images. and “Bicycle”) and “Vado and Torno magazine”, of which Pirelli is among the sponsors of the Museum of Modern Art of São Paulo, one of the most important structures in Latin America which, in addition to the permanent collection, every year offers major exhibitions, seminars, events and courses. Pirelli provided support to the event ArtRio, a collection of FONDAZIONE PIRELLI (PIRELLI FOUNDATION) Beauty, innovation, production) (January 18 - May 1, 2017, about 70 issues were previously worked on; Biblioteca Archimede, Settimo Torinese): the exhibition,  > Project for the census and analysis of the Pirelli Group a focus on the more than 140 years of the company’s archives: launched in 2016, the project for the analysis life, was curated by the Pirelli Foundation and promoted of the Group’s archiving practice involved 40 offices, by the Municipality of Settimo Torinese and the ECM for a total of 60 persons interviewed; moreover, in 100 national and international galleries. In Brumadinho, Pirelli One of the missions of the Fondazione Pirelli, or Pirelli Foundation with the patronage of the Piedmont Region collaboration with the Facility Department, the analysis supports the Instituto Inhotim, with a famous collection of Foundation, established in 2008, is the preservation of the and the Metropolitan City of Turin. The exhibition is also of the documentation sent to the deposit archive before contemporary art and a collection of plants from around the Group’s historic and cultural heritage and the promotion of linked to the publication of a catalogue that describes 2008, in order to rationalize the company warehouses world. In the field of music, Pirelli sponsors the Mozarteum its corporate culture through initiatives having a strong social the sections of the exhibition path, and which also and implement the Historical Archive; 1 8 8 project, which presents great international orchestras of and cultural impact, exhibitions, as well as collaborations with includes some of the most beautiful images of the Pirelli  > Research and historical materials for exhibitions and classical music. Also in Brazil, Pirelli supported the exhibition other institutions. Calendar; publications: - loans to institutions, also international 9 8 1 of the collection of the banker Roger Wright at the Pinacoteca  > Documentary “Leopoldo Pirelli, Impegno industriale e (e.g.: La Triennale, Milan; Design Museum, London); de São Paulo, a selection of more than 170 Brazilian works of Many projects, even in 2017, are aimed at sharing the cultura civile” (Leopoldo Pirelli, Industrial commitment - documentary research for scholars and exhibition the 60s and modern installations. Pirelli also supports the Company’s history and promoting its cultural and artistic and civil culture) (3D Production for MemoMi): on projects (e.g. exhibition on design “Pirelli by Dixon”, photo exhibition Exposição Antilogias, also at the Pinacoteca heritage. Among these, the following are noted: the occasion of the 10th anniversary of the death of Milan Furniture Fair, April 2017) (about 100 requests). de São Paulo.  > Volume “La pubblicità con la P maiuscola. La comunicazione the entrepreneur, with testimonies, interviews and visiva Pirelli, tra design d’autore e campagne globali anni documents largely from the Historical Archive of the In 2017, around 3,300 people visited the Pirelli Foundation (and Pirelli in Brazil continued, after the restoration of the Cristo Settanta-Duemila” (Corraini Edizioni, June 2017, hardback Pirelli Foundation, the film was previewed on 25/01/2017 the Pirelli Headquarters) through: Redentor in Rio de Janeiro, to maintain the famous statue, and and e-book, in Italian and English). Over 1,800 paper at Pirelli HANGARBICOCCA™ and subsequently aired on  > Participation in initiatives to promote Corporate Culture: - contributed to the restoration of the Cidade de Milão square copies of the book were distributed, of which about 1,700 Sky Arte HD; Museocity (Municipality of Milan, 4/3/2017): extraordinary in São Paulo. to foreign business markets (e.g. China, USA, Germany,  > Digital content (fondazionepirelli.org and social media): opening of the Pirelli Headquarters with exposure of the Poland, Australia, MEAI). For the use of audiovisual production of about 500 contents on the site and photographic work L’uscita delle maestranze Pirelli dallo In Romania, Pirelli sponsors theatre days for the community, materials and exclusive content related to the book, activation of the new weekly section “Storia e storie dal stabilimento di via Ponte Seveso (The exit of Pirelli workers in collaboration with the Cultural Center of Slatina “Eugen a web-app and the section of the Foundation website mondo Pirelli” (History and stories from the Pirelli world). from the plant in via Ponte Seveso of 1905 conserved in Ionescu”. In Russia, Pirelli organized a competition between advbook.fondazionepirelli.org dedicated to the volume The site has been visited approximately 43,500 times the Foundation (about 250 participants); - Photoweek art students with a trip to Italy as a prize, and was a partner were developed. On 4/7/2017, the book was presented, (+48% vs 2015), mainly in the English language section. (Municipality of Milan, June 5-11, 2017): participation of the Platonov international art festival, in Voronezh. Also in also through multimedia installations and exhibition The Facebook and Instagram Foundation accounts have with guided tours and creative workshops for children Voronezh, Pirelli sponsored a fundraising dance to promote paths, at the Franco Parenti Theatre in Milan, with an over 7,500 followers (+70% vs 2015); (about 70 people); - XVI Week of Business Culture “I young musical and artistic talents. Also in 2017, an exhibition event that saw the participation of over 500 people  > Educational and training activities: - Pirelli Educational linguaggi della crescita: impresa, cultura e territorio” (The of the Pirelli Calendar was presented at the Multimedia Art and Marco Tronchetti Provera, Antonio Calabrò, Carlo Foundation: more than 2,200 primary and secondary languages of growth: business, culture and territory) Museum in Moscow. In the United States, Pirelli sponsors the Bonomi, Paola Dubini, Vicky Gitto and Aldo Grasso as school students involved in the themes of corporate (Confindustria/Museimpresa, November 10-24, 2017): Council for the Arts in Rome, Georgia. speakers; culture and 400 teachers involved in training. The Pirelli guided tours, installations and projections inside the In Turkey, Pirelli has collaborated with the club “The Art composition inspired by the rhythms of the Pirelli digital (May 2017) and at the 5th Festival of Innovation and Science 260 participants); of Reading” to spread reading also in schools. In addition, factory in Settimo Torinese commissioned by the Pirelli in Settimo Torinese (October 2017) proposing training  > Guided tours and events at the Foundation to support the some children of employees of the Izmit factory presented a Foundation to the violist Francesco Fiore for the Italian activities that saw the overall participation of about 400 Business Units for the valorization of the Pirelli Brand: theatrical show called “Fabrika”. Chamber Orchestra conducted by Maestro Salvatore children and youths; - Universities: lessons and guided about 2,200 guests.  > Concert “Il Canto della fabbrica” (The Song of the Factory): Foundation took part in the Robotics Festival in Milan former cooling tower of the Pirelli Headquarters (about ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainInitiatives in favour of the Internal Community include: The vocation of Pirelli HANGARBICOCCA™ is that of a With the aim of valorization of the Seven Heavenly Palaces During the year, Pirelli HANGARBICOCCA™ also hosted 11  > Pirelli company libraries of Milan Bicocca and Bollate: over place open to the city and its hinterland, of institution that of Anselm Kiefer, the collaboration with the Milano Musica major private events including the Annual conference of 6,000 titles available to employees, selectable for loan accompanies the normal exhibition activity with a range of Festival continued with two concert weekends; in June, an Italian Ambassadors abroad, Ferrari’s 70-year gala dinner, and consultation on the online OPAC Catalogue. In total, programs intended to attract even the non-specialised public event open to the public was held with poetry readings in Barilla World Nutrition Forum, Ermenegildo Zegna’s FW 2018 in 2017, there were about 2,200 loans, 2,919 movements to contemporary art. collaboration with the Paolo Grassi theatre and the Sorbonne fashion show, Hitachi’s Social Innovation Forum 2018 as well and 400 users. On 20/11/2017, the first anniversary 2 university in Paris. of the libraries in the Pirelli Headquarters of Bicocca In 2017, the Public Program accompanied the exhibitions with as Goran Bregovich’s concert for Vidas organized for the fundraising for the new pediatric project and supported by was celebrated with an exhibition entitled “Visioni a full calendar of events, guided tours to the exhibitions and In April 2016, the new Bookshop was inaugurated, with Pirelli HANGARBICOCCA™, granting free use of space. milanesi” and an event in the presence of the writer the district, projections and meetings with the key players in a selection of books and catalogues related to current Alessandro Robecchi and chef Filippo La Mantia (over 300 art and culture. exhibitions, children’s books, art-related non-fiction, The activities of Pirelli HANGARBICOCCA™ generate, among participants); reference books and merchandising products, including other things, significant induced employment: in 2017, the  > “Bambini in Bicocca”: in collaboration with the Human During the year, there were about 12 cultural events (day t-shirts, shopping bags, small stationery and umbrellas with creation of exhibitions and major initiatives involved 49 Resources Department of Pirelli, the Foundation has devised and/or evening) that involved nearly 3,000 participants in the institutional logo, as well as postcards and posters with companies and generated over 5,000 days/worker. didactic paths for employees’ children during school break activities related to ongoing exhibitions, including a 2-day exhibition images. days (over 200 children between the ages of 6 and 10). summer festival in July, which was attended by about 1,300 people. PIRELLI HANGARBICOCCA™ In 2016, Pirelli HANGARBICOCCA™ launched the Membership program with the aim of creating a community that shares Pirelli HANGARBICOCCA™, which with its 15,000 square a passion for contemporary art. In less than two years, metres is one of the largest exhibition venues in Europe, is a Membership has reached the number of 676 active Members, space dedicated to the production, exhibition and promotion with a growth of 100% compared to the year 2016. Among the 1 9 0 of contemporary art, created in 2004 from the reconversion of new benefits for 2017, free guided tours and bike tours, special a vast industrial facility that belonged to Ansaldo-Breda. opening on Wednesdays by appointment, new affiliations: GAMeC in Bergamo, Peggy Guggenheim Collection in Venice The programming of solo exhibitions by the most important and Milan Design Film Festival. international artists is distinguished by a character of research and experimentation and special attention to site-specific In 2017, 14 dedicated activities including 4 preview visits to projects which are capable of maintaining a dialogue with exhibitions, 5 curatorial visits, 2 Family Labs reserved for the unique features of the space. The 2017 artistic program, Family Members, 1 bike tour and 2 visits to exhibitions hosted curated by Artistic Director Vicente Todolí and curator by other institutions. 15 dedicate Newsletters. Among the Roberta Tenconi, presented artists of great international benefits, there is always the possibility to reserve a spot for profile, alternating exhibitions of very successful names with the activities of the Public Program and take advantage of exhibitions of emerging artists. The program managed to special discounts on the purchase of exhibition catalogues and attract an Italian and international audience composed of art the institutional line at the bookshop and at the IUTA Bistrot. experts, representatives of the most important museums, trade journalists and the general press, as well as an equally HB Kids and HB Family activities for children aged between large number of enthusiasts, families and students. During the 4 and 14, saw the participation of 2,500 children and young year, there was a total of about 222,000 visitors who visited the people, in line with the figures of the previous years. The 6 major exhibition projects dedicated to international artists, number of participants who took part in the HB School including “Take Me (I’m Yours)” the collective exhibition that activities has instead reached over 8,000 while visits by Italian reinvents the rules by which to experience a work of art and and foreign university students and professors have involved the permanent installation of the Seven Heavenly Palaces of about 2,900 people. Anselm Kiefer.  > Kishio Suga, “Situations”; The education department also continued its guided tours  > Laure Prouvost, “GDM - Grand Dad’s Visitor Center”; proposing activities in Italian and foreign language in addition  > Miroslaw Balka, “CROSSOVER/S”; to the format “Art on Sunday” involving cultural mediators in  > Rosa Barba, “From Source to Poem to Rhythm to Reader”; Sunday lessons on the history of art related to the exhibitions  > Lucio Fontana, “Ambienti/Environments”; and Bike Tours to discover the neighbourhood for school  > “Take Me (I’m Yours)”. students of all levels. 1 9 1 ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on responsible management of the value chainReport on responsible management of the value chainLUIGI SALUSTRI ALTEREGO This startup launched by an eco-sustainable technology enthusiast and an architect, designs and makes eco-compatible surfboards to measure using the most advanced design technology and searching for natural and innovative materials. RIDING THE WAVE OF DIGITAL MANUFACTURING components in cork. When the glue has done its work and after two days left to set in E xpanded polystyrene is initially cut by hand, and is then glued to two lateral software to a physical draft of the almost finished product. A scrubbing and resin the workshop, a technician places the as yet unsculpted form into the shaping machine. The vision begins to take shape, evolving from a mathematical representation in 3D coating stage is the final operation, entrusted once more to human hands. This is how AlterEgo surfboards enter the world: «Working as an architect I’ve always been a bit more interested in designs with a strong physical element. I love the physicality of materials, the way they change and interact to give shape to the concept in my imagination», says Luigi Salustri, co-founder of AlterEgo Surfboards. A youthful-looking 58 year-old, with a slightly unkempt dark beard and the healthy tan of a surfer, Salustri was born and raised in Rome where he has worked in architecture, scenography and set design. In early 2017 he moved to Alghero to open the AlterEgo workshop. «From the moment I decided to found the company my idea was to build surfboards ecologically, using recycled and recyclable materials and working in the most environmentally-friendly way possible». The story of AlterEgo is typical of a garage hobby that became a business opportunity. Salustri started crafting surfboards in his youth, as a passion, but never imagined making much out of it. He was just a surfer who wanted to try his hand at creating the tools of his long-time hobby. Then his friends started asking questions about those beautiful surfboards: could they buy one? The seed had been sown. The decisive impulse came from Smart&Start Italia, a government initiative offering grants and zero- interest loans to new companies that combine a digital element, an innovative idea and a concern for environmental sustainability. For AlterEgo respect for the environment is of central importance, driving both its choice of materials and its manufacturing processes. The use of cork as a structural element, for example, is not common practice in the industry. Salustri chose it both for the natural visual touch that it gives the boards and for its typically eco-friendly characteristics compared to more traditional choices such as carbon fibre or aramid (commonly known as Kevlar). But then there’s the polystyrene, a key component with a markedly non-ecological production process. To get around this problem AlterEgo sources its polystyrene exclusively from a recycling plant located 40 km from the workshop. The waste materials produced by the shaping machine (a made-to-measure CNC lathe designed and built by an Italian engineer using steel from Terni, German-made electronic boards and high-precision Japanese microchips) are also fed back into the recycling loop. The bio-resin used to finish the surfboards, produced exclusively from vegetable oils, is also one of the most environmentally friendly solutions currently available. 2 0 2 GLOSSARY IPO: the procedure for the listing of Pirelli shares completed Report: this report on corporate governance and the successfully in October 2017 with the start of trading on the MTA. ownership structure prepared pursuant to art. 123-bis TUF. INTRODUCTION Annual General Meeting: the shareholders’ meeting called to LTI: Long-Term Investments Luxembourg S.A., Luxembourg Compensation Report: the report prepared pursuant to art. This Report describes the system of corporate governance of approve the financial statements as of 31 December 2017. company with registered offices at 124 Boulevard de la 123-ter TUF. Pétrusse, L-2330, Luxembourg (Grand Duchy of Luxembourg), the Company in force as of the First Trading Day. This system is consistent with the principles contained in the Corporate Camfin: Camfin S.p.A., Italian company with registered offices Luxembourg Companies and Commerce Register number Website: the institutional website of Pirelli containing inter Governance Code adopted by the Company 26. at via Bicocca degli Arcimboldi 3, Milan, Tax Code, VAT and B-187332. Milan Companies Register number 00795290154. alia information about the Company, which can be found at the Internet domain www.pirelli.com. ChemChina: China National Chemical Corporation, Chinese Borsa Italiana S.p.A.. Company: Pirelli & C. MTA: Screen-traded Stock Market organised and managed by company with registered offices at 62 West Beisihuan Road, Haidian, Beijing (People’s Republic of China), registered Marco Polo: Marco Polo International Italy S.p.A., Italian SPV HK1: CNRC International Limited, limited company formed with the State Administration of Industry and Commerce company with registered offices at via San Primo 4, Milan, Tax under the laws of Hong Kong (People’s Republic of China), 1. COMPANY PROFILE of the People’s Republic of China, registration number Code, VAT and Milan Companies Register number 09052130961. with registered offices at RMS 05-15, 13A/F South Tower World Pirelli, with its 30,000 employees and annual sales of about 100000000038808. Finance CTR Harbour City, 17 Canton Rd TST KLN, Hong Kong Euro 5.3 billion in 2017, ranks among the principal global MTP&C: Marco Tronchetti Provera & C. S.p.A., Italian company (People’s Republic of China), Hong Kong Companies Register manufacturers of tyres and supplier of ancillary services, CNRC: China National Tire & Rubber Corporation Ltd., Chinese with registered offices at via Bicocca degli Arcimboldi 3, number 2222516. company with registered offices at 62 West Beisihuan Road, Milan, Tax Code, VAT and Milan Companies Register number being the only operator in the sector exclusively specialised in the consumer market (tyres for cars, motorcycles and Haidian, Beijing (People’s Republic of China), registered 11963760159. SPV HK2: CNRC International Holding (HK) Limited, limited bicycles), with a globally-recognised brand. The Company with the State Administration of Industry and Commerce company formed under the laws of Hong Kong (People’s has a distinctive positioning with regard to High Value of the People’s Republic of China, registration number New Shareholders’ Agreement: the shareholders’ agreement Republic of China), with registered offices at RMS 05-15, 13A/F tyres, which are manufactured to achieve the highest 100000000008065. signed on 28 July 2017 by ChemChina, CNRC, SRF, SPV HK 1, SPV South Tower World Finance CTR Harbour City, 17 Canton Rd levels of performance, safety, quietness and road grip, with HK 2, SPV Lux, Camfin, LTI and MTP&C, with effect from the First TST KLN, Hong Kong (People’s Republic of China), Hong Kong significant input from technology and/or customisation (i.e. Corporate Governance Code: the Corporate Governance Code Trading Day. The essential content of the New Shareholders’ Companies Register number 2228664. specifically, New Premium, Specialties and Super Specialties tyres for listed companies, last updated in July 2015 by the Corporate Agreement, to which reference is made for further information, and Premium motorcycle tyres). In addition, the Company is Governance Committee and promoted by Borsa Italiana S.p.A., is available on the Website (www.pirelli.com). SPV Lux: Fourteen Sundew S.à r.l., Luxembourg limited currently leader in the Prestige tyres segment, with more ABI, Ania, Assogestioni, Assonime and Confindustria. company (société à responsabilité limitée) with registered offices than one-third of the global market in volume terms, and Pirelli: Pirelli & C. S.p.A., Italian company with registered at rue Robert Stümper 7A, L-2557, Luxembourg (Grand Duchy in the radial segment of the after-market for motorcycle Civil Code: the Italian Civil Code. offices at viale Piero e Alberto Pirelli 25, Milan, Tax Code, VAT of Luxembourg), Luxembourg Companies and Commerce tyres. Pirelli is also the leader in Europe, China and Brazil, in and Milan Companies Register number 00860340157. Register number B-195473. the after-markets for New Premium car tyres and Premium Board of Directors: the Board of Directors of Pirelli & C. S.p.A.. motorcycle tyres. Pirelli International: Pirelli International plc, English company SRF: Silk Road Fund Co., Ltd., Chinese company with registered Consob: the National Commission for Companies and the with registered offices in Derby Road, Burton on Trent (United offices at F210-F211, Winland International Finance Center The current positioning of Pirelli as a “Pure Consumer Tyre Stock Exchange. Kingdom), registered with the Companies House of England Tower B, 7 Financial Street, Xicheng, Beijing (People’s Republic Company” results from the public takeover bid made in 2015 by and Wales, number 04108548. of China), registered with the State Administration of Industry Marco Polo Industrial Holding S.p.A. (the vehicle incorporated Report Date: the meeting held on 26 February 2018 by the and Commerce of the People’s Republic of China, registration by ChemChina, Camfin and LTI, merged by absorption in Board of Directors that approved this Report. Pirelli Tyre: Pirelli Tyre S.p.A., Italian company with registered number 100000000045300(4-1). Pirelli during 2016) on the entire share capital of the Company First Trading Day: 4 October 2017, being the date on which the and Milan Companies Register number 07211330159. Articles: the Articles of Association of Pirelli & C., available on the separation of Industrial activities previously held from the shares of the Company were admitted to trading on the MTA the Website. market organised and managed by Borsa Italiana S.p.A.. Issuers’ Regulation: the Regulation approved by Consob Consumer activities. The transformation process culminated in October 2017 with the return of the Company to the stock offices at viale Piero e Alberto Pirelli 25, Milan, Tax Code, VAT and the consequent process of transformation, which led to Year: the financial year to which this Report relates. February 1998 (as amended subsequently). resolution 11971/1999 (as amended) on the subject of issuers. TUF: the Consolidated Finance Law, being Decree 58 dated 24 exchange. Group: Collectively Pirelli and its subsidiaries, as defined in art. Consob resolution 17221 dated 12 March 2010 (as amended) on 2359 of the Civil Code and art. 93 TUF. the subject of related-party transactions. Related Parties Regulation: the Regulation approved by 26 Adopted by resolution of the Board of Directors prior to the First Trading Day. 3 0 2 ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownership1.1 MODEL OF CORPORATE GOVERNANCE with both the international reference standards for reporting on sustainability and the Italian Decree 254/2016; the annual The model of corporate governance adopted by Pirelli report can be found on the Website. implements the traditional system of administration and control, with a Board of Directors (14 members) responsible The Company complies with the requirements of current for managing the business and a Board of Statutory Auditors regulations and the principles and criteria set out in the entrusted with monitoring the administration and compliance Corporate Governance Code for the composition of its with the law and the Articles. administrative and control bodies in terms of age, gender, 2. INFORMATION ON THE OWNERSHIP STRUCTURE In compliance with the Corporate Governance Code, the Board application, particularly with regard to self-assessment education and professional experience. Their actual 2.1 STRUCTURE OF SHARE CAPITAL In particular, the Board of Directors of Pirelli has determined that, from the First Trading Day, Pirelli is no longer subject to any management and coordination activities considered typical, neither by Marco Polo nor by other companies or entities (including CRNC and ChemChina), and therefore, by way of example: 1. Pirelli conducts relations with customers and suppliers in full autonomy without any external interference; 2. Pirelli prepares the strategic, industrial, financial and/or budget plans of the Company or the Group independently; has established five internal committees with the power activities, is monitored by the Board of Directors. On the Report Date, the issued share capital of Pirelli amounts 3. Pirelli is not subject to any group regulations; of making recommendations to, advising and carrying out to Euro 1,904,374,935.66 fully paid, and is represented by 4. no organisational-functional links exist between Pirelli on the analytical work for the Board. Pirelli is characterized by a multinational context in which 1,000,000,000 ordinary shares without nominal value. one hand and Marco Polo, CNRC and/or ChemChina on the other; The Shareholders’ Meeting is responsible for adopting resolutions management of this diversity generates competitive categories of share and no financial instruments have been out any deeds, adopted any resolutions or made any on the matters reserved to it by law or by the Articles. advantages, opportunities for the development and issued with the right to subscribe for new shares. communications that might cause reasonable belief that the people express a huge heritage of diversity. Conscious Each share grants the right to one vote. There are no other 5. Marco Polo, CNRC and/or ChemChina have not carried enrichment of the business, and shared corporate values. In decisions of Pirelli are in some way imposed or required by The legal audit of the accounts is entrusted to line with the Company’s mission, Pirelli business culture has At present, the Company does not have any form of stock Marco Polo, CNRC and/or ChemChina; PricewaterhouseCoopers S.p.A., the registered auditing firm been able to anticipate over the years several topics and issues incentive plan for employees. 6. Marco Polo, CNRC and/or ChemChina do not centralise appointed by the Shareholders’ Meeting, following a reasoned (such as environment and gender diversity) well in advance, treasury management activities or other financial support or recommendation presented by the Board of Statutory Auditors. thereby being able to satisfy the need to respond to new and Additionally, the Articles do not provide for the possibility of coordination functions; growing requests made by the stakeholders. increased voting rights or the issue of shares with multiple 7. Marco Polo, CNRC and/or ChemChina do not issue directives 2 0 4 In order to ensure the preservation and continuity of the Pirelli voting rights. business culture, the shareholders’ agreements (described in Even at Board level, the above values are deemed as success more detail later in the Report) expressly recognise the central factors necessary for achieving the Company’s strategic targets. role played by current top management, establishing inter alia that Marco Tronchetti Provera will hold the offices of Chief For this reason, although the Board has not yet adopted a Executive Officer and Executive Vice Chairman of Pirelli and formal diversity policy due to the short period between the 2.2 SIGNIFICANT SHAREHOLDINGS OF CAPITAL or instructions – and in any case would not coordinate initiatives – concerning the financial and borrowing decisions of Pirelli; 8. Marco Polo, CNRC and/or ChemChina do not issue directives regarding any special transactions carried out by Pirelli including, for example, the listing of financial instruments, acquisitions, disposals, concentrations, contributions, mergers, spin-offs etc.; 5 0 2 guide the activities of top management until the approval of the First Trading Day (4 October 2017) and the end of the Year (31 Based on the communications received by the Company until 9. Marco Polo, CNRC and/or ChemChina do not make any financial statements of the Company as of 31 December 2019. December 2017), the respect of said values has already been the Report Date pursuant to art. 120 TUF, the significant direct crucial decisions regarding the operating strategies of Pirelli guaranteed by the shareholders in the context of last renewal and indirect shareholdings of Pirelli capital are indicated in or formulate group strategic guidelines. of the Board of Directors, in terms of age, gender, nationality Table 1 attached to this Report. Conversely, Pirelli exercises management and coordination 1.2 SUSTAINABILITY AND DIVERSITY POLICIES and educational, professional and cultural experiences. This enables the Board to perform its duties in the most effective way, through the support of different points of view, with Pirelli has adopted a sustainable management model. the ability to analyse individual situations from multiple Responsible management by Pirelli addresses the entire perspective. value chain. 2.3 MANAGEMENT AND COORDINATION ACTIVITIES The Company is indirectly controlled, pursuant to art. 93 2.4 RESTRICTIONS ON THE TRANSFER OF SECURITIES activity on several subsidiaries, having made the communications required by art. 2497-bis of the Civil Code. As of 2005, the sustainable performance of Pirelli is described adoption of a formal policy on diversity that complies with the including Marco Polo. The Articles do not impose any restrictions on the in the annual report of the Company (to which reference is principles described above. transferability of the shares issued by the Company. made), certified by a third party and prepared in accordance At the meeting held on 31 August 2017, the Board of Directors Lastly, during 2018 the Board of Directors will consider the TUF, by ChemChina via CNRC and certain of its subsidiaries, acknowledged that the management and coordination However, the New Shareholders’ Agreement does place activities of Marco Polo would cease with effect from the restrictions on the transfer of shares in the Company until First Trading Day, while CNRC would retain the right to completion of the process of divestment and reorganisation consolidate Pirelli. This situation has further strengthened carried out by Marco Polo, which will include inter alia the de- the autonomy of Pirelli and its management in the definition merger of said company into three companies wholly owned and management of the industrial, economic and financial by, respectively, SPV Lux, Camfin and LTI (the “Marco Polo strategies of the Group. Demerger”). For further details see Section 2.8.2. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownershipMore specifically, the signatory shareholders have agreed not In particular, in order to achieve the objectives of SRF and to sell, assign, transfer or in any case make use of in any other CNRC for their joint (and indirect) investment in Pirelli, the way, directly or indirectly (except for transfers to their parent parties to the First SRF Contract agreed that SRF would be 2.8.3 The shareholders agreement relating to Camfin In relation to Camfin, a shareholders’ agreement is also in force, originally signed on 11 August 2015 by Marco more than 50% of the share capital with voting rights at the ordinary shareholders’ meeting of Pirelli Tyre (except if Pirelli and Pirelli Tyre are merged) or (ii) a party (other than Camfin companies, subsidiaries or fellow subsidiaries), inter alia, their entitled to designate a candidate for the Boards of Directors Tronchetti Provera & C. S.p.A., Nuove Partecipazioni S.p.A., or another party working together with Camfin), or several respective direct or indirect equity interests in Pirelli until the of Marco Polo and Pirelli. UniCredit S.p.A., Manzoni S.r.l. and Intesa Sanpaolo S.p.A., parties working together (not being shareholders of Camfin first anniversary of the First Trading Day (except for LTI, which subsequently updated by said companies on 4 May 2017 in the or their subsidiaries working together) (a) acquire (directly or may transfer directly or indirectly, via Marco Polo, its equity Nothing in the First SRF Contract prejudices the right of context of the completion of the merger of the company Coinv indirectly) more than 20% of the share capital with voting rights interest in Pirelli after six months have elapsed from the First ChemChina to exercise control over Pirelli via CNRC. S.p.A. in Camfin, which had effects as of 12 June 2017 (the “Coinv at the ordinary shareholders’ meeting of Pirelli and that equity Trading Day). 2.5 SECURITIES THAT CARRY SPECIAL RIGHTS 2.8.2 New shareholders’ agreement On 28 July 2017 ChemChina, CNRC, SRF, SPV HK 1, SPV HK 2, SPV Lux, Camfin, LTI Merger”) and in consideration of the Coinv Merger itself and of investment is greater than the investment held by Camfin from certain provisions of the agreement no longer applicable (the time to time; or (b) appoint or cause the removal of the majority “Camfin Shareholders’ Agreement”). The Camfin Shareholders’ of the members of the Board of Directors of Pirelli. Agreement has not been updated by the parties following the and MTP&C (together, the “Parties to the New Agreement”) IPO and it contains several provisions that must be considered On 23 February 2018, Pirelli International Plc decided to signed the New Shareholders’ Agreement that governs, on outdated due to the beginning of the trading of the Pirelli exercise the right to early reimburse all the Securities and No securities have been issued that carry special rights of control. the one hand, the governance of Pirelli with effect from the shares on the MTA; however some limited provisions, relevant then to cancel them. 2.6 SHARE OWNERSHIP BY EMPLOYEES: MECHANISM FOR THE EXERCISE OF VOTING RIGHTS any case, by 31 December 2018, subject to (i) the beginning of the trading (which took place on 4 October 2017) and (ii) the reimbursement of the loan of Euro 1,250 million obtained by * * * First Trading Day, as well as the commitment of CNRC, SRF, pursuant to art. 122, first and fifth paragraph, of the TUF, are Camfin and LTI to arrange for the Marco Polo Demerger as still applicable in relation to the planned disinvestment from The above transaction is scheduled for completion by 31 soon as possible subsequent to the First Trading Day and, in Camfin by the current shareholders. March 2018. 2.9.2 Loan On 13 June 2017 Pirelli, on the one hand, and Banca IMI S.p.A., J.P. Morgan Limited and The Bank of Tokyo- With regard to the shares owned by employees, there are no Marco Polo (which took place on 5 October 2017). For further information about the clauses contained in the 2 0 6 specific procedures or restrictions governing the exercise of abovementioned Shareholders’ Agreements, see the extracts Mitsubishi UFJ, Ltd., in their roles as mandated lead arrangers, their voting rights. The New Shareholders’ Agreement requires the Board of from the agreements available on the Website, published bookrunners, underwriters and global coordinators signed 7 0 2 Directors of Marco Polo to approve the demerger project pursuant to art. 130 of the Issuers’ Regulation. a mandate letter regarding the grant of an unsecured loan 2.7 RESTRICTIONS ON VOTING RIGHTS relating to the Marco Polo Demerger in favour of three beneficiary companies each wholly owned by, respectively, SPV Lux, Camfin and LTI. The Marco Polo Demerger will be non- 2.9 CHANGE OF CONTROL CLAUSES to Pirelli and Pirelli International (the “Beneficiaries”) for a maximum amount of Euro 4,200,000,000 (the “New Loan”). There are no mechanisms that restrict the voting rights of proportional pursuant to art. 2506-bis, para. 4, of the Civil Code The contract signed on 27 June 2017 in relation to the New Loan shareholders, except for the terms and conditions governing and, accordingly, the net assets of Marco Polo will be divided The most significant contracts containing clauses of this type envisages, inter alia, that the Beneficiaries shall repay early that the exercise of the right to attend and vote at Shareholders’ among the beneficiary companies in proportion to the equity are summarised below. part of the New Loan made available by each lender should certain Meetings, as discussed in Chapter 18 of the Report. interests held by SPV Lux, Camfin and LTI in Marco Polo (being events occur, including changes in the control structure of Pirelli. 2.8 SHAREHOLDERS’ AGREEMENTS 65%/22.4%/12.6%). In the context of the Marco Polo Demerger, Pirelli shares will be measured at their placement price. 2.9.1 2014 Bond On 18 November 2014, Pirelli International issued a bond for a total nominal amount of Euro 600 million The Marco Polo Demerger must be completed as soon as (the “2014 Bond”). possible after the First Trading Day and, in any case, within In particular, this change of control clause may be invoked solely in one of the following circumstances: (i) ChemChina ceases to hold, directly or indirectly, individually or together with Camfin or another company controlled by Marco Tronchetti Provera or 2.8.1 SRF contract On 5 June 2015, SRF, CNRC and ChemChina signed an “Investment Contract” (the “First SRF three months of the date of approval of the 2017 financial The securities issued pursuant to the 2014 Bond, having his close family members, more than 25% of Pirelli post IPO; or statements of Marco Polo, subject to the positive outcome of a minimum nominal value of Euro 100,000 each (the (ii) ChemChina ceases to be, directly or indirectly, individually Contract”) regarding investment by and the participation of the opinion requested by Marco Polo from the Tax Authorities “Securities”), are listed on the regulated market of the or together with Camfin or another company controlled by SRF, together with ChemChina and CNRC, in the acquisition regarding the tax treatment of the Marco Polo Demerger. Luxembourg Stock Exchange. Marco Tronchetti Provera or his close family members, the of control over Pirelli. relative majority holder of the voting rights in Pirelli (i.e. more If the Marco Polo Demerger cannot be completed by the The regulation for the 2014 Bond provides for, inter alia, the than other parties that act individually or together); or (iii) any The First SRF Contract granted SRF – holder of 25% of the above deadline, or should any of the Parties to the New reimbursement of the capital in a lump sum on the expiration other party (or parties acting together) appoints or removes share capital of SPV HK2 – with certain rights and prerogatives Agreement believe, in good faith, that the demerger is not date set forth 18 November 2019. the majority of the Board of Directors. in relation to the corporate governance of SPV HK2, SPV Lux, the most efficient solution, each of them will be entitled to Marco Polo and Pirelli; it also established certain restrictions request an assessment in good faith of possible alternative Pursuant to the 2014 Bond Regulation, the bondholders are Any takeover by Camfin (or another company directly or on the transfer of the shares held in SPV HK2. solutions to the Marco Polo Demerger for the assignment to entitled to request early reimbursement of the Securities indirectly controlled by Marco Tronchetti Provera or his close the shareholders of Marco Polo of its net assets. if there is a Change of Material Shareholding, which would family members) as the parent company of Pirelli would arise inter alia if (i) Pirelli ceased to hold (directly or indirectly) not represent a change of control on condition that certain ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownershiprequirements are met, including the requirement for Marco In particular, this change of control clause may be invoked Lastly, it is confirmed that: Tronchetti Provera or a person designated by him to be the solely in one of the following circumstances: (i) ChemChina  > the information required by art. 123-bis, para. 1, letter i) TUF CEO of both that company and Pirelli. ceases to hold, directly or indirectly, individually or together (regarding “agreements between the company and its directors 4. BOARD OF DIRECTORS 2.9.3 PT Evoluzione Tyres joint venture On 24 April 2012, Pirelli Tyre and PT Astra Otoparts tbk, an Indonesian with Camfin or another company controlled by Marco […] that envisage indemnities in the event of resignation or Tronchetti Provera or his close family members, more than 25% termination without just cause or following a takeover bid”) is of Pirelli; or (ii) ChemChina ceases to be, directly or indirectly, contained in the Compensation Report, which is available individually or together with Camfin or another company at the registered offices and on the Website; 4.1 APPOINTMENT AND REPLACEMENT OF DIRECTORS company, signed a Joint Venture Agreement in relation to PT controlled by Marco Tronchetti Provera or his close family  > the information required by art. 123-bis, para. 1, letter l) The provisions contained in the Articles, to which reference Evoluzione Tyres, an Indonesian company incorporated on 6 members, the relative majority holder of the voting rights TUF (regarding “the rules applicable to the appointment is made, regarding the appointment and replacement of June 2012 and operating in the production of motorcycle tyres in Pirelli (i.e. more than other parties that act individually or and replacement of directors […] as well as to the amendment directors are summarised below. in the plant of Subang, West Java. together); or (iii) any other party (or parties acting together) of the articles of association, if different to the legislation Pursuant to this contract, in the event of a change in the described in the section of this Report on the Board of ownership structure of one of the shareholder that is deemed Any takeover by Camfin (or another company directly or Directors (Section 4.1 below). appoints or removes the majority of the Board of Directors. and regulations applicable in the absence of specific rules”) is to be a change of control event, a put&call procedure could indirectly controlled by Marco Tronchetti Provera or his close be activated that, in the extreme case, might lead to the family members) as the parent company of Pirelli, in place acquisition by Pirelli Tyre of the entire equity interest held of ChemChina, would not give rise to a change of control on by PT Astra Otoparts tbk in PT Evoluzione Tyres, with the condition that certain requirements are met, including the consequent termination of the joint venture agreement. requirement for Marco Tronchetti Provera or a person designated by him to be the CEO of both that company and Pirelli. 3. COMPLIANCE 4.1.1 Appointment Pursuant to art. 10 of the Articles, the Company is managed by a Board of Directors made of a maximum of fifteen members, who remain in office for three years and who may be re-elected. The Board of Directors is appointed on the basis of lists presented by the shareholders, in which the candidates must each be listed with a sequence number. 2 0 8 2.9.4 Supply contract with Bekaert The strategic suppliers of the Group include Bekaert, to which the Company Under the EMTN Programme, on 25 January 2018 Pirelli issued a Pirelli has adopted the Corporate Governance Code approved The lists presented by shareholders, signed by those submitting new, unrated, fixed-rate bond for a total nominal amount of Euro by the Corporate Governance Committee established them, must be filed at the registered offices of the Company at sold the steelcord business unit in 2014. Having regard to the 600 million, with a duration of 5 years and known as “Pirelli & C. by the associations of businesses (ABI, ANIA, Assonime, least twenty-five days prior to the date fixed for the Meeting 9 0 2 special nature of the contractual conditions associated with S.p.A. €600,000,000 1.375% Guaranteed Notes due 2023”. The above- Confindustria) and professional investors (Assogestioni), as called to resolve on the appointment of Board members. These the sale of the above business unit, a contract for the supply mentioned Change of Control clause applies to that new bond. well as by Borsa Italiana S.p.A.27. lists are made available to the public at the registered offices, of steelcord exists with that supplier, under which Pirelli purchased about 90% of its 2016 requirements. The contract with Bekaert includes a change of control clause whereby Bekaert has the right, inter alia, to withdraw within 2.10 CLAUSES IN THE ARTICLES ABOUT PUBLIC OFFERS on the website of the Corporate Governance Committee, at of the Meeting. the following link http://www.borsaitaliana.it/comitato- corporate-governance/codice/2015clean.pdf. Each shareholder may present or contribute to the presentation The Corporate Governance Code is available to the public Consob regulation, at least twenty-one days prior to the date on the Website and in any other ways envisaged in a relevant 90 days after becoming aware of a situation in which a third The Articles do not provide for exceptions to the provisions of just one list and each candidate may be included in just one party acquires control of Pirelli. regarding the passivity rule, or application of the neutralisation As Pirelli is among the companies included in the FTSE-MIB list, subject otherwise to becoming ineligible. rule set out in art. 104-bis TUF. index, the recommendations of the Corporate Governance 2.9.5 EMTN programme and 2018 bond On 21 December 2017, in order to ensure the constant optimisation of the financial structure of the Company, the Board of Directors (i) approved an EMTN programme (Euro Medium Term Note Programme) for the issue of non-convertible, 2.11 MANDATE TO INCREASE SHARE CAPITAL AND AUTHORISATIONS TO PURCHASE OWN SHARES Code specifically envisaged for those companies are applied Shareholders are only entitled to present lists if, alone or by the Company. together with other shareholders, they own shares in total representing at least 1% of the share capital entitled to vote This Report has essentially been prepared using the Borsa at an Ordinary Meeting, or any lower amount specified Italiana format. in a regulation issued by Consob, with the obligation to evidence their ownership of the number of shares needed senior unsecured bonds for a maximum amount of Euro 2 With regard to the year ended 31 December 2017, the On the Report Date, Pirelli is not subject to any non-Italian for the presentation of lists by the deadline envisaged for the billion and (ii) in the context of that programme, authorised Directors were not granted with mandates to increase share laws that might influence the corporate governance structure publication of such lists by the Company. the issue by 31 January 2019 of one or more bonds to be capital for payment on one or more occasions, or to issue of the Company. placed with institutional investors for a maximum total bonds convertible into ordinary or savings shares or with amount of Euro 1 billion. The new securities may be listed warrants carrying the right to subscribe shares. Similarly, the on one or more regulated markets. Pursuant to the EMTN Shareholders’ Meeting of the Company did not authorise any Programme, bondholders that subscribe for bonds issued purchases of own shares. under the programme will be entitled to request the early reimbursement of their securities (put option) in the case of * * * a Change of Control event. Each list filed must be accompanied by acceptances of nomination and declarations from each candidate confirming, under their own responsibility, that there are no reasons making them ineligible for or incompatible with the role, and that they satisfy any requirements established for the role 27 Resolution adopted by the Board of Directors as part of the IPO process. Note that Pirelli has adopted the Code since it was first issued (October 1999) and the Company was not listed on the Stock Exchange during the period from 26 February 2016 to 3 October 2017. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownershipconcerned. These declarations must be accompanied by the the lesst represented gender not already elected, drawn from In fact, the following procedure will be implemented as of Goldberg, Tao Haisu, Marisa Pappalardo, Fan Xiaohua and curriculum vitae of each candidate, describing their personal that list pursuant to the sequential order of presentation and 1 November 2019: (i) the candidates to be considered for the Wei Yintao were designated by CNRC; and professional characteristics, indicating the administration so on, for each list (solely for lists that contain three or more succession will be indicated by the Chief Executive Officer  > Directors Marco Tronchetti Provera, Giovanni Tronchetti and control appointments held by them in other companies candidates) until the minimum number of directors belonging and Executive Vice Chairman to the Appointments and Provera, Giorgio Luca Bruno and Laura Cioli were and confirming their satisfaction of the independence to the less represented gender has been obtained. Lastly, Succession Committee (the “Proposed Candidates”), (ii) a designated by MTP&C; requirements envisaged for the directors of listed companies if the above procedure does not ensure the result specified leading, independent, international HR firm will be engaged  > Directors Domenico De Sole and Cristina Scocchia were by law or by the code of conduct adopted by the Company. In above, the replacement shall be made by resolution of the to assess the Proposed Candidates, and (iii) the Appointments appointed by Marco Polo on joint designation by CNRC order to ensure gender balance, lists containing three or more Shareholders’ Meeting, adopted by the relative majority of the and Succession Committee will resolve, on proposal of the and MTP&C, taking into account the indications expressed candidates must include a number of candidates of different votes expressed, following presentation of the candidacies of Chief Executive Officer and Executive Vice Chairman and, in by the Joint Global Coordinators, engaged as part of the gender that at least satisfies the minimum required by law persons belonging to the less represented gender. the event of a voting tie, the latter shall have the casting vote. IPO procedure, regarding the professional characteristics and/or any regulations in force at the time, as specified in of the directors. the notice of call issued for the Meeting. Any changes arising Should application of the list voting mechanism not obtain The Proposed Candidate positively appraised by the HR At the Report Date, about 29% of Board members belong to prior to the actual date of the Meeting must be notified to the the minimum number of independent directors envisaged by firm must be included by CNRC on the voting list for the the female gender and about 71% belong to the male gender. Company on a timely basis. the laws and/or regulations in force, the non-independent appointment of the new Board of Directors and CNRC must In addition, about 64% of directors are over 50 years of age Any lists presented that do not comply with the above number in the list that obtained the largest number of votes appointed by the Shareholders’ Meeting, the non-independent Board members is about 55. The average tenure in charge of instructions will be treated as if not presented. shall be replaced by the first independent candidate not directors designated by CNRC vote for and appoint the the Directors is about 4 years28. candidate elected indicated with the highest progressive ensure that, during the first meeting of the Board of Directors and about 36% are between 30 and 50. The average age of already elected from that list following the sequential order Proposed Candidate as the new Chief Executive Officer. Each party entitled to vote may only vote for one list. of presentation, and so on for each list until the minimum Pursuant to the New Shareholders’ Agreement, the Board of number of independent directors has been obtained, in Should Marco Tronchetti Provera no longer be able to Directors of Pirelli must be supplemented by an additional The Board of Directors is appointed as follows: all cases in compliance with the laws and/or regulations take part in the above activities, for any reason, the above independent director, to be appointed by the minority a) four-fifths of the directors to be elected are drawn from governing gender balance in force at the time. prerogatives shall be granted to one of the directors shareholders, with the majorities established by law without 2 1 0 the list that obtains the majority of the votes expressed by designated by the Appointments and Succession Committee application of the list voting mechanism, at the first Shareholders’ the shareholders, as rounded down to the nearest whole For the appointment of directors who, for any reason, were on recommendation of MTP&C. Meeting of Pirelli held subsequent to the First Trading Day 1 1 2 number in the case of fraction number; not appointed in accordance with the list voting mechanism, (which will coincide with the Annual General Meeting). b) the remaining directors are drawn from the other lists, the Shareholders’ Meeting shall adopt resolutions with the using the quota method described in the Articles. majorities required by law, without prejudice in all cases to Should several candidates obtain the same quota, the candidate compliance with the independence requirements specified in 4.2 COMPOSITION Table 2 attached provides for the relevant information about each member of the Board of Directors in charge at the Report elected will be drawn from the list that has not yet elected a the Articles and the gender balance requirements envisaged The Board of Directors in charge at the Report Date was Date. In addition, a summary of their professional profiles is director or that has elected the minor number of directors. by the laws and/or regulations in force at the time. appointed by the Shareholders’ Meeting held on 1 August available on the Website. 2017 (effective date for the appointments: 31 August 2017) If none of those lists has elected a director yet or all of them and is made of 14 members: Ren Jianxin (Chairman), Marco There were no changes to the composition of the Board of have elected the same number of directors, the candidate elected will be drawn from the list that obtains the largest 4.1.2 Replacement Should one or more directors cease from the office during the fiscal year, they shall be replaced Tronchetti Provera (Executive Vice Chairman and CEO), Directors between the end of the Year and the Report Date. Yang Xingqiang, Bai Xinping, Giorgio Luca Bruno, Laura number of votes. In the event of a voting tie, again with pursuant to art. 2386 of the Civil Code, without prejudice Cioli, Domenico De Sole, Ze’ev Goldberg, Tao Haisu, Marisa more than one candidate obtaining the same quota, the for the compliance with the gender balance requirements Pappalardo, Cristina Scocchia, Giovanni Tronchetti Provera, Shareholders’ Meeting will vote again and the candidate who envisaged by the laws and/or regulations in force at the time. Fan Xiaohua and Wei Yintao. 4.3 LIMITATIONS ON THE NUMBER OF POSITIONS HELD receives the largest number of votes will be elected. If only one list is presented, all the directors will be elected cause of removal if the number of directors still in possession Chairman of the Board of Directors and, at its first meeting on 31 August 2017, it is not considered compatible with the from that list. of the legal independence requirements is not lower than the held on 31 August 2017, the Board of Directors confirmed Marco duties of a director of the Company to be a director or statutory minimum specified by the laws and/or regulations in force. Tronchetti Provera as Chief Executive Officer and Executive auditor of more than five other companies other than those Loss of the independence requirements by a director is not a The above Shareholders’ Meeting confirmed Ren Jianxin as Pursuant to the orientation of the Board of Directors adopted The Board of Directors must be appointed in compliance with the regulations governing gender balance in force at the time. Should application of the list voting mechanism not ensure the minimum number of directors belonging to the less represented 4.1.3 Succession plans Pursuant to the New Shareholders’ Agreement, even in order to ensure the continuity of the The composition of the Board of Directors reflects the clauses on the FTSE/MIB index (or equivalent foreign index) or (ii) contained in the New Shareholders’ Agreement, pursuant to Italian or foreign companies that carry out financial, banking Vice Chairman. subject to management and coordination by the Company, or its subsidiaries or affiliates, in case of (i) companies listed gender set out by laws and/or regulations in force at the time, Pirelli business culture, Marco Tronchetti Provera has been which: or insurance activities; furthermore, it is not considered the candidate belonging to the most represented gender and granted with a leading role in the procedure for identifying his  > Directors Ren Jianxin, Yang Xingqiang, Bai Xinping, Ze’ev compatible for the same director to hold more than three elected, indicated in the list that obtained the largest number successor as the CEO of Pirelli. of votes, shall be replaced by the first candidate belonging to 28 The calculation of the tenure of the Board: (i) considered all Directors in office, except for those appointed for the first time at the Shareholders’ Meeting held on 1 August 2017; and (ii) considered for each Director the date of initial appointment indicated in Table 2. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownershipexecutive positions in companies of the types indicated in 4.5 ROLE OF THE BOARD OF DIRECTORS points (i) and (ii) above. into English and Chinese the documentation to be examined must be approved (as an internal restriction of the power by the Board and the Committees, as well as to make a granted to the Chief Executive Office on that date) by the The Board of Directors plays a central role in the guidance simultaneous translation service available to the participants. Board of Directors of the Company: Positions held in several companies belonging to the same and management of the Company. Pursuant to art. 11 of the If the Chairman is absent or unavailable, the chair is taken (i) obtaining or granting loans for a total value higher than group are considered to be a single position and an executive Articles, the Board of Directors manages the business and, for by the Chief Executive Officer; if the latter is also absent or Euro 200 million and with a duration of more than 12 position prevails over a non-executive position. this purpose, exercises all the widest powers of management, unavailable, the chair is taken by another director appointed months; except for those reserved by law or the Articles to the by the majority of those present. The Board of Directors (ii) issuing financial instruments to be listed on European or The Board of Directors is entitled to make a different Shareholders’ Meeting. appoints a Secretary who may also not be a Director. non-European regulated markets or multilateral trading assessment, properly motivated, to be published in the Report and explained appropriately therein. For the validity of the resolutions of the Board of Directors, their delisting; systems that total more than Euro 100 million and/or Following review by the Corporate Governance, Sustainability, 4.5.1 Functioning of the board of directors Meetings of the Board of Directors are called by the Chairman or his the meeting shall be attended by the majority of the members (iii) giving guarantees in favour of or in the interests of third and the majority of the votes expressed is necessary. parties for amounts higher than Euro 100 million; Control and Risks Committee, each year the Board of Directors deputy and held at the registered offices, or in any another Resolutions, including those adopted at meetings held (iv) signing derivative contracts (a) with a notional value examines the positions held by each Director (based on the location specified in the notice of convening, whenever using telecommunications technology, are recorded in the higher than Euro 250,000,000, and (b) except for information provided by that person and/or on the other deemed appropriate by the Chairman in the interests of the relevant book; all minutes are signed by the Chairman and those having the sole object and/or effect of hedging information available to the Company). At the Report Date, no Company, or when requested in writing by the Chief Executive the Secretary of the meeting. All copies of and extracts from corporate risks (e.g. interest-rate risk, exchange-rate Director holds a number of positions higher than the number Officer or by one-fifth of the appointed Directors. Meetings minutes not prepared by a Notary are certified true by the risk, commodity market risk); set out in the orientation adopted by the Company. of the Board of Directors may also be called by the Board of Chairman. Statutory Auditors, or by each effective auditor, following (v) purchasing or selling equity investments in subsidiaries and affiliates for amounts higher than Euro 150 million Attachment A indicates the principal appointments held by notification sent to the Chairman of the Board of Directors. As recommended by the Corporate Governance Code, and that involve entering into (or exiting from) the Directors in companies that do not belong to the Group at Director awareness of the business reality and dynamics of geographical and/or commodity markets; the Report Date. The Board of Directors in office at the Report Date met twice the Company and the Group is enhanced by the systematic (vi) purchasing or selling equity investments other than 2 1 2 4.4 INDUCTION PROGRAM between the First Trading Day and the end of the Year. The attendance of top management at their meetings, which those described in point (v) above for amounts higher 3 1 2 average duration of each meeting was 50 minutes, with makes it possible to explore the matters on the agenda in than Euro 250 million; attendance by more than 90% of the Directors and more than appropriate detail. (vii) purchasing or selling businesses or lines of business that 90% of the Independent Directors. have strategic importance or, in any case, a value of The Directors perform their duties autonomously and with Given the short period of time between the First Trading Day more than Euro 150 million; competence, pursuing the priority objective of creating Given the short time between the First Trading Day and the end and the end of the Year, the Board of Directors will start as (viii) purchasing or selling fixed and other assets that have sustainable value over the medium-long term. They are aware of the Year, no meetings reserved solely for the independent from 2018 the process of assessing its functioning and that of strategic importance or, in any case, a total value of of the responsibilities pertaining to their role and, like the Directors were held during that period. the Board committees. more than Euro 150 million; Statutory Auditors, they are kept periodically informed by the (ix) carrying out transactions of greater significance with competent business functions about the principal regulatory With regard to the current year, Pirelli has made available to The Articles establish that, until decided differently at a related parties, being those satisfying the conditions and self-regulatory changes affecting the Company and the the market a calendar of corporate events (also available on Shareholders’ Meeting, the Directors are not bound by the envisaged in Attachment 1 to the “Procedure for Related- performance of their duties. the Website), according to which the Board is expected to restrictions specified in art. 2390 of the Civil Code. Party Transactions” approved by the Board of Directors In particular, in the context of the Board meetings, the meet at least 4 times. Directors have been provided, also with support of the top of the Company on 31 August 2017, in confirmation of the resolutions adopted on 28 July 2017 by the out-going management, with an explanation of the main characteristics The Directors and Statutory Auditors receive with prior notice of the activities of Pirelli and its Group, of the field in which the documentation and information deemed necessary in 4.5.2 Reserved matters In accordance with the Articles, the Shareholders’ Meeting requires a qualified majority (i.e. Board of Directors; (x) defining the Company’s remuneration policy; it operates, of the sustainable management model and of the order to be properly informed for the discussion of the items favourable votes by shareholders representing at least 90% (xi) determining, in compliance with the Company’s internal internal control and risk management system adopted by the subject to their examination. The advance notice provided of the share capital of the Company), if any of the following policies and the applicable regulations, the remuneration Company. Additionally, with the listing, information about is generally deemed reasonable and appropriate. In fact, the resolution has to be passed, in order to authorise the Board of of the executive directors and the directors with specific the relevant legal and regulatory framework and the specific documentation examined by the Board is usually circulated Directors to carry out such resolutions: responsibilities and, where required, allocating the total procedures and disciplines adopted by the Company have about ten days prior to the meeting. In the limited and  > transfer the operational and administrative headquarters remuneration authorised by the Shareholders’ Meeting been provided. exceptional cases in which it was not possible to transmit the outside of the municipality of Milan; among the members of the Board of Directors pursuant Further, specific induction-related activities will be structured matter concerned was provided directly during the meeting, know-how (including the granting of licences). (xii) approving the strategic, industrial and financial plans of and carried out during 2018, also in the context of the Board in order to ensure that informed decisions were made. On 31 August 2017, the Board of Directors established that Pirelli and the Group; meetings and of the Board committee meetings. all resolutions regarding the following matters arranged (xiii) adopting corporate governance rules for the Company documentation so far in advance, full information about the  > any transfer and/or deed of disposal, in any form, of Pirelli to art. 2389, para. 3, of the Civil Code; Considering the international composition of the Board of by Pirelli and/or any company subject to management and and defining guidelines for the corporate governance of Directors, it is standard practice for the Company to translate coordination by Pirelli (excluding intercompany transactions) the Group; ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownership(xiv) defining guidelines for the system of internal control, either separately or together with others, and all other Considering the frequency of Board meetings, the Chief including the appointment of a Director responsible for powers deemed appropriate by him in the best interests of the Executive Officer usually reports on his work during those overseeing the system of internal control, determining Company, including the right to sub-delegate. meetings. the related duties and powers; (xv) any other matter deemed to be responsibility of the In particular the Executive Vice Chairman and Chief Executive board of directors of a listed company by the Corporate Officer Marco Tronchetti Provera was granted with: Governance Code promoted by Borsa Italiana, as a) as sole signatory, powers for the ordinary management 4.7 INDEPENDENT DIRECTORS 5. PROCESSING OF CORPORATE INFORMATION amended from time to time; of Pirelli and the Pirelli Group, with reference to both At the Report Date, 50% of the Board of Directors consists Pirelli has adopted and consolidated over time a compendium (xvi) approving the budget and the business plan of the Pirelli and any other company (including unlisted foreign of directors who satisfy the requirements for identification of rules and procedures for the proper management of Company and the Group, as well as all significant companies) subject to management and coordination as independent: Laura Cioli, Domenico De Sole, Tao Haisu, corporate information, in compliance with the regulations changes to those documents; and by Pirelli, with the following internal restrictions and Marisa Pappalardo, Cristina Scocchia, Fan Xiaohua and Wei applicable to the various types of data. (xvii) adopting any resolutions regarding industrial therefore with the assignment of the related responsibility Yintao. The existence of their independence requirements has partnerships or strategic joint ventures to which Pirelli to the Board of Directors, if: been evaluated in the context of the Board meeting held on 31 With particular reference to the prevention of market abuses, and/or any Group company are party, (i) the threshold amounts envisaged for each of the August 2017, on the basis of the information provided by them the Board of Directors of Pirelli has adopted, with effect from it being understood that the approval of the transactions listed matters indicated above are exceeded; or at the time of their appointment, the information available to the date of submission to Borsa Italiana of the application above is reserved solely to the Board of Directors not only if (ii) for the matters listed from (i) to (ix) in section 4.5.2 the Company and the requirements established in the TUF and for the admission of the shares of the Company to trading on the threshold indicated for each matter are exceeded, but also above, if the amounts indicated in the business plan recommended by the Corporate Governance Code. the MTA, a procedure for defining the principles and rules for if the matters listed from (i) to (ix), whether considered as a and/or the annual budget are exceeded; or preventing such abuses by Pirelli, Group companies and their single action or as a series of coordinated actions (carried out in (iii) for the matters listed from (i) to (viii) in section 4.5.2 At the same time of the assessment made by the Board of related parties (the “Market Abuse Procedure”). The objective the context of a common executive programme or a strategic above, if they were not included, listed or envisaged Directors, the Board of Statutory Auditors confirmed that of this procedure is to protect investors, in order to avoid the project) exceed the amounts indicated in the business plan in the business plan or the annual budget; and it had verified, in line with the recommendations of the asymmetrical release of information and stop certain parties and/or the annual budget or (solely for the matters listed from b) the power to propose to the Board of Directors (the Corporate Governance Code, the proper application of the making use of information that is not in the public domain to 2 1 4 (i) to (viii)) if they were not included, listed or envisaged in the “Power to Propose”) adoption of the following resolutions assessment criteria and procedures adopted by the Board of carry out speculative transactions in the markets, as well as to business plan or the annual budget. (together, the “Significant Matters”): Directors to verify the independence of its Directors. protect the Company from potential liabilities arising from the 5 1 2 (i) approval of the business plan and the budget of the conduct of parties under its control. As required by the Corporate Governance Code, the Board Company and the Group, as well as all significant Following their appointment, the satisfaction of the of Directors has assessed positively the adequacy of the changes to those documents. The business plan independence requirements is assessed at least on an annual In particular, the Market Abuse Procedure - the full version organisational, administrative and accounting systems and and the annual budget must (a) address certain basis (for 2018, this activity was carried out during the Board of which is available on the Website - governs: (a) the structure of the Company, with particular reference to the operational and financial aspects of Pirelli including, meeting held on 26 February 2018). management of “significant information”, being information system of internal control and risk management, making but not limited to, the identification of all sources of that may become “inside information” pursuant to art. 7 of reference to the analytical work carried out by the Corporate funding for such business plans and budgets, as well As already stated, the New Shareholders’ Agreement requires Regulation (EU) 596/2014 (“Inside Information”); (b) the Governance, Sustainability, Control and Risks Committee. as the decisions about the operational activities the Board of Directors of the Company to be integrated with management and communication to the public of Inside underlying them; and (b) be accompanied and an additional independent director designated by the minority Information; (c) the creation, keeping and updating of The Board has also evaluated the general results of operations, supported by adequate and suitable documentation shareholders at the first Ordinary Meeting held after the the register of persons who, in view of their working or taking into particular account the information received from describing the items contained therein; First Trading Day, which coincides with the Annual General professional activities or the functions they perform, have delegated bodies and comparing periodically, at least every (ii) any resolutions regarding industrial partnerships Meeting. quarter, the results obtained with those planned. or strategic joint ventures to which Pirelli and/or access to Inside Information; (d) the obligations regarding transactions in the shares of the Company, credit instruments any Group company are party, in all cases following Considering the above, the system of mandates and the issued by the Company and the derivative or other financial examination by the Strategies Committee, ownership structure, the Board of Directors has not yet instruments linked to them, by parties deemed to be senior it being understood that: (a) the power to resolve on the appointed a lead independent director. decision-makers (“internal dealing”); (e) the operational 4.6 DELEGATED BODIES: EXECUTIVE DIRECTORS Significant Matters is reserved solely for the Board of Directors and/or the Shareholders’ Meeting, as applicable; and With resolution dated 31 August 2017, the Board of Directors (b) should the Board of Directors not approve the proposal of granted the Executive Vice Chairman and Chief Executive the Chief Executive Officer and Executive Vice Chairman, the Officer Marco Tronchetti Provera with all the powers necessary related resolution must be motivated and, in all cases, take to carry out deeds relating to all aspects of corporate activity, into account the best interests of the Company. without any exceptions aside from those that the law or the Articles reserve to the Board of Directors; all with the power In light of the above, Executive Vice Chairman and Chief to grant special and general powers of attorney that give the Executive Officer Marco Tronchetti Provera is identified as representative the right to sign on behalf of the Company, executive director. procedures and scope of application of the prohibition imposed on the Company and the persons who perform administrative, control or management functions for the Company regarding the execution of transactions in Pirelli shares, credit instruments issued by Pirelli and the derivative or other financial instruments linked to them during predetermined periods (“black out periods”); (f) any market soundings carried out or received in compliance with art. 11 of Regulation (EU) 596/2014 and the related enabling regulations. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownershipAlso following the orientations expressed by the competent The Strategies Committee meets at least 5 days prior to the Control and Risks Committee and the Compensation Committee. authorities, the Company is about to adopt an operational Board meeting called to approve the annual budget and/or the One member of the Board of Statutory Auditors is invited to regulation intended to ensure appropriate implementation business plan, receiving the related documentation at least 3 attend the meetings of the Appointments and Succession of the Market Abuse Procedure and proper information flows days prior to the meeting. Committee and the Strategies Committee. among the parties required to comply with the Procedure. Further, again in the light of the above orientations, the The Secretary of each Committee is the Secretary of the Board. The members of the Board of Statutory Auditors are invited Board of Directors is currently considering an update to the Committee meetings are called by a notice sent, by the to attend the meetings of the Related-Party Transactions Procedure. Committee Secretary or otherwise, at the request of the Committee. Committee Chairman. 8. APPOINTMENTS AND SUCCESSION COMMITTEE At the Report Date, the Appointments and Succession Committee comprises 4 directors: Marco Tronchetti Provera The Market Abuse Procedure also defines rules for transactions Further information about the number of meetings held by (Chairman), Ren Jianxin, Giovanni Tronchetti Provera and Bai carried out by “Significant Parties” or by “Persons Closely The documentation and information available (and, in all each Committee during the Year and about the attendance Xinping. As an exception to the Corporate Governance Code, Related to Significant Parties” in financial instruments issued cases, the necessary information) are sent in good time to of each member at those meetings can be found in Table 2 the majority of the members of this committee are non- by the Company, with an annual amount of at least Euro all members of the relevant Committee so that they can attached to this Report. executive directors (albeit not independent). This is partly 20,000, in compliance with the applicable current regulations. participate in the meeting in an informed manner. In this regard, a black-out period of 30 calendar days is imposed prior to the announcement by the Company of the Committee meetings are quorate when attended by the data contained in annual, half-yearly and periodic financial majority of appointed members and resolutions are adopted reports, during which time internal dealers are forbidden to by the majority of those present. In the event of a voting tie carry out transactions in those financial instruments. at meetings of the Appointments and Succession Committee held to appoint a successor to the Chief Executive Officer, the outgoing Chief Executive Officer’s vote will prevail. Committee meetings may be held by conference call; their minutes are 7. STRATEGIES COMMITTEE because the committee addresses not only matters relating to appointments, but also those regarding top management succession; in addition, committee membership takes account of the fact that the New Shareholders’ Agreement has established a structured procedure for identifying the successor to Marco Tronchetti Provera as the Chief Executive Officer of Pirelli (see section 4.1.3). In particular, the Appointments and Succession Committee: 2 1 6 6. BOARD COMMITTEES taken by the Committee Secretary and recorded in the related At the Report Date, the Strategies Committee is made  > prepares opinions for the Board of Directors on the size and minute book. The Chairman of each committee informs the of 7 directors (including 2 independent directors): Marco composition of the Board and makes recommendations Board of Directors about the outcome of the meetings held. Tronchetti Provera (Chairman), Giorgio Bruno, Yang Xingqiang, about the professional roles whose presence on the Board 7 1 2 Bai Xinping, Ze’ev Goldberg, Domenico De Sole and Wei Yintao. is deemed appropriate; The role of the Board committees is to carry out analyses for, Committee awareness of the business reality and dynamics of  > prepares opinions for the Board of Directors on the adoption make recommendations to and/or give advice to the Board in the Company and the Group is enhanced by the attendance of The Strategies Committee advises and makes and/or amendment by the Board of its orientation towards relation to matters deemed worthy of further investigation, top management at their meetings, which makes it possible recommendations to the Board of Directors on the the number of appointments considered compatible with in order to ensure that there is an effective and informed to explore the matters on the agenda in appropriate detail. definition of strategic guidelines, as well as on the effective performance as a director of the Company; exchange of opinions about them. In particular, as a practice, the Executive Vice President & identification and definition of terms and conditions for  > makes recommendations to the Board of Directors about Chief Human Resources Officer attends the meetings of individual transactions of strategic importance. any issues regarding application of the prohibition of On 31 August 2017, the Board of Directors of the the Compensation Committee, while the Corporate Vice competition envisaged in art. 2390 of the Civil Code, should Company established the Strategies Committee, the President Internal Audit and the Head of Sustainability & In particular, the Strategies Committee: the Shareholders’ Meeting - for organisational reasons Appointments and Succession Committee, the Corporate Risks Governance attend the meetings of the Corporate  > examines the strategic, industrial and financial plans - both - authorise in advance, on a general basis, exceptions to Governance, Sustainability, Control and Risks Committee, Governance, Sustainability and Control and Risks Committee. short and long term - of the Company and the Group this prohibition; the Compensation Committee and the Related-Party before their submission to the Board of Directors;  > recommends candidates to the Board of Directors, should Transactions Committee. Committees - which may make use of external advisers in  > helps the Board to assess transactions, initiatives and it be necessary to co-opt new Directors to replace 6.1 FUNCTIONING OF COMMITTEES carrying out their functions - are granted with adequate financial activities of strategic importance including, in particular: Independent Directors; resources to perform their tasks with spending autonomy. The entry into new geographical markets and businesses;  > recommends “emergency” top management succession Related-Party Transactions Committee is entitled to obtain (i) industrial alliances (e.g. joint ventures); (ii) special plans to the Board of Directors; assistance, at the expense of the Company, from one or more transactions (mergers, spin-offs, capital increases and  > prepares opinions for the Board of Directors on the The Committees are appointed by the Board of Directors and independent experts selected by the Committee. capital reductions, except for those to cover losses); designation of candidates (including persons to be remain in office for the entire mandate of the Board, meeting (iii) investment projects; (iv) industrial and/or financial coopted) for the position of Chief Executive Officer; whenever deemed appropriate by the Committee Chairman, Committees are entitled to access relevant business information restructuring projects and programmes;  > over proposal of the Chief Executive Officer, identifies or when requested by at least one member, by the Chairman of and functions in the performance of their tasks, with support  > examines periodically the organisational structure of the criteria for the succession plans covering top and senior the Board of Directors or, if appointed, by the Chief Executive from the Secretary to the Board of Directors for this purpose. Company and the Group, presenting any suggestions and management in general, in order to guarantee the Officer and, in any case, with the frequency necessary in order opinions to the Board. continuity of business strategies. to properly carry out their functions. The entire Board of Statutory Auditors is entitled to participate in the activities of the Corporate Governance, Sustainability, ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownership9. RELATED-PARTY TRANSACTIONS COMMITTEE This Committee has advisory and supervisory functions The Compensation Committee is granted with the functions and makes recommendations to ensure the definition and of the Related-Party Transactions Committee (discussed application within the Group of compensation policies that, on above), envisaged pursuant to the Consob regulations and the one hand, attract, motivate and retain human resources the procedures for related-party transactions adopted by with the professional qualities required to pursue profitably the Company, for matters concerning the remuneration of the objectives of the Group and, on the other, are capable directors with specific responsibilities and executives with of aligning the interests of management with those of the strategic responsibilities. At the Report Date, the Related-Party Transactions shareholders. Committee is made of 3 independent directors: Domenico De The directors part of the Compensation Committee do not Sole (Chairman), Marisa Pappalardo e Cristina Scocchia. In particular, the Compensation Committee: attend the meetings held to make recommendations to the  > helps the Board of Directors to define the General Policy Board about their own remuneration. The Related-Party Transactions Committee provides advice for Group Remuneration, making recommendations in and makes recommendations to the Board of Directors about this regard; transactions with related parties, with the sole exception  > assesses periodically the adequacy, overall consistency of matters concerning the remuneration of directors and and concrete application of the General Policy for executives with strategic responsibilities, which are addressed Remuneration, making reference in this last regard to by the Compensation Committee. the information provided by the chief executive officers; makes recommendations to the Board of Directors on In particular, the Related-Party Transactions Committee: this matter; 11. REMUNERATION OF THE DIRECTORS 12. CORPORATE GOVERNANCE, SUSTAINABILITY, CONTROL AND RISKS COMMITTEE At the Report Date, the Corporate Governance, Sustainability, Control and Risks Committee is made of 3 independent directors: Fan Xiaohua (Chairman), Laura Cioli and Cristina Scocchia, all with suitable experience of financial and accounting matters or risk management. The Committee will be integrated with the appointment of the independent Director to be elected at the Annual General Meeting (see section 4.2). 2 1 8  > prepares advance opinions on the procedures governing  > with regard to the executive directors and the other The Corporate Governance, Sustainability, Control and Risks the identification and management of related-party directors with specific responsibilities, makes The system for remunerating Group management is designed Committee, which incorporates the functions of the “control transactions arranged by Pirelli and/or by its subsidiaries, recommendations or expresses opinions to the Board: to attract, motivate and retain key resources. It is defined in and risks committee”, helps the Board of Directors to assess as well as their amendment; (i) about their remuneration, consistent with the a way that aligns the interests of management with those of and make decisions about the system of internal control and  > prepares advance, reasoned opinions, if expressly General Policy for Remuneration; (ii) about setting the shareholders, pursuing the priority objective of creating risk management, as well as the approval of periodic financial requested, on the interest of Pirelli in carrying out a specific performance objectives linked to the variable element of sustainable value over the medium-long term via an effective reports, as required by art. 7 of the Corporate Governance Code. 9 1 2 related-party transaction and on the reasonableness and that remuneration; (iii) about the definition of any no- and verifiable link between remuneration, on the one hand, substantial fairness of the relevant conditions; competition agreements; (iv) about the definition of any and individual and Group performance on the other. In particular, the Corporate Governance, Sustainability,  > in the case of significant transactions with related parties, agreements for the termination of working relationships, Control and Risks Committee: the committee is involved in the related negotiations having regard to the principles established in the General Even after the delisting in 2016, the Company maintained  > assists the Board of Directors by expressing an opinion on the and the analytical phase via the receipt of complete and Policy for Remuneration; a remuneration structure consistent with the general (i) definition of guidelines for the system of internal control timely information, with the right to request information  > with regard to the executives with strategic criteria specified in art. 123-ter TUF. Subsequent to the First and risk management, so that the principal risks faced by and to make observations to the persons responsible for responsibilities, checks the consistency of their Trading Day, the Board of Directors has adopted a new 2018 the Company and its subsidiaries are properly identified carrying out the negotiations or analyses. remuneration with the General Policy for Remuneration remuneration policy for the Company that complies with the and appropriately measured, management and monitored; 10. COMPENSATION COMMITTEE and expresses an opinion on it pursuant to the Procedure above regulations applicable to listed companies and with (ii) determination of the extent to which those risks are for Related-Party Transactions; the Corporate Governance Code. The related report will be compatible with managing the Company in a manner  > helps the Board of Directors to examine proposals to the presented at the Annual General Meeting in order to obtain consistent with the strategic objectives identified, having Shareholders’ Meeting for the adoption of compensation the opinion of shareholders. plans based on financial instruments; regard for the risks that might be significant in terms of the sustainability of the business over the medium-long term;  > monitors application of the decisions adopted by the Information about the remuneration policy can be found in (iii) identification of an executive director responsible for Board, checking in particular the effective achievement the Compensation Report prepared pursuant to art. 123-ter supervising the functioning of the system of internal control of the established performance objectives; TUF, which is made available to the public on the basis and and risk management, considering the characteristics of  > examines and submits to the Board of Directors the by the deadlines envisaged by current laws and regulations, the business and the desired risk profile; (iv) assessment, At the Report Date, the Compensation Committee is made Annual Compensation Report that, by name for the including by publication on the Website. each year or more frequently, of the adequacy of the system of 3 directors (including 2 independent directors): Tao Haisu members of the management and control bodies (Chairman); Laura Cioli (Director with suitable knowledge and in aggregate for the executives with strategic and experience of financial matters or remuneration policies) responsibilities: (i) provides adequate information about and Bai Xinping. The Committee will be integrated with the each component of their remuneration; and (ii) explains appointment of the independent Director to be elected at the in detail all the remuneration paid during the year, for Annual General Meeting (see section 4.2). whatever reason and in whatever form, by the Company and its subsidiaries. of internal control and risk management, considering the characteristics of the business and the desired risk profile, as well as the effectiveness of its functioning in practice; (v) approval, each year or more frequently, of the work plan prepared by the internal audit manager and the compliance function manager; (vi) description, in the report on corporate governance, of the essential elements of the ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownership2 2 0 system of internal control and risk management and the  > defines and recommends “sustainability” guidelines to the The Responsible Director is tasked with supervising the a structured process of analysis and prioritisation of the methods of coordination adopted by the parties involved, Board of Directors and monitors compliance with any functioning of the system of internal control and risk principal risks; expressing an opinion on their overall adequacy; (vii) related codes of conduct adopted by the Company and its management and implementing the related guidelines  > carries out verifications, also on request of the Corporate assessment, having heard the Board of Statutory Auditors, subsidiaries; formulated by the Board of Directors, with support from Governance, Sustainability, Control and Risks Committee, of the results presented by the legal auditor in the letter of  > helps the Board of Directors to prepare and subsequently the Corporate Governance, Sustainability, Control and Risks of the Board of Statutory Auditors and of the Responsible recommendations provided to management, if applicable, examine and approve the sustainability report. Committee, ensuring that all actions necessary for the Director, on specific operating areas and on compliance and the report on fundamental matters identified during the legal audit work, if applicable;  > expresses an opinion on proposals concerning the appointment, revocation, assignment of duties and determination of the remuneration, consistent with Company policies, of the Internal Audit Manager, as well as on the adequacy of the resources allocated to the latter in order to carry out the assigned functions;  > assesses, together with the administrative managers of the Company and the chief reporting officer, after having heard the Board of Statutory Auditors and the 13. SYSTEM OF INTERNAL CONTROL AND RISK MANAGEMENT implementation of the system are taken. with the internal rules and procedures for the conduct of business operations; In particular, the Responsible Director:  > prepares periodic reports on its assessment of the suitability  > ensures identification of the principal business risks, taking of the System of Internal Control and Risk Management. into account the characteristics of the activities carried These reports are sent, at least every quarter, to the out by the Company and its subsidiaries, and submits them Board of Statutory Auditors, the Corporate Governance, periodically to the Board of Directors for examination; Sustainability, Control and Risks Committee, and the  > implements the guidelines formulated by the Board of Responsible Director, and, at least every six months, to Directors, supervising the design, implementation and the Board of Directors; management of the system of internal control and risk  > receives and analyses reports obtained in accordance management and checking constantly its adequacy and with the whistle-blowing procedures established by the auditing firm, the proper and consistent application of The system of internal control and risk management is designed effectiveness; Group and regarding any cases of corruption/violation of the accounting policies adopted by the Group for the to contribute, by identifying, managing and monitoring the  > ensures that this system adapts to any changes in operating the principles of internal control and/or the precepts of preparation of the consolidated financial statements; principal risks faced by the Company, to the conduct of a conditions and the legislative and regulatory framework; the Code of Ethics, Equal Opportunities, corporate rules  > at the request of the director responsible, expresses healthy and proper business, consistent with the objectives  > may request the internal audit function to audit specific and regulations, or any other actions or omissions that, opinions on specific aspects regarding the identification established by the Board of Directors. The system of internal operating areas and compliance with the internal rules and directly or indirectly, might result in economic or financial of the main business risks, as well as on the design, control and risk management allows the identification, procedures for the conduct of business operations; and losses for or damage to the reputation of the Group and/ implementation and management of the system of measurement, management and monitoring of the principal  > reports in a timely manner to the Corporate Governance, or its subsidiaries; internal control and risk management; risks, as well as the reliability, accuracy, trustworthiness and Sustainability, Control and Risks Committee (or to the Board  > provides adequate support to the Supervisory Bodies  > examines the periodic reports prepared by the internal timeliness of financial information. of Directors) on issues and critical situations identified established pursuant to art. 6 of Decree 231/2001; audit manager and the compliance function manager; during his work or that came to his attention, so that the  > provides advice and support to the relevant Company  > monitors the autonomy, adequacy, effectiveness and The Board of Directors is responsible for the adoption of an Committee (or the Board) can take appropriate action. departments – without exercising any decision-making efficiency of the internal audit function; adequate system of internal control and risk management,  > requests, if deemed appropriate, the performance of checks carrying out the duties assigned to it by the Corporate in specific operational areas, informing the Chairman of Governance Code with support from the Corporate the Board of Statutory Auditors at the same time; Governance, Sustainability, Control and Risks Committee. 13.2 INTERNAL AUDIT FUNCTION or authorisation responsibilities – regarding inter alia: (i) the reliability of their systems for safeguarding corporate assets; (ii) the adequacy of their procedures for recording, controlling and reporting administrative activities; (iii)  > reports to the Board of Directors on the work performed The Company has established an internal audit department, the assignment of engagements to the firm of legal and on the adequacy of the system of internal control and A more complete description of the system of internal control managed by Maurizio Bonzi, who has been granted with duties auditors and to other firms in its network. risk management at least every six months, at the time of adopted by Pirelli can be found in the Report on the responsible essentially consistent with those set out in the Corporate approving the financial statements and the half-year report; management of the value chain. Additionally, in this regard, the Governance Code.  > at the request of the Board, supports with appropriate Board of Statutory Auditors has issued an attestation about 13.3 COMPLIANCE FUNCTION preparatory work the evaluations and decisions of the the administration and accounting systems adopted by the In particular, this function is tasked with assessing the Board of Directors concerning the management of risks significant subsidiaries of Pirelli to ensure that the economic, adequacy and functioning of the control, risk management Operating within the Corporate Affairs and Compliance arising from any detrimental facts that may have come to financial and cash flow data required for the preparation of and corporate governance processes, through an independent Department, the Compliance Function works with the Legal its attention; the consolidated financial statements is received properly by and objective assurance and advisory activities. departments and other business functions to ensure that  > monitors compliance with and the periodic update of the management of Pirelli and its auditors. The internal audit function: internal regulations, processes and business activities are the corporate governance rules, as well as compliance with any codes of conduct adopted by the Company and its subsidiaries. In particular, the committee proposes procedures and related timing for the annual self- 13.1 RESPONSIBLE DIRECTOR  > verifies, both on a continuous basis and in relation to specific constantly aligned with the applicable regulatory framework, needs and in accordance with international standards, participating actively in the identification of any non- the effective operation and suitability of the System conformity risks that might give rise to court-imposed and of Internal Control and Risk Management - suggesting administrative penalties, with a consequent loss of reputation. assessment of the Board of Directors; The Board has designated Marco Tronchetti Provera as the any corrective actions - by implementing an audit plan,  > monitors sustainability matters relating to the conduct of director responsible for supervising the functioning of the approved each year by the Board of Directors, based on the business and the dynamics of its interactions with all internal control system (the “Responsible Director”). stakeholders; 1 2 2 ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownership13.4 SYSTEM OF RISK MANAGEMENT AND CONTROL OVER FINANCIAL INFORMATION A system for supervising the verification work carried out would not eliminate in full the risk of incurring penalties as a entail: (i) the legal audit of the accounts (including verification has been implemented through a chain-of-certifications consequence of their activities. that the accounting records are properly kept and that the mechanism; any problems that emerge during the evaluation results of operations are properly reflected in the accounting process are the subject of action plans whose implementation The 231 Model comprises: (a) a general part covering topics entries) pursuant to arts. 13 and 17 of Decree 39/2010 for the Pirelli has implemented a specific and detailed system of is monitored at subsequent reporting dates. relating, inter alia, to the applicability and application of Decree financial years 2017-2025, in relation to the separate financial internal control and risk management, supported by a 231/2001, the composition and functioning of the Supervisory statements of the Company, the consolidated financial dedicated IT application, covering the process of preparing Lastly, the Chief Executive Officers and Chief Financial Officers Body, and the system of penalties applicable in the event of statements of the Group and the additional related activities; its half-yearly and annual separate and consolidated financial of subsidiaries issue a quarterly confirmation of the reliability violations of the standards of conduct specified in the 231 and (ii) the limited examination of the abridged consolidated information, in order to safeguard corporate assets and ensure and accuracy of the data submitted for the preparation of Model, and (b) special parts containing the general principles half-year financial statements of Pirelli & C. S.p.A. for the six- compliance with the relevant laws and regulations, as well as consolidated financial statements. of conduct and the control protocols for each type of identified month periods ending on 30 June 2018-2025. the efficiency and effectiveness of business operations and the offence deemed significant for the Company. reliability, accuracy and timeliness of financial information. Shortly before the Board meetings held to approve the consolidated data as of 30 June and 31 December, the Chief The Supervisory Body was appointed by the Board of Directors 13.8 CHIEF REPORTING OFFICER In particular, the financial reporting process is carried out Financial Officer discusses the results of the verification work on 31 August 2017 and comprises Carlo Secchi (Chairman), by applying appropriate administrative and accounting carried out with the Chief Financial Officers of each Group Antonella Carù (Serving Auditor), Maurizio Bonzi and Alberto The Board of Directors has assigned to Francesco Tanzi, procedures created in accordance with the criteria established company. Bastanzio (the last mentioned in view of their respective roles with effect from the First Trading Day and after receiving a by the Internal Control – Integrated Framework issued by the as Corporate Vice President Internal Audit and Corporate favourable opinion from the Board of Statutory Auditors, the Committee of Sponsoring Organizations of the Treadway The Internal Audit Department carries out periodic audits to Vice President Corporate Affairs, Compliance and Company role of executive responsible for the preparation of corporate Commission. verify the adequacy of the design and the effective operation Secretary). The Supervisory Body satisfies the autonomy, and accounting documentation pursuant to art. 154-bis TUF of the controls over companies and processes. These audits independence, professionalism and continuity of action (the “Chief Reporting Officer”). The Board of Directors has The administrative/accounting procedures adopted for are performed using samples selected applying materiality requirements specified by law for that body. also verified that the Chief Reporting Officer is an expert in the preparation of financial statements and all other criteria. administration, finance and control matters and satisfies the 2 2 2 financial disclosures are created under the responsibility of the Chief Financial Officer, who periodically (and in any case, on preparation of the separate/consolidated financial statements) checks their adequacy and proper application. 13.5 DIRECTOR RESPONSIBLE FOR SUSTAINABILITY MATTERS Pirelli has adopted a Code of Ethics that sets out principles for honourability requirements established for the directors. the required conduct of directors, statutory auditors, executives 3 2 2 and employees of the Group and, in general, all those that work The Chief Reporting Officer puts suitable administrative and in Italy and abroad on behalf of or for the benefit of the Group, accounting procedures in place for the preparation of the or that engage in business relations with the Group, each in the separate and consolidated financial statements, as well as of In order to permit certification by the Chief Financial Officer, The Board has assigned to Director Giorgio Luca Bruno the role context of their own functions and responsibilities. all other financial communications. the companies and the significant processes that generate of Director responsible for sustainability matters. In that role, economic, financial or cash flow information have been mapped. he is entrusted with supervising the sustainability matters Group companies and significant processes are identified associated with the conduct of business activities and the each year on the basis of quantitative and qualitative criteria. related dynamics of interactions with all stakeholders, as well 13.7 AUDIT COMPANY The Company deeds and communications made public to the market that contain accounting information, including interim data, must be accompanied by a written declaration from the Quantitative criteria include the identification of those Group as with implementing the guidelines defined by the Board of The company engaged to perform the legal audit of the Chief Reporting Officer confirming that it corresponds to the companies whose aggregate value, in relation to the processes Directors, with assistance from the Corporate Governance, accounts of the Company is PricewaterhouseCoopers S.p.A. supporting documentation, records and accounting entries. selected, exceeds a predetermined threshold of materiality. Sustainability, Control and Risks Committee. (the “Auditing Firm”), with registered and administrative Qualitative criteria include the review of those processes and of those companies that, as determined by the Chief Financial Officer, may be exposed to risk despite not falling within the 13.6 231 MODEL AND CODE OF ETHICS offices at via Monte Rosa 91, Milan, recorded on the Register of In particular, the Chief Reporting Officer, together with Legal Auditors established pursuant to art. 6 et seq of Decree the Chief Executive Officer, certifies in specific reports 39/2010, as implemented by Decree 144 of the Ministry of the accompanying the separate financial statements, the Economy and Finance dated 20 June 2012. consolidated financial statements and the abridged half-year quantitative parameters described above. The Company has adopted the organisation and management financial statements: Risks/control objectives have been identified for each (the “231 Model”), in order to create a system of rules April 2017 engaged the Auditing Firm to perform the legal audit and accounting procedures during the period to which selected process involved in the preparation of the financial designed to prevent illegal conduct that might be significant of the accounts of Pirelli, pursuant to art. 14 of Decree 39/2010, the documents refer; statements and related disclosures, as well as with regard to for the purposes of applying the above regulations and, as as amended by Decree 135/2016, and art. 2409-bis et seq of the  > that the documents have been prepared in accordance with the effectiveness/efficiency of the system of internal control a consequence, has established a Supervisory Body (the Civil Code, for the three-year period 2017, 2018 and 2019. the international accounting standards endorsed by the in general. “Supervisory Body”). European Union pursuant to Regulation (EC) 1606/2002 of model envisaged by Decree 231 dated 8 June 2001, as amended In particular, the Ordinary Shareholders’ Meeting held on 27  > the adequacy and effective application of the administrative The Ordinary Shareholders’ Meeting held on 1 August 2017 the European Parliament and of the Council of 19 July 2002; Detailed verification work and specific responsibilities have The Company has not extended adoption of the 231 Model to confirmed the above appointment to perform the legal audit of  > the conformity of the documents with the accounting been defined for each control objective. its foreign subsidiaries as that model might not be compatible the accounts, establishing that, with effect from the admission records and entries; with their current national regulations and, therefore, of Pirelli shares to trading on the MTA, such appointment would  > the suitability of the documents to present a true and fair ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownershipview of the economic and financial position and cash establishing stricter rules for the transactions of greater and an Alternate Auditor, the Board of Statutory Auditors is Should application of the list voting mechanism not obtain, flows of the Company and, taken as a whole, of all the significance, with regard to both their authorisation process appointed on the basis of lists presented by the shareholders, considering the Effective and Alternate Auditors separately, companies included in the consolidation; and the information provided to the market. The Related- in which each candidate is listed with a sequence number. Each the minimum number of statutory auditors belonging to  > for the separate and consolidated financial statements, Party Transactions Committee (composed of independent list contains a number of candidates that does not exceed the the less represented gender envisaged by the laws and/or that the report on operations includes a reliable analysis directors) is required to express an opinion on all transactions number of members to be elected. regulations in force at the time, the candidate belonging of performance and the results of operations, as well as of of greater or minor significance, in terms of the interest of to the most represented gender and elected, indicated with the situation of the Company and, taken as a whole, the the Company in carrying out the transaction, as well as the Shareholders are only entitled to present a list if, alone or the highest progressive number of each section from the list companies included in the consolidation, together with reasonableness and substantial correctness of the related together with other shareholders, they hold at least 1% of that obtained the largest number of votes, is replaced by the a description of the principal risks and uncertainties to conditions. This opinion is binding for all transactions of the shares entitled to vote at an Ordinary Meeting, or any first candidate belonging to the less represented gender not which they are exposed; greater or minor significance. lower amount required by a regulation issued by Consob already elected from the same section of that list, pursuant to  > for the abridged half-year financial statements, that the for the presentation of lists of candidates for appointment the sequential order of presentation. interim report on operations contains a reliable analysis The approval process envisaged by the RPT Procedure is not to the Board of Directors. Each shareholder may present or of the information required by para. 4 of art. 154-ter TUF. required, on the other hand, for transactions of insignificant contribute to the presentation of just one list. An Effective Auditor is replaced, in the event of death, 14. INTERESTS OF THE DIRECTORS AND RELATED-PARTY TRANSACTIONS 2 2 4 amount. The RPT Procedure also envisages certain exemptions, resignation or forfeiture, by the first Alternate Auditor drawn as well as the possibility of adopting framework resolutions The lists of candidates, signed by those presenting them, must from the same list. If this replacement does not allow the and, in urgent cases, of making exceptions to the obligations be filed at the registered offices of the Company at least twenty- Board of Statutory Auditors to be reconstructed in compliance established in the RPT Procedure. five days prior to the date fixed for the Meeting called to appoint with current regulations, including those governing gender the members of the Board of Statutory Auditors, unless more balance, recourse is made to the second Alternate Auditor The full text of the RPT Procedure is available on the Website. time is allowed for the presentation of candidates in the cases drawn from the same list. If, subsequently, it becomes Periodically and at least every three years, the Board of envisaged by law and/or the regulations. These lists are made necessary to replace another Effective Auditor drawn from Directors - having received the opinion of the Related-Party available to the public at the registered offices, on the Website the list that obtained the largest number of votes, recourse Transactions Committee - considers the need to revise the and in any other ways envisaged in a relevant Consob regulation, is always made to the other Alternate Auditor on that list. Procedure. at least twenty-one days prior to the date of the Meeting. Should it be necessary to replace the Chairman of the Board 5 2 2 As required by art. 2391-bis of the Civil Code and the Related Parties Regulation, on 6 November 2017 – in confirmation of the resolutions adopted on 31 August 2017 - the Board of Directors resolved to adopt the procedure for related- party transactions (the “RPT Procedure”), following the unanimous favourable opinion expressed by the Related- Party Transactions Committee. The RPT Procedure establishes rules for the approval and execution of the related-party transactions arranged directly by Pirelli or by its subsidiaries. 15. BOARD OF STATUTORY AUDITORS 15.1 APPOINTMENT, REPLACEMENT AND DURATION IN OFFICE of Statutory Auditors, the chair is taken by the second auditor Each candidate may be included on just one list, subject on the same list as the Chairman to be replaced, on condition otherwise to becoming ineligible. in all cases that the replacement satisfies the requirements for the position established by law and/or the Articles and Each list comprises two sections: one for candidates Effective complies with the gender balance requirements envisaged Auditors and the other for candidates Alternate Auditors. by the laws and/or regulations in force at the time; if it is not The first candidate in each section must be a registered Legal possible to make replacements in accordance with the above Auditor who has worked as a legal auditor for not less than criteria, a Shareholders’ Meeting is called to reconstruct the three years. In compliance with the regulations in force from Board of Statutory Auditors with resolutions adopted by a time to time concerning gender balance, lists - considering relative majority of the votes cast. both sections - that contain three or more candidates must include candidates of different gender in both sections for When the Shareholders’ Meeting shall appoint the Effective Effective Auditors and Alternate Auditors. and/or Alternate Auditors necessary to reconstruct the Board In particular, the RPT Procedure distinguishes: At the Report Date, the Board of Statutory Auditors is made of of Statutory Auditors, the procedure is the following: if it is 1. transactions of insignificant amount (with a value not five Effective Auditors and three Alternate Auditors who are Each party entitled to vote may only vote for one list. The members necessary to replace auditors elected from the majority list, exceeding Euro 150,000); required to satisfy current regulatory requirements; in this regard of the Board of Statutory Auditors are elected as follows: the appointment is made by a relative majority of the votes 2. transactions of greater significance, being those it shall be considered that the subjects and sectors of activity 1. four Effective Auditors and two Alternate Auditors are cast, without any list requirements and without prejudice, in exceeding the thresholds envisaged in attachment 3 to closely related to those of the company are those indicated in drawn, in the sequence listed, from the list that obtained all cases, to compliance with the gender balance requirements the Related Parties Regulation or those that, although the corporate objects, with particular reference to companies or the largest number of votes (the majority list); envisaged by the laws and/or regulations in force at the not exceeding such thresholds, given their nature, bodies operating in the financial, industrial, banking, insurance 2. the remaining Effective Auditor and Alternate Auditor are time; if, on the other hand, it is necessary to replace auditors strategic importance, size or commitments, have a and real estate fields and of services in general. drawn, in the sequence listed, from the list that obtained elected from the minority list, the Meeting replaces them significant impact on the activities of the Company or the the second largest number of votes (the minority list); by a relative majority of the votes cast, choosing - where Group, or might affect the operational autonomy of the The Ordinary Meeting appoints the Board of Statutory should several lists obtain the same number of votes, a possible - among the candidates indicated on the list from Company (transactions of strategic significance); and Auditors and determines its remuneration. new vote limited to just those lists is held by all those which the auditor to be replaced was drawn and, in all cases, 3. transactions of minor significance, different from entitled to vote that are present at the Meeting, with the in compliance with the principle guaranteeing representation transactions of greater significance and transactions of In order to enable the minority to elect an Effective Auditor elections of the candidates from the list that obtains the for the minorities that, pursuant to the Articles, are entitled insignificant amount; (who will be the Chairman of the Board of Statutory Auditors) relative majority of the votes cast. to participate in the appointment of the Board of Statutory ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownershipAuditors, without prejudice in all cases to compliance with On 30 August 2017, Effective Auditors David Reali and Table 3 attached provides for the relevant information about In addition to the matters reserved for examination and/or the gender balance requirements envisaged by the laws and/ Giovanni Bandera resigned for professional reasons with each member of the Board of Statutory Auditors in charge at approval by the Board of Directors of the Company pursuant or regulations in force at the time. The principle guaranteeing effect from the date of the Shareholders’ Meeting called the Report Date. In addition, a summary of their professional to the law and the Articles, the flow of information to the representation for the minorities is respected if the auditors to resolve on their replacement. The Board of Statutory profiles is available on the Website. Directors and Statutory Auditors contains information about: elected were previously candidates on the minority list or on Auditors was therefore reconstructed by the appointment lists other than that which, at the time of appointing the Board of two new Effective Auditors at the Shareholders’ Meeting of Statutory Auditors, obtained the largest number of votes. held on 5 September 2017. If only one list is presented, the Meeting votes on it; if the The Board of Statutory Auditors in office at the Report Date list obtains the relative majority of votes cast, the candidate is made of the following members: Francesco Fallacara, Fabio Effective Auditors and Alternate Auditors named in the Artoni, Antonella Carù, Alberto Villani, Luca Nicodemi, Fabio respective sections of the list are elected; the person named Facchini and Giovanna Oddo. first on the list becomes the Chairman of the Board of Directors. For the appointment of statutory auditors who, for any statutory auditors is three with one resulting vacancy. reason, were not appointed in accordance with the above Since, according to the relevant agenda, the entire Board procedure, the Shareholders’ Meeting adopts resolutions with of Statutory Auditors will be renewed by the upcoming Pursuant to the new Articles the number of alternate 16. INFORMATION FLOWS TO THE DIRECTORS AND STATUTORY AUDITORS (I) the general results of operations and the outlook for the future; (ii) the activities carried out, with particular reference to the transactions (a) of greater strategic, economic, financial and investment interest, (b) with related parties, and (c) that are atypical or unusual; (iii) the instructions given in the exercise of management and coordination activities pursuant to arts. 2497 et seq. of the Civil Code, and (iv) any other activities, transactions or events that it is deemed appropriate to bring to the attention of the Directors and Statutory Auditors. When the information flows relate to Inside Information and/or Significant Information, they must take place in accordance and compliance with the procedures indicated in the Market Abuse Procedure. the majorities required by law, without prejudice in all cases to Shareholders’ Meeting approving the financial statements On 28 July 2017, the Board of Directors of Pirelli adopted a compliance with the gender balance requirements envisaged 2017, it was not necessary to proceed with an immediate procedure for information flows to the Directors and Statutory by the laws and/or regulations in force at the time. Outgoing integration of the Board. Statutory Auditors may be re-elected. Auditors, in order to (i) guarantee the transparent management of the business, (ii) establish conditions for the effective and 2 2 6 15.2 COMPOSITION The professional profiles of the members of the Board of efficient management and control of the activities of the Statutory Auditors are summarised on the Website. Company and the operations of the business by the Board of Except as indicated above with reference to the Meeting the sources of information needed for the efficient performance Directors, and (iii) provide the Board of Statutory Auditors with 17. RELATIONS WITH SHAREHOLDERS 7 2 2 On 14 May 2015, the Ordinary Meeting appointed (using the held on 14 May 2015, the Board of Statutory Auditors was of its supervisory role. On 31 August 2017, the Board of Directors list voting mechanism as, at the time, the Company was listed elected without application of the above-mentioned list confirmed adoption of the above procedure. Pirelli considers that financial communications have strategic on the stock exchange) Francesco Fallacara (appointed by voting mechanism, which will be applied from the first importance for consolidating the relationship of trust existing the minorities), Fabio Artoni and Antonella Carù, as Effective renewal of that Board subsequent to the First Trading Day. The flow of information to the Directors and Statutory Auditors with the financial community. Pirelli maintains constant Auditors, and Andrea Lorenzatti, Fabio Facchini and Giovanna In particular, that renewal will take place at the Annual is assured, preferably, by the transmission of documents dialogue with Shareholders, Bondholders, institutional and Oddo, as Alternate Auditors until the date of the Shareholders’ General Meeting. on a timely basis and, in any case, with sufficient frequency individual investors, Analysts and, more generally, with Meeting called to approve the financial statements for the to ensure compliance with the disclosure requirements the Italian and international financial community through year ended on 31 December 2017. The remuneration of the statutory auditors is discussed in the established by law and the Articles, and in accordance with the Investor Relations function, in order to promote equal, Compensation Report. deadlines consistent with the timetables set for each Board transparent, timely and accurate communications. On 15 March 2016, following the resignation at the time meeting. of the delisting of Antonella Carù and Andrea Lorenzatti, During the period between the First Trading Day and the Following the return to the stock exchange, the “Investors” the Ordinary Meeting resolved to increase the number end of the Year, the Board of Statutory Auditors of Pirelli These documents may be integrated by verbal explanations section of the Website has been expanded with new content of of Effective Auditors to five and consequently appointing has met 3 times, with each meeting having an average given by the Chairman, the Executive Directors or top interest to the financial market: the strategy (“Equity Story”), Fabrizio Acerbis, Giovanni Bandera and David Reali as duration of about 2 hours. managers of the Group in the context of the board meetings, economic-financial data (including the carve-out financial Effective Auditors until the date of the Shareholders’ Meeting or at specific informal meetings organised to examine topics statements for 2014, 2015 and 2016), and the opinions on Pirelli called to approve the financial statements for the year ended At the Report Date, about 29% of the members of the Board of interest relating to the management of the Company. expressed by financial analysts (“Consensus”). The Investor on 31 December 2017. of Statutory Auditors belong to the female gender and Relations Department also promotes periodic meetings with about 71% belong to the male gender (respectively 20% and In all cases, the Directors and Statutory Auditors receive Shareholders and Investors in Italy and abroad. On 1 August 2017, following the resignation for professional 80% considering just the Effective Auditors). In addition, the information published by Pirelli in accordance with the reasons of Effective Auditor Fabrizio Acerbis, the Ordinary 80% of the Effective Auditors are over 50 years of age and regulations governing corporate disclosures (such as press Meeting reconstructed the Board of Statutory Auditors by the remaining 20% are between 30 and 50. The average age releases and reports) and investment proposals (prospectuses, appointing Antonella Carù as a Effective Auditor. On 31 August of both the members of the Board of Statutory Auditors howsoever described). 2017, the Board of Statutory Auditors verified that Effective taken as a whole and ust the Effective Auditors is about 54. Auditors Francesco Fallacara, Antonella Carù and Fabio Artoni satisfied the relevant independence requirements. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownership18. SHAREHOLDERS’ MEETINGS discussed. At the time of publishing the notice of call for the Ordinary and Extraordinary Shareholders’ Meetings are Meeting resolutions are evidenced by the minutes signed by the Meeting and in accordance with the procedures envisaged by chaired by the Chairman of the Board of Directors or, if absent Chairman of the Meeting and by the Secretary of the Meeting law, the Board of Directors must make the report prepared or unavailable, by the Chief Executive Officer. If the above or the Notary. The minutes of Extraordinary Meetings must be by the shareholders available to the public, together with its persons are absent, the chair is taken by another person taken by a Notary designated by the Chairman of the Meeting. considerations, if any. appointed by a majority of the share capital represented at All copies of and extracts from minutes not prepared by a Notary Pursuant to art. 7 of the Articles, ordinary and extraordinary the Meeting. are certified true by the Chairman of the Board of Directors. Shareholders’ Meetings of the Company are held in single In the cases, in the manner and with the timing envisaged by call. Their resolutions are adopted with the majority required law, shareholders that, individually or together, represent at The Chairman of the Meeting is assisted by a Secretary, In addition to the law and the Articles, the course of the by law, with the sole exception of the authorisation of the least one-fortieth of share capital may request the integration appointed by a majority of the share capital represented at the Shareholders’ Meetings is governed by the Meeting Regulation Board of Directors to carry out the deeds listed below, which of the items of the agenda, indicating in their request the Meeting, who does not need to be a shareholder; assistance approved at the Shareholders’ Meeting held on 1 August 2017, requires a qualified majority (votes in favour of shareholders additional topics proposed by them, or proposing resolutions from the Secretary is not necessary when the minutes of the which took effect from the first day of trading in the shares of representing at least 90% of the share capital of the Company): on matters already on the agenda. Meeting are taken by a Notary. the Company on the MTA organised and managed by Borsa  > transfer the operational and administrative headquarters Italiana S.p.A.. outside of the municipality of Milan; A notice is published about the addition of items to the agenda The Chairman of the Meeting chairs the Meeting and, in  > any transfer and/or deed of disposition, in any form, of or the presentation of additional proposed resolutions on accordance with the law and the Articles, moderates its Pirelli know-how (including the granting of licences). matters already on the agenda, by the legal deadlines, in the course. For this purpose, the Chairman - inter alia - verifies Parties entitled to vote may be represented by proxy, given manner established for publication of the notice of call. that the Meeting has been properly convened, verifies in accordance with the procedures envisaged by law and the the identity of those attending and their right to attend, regulations in force. Shareholders requesting additions to the agenda must prepare directly or by proxy; verifies the legal quorum for voting; Proxies may be notified to the Company via electronic means the presentation of requests for additions, a report explaining of discussion of the items indicated in the notice of call. The by: (i) using the specific section of the Website indicated by their reasons for the proposed resolutions on the matters they Chairman also adopts suitable measures to ensure orderly and send to the Board of Directors, by the final deadline for directs the proceedings, with the right to change the order 19. CHANGES SINCE THE END OF THE YEAR 2 2 8 the Company in the notice of call; (ii) sending a e-mail to the wish to discuss, or their reasons for the additional proposed discussions and voting, determining the related procedures There have not been any changes to the structure of corporate certified e-mail address indicated by the Company in the resolutions presented in relation to matters already on and checking the results. governance since the end of the Year, except as already 9 2 2 indicated in the previous sections, if applicable. notice of call. the agenda. At the time of publishing the notice about the additions to the agenda and in accordance with the procedures The notice of call may also limit to one of the above methods envisaged by law, the Board of Directors must make the report the specific procedure usable in relation to the Meeting called prepared by the shareholders available to the public, together by that notice. with its considerations, if any. For each Meeting, the Company designates one or more The Meeting quorum and the validity of resolutions are persons to which those entitled to vote at the Meeting may governed by law. grant a proxy, with voting instructions for all or just some of the motions on the agenda. The proxy does not apply to The right to attend Meetings and vote is governed by motions for which no voting instructions were given. The the relevant current legislation and is certified by a persons designated to receive proxies for the Meeting are communication sent to the Company, by an authorised specified in the related notice of call, together with relevant intermediary with reference to its accounting records, on procedures and deadlines. behalf of the party entitled to vote. This certification is based on the evidence existing at the end of the accounting day The Ordinary Meeting for the approval of the financial on the seventh trading day prior to the date fixed for the statements must be called, in accordance with the law, by no Meeting. The additions and deductions recorded on those later than 180 days from the end of the financial year. accounts subsequent to that deadline are not relevant In the situations envisaged by law and in accordance with the the Meeting. The communication must be received by the related procedures, the directors must call a Meeting without Company by the end of the third trading day prior to the date delay when requested by shareholders representing at least fixed for the Meeting, or by any different deadline established one-twentieth of share capital. by the applicable regulations. Shareholders are still entitled when determining the legitimacy of the right to vote at The shareholders requesting the Meeting must prepare Company after the above deadlines, on condition that it is a report on their proposals regarding the matters to be received before business commences at the Meeting. to attend and vote if the communication is received by the ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownershipTABLE 1: SIGNIFICANT SHAREHOLDINGS Listed below are the parties who, according to Consob publications at the publication date of this Report, hold shares with voting rights at Ordinary Shareholders’ Meetings of more than 3% of the ordinary capital. SIGNIFICANT SHAREHOLDINGS Declarant Direct shareholder % on ordinary capital % on voting capital China National Chemical Marco Polo International Corporation Italy S.p.A. 63.11 % 63.11 % N.B.: Information on the shareholders who, directly or indirectly, hold ordinary shares of more than 3% of the share capital with voting rights at the Company’s ordinary shareholders’ meetings is taken from the Consob website. In that regard, note that information published by Consob on its website, in accordance with the notifications made by the parties subject to the obligations of Art. 120 TUF and the Issuer Regulations, may deviate significantly from the actual situation, as the obligation of notification of changes in the percentage of shareholdings held does not apply to a change in this percentage alone, but only when the holding “exceeds” or “falls below” pre-determined thresholds (3%, 5% and subsequent multiples of 5% up to the threshold of 30% and, above this threshold, 50%, 66.6% and 90%). Therefore, for example, a shareholder (i.e. the declarant) who declares they hold 5.1% of the capital with voting rights may increase their shareholding up to 9.9%, without being required to notify Consob and the Company, as per Art. 120 TUF. It is furthermore specified that the Articles of Association of the Company do not allow a majority of voting rights or the issue of shares with multiple votes. 2 3 0 1 3 2 ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownership TABLE 2: STRUCTURE OF THE BOARD OF DIRECTORS AND ITS COMMITTEES Board of Directors29 Position Members Year of birth Date of first appointment* In office since32 In office until List (**) Exec. Non- esec. Indep. Code Indep. TUF No. of other positions *** (*) Chairman Ren Jianxin 1958 20 October 2015 31 August 2017 Meeting of balance sheet as at 31 December 2019 - x See App. A 1/2 Chief Executive Officer and Executive Vice Chairman •◊ Marco Tronchetti Provera 1948 07 May 200333 31 August 2017 Meeting of balance sheet as at 31 December 2019 - x 2 3 2 Director Yang Xingqiang 1967 20 October 2015 31 August 2017 Director Bai Xinping 1968 02 September 2015 31 August 2017 Director Giorgio Luca Bruno 1960 15 March 2016 31 August 2017 Meeting of balance sheet as at 31 December 2019 Meeting of balance sheet as at 31 December 2019 Meeting of balance sheet as at 31 December 2019 - - - x x x See App. A 2/2 See App. A 2/2 See App. A 2/2 See App. A 2/2 Control, Risks, Sustainability and Corporate Governance Committee30 Remuneration Committee31 Appointments Committee Strategies Committee RPT Committee (*) (**) (*) (**) (*) (**) (*) (**) (*) (**) - - M C 1/1 M - M - - - - C M M M 3 3 2 29 The new Shareholders’ Agreement provides for an additional independent Director be added to the Board of Directors, who shall be appointed by minorities at the first ordinary shareholders’ meeting held after the First Trading Day. 30 The Control, Risks, Sustainability and Corporate Governance Committee shall be integrated with the director appointed by the first shareholders’ meeting of the Company. 31 The Remuneration Committee shall be integrated with the director appointed by the first shareholders’ meeting of the Company. 32 The Board of Directors in office at the Report Date was appointed by the Ordinary Shareholders’ Meeting held on 01 August 2017, effective as of 31 August 2017. 33 Marco Tronchetti Provera took the position of general partner (socio accomandatario) at Pirelli & C. Limited Joint-Stock Company (società in accomandita per azioni) on 29 April 1986. On 07 May 2003, the Company was transformed into joint-stock company (società per azioni). Consequently, given the non-applicability of the figure of general partners (soci accomandatari), the Directors were appointed. The following symbols should be entered in the “Position” column: • This symbol indicates the Director in charge of the Internal Control and Risk Management System. ◊ This symbol indicates the main responsible of the management of the Company (Chief Executive Officer or CEO). * Date of first appointment means the date on which the Director was appointed to the issuer’s BoD for the very first time. ** This column indicates the list from which each Director was taken (“M”: majority list; “m”: minority list; “BoD”: list submitted by the BoD). *** This column indicates the number of Director or Statutory Auditor positions held by the interested party in other companies listed on regulated markets, including foreign markets, in financial companies, banks, insurance companies or very large companies. The posts are listed in full in the Corporate Governance Report. (*). This column indicates the Directors’ attendance at meetings of the BoD and its committees respectively (indicate the number of meetings attended over total number of meetings held; e.g. 6/8; 8/8 etc.). (**).This column indicates the Director’s position in the Committee: “C”: Chairman; “M”: member. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownershipBoard of Directors29 Position Members Year of birth Date of first appointment* In office since32 In office until List (**) Exec. Non- esec. Indep. Code Indep. TUF Director Laura Cioli 1963 01 August 2017 31 August 2017 Director Domenico De Sole 1944 01 August 2017 31 August 2017 Director Ze’ev Goldberg 1960 02 September 2015 31 August 2017 Director Tao Haisu 1949 01 August 201734 31 August 2017 Director Marisa Pappalardo 1960 01 August 2017 31 August 2017 Director Cristina Scocchia 1973 01 August 2017 31 August 2017 2 3 4 Director Giovanni Tronchetti Provera 1983 01 August 2017 31 August 2017 Director Fan Xiaohua 1974 01 August 2017 Director Wei Yintao 1971 01 August 2017 31 August 2017 31 August 2017 DIRECTORS CEASED DURING THE YEAR No Directors ceased to hold the office as of the First Trading Day. Meeting of balance sheet as at 31 December 2019 Meeting of balance sheet as at 31 December 2019 Meeting of balance sheet as at 31 December 2019 Meeting of balance sheet as at 31 December 2019 Meeting of balance sheet as at 31 December 2019 Meeting of balance sheet as at 31 December 2019 Meeting of balance sheet as at 31 December 2019 Meeting of balance sheet as at 31 December 2019 Meeting of balance sheet as at 31 December 2019 - - - - - - - - - x x x x x x x x x x x x x x x x x x x x x x x No. of other positions *** (*) See App. A 2/2 See App. A 2/2 See App. A 2/2 See App. A See App. A See App. A See App. A 1/2 2/2 2/2 2/2 See App. A 2/2 See App. A 2/2 Number of Board of Directors meetings during the Year as of the First Trading Day: 2 Audit & Risk Committee: 1 / Remuneration Committee: 1 / Appointments Committee: 0 / Strategies Committee: 0 / RPT Committee: 2 Indicate the quorum required for the submission of lists by the minority for the election of one or more Members (as per Art. 147-ter TUF): 1% of the share capital with voting rights at ordinary shareholders’ meetings. 34 Tao Haisu was a Director of Pirelli from 20 October 2015 to 15 March 2016. Control, Risks, Sustainability and Corporate Governance Committee30 Remuneration Committee31 Appointments Committee Strategies Committee RPT Committee (*) (**) (*) (**) (*) (**) (*) (**) (*) (**) 1/1 M 1/1 M 1/1 C 1/1 1/1 M P 2/2 C - - M M 2/2 2/2 M M - M 5 3 2 - M ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownershipTABLE 3: STRUCTURE OF THE BOARD OF STATUTORY AUDITORS Board of Statutory Auditors Board of Statutory Auditors Position Members Year of birth Date of first appointment* In office since In office until List ** Indep. Code Presidente Francesco Fallacara 1964 14 maggio 2015 14 maggio 2015 Sindaco effettivo Sindaco effettivo Sindaco effettivo Sindaco effettivo Sindaco supplente Sindaco supplente Fabio Artoni 1960 14 maggio 2015 14 maggio 2015 Antonella Carù 1961 14 maggio 2015 1 agosto 2017 Luca Nicodemi 1973 5 settembre 2017 5 settembre 2017 Alberto Villani 1962 5 settembre 2017 5 settembre 2017 Fabio Facchini 1955 14 maggio 2015 14 maggio 2015 Giovanna Oddo 1967 14 maggio 2015 14 maggio 2015 Ass. di bilancio al 31 dicembre 2017 Ass. di bilancio al 31 dicembre 2017 Ass. di bilancio al 31 dicembre 2017 Ass. di bilancio al 31 dicembre 2017 Ass. di bilancio al 31 dicembre 2017 Ass. di bilancio al 31 dicembre 2017 Ass. di bilancio al 31 dicembre 2017 m M - - - M M x x x x x x x AUDITORS CEASED DURING THE YEAR No Statutory Auditors ceased to hold the office as of the First Trading Day. 2 3 6 Number of Board of Statutory Auditors meetings during the year as of the First Trading Day: 3 Indicate the quorum required for the submission of lists by the minority for the election of one or more Members (as per Art. 148 TUF): 1% of the shares with voting rights at ordinary shareholders’ meetings. Attendance at Board of Statutory Auditors meetings *** Attendance at BoD meetings Attendance at CRSCG Committee meetings Attendance at Remuneration Committee meetings Attendance at Appointments Committee meetings Attendance at Strategies Committee meetings Attendance at RPT Committee meetings No. of other positions **** 3/3 3/3 3/3 3/3 2/3 - - 2/2 2/2 2/2 2/2 2/2 - - 0/1 1/1 1/1 1/1 1/1 - - 1/1 1/1 1/1 1/1 1/1 - - - - - - - - - - - - - - - - 2/2 2/2 1/2 2/2 2/2 - - Cfr. All. A Cfr. All. A Cfr. All. A Cfr. All. A Cfr. All. A Cfr. All. A Cfr. All. A 7 3 2 * Date of first appointment means the date on which the Auditor was appointed to the issuer’s Board of Statutory Auditors for the very first time ** This column indicates the list from which each Auditor was taken (“M”: majority list; “m”: minority list). *** This column indicates the Auditors’ attendance at Board of Statutory Auditors meetings (indicate the number of meetings attended over the total number of meetings held; e.g. 6/8; 8/8 etc.). **** This column indicates the number of Director or Statutory Auditor posts held by the interested party pursuant to Art. 148-bis TUF and the relevant implementing provisions of the Consob Issuer Regulations. The full list of posts is published by Consob on its website pursuant to Art. 144-quinquiesdecies of the Consob Issuer Regulations. ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownershipANNEX A Section I: list of the main positions held by the directors in other companies not belonging to the Pirelli group on the report date Name and surname Company Position in the Company Name and surname Company Position in the Company China National Bluestar Co. Ltd. Chairman of the Board of Directors Ansaldo Energia S.p.A. Ren Jianxin China National Chemical Corporation Chairman of the Board of Directors Laura Cioli Brembo S.p.A. Syngenta AG Chairman of the Board of Directors TP Industrial Holding S.p.A. Chairman of the Board of Directors Camfin S.p.A. Chairman of the Board of Directors and CEO Marco Tronchetti Provera & C. S.p.A. Chairman of the Board of Directors Domenico De Sole Sprintitaly S.p.A. Ermenegildo Zegna S.p.A. Newell Brands Sotheby’s Director Director Director Director Director Director Marco Tronchetti Provera Nuove Partecipazioni S.p.A. Chairman of the Board of Directors Tom Ford International Chairman of the Board of Directors RCS MediaGroup S.p.A. Director Ze’ev Goldberg Marco Polo International Italy S.p.A Director TP Industrial Holding S.p.A. Vice-Chairman of the Board of Directors ADAMA Agricultural Solutions Ltd. Chairman of the Board of Directors Tao Haisu China Global Natural Resources Investment Funds Director Mercuria Energy Group Asia Executive Director Yang Xingqiang 2 3 8 China National Chemical Corporation President Marco Polo International Italy S.p.A. Director TP Industrial Holding S.p.A. Director Aeolus Tyre Co. Ltd. Chairman of the Board of Directors Cristina Scocchia China National Chemical Corporation Vice-President China National Chemical Equipment Co. Ltd. Chairman of the Board of Directors Marisa Pappalardo Finstar S.p.A. Elica S.p.A. EssilorLuxottica S.A. KIKO S.p.A. Luxottica S.p.A. Camfin S.p.A. Director Director Director CEO Director Director 9 3 2 China National Tire & Rubber Corporation Chairman of the Board of Directors and President Marco Polo International Italy S.p.A. Director Bai Xinping CNRC International Holding (HK) Ltd. Director Giovanni Tronchetti Provera Marco Tronchetti Provera & C. S.p.A. Director CNRC Capitale Ltd. CNRC International Ltd. Fourteen Sundew S.a.r.l. Director Director Director Nuove Partecipazioni S.p.A. TP Industrial Holding S.p.A. Fan Xiaohua Aeolus Tire Co. Ltd. Marco Polo International Italy S.p.A. Chairman of the Board of Directors Wei Yintao - Director Director Director - TP Industrial Holding S.p.A. Camfin S.p.A. Marco Polo International Italy S.p.A. Giorgio Luca Bruno Nuove Partecipazioni S.p.A. Director Director CEO CEO Prometeon Tyre Group S.r.l. Chairman of the Board of Directors and CEO TP Industrial Holding S.p.A. CEO ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownership Section II: list of the main positions held by the statutory auditors in other companies on the report date Name and surname Company Position in the Company Name and surname Company Position in the Company Maire Tecnimont S.p.A. Chairman of the Board of Statutory Auditors F.C. Internazionale S.p.A. Chairman of the Board of Statutory Auditors Francesco Fallacara Ro. Co. Edil. S.r.l. Effective Auditor Inter Media S.p.A. Chairman of the Board of Statutory Auditors Hira film S.r.l. Effective Auditor Inter Brand S.r.l. Chairman of the Board of Statutory Auditors Mag JLT S.r.l. Effective Auditor Buccellati S.p.A. Chairman of the Board of Statutory Auditors Ecosesto S.p.A. Effective Auditor Mario Buccellati Italia S.r.l. Chairman of the Board of Statutory Auditors Camfin S.p.A. Effective Auditor Restiani S.p.A. Chairman of the Board of Statutory Auditors Pastificio Castiglioni S.p.A. Chairman of the Board of Statutory Auditors Nordest SGR S.p.A. Chairman of the Board of Statutory Auditors Elba S.p.A. Antrim S.p.A. Chairman of the Board of Statutory Auditors Chairman of the Board of Statutory Auditors Alucart S.r.l. Effective Auditor Alhof di A. Hofmann S.p.A. Effective Auditor Finser S.p.A. V.I.P. S.p.A. Chairman of the Board of Statutory Auditors Chairman of the Board of Statutory Auditors Augens SGR S.p.A. Chairman of the Board of Statutory Auditors Italian Creation Group S.p.A. Chairman of the Board of Statutory Auditors JMACC S.p.A. CPC S.r.l. Chairman of the Board of Statutory Auditors Effective Auditor Dainese S.p.A. Effective Auditor Corneliani S.p.A. Effective Auditor Barry Callebaut Italia S.p.A. Chairman of the Board of Statutory Auditors Luca Nicodemi Savills SGR S.p.A. Effective Auditor 2 4 0 Barry Callebaut Manufactoring Italia S.p.A. Chairman of the Board of Statutory Auditors TP Industrial Holding S.p.A. Chairman of the Board of Statutory Auditors Fabio Artoni Euro TLX SIM S.p.A. Effective Auditor Driver Italia S.p.A. Effective Auditor Dolphin S.r.l. Chairman of the Board of Statutory Auditors Chromavis S.p.A. Chairman of the Board of Statutory Auditors Falck Energy S.p.A. Effective Auditor VIP Logistics S.p.A. Chairman of the Board of Statutory Auditors Emma S.p.A. Effective Auditor London Stock Exchange Group Holdings Italia S.p.A. Effective Auditor Marco Polo International Italy S.p.A. Effective Auditor Corob S.p.A. Effective Auditor Imprima S.p.A. (già Color Wind S.p.A.) Effective Auditor Holding di Piergiorgio Coin S.r.l. Effective Auditor One Audit S.p.A. Effective Auditor Guazzotti S.r.l. Effective Auditor Pillarstone Italy Holding S.p.A. Alternate Auditor POC Holding S.p.A. Effective Auditor Wise SGR S.p.A. Alternate Auditor Pillarstone Italy S.p.A. Alternate Auditor De Fonseca S.p.A: Director DUEMMEI S.R.L. Chairman of the Board of Statutory Auditors BORMIOLI PHARMA S.r.l. Chairman of the Board of Statutory Auditors 1 4 2 Prometeon Tyre Group S.r.l. Chairman of the Board of Statutory Auditors BORMIOLI PHARMA BIDCO S.P.A. Chairman of the Board of Statutory Auditors Elite S.p.A. Effective Auditor Foodelicious S.r.l. Effective Auditor Cassa di Compensazione e Garanzia S.p.A. Effective Auditor Pirelli Industrie Pneumatici S.r.l. Effective Auditor Gatelab S.r.l. Tetis S.p.A. Alternate Auditor Alternate Auditor AMFIN HOLDING S.P.A. Effective Auditor Antonella Carù Autogrill S.p.A. Effective Auditor Autogrill Advanced Business Service S.p.A. Effective Auditor ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownershipName and surname Company Position in the Company Name and surname Company Position in the Company AGB Nielsen Media Research Holding S.p.A. Chairman of the Board of Statutory Auditors Ali Group S.r.l. Effective Auditor BTSR International S.p.A. Chairman of the Board of Statutory Auditors Ali Holding S.r.l. Effective Auditor Fratelli Consolandi S.r.l. Chairman of the Board of Statutory Auditors Aliaslab S.r.l. Effective Auditor HDP S.p.A. Chairman of the Board of Statutory Auditors Costa Edutainment S.p.A. Effective Auditor 12 Capital PartnerS SGR S.p.A. Chairman of the Board of Statutory Auditors Dea Capital S.p.A. Effective Auditor Selecta S.p.A. Chairman of the Board of Statutory Auditors Minetti S.p.A. Effective Auditor Selecta Taas S.p.A. Chairman of the Board of Statutory Auditors Fabio Facchini Mundipharma Pharmaceuticals S.r.l. Effective Auditor Quattroduedue S.p.A. Chairman of the Board of Statutory Auditors Massimo Zanetti Beverage Group S.p.A.. Chairman of the Board of Statutory Auditors Riva & Mariani Group S.p.A. Chairman of the Board of Statutory Auditors Nova Foods S.r.l. Sole Auditor Tenuta Montemagno Soc. Agricola S.p.A. Chairman of the Board of Statutory Auditors Prysmian PowerLink S.r.l. Effective Auditor Bennet S.p.A. Effective Auditor RCF Group S.p.A. Chairman of the Board of Statutory Auditors 2 4 2 Alberto Villani Bennet Holding S.p.A. Effective Auditor Carcano Antonio S.p.A. Effective Auditor DE' Longhi Capital Services S.r.l. Effective Auditor DE' Longhi Appliances S.r.l. Effective Auditor EFFE 2005 Gruppo Feltrinelli S.p.A. Effective Auditor FINMEG S.r.l. Effective Auditor Gallerie Commerciali Bennet S.p.A. Effective Auditor INTEK Group S.p.A. Effective Auditor Kiepe Electric S.p.A. Effective Auditor Lambda Stepstone S.r.l. Effective Auditor Meg Property S.p.A. Effective Auditor Nuova GS S.p.A. Effective Auditor Over Light S.p.A. Effective Auditor Vetus Mediolanum S.p.A. Effective Auditor San Remo Games S.r.l. Sole Auditor Viator S.p.A. in liq.ne Alternate Auditor Immobiliare Andronica S.p.A. Alternate Auditor Impresa Luigi Notari S.p.A. Alternate Auditor Compagnia Padana per Investimenti S.p.A. Alternate Auditor Borgogestion S.r.l. Sole Director Royal Immobiliare S.r.l. Sole Director Calvi S.p.A. Pamal S.r.l. SO.SE.A. S.r.l. Vianord Engineering Société par action simplifiée Director Director and CEO Director Director Royal Seeds S.r.l. Director Fondazione Silvio Tronchetti Provera Auditor Tiglio II S.r.l. in liquidazione Liquidator M.S.M.C. Immobiliare Due S.r.l. in liquidazione Liquidator Centrale Immobiliare S.r.l. Liquidator Trixia S.r.l. Chairman of the Board of Statutory Auditors Gromis S.r.l. in liquidazione Liquidator Aida S.r.l. in liquidazione Liquidator Ganimede Due S.r.l. in liquidazione Liquidator Lupicaia S.r.l. in liquidazione Liquidator Giovanna Oddo Iniziative Retail S.r.l. in liquidazione Liquidator 3 4 2 Pirelli Sistemi Informativi S.r.l. Effective Auditor Iniziative Immobiliari S.r.l. in liquidazione Liquidator Riva De Ronchi S.r.l. in liquidazione Liquidator Nuove Partecipazioni S.p.A. Effective Auditor Geolidro S.p.A. Chairman of the Board of Statutory Auditors Pirelli Servizi Amministrazione e Tesoreria S.p.A. Effective Auditor Manifatture Milano S.p.A. Effective Auditor Marco Tronchetti Provera & C. S.p.A. Effective Auditor ANNUAL REPORT 2017ANNUAL REPORT 2017 Report on the corporate governance and structure of share ownershipReport on the corporate governance and structure of share ownershipRICCARDO BIGIO DIFFERENTHOOD This is the first online platform on which users can create unique garments, entirely made in Italy, picking from over 5000 fabrics offering over one million different combinations. The models can be shared with the community and users can earn whenever their garment is purchased by other users.  DIFFERENTHOOD, MAKING THE DIFFERENCE WITH FASHION AND TECHNOLOGY to aristocrats, the wealthy and show business celebrities. Then over the years O nce upon a time buying a made-to-measure suit was a privilege reserved only years ago by Riccardo Bigio in Milan. «My father has always worked in the silk business in Como, while taking it home. This is now possible with Differenthood, a startup founded three it been possible to imagine designing your own clothing, having it made and it came within the reach of increasing numbers of people. But never before has on my mother’s side we have a tailor’s shop that was founded in 1856» says Riccardo, an engineer by training who, until a few years ago, worked as a strategic consultant; he always dreamt, however, that one day he might set himself up in a sector that seems an unavoidable passion given his family pedigree. A pedigree that evokes an era, the 19th century, in which gentlemen (and gentlewomen) would entrust their custom to a tailor’s shop to create exclusive garments. Tailors and dressmakers often copied the patterns of the most celebrated stylists or tailoring houses, bringing the style of the great capitals to the provinces. Now, however, everybody can be their own tailor and designer rolled into one. No particular skills are needed: customers choose from a “base” of overcoats, suits, jackets, trench coats and shirts. They then personalise the shape of the base by choosing their preferred variants: lengths, collars, pockets, cuffs. At this point they choose the fabric and add buttons, buckles, inserts and other accessories. And as if by magic the garment is ready, seemingly produced by the skilled hands of a tailor from another era. But with the convenience of today. Differenthood is also working on another way of assisting the choice process. «Our idea is to provide a box: when you register we send a set of garments in different sizes to your home, with samples of fabrics. You keep them for a week to ten days, then when you’ve chosen you can order online. It isn’t rocket science but nobody else is doing it», says Riccardo. Another possibility not available to the customers of 19th century tailors was sharing: with a catalogue of five thousand fabrics, which crossed with the different design variants enable up to a billion different combinations, each garment is absolutely unique but can be shared with other customers. Earning money in the process: «If someone wants the same garment as you, exactly as you designed it, you as customer-designer take a percentage». It’s fair that you be paid for the copyright», says Riccardo. The tailoring service provided by Differenthood also achieves another ideal aim, at least for company management: the absence of warehouse stocks. And the prices, thanks to the lack of intermediaries, are also 40% lower than for traditional fashion. Once your unique product has been designed it generally takes around 3-4 weeks for it to be made. Shirts are made up in Bergamo, and suits are produced in Rome. «My dream has always been to create something of my own, starting from zero», says Riccardo. “I’ve been working on the project for a long time, including at night during my previous job. Then I took six months’ leave before giving in my notice to open Differenthood». Now his dream has become reality. Technology and courage have enabled him to continue an ancient profession, but with a modern twist. INTRODUCTION For the purposes of the Policy, the Directors not holding special the achievement of certain pre-set business objectives as of creating sustainable value, in the medium to long term offices in other Pirelli Companies, who are also executives of explained in paragraph 5 below. period, by establishing an actual and verifiable link, between the Group (excepting the case where a resolution of the Board remuneration, on the one hand and the performance of the This Remuneration Report (“Report”) is broken down into two of Directors of Pirelli & C. classifies them “Managers with 2018-2020 LTI Plan: means the Long Term Incentive Cash Plan individuals and Pirelli on the other. sections: strategic responsibilities”), are, as regards their role, Executive explained in paragraph 5 below.  > Section I: “Policy” for financial Year 2018 (“2018 Policy”) and o Senior Managers. The structure of the Management remuneration, which  > Section II: “Statement” for financial Year 2017 (“2017 Retention Plan: means the Retention Plan explained in is defined also on the basis of domestic and International Statement”). Annual Total Direct Compensation at Target: means the sum paragraph 7 below. benchmarks prepared by Companies specializing in Executive The Report has been prepared pursuant to art. 123 ter of the of the following components, regardless of the fact that they Compensation, consists of three main elements: Italian Consolidated Law on Finance and to art. 84-Quater of are paid by Pirelli & C. or by another Company of the Group: GAS: means the gross annual fixed component of the  > Gross annual fixed component; the so-called “Issuers Regulation” of CONSOB and also based a) Gross annual fixed component of the remuneration; remuneration for the individuals who are employed by a  > annual variable component (MBO); on the Scheme 7-bis of Annex 3 A of the Regulation of Issuers. b) annual variable component (MBO) which the beneficiary Company of Pirelli Group under an employment contract.  > medium-to-long term variable component (LTI), intended While preparing the report, we took in due consideration would receive in the case where the objectives at target for rewarding the performance of Pirelli Group during the the recommendation of the European Commission on are achieved; Senior Managers: means the first report persons to (i) the 2018-2020 period. remuneration of the Directors of listed companies and c) annualisation of the medium-to-long term variable Directors holding special offices who are assigned specific The MBO and LTI variable components are established - by the recommendations on remuneration of the Corporate component (LTI), which the beneficiary may receive in the duties and (ii) the Executive Vice President whose activity has keeping in account the benchmarks for each position - as a Governance Code issued by Borsa Italiana S.p.A. which was case where the objective set for multiple years at target a significant impact on the business results. percentage of the fixed component, which will raise based on endorsed by Pirelli. are achieved in addition to the annual rolling mechanism the role held by the beneficiary. for the deferred pro-quota payment of the accrued MBO Company: means Pirelli & C. S.p.A.. The Report has also been adopted for the purposes established and payment of an increase of the full accrued MBO based The variable remuneration of the Management is based under article 14 of the Procedure for the Transactions with on the consistency over time (which means during the Top Management: means all the Directors holding special on short and medium-to-long term objectives which are Related Parties of Pirelli. year following the year of accrual of the MBO) in achieving offices and the Managers with strategic responsibilities. established under annual and multi-annual Plans that are 2 5 4 The 2018 Policy sets out principles and guidelines which are the yearly objectives at target. disclosed to the Market. 5 5 2 followed by Pirelli in order to (i) determine and (ii) monitor the Remuneration Committee: means the Remuneration application of the remuneration policies, as presented below, Committee of Pirelli & C.. concerning:  > Directors holding special offices and Managers with Board of Directors: means the Board of Directors of Pirelli & C.. strategic responsibilities of Pirelli & C.;  > The Senior Managers and Executives of the Group. Managers with strategic responsibilities: means the The 2017 Statement, submitted to the Shareholders’ Meeting managers, identified through an express resolution by the for information purposes, provides the final figures on Board of Directors of Pirelli & C., who hold the power or the remuneration for Year 2017. responsibility for planning and supervising the operations of the Company or the power to adopt decisions which may In order to facilitate the understanding and the reading affect the evolution or the future perspective of the Company REMUNERATION POLICY FOR YEAR 2018 1. PRINCIPLES AND REVIEW OF THE RISKS Please refer to paragraph 5 “MBO and LTI Plan” for further details on the operation of said variable components. As this regards, it has to be underlined that the process for managing the risks is fully integrated in the strategic planning process in order to ensure that the objectives provided for achieving the variable incentives shall not expose Pirelli to managerial approaches which are not consistent with the acceptable level of risk (the so-called risk appetite) which is defined by the Board of Directors upon approval of the Plans. of the Report, please find below a glossary of some of the itself or more generally of Pirelli. The Policy is intended to attract, motivate and retain The structure of the remuneration of the Management is recurring terms: resources that have the professional skills necessary to defined so to ensure a balance of its components. Executive: means the managers of the Italian Pirelli Companies successfully pursue the corporate objectives of Pirelli. Pirelli, Directors holding special offices: means the Directors of or the employees of foreign Companies of the Group who hold a in fact, defines and implements a Policy which is characterised Part of the variable remuneration which is accrued in form of Pirelli & C. who hold the office of Chairman and Executive comparable position or a role to those held by an Italian manager. by the following: MBO is deferred for supporting the consistency over time of Vice Chairman and CEO. For the purposes of the Policy, the  > as regards Top Managers and Senior Managers, by a strong the results (and it thus subject to the “risk” of payment) with Directors holding special offices in other Pirelli Companies, Pirelli Group or Pirelli: means all the Companies included pull on the third quartile of the corresponding employment a potential “rewarding” increasing scheme (please refer to who are also executives of the Group (excepting the case within the scope of consolidation of Pirelli & C. S.p.A.. market (as measured by the standard benchmark); paragraph 5 for an analytical description). where a resolution of the Board of Directors of Pirelli & C.  > as regards Executives, in line with the relevant market classifies them “Managers with strategic responsibilities”), Management: means all the Directors holding special offices, practice. The definition of a mix of objectives, which include also certain are, as regards their role, Executive o Senior Managers. the Managers with strategic responsibilities, the Senior The Annual Total Direct Compensation at Target represents non-financial objectives, for the medium/long term variable Directors not holding special offices: means all the Directors Furthermore, the existence of objectives for achieving a of Pirelli & C. who are not Directors holding special offices. MBO: means the annual variable component of the The Policy is defined so as to align the interests of Management significant part of the LTI incentives based on economic/ Managers and the Executives. the comparison benchmark. portion, avoids the prevalence of a single performance objective. remuneration which may be obtained in consideration of with those of Shareholders, pursuing the priority objective financial parameters accrued over three years (and without, ANNUAL REPORT 2017ANNUAL REPORT 2017 Remuneration reportRemuneration reporttherefore, any intermediate accounting) avoid any adoption of certain behaviours which are intended only to reach the short term objectives for receiving the annual incentives. 3. REMUNERATION COMMITTEE Please refer to the specific paragraphs describing, for each Composition The Remuneration Committee is appointed by the Board of Directors (who appoints also its Chairman) by the chief executive officers for that purpose and submits the relevant proposal to the Board of Directors;  > as regards the executive directors and the Directors holding special offices, it submit proposals or provides its opinion to the Board on the following matters: 5. MBO AND LTI PLAN MBO The scope of the MBO plan covers the whole management, excepting some specific cases, and may be category, the relevant structures of any further component and will hold office throughout the mandate of the Board > > their remuneration, in line with the General extended to those who will be hired by the Group during of the remuneration (Severance Indemnities, Non compete of Directors. Remuneration Policy; the year and/or whose internal career leads to an Executive agreement, Retention Plan, non-financial bonuses). > > the setting of certain performance objectives linked position. 2. “PROCESS” FOR DEFINING AND IMPLEMENTING THE POLICIES AND INVOLVED ENTITIES As of the date of this Report, the Committee is formed by to the variable component of said remunerations; three members, who are all non-executives, in majority > > the definition of non compete agreement, if any; The annual variable component (so-called MBO) is the independent, and in line with the provision of the Corporate > > the definition of any agreement for the termination remuneration for the performance of the beneficiary in the Governance Code, the Chairman of the Committee is an of the labour contract also based on the principles short term, typically on an annual basis. independent director. laid down by the General Remuneration Policy;  > as regards the Managers with strategic responsibilities it The objectives of the MBO for the Directors holding special The definition of the Policy is the result of a clear and transparent The Board of Directors, on August 31, 2017, adopted the checks the consistency of their remuneration with the offices who are assigned specific duties and for the Managers process, in which the Remuneration Committee and the Board resolution that the committee will be integrated by General Remuneration Policy and provides its opinion with strategic responsibilities are established by the Board of Directors play a key role. The policy is actually adopted appointing the Director who will be elected by the minorities on it also under the procedure for the Transactions with of Directors (without the concerned officers taking part in and approved on a yearly basis - following a proposal by the during the first Shareholders’ Meeting which will follow the Related Parties; the meetings which decide on this matter) following the Remuneration Committee - by the Board of Directors which listing of the Company.  > provides support to the Board of Directors in reviewing proposal of the Remuneration Committee and are linked to submits it to the consultation vote of the Shareholders’ Meeting. the proposals of the Shareholders’ Meeting on the the performance, on an annual basis, of Pirelli. As of the date of this Report, the Committee is formed by adoption of remuneration schemes based on financial The Board of Statutory Auditors expresses its opinion on the the following persons. Tao Haisu (Chairman), Bai Xinping and instruments; The objectives of the Senior Management and of the 2 5 6 Policy, namely for the part concerning the remuneration of Laura Cioli, whose appropriate experience in financial and  > monitors the implementation of the decisions adopted by Executives are, on the other hand, defined by their direct the Directors holding special offices. remuneration matters was assessed by the Board of Directors the Board assessing, in particular, the actual achievement supervisor, jointly with the Human Resources Department 7 5 2 The Remuneration Committee, the Board of Statutory Auditors  > reviews and submits to the Board of Directors the Annual differently from the Top Management, certain objectives lined and the Board of Directors will supervise its implementation. The full Board of Statutory Auditors is entitled to take part in Remuneration Report, which, on an individual base for to the economic performance of their unit/department or For this purpose, at least once a year, when the Statement on the works of the Remuneration Committee. the members of the governing and supervisory bodies quantity objectives linked to specific individual performance Remuneration is presented, the head of the Human Resources and in aggregate form for the Managers with strategic parameters may be assigned. upon her appointment. of the established performance objectives; and the Planning and Controlling Department. For these roles, department provides his reports on the compliance with the The Secretary of the Board of Directors shall act as Secretary responsibilities: Policy to the Remuneration Committee, whose Chairman shall of the Remuneration Committee. a) provides an appropriate picture of each item which At the end of the relevant year and based on the final report, in turn, to the Board of Directors. The 2018 Policy, which was proposed by the Remuneration Committee and then approved by the Board of Directors, Responsibilities of the Remuneration Committee The Committee has consultation, proposing and supervisory form the remuneration; performance, the Human Resources Department, with the b) analytically lists the remuneration paid by the support of the Planning and Controlling Department, shall Company and its subsidiaries during the relevant assess the level of achievement of the objectives. period at any title and in any form. following the favourable opinion of the Board of Statutory duties for ensuring the definition and the application, within Please refer the Report on Corporate Governance and The accrual of the annual variable component is subject to the Auditors, during the meeting held on February 26, 2018 - is now the Group, of the remuneration policies which are intended Ownership Structure for details on the operation procedures achievement of a financial access condition (the so-called on/ submitted to the Shareholders’ Meeting for its consultation vote. to attract, motivate and retain resources that have the of the Remuneration Committee. off condition), which is defined based on the role held by the For the sake of completeness, please remind that, under current corporate objectives of the Group and, on the other hand, statutory provisions, the Board of Directors is responsible which are suitable to align the interests of the Management for providing (or if required by the Law, proposing to the with the interests of the Shareholders. professional skills necessary to successfully pursue the 4. CONTENTS OF THE 2018 POLICY role held by the beneficiary. beneficiary. The incentive is then calculated on the base of certain objectives which are also defined with regards to the Shareholders’ Meeting) the adoption of incentive schemes by As highlighted in the preamble, the Policy defines principles allocating financial instruments or option rights to financial Namely, the Remuneration Committee: and guidelines which: instruments which, if approved, shall be disclosed to the public  > Supports the Board of Directors in defining the General (i) the Board of Directors complies with for defining the at the latest in the Annual Report on Remuneration (without Remuneration Policy of the Group, by providing its remuneration of the Directors of Pirelli & C., namely prejudice for any further transparency duties established proposals on the matter; the Directors holding special offices and Managers with under the relevant legislation). As of the date of this Report,  > measures, on a regular basis, the overall appropriateness, strategic responsibilities; the Company does not provide any incentive plan based on consistency and the actual implementation of the General (ii) Pirelli refers to for defining the remuneration of the Senior financial instruments. Remuneration Policy, employing the information provided Managers and more generally of the Executives. ANNUAL REPORT 2017ANNUAL REPORT 2017 Remuneration reportRemuneration reportThe objectives for the different roles of the Management and the relevant weight at target are listed below. Each objective provides and access threshold to which the payment of an incentive equal to the 75% of the potential incentive at target is linked; a cap of the payable sum is also provided. Role Objective Weight at target The range of the objectives is established according to the following general rules: Group NFP (before dividends) as of 31 December 2018 On/off condition  > for each objective, the delta between target and maximum is always at least 1.5 times the delta between the target level and the Executive Vice Chairman and CEO and Managers with strategic responsibilities Group Adjusted Ebit Group NFP (before dividends) as of 31 December 2018 Group EBT 40% 40% 20% “access threshold” level;  > the 25% penalization percentage of the reward upon the achievement of the objective at the “access threshold” level, is always higher than the tolerance margin represented by the difference in percentage between the “access threshold” result and the “target” result. Group NFP (before dividends) as of 31 December 2018 On/off condition The final summary of the incentive between access threshold and target and between target and maximum is carried out by Senior Manager/Executive of Headquarter Group Adjusted Ebit Group NFP (before dividends) as of 31 December 2018 or one or more functional objectives with Group “scope” Group EBT Group NFP (before dividends) as of 31 December 2018 if BU; Region NFP if Region responsibility; DSO for Sales Managers35 Senior Manager/Executive of Region/BU Region/EU Adjusted Ebit Functional objective/s with Region/BU/Group “scope” Group EBT 40% 40% 20% On/off condition From 20% to 50% From 20% to 50% From 10% to 20% linear interpolation. MBO LEVERAGE Leverage 200% 100% 75% 2 5 8 The objectives at target represent a performance which is perfectly aligned to the corresponding objectives disclosed to the market. The on/off condition is fixed with a “tolerance margin” against the budget value. 9 5 2 Please find below the target disclosed to the market on February 26, 2018: 75 100 200 Performance FY 2018 OUTLOOK_ The incentive percentages for the different roles of the Management are listed below. Accrued Incentive Role When meeting the objectives When meeting the When meeting the objectives at access threshold objectives at target at maximum level (cap) Executive Vice Chairman and CEO 75% of the incentive at target 125% of the remuneration for the main executive office 200% of the incentive at target Managers with strategic responsibilities 75% of the incentive at target From 50% to 75% of the GAS 200% of the incentive at target Senior Manager/Executive 75% of the incentive at target From 20% to 40% of the GAS based on the role 200% of the incentive at target 35 In case of failure to meet of the on/off condition Region NFP or DSO, it is provided the activation of the on/off condition Group NFP with a 25% reduction of the total accrued payout. RevenuesHigh Value weight≥+6% YoY~+10% Net of FX~60%~€1,0 blnAdjusted EBIT2Net financial position / Adjusted EBITDA w/o start-up costs3~2.3XCapEx on Revenues~8%2018EAdjusted EBIT w/o start-up1>€1,0 bln≥83%Start-up costs~40High Value weight- ~50% High Value capacity increase (Europe, NAFTA, APac and LatAm)- ~25% mix & quality- ~25% maintenance & other1 EBIT adjusted excluding PPA amortization, non recurring, one-off, extraordinary items and start-up costs;2 EBIT adjusted excluding PPA amortization, non recurring, one-off and extraordinary items;3 EBIT adjusted excluding non recurring, one-off, extraordinary items and start-up costs;ANNUAL REPORT 2017ANNUAL REPORT 2017 Remuneration reportRemuneration report Deferred payment of the MBO The payment of 25% of any accrued MBO is deferred by 12 months and is subject to the achievement of the MBO objectives set for the following year. Namely: The incentive percentages for the different roles of the Management are listed below.  > in the case where the year following the year of accrual of the MBO no MBO accrued, the portion of MBO deferred from the Accrued Incentive previous year is finally “lost”;  > in the case where the year following the year of accrual of the MBO the MBO accrued up to the access threshold, the portion of MBO deferred from the previous year is paid;  > in case of achievement, during the following year, of the MBO between target and maximum level, it is provided the payment - in addition to the restitution of the MBO portion deferred from the previous year - of an additional sum between 20% and 40% of the full MBO accrued during the previous year (for intermediate results, during the following year, between target an maximum the increase of the MBO of the previous year shall be calculated by linear interpolation). Role When meeting the objectives When meeting the When meeting the objectives at access threshold objectives at target at maximum level (cap) Vice Chairman and CEO 75% of the incentive at target 250% of the remuneration for the main executive office 200% of the incentive at target Managers with strategic responsibilities 75% of the incentive at target From 167% to 200% of the GAS 200% of the incentive at target Senior Manager/Executive 75% of the incentive at target From 50% to 167% of the GAS based on the role 200% of the incentive at target MBO PLAN - TIMELINE Year T T+1 The objectives of the LTI plan shared between all the different roles of the Management and their relevant weight at target are listed below. Payment 75% Deferred Payment 25% Additional sum between 20% and 40% of the full MBO accured at year T 2 6 0 LTI Plan The 2018-2020 LTI Plan is extended to the whole Management (excepting specific cases such as, for example, the Managers of the Internal Audit department) and may be extended also to those who during the three year term become members of the Group Management and/or whose internal career leads to an Executive position. In this case, the inclusion is subject to the condition to be part of the Plan for at least one full year and the percentage of incentives are reconfigured on the number of months of actual participation to the Plan. Deleveraging (Net Financial Position/Ebitda adjusted ratio) < 2 as of 31.12.2020 On/off condition Target Weight at target Group ROS (which is measured as the ratio between Group Adjusted EBIT accrued during the three year term and the turnover accrued during the three year term). (average value of the share during the last half of 2020 – average value of the share during the last quarter of 2017 + paid dividends) and (average value of the share during the last quarter of 2017) “Absolute” total Shareholder Return measured as: “Relative” Total Shareholder Return against a selected panel of peers (Michelin, Nokian and Continental) Sustainability Index: measured against the placing of Pirelli in the Dow Jones Sustainability World Index, ATX Auto Components industry. This objective is subject to the achievement of the access threshold of at least one of the above economic/financial objectives (if only such objective is met, then no pro-quota of any three year incentive shall be therefore paid) 30% 40% 20% 10% 1 6 2 The 2018-2020 LTI Plan provides and incentive (the so-called “LTI Bonus”) subject to the achievement of multiple year objectives and at the time to the market. As regards the objectives at “relative” performance the target level is set a particularly challenging levels.: The target level of the economic/financial objectives is in line with the objectives of the 2018-2020 Industrial Plan which were disclosed established on a percentage basis of the gross annual fixed component; (GAS) received by the beneficiary as of the date on which the admission the Plan thereof was granted. Said incentive percentage raises based on the role held and takes in due account the reference benchmarks for each role. Role Target Deleveraging (Net Financial Position/Ebitda adjusted ratio) Target Objective On/off condition < 2 as of 31.12.2020 Each objective provides and access threshold to which the payment of an incentive equal to the 75% of the respective portion of potential incentive at target is linked- and a cap of the payable sum. The LTI Bonus, in case of achievement of all the objectives at the maximum level cannot exceed a sum which is twice the incentive which may be received in case of achievement of the target objectives. In case of failed achievement of the access threshold level of each objective, the beneficiary will not accrue any right to the payment of the relevant incentive portion. Executive Vice Chairman and CEO and Managers with strategic responsibilities Group ROS (which is measured as the ratio between Group Coherent with the targets Adjusted EBIT accrued during the three year term and disclosed to the market, the turnover accrued during the three year term). as indicated below “Absolute” total Shareholder Return measured as : (average value of the share during the last half of 2020 – average value of the share during the last quarter of 2017 + paid dividends) and (average value of the share during the last quarter of 2017) +48.4% “Relative” Total Shareholder Return against a selected panel of peers (Michelin, Nokian and Continental) Performance equal to the weighted average of the panel performance Sustainability Index: measured against the placing of Pirelli in the Dow Jones Sustainability World Index, ATX Auto Components industry. This objective is subject to the achievement of the access threshold of at least one of the above economic/ financial objectives (if only such objective is met, then no pro-quota of any three year incentive shall be therefore paid) Placing in the highest decile ANNUAL REPORT 2017ANNUAL REPORT 2017 Remuneration reportRemuneration report Below the targets disclosed to the market for the three-years period 2018-2020 In case of termination of the employment contract due to any Any agreement executed in case of termination of the TARGETS_ €Mln REVENUES High Value weight on Revenues Adjusted EBITDA margin1 Adjusted EBITDA margin2,3 High Value weight on Ebit CapEx on Revenues Net finacial position/ Adjusted EBITDA ROI4 2016A 4,976 55% 21.7% 17,0% 81% ~6.8% 4.6X 27% 2020E ≥9% CAGR 16-20 ~63% ~23% ÷ ~24% ~18.5% ÷ ~19.5% ~85% ~7.0% on average’17-20 <2.0X ~35% 1 EBITDA margin adjusted excluding non recurring, one-off and extraordinary items; 2 EBITDA margin adjusted excluding PPA amortization, non recurring, one-off and extraordinary items; 3 Margin to be impacted by start-up costs up to 1% in 2017 e 2018; 4 ROI calculated as EBIT Adjusted / average Net Invested Capital w/o financial assets and intangibles from PPA. case and occurred before the end of the three year period, the current relationship with Pirelli Group for any reason which is entitled person is therefore excluded from the LTI Plan and not a dismissal for cause. The line of Pirelli is in fact to seek therefore the bonus shall not be paid, not even pro-quota. agreements capable to reach an amicable termination of the contract. Without prejudice, in any case for the statutory As regards Directors holding special offices or who are and/or contractual obligations, the agreements for the assigned specific duties (this is the case of the Executive Vice termination of the contract with Pirelli Group are inspired by Chairman and CEO Mr. Tronchetti Provera) who leave their the reference benchmarks for the matter and within the limits office due to expiration of the mandate and who subsequently defined by the case law and the practice of the Country where are not even appointed directors the pro-quota payment of the agreement was reached. the LTI Bonus is allowed. Claw back clauses The annual (MBO) and multi-annual (LTI) plans intended for: The Company defines within its organisation certain criteria which must be followed also by the other companies of the Group for managing any early termination agreements for the Directors holding special offices who are assigned specific duties contracts with executives and/or Directors holding special and the Managers with strategic responsibilities provide, among offices. the other terms, certain so-called claw-back mechanisms. In particular, and without prejudice for any further statutory duties and are not parties of executive contracts, Pirelli does remedy granted for the protection of the interests of not provide the payment of any extraordinary indemnity or the Company, it will be provided the execution with said remuneration linked to the end of the mandate. The payment individuals of certain contractual covenants which allow of a specific indemnity may be allowed, subject to review by Directors holding special offices who are assigned specific 2 6 2 The range of the objectives is established according to the following general rules: Pirelli to request the (full or partial) refund, within three years the competent corporate bodies, in the following cases:  > for each objective, the delta between target and maximum is always at least 1.5 times the delta between the target level and the of their payment, of any incentive paid to the individuals who,  > termination decided by the Company and not for cause; 3 6 2 “access threshold” level; by fraud or gross negligence, carried out (or take part in the  > termination for cause decided by the Director, consisting of,  > the 25% penalization percentage of the reward upon the achievement of the objective at the “access threshold” level, is always commission of) any facts, as listed below and concerning the by way of example, the significant change of the role or of higher than the tolerance margin represented by the difference in percentage between the “access threshold” result and the economic/financial indicators included in the Annual Financial the granted powers and/or any case of “Hostile” Take-over. “target” result. Report and which lead to a subsequent comparative report In such cases, the amount of the indemnity is 2 years of the With regards to the TSR and ROS objectives, any intermediate result between the access threshold and the target value or between and are adopted as parameters for establishing the variable gross annual salary, which consists of the sum of the gross the target value and the maximum value, the final figures of the performance will be established by linear interpolation. rewards of said incentive plans: annual fixed salaries for the offices held in the Group, the LTI LEVERAGE Leverage 200% 100% 75% (i) proven and significant errors which cause a failed average of the annual variable salaries (MBO) which have compliance with the accounting principles that Pirelli been accrued during the previous three year term and of the declares to apply, or Severance Indemnities on the above sums as specified in the (ii) Assessed fraudulent behaviours intended to obtain a following paragraph 10. specific representation of the equity-financial status, the economic result or the financial flows of Pirelli. 6. INDEMNITY IN CASE OF RESIGNATION, DISMISSAL OR TERMINATION OF THE CONTRACT 7. NON COMPETE AGREEMENT AND RETENTION PLAN The Group may enter with its Managers with strategic responsibility and with Senior Managers and Executives vested with particularly critical duties non compete agreements36 Pirelli Group has the policy to not enter with any Director, which entail the payment of a GAS-related consideration to be Manager with strategic responsibilities, Senior Manager determined by the duration and the extent of the restrictions 75 100 200 the economic matters linked to the early termination of the Performance and Executive, any agreement which may ex ante govern arising from said agreements. contract by decision of the Company or the individual (the so- The obligation refers to the industry in which the Group trades The full cost of the LTI Plan is included in the economics of the Industrial Plan, so that the cost thereof will be “self financed” by the called “parachutes”). achievement of the results. The LTI Plan has also retention purposes. upon the definition of the agreement and to the geographical scope. The scope varies based on the position held at the 36 Mr Giorgio Luca Bruno, Company’s Director, is a part to a non compete agreement and a recipient of the retention plan exclusively as a Group’s Executive. ANNUAL REPORT 2017ANNUAL REPORT 2017 Remuneration reportRemuneration reportmoment when the agreement is executed and may reach, in certain cases deemed especially critical, such as the Managers with In line with the best practices, no variable component of the Furthermore, the Statutory Auditors are entitled to be strategic responsibilities, a geographical scope which covers all the main countries in which the Group is active. remuneration is provided for the Directors not holding special refunded of the costs incurred due to their office. offices. The Executive Vice Chairman and CEO does not hold a non compete agreement. In line with the best practices a so-called D&O (Directors & Furthermore a medium-to-long term retention plan is provided for the Managers with strategic responsibilities and for a selected costs incurred due to their office. the third party civil liability of the corporate bodies, of number of Senior Managers and Executives whose contribution for the implementation of the new Strategic Plan is deemed to be the Managers with strategic responsibilities, the Senior Furthermore, the Directors are entitled to be refunded of the Officers) Liability insurance policy is provided for covering particularly significant. Still in line with the best practices a so-called D&O (Directors Managers and Executives during the performance of their & Officers) Liability insurance policy is provided for covering duties, intended to hold Pirelli harmless from any obligation For the Managers with strategic responsibilities, the Retention Plan provides the payment of a consideration geared on the Total Direct the third party civil liability of the corporate bodies, of arising from the related damages, as established under Compensation 2017 at target of each participant and up to a max of 2.3 times it. The consideration is organised in 4 annual instalments the Managers with strategic responsibilities, the Senior the provisions of the applicable national collective labour of increasing amount in order to obtain the highest retention effect possible, with the payment of the last instalment scheduled in 2021. Managers and Executives during the performance of their contract and the legislation on mandate, excluding the cases The payment of each instalment is subject to the condition that the manager remains in the company as of the date of each payment. duties, intended to hold Pirelli harmless from any obligation of fraud or gross negligence. The Executive Vice Chairman and CEO does not participate to the Retention plan. 8. THE REMUNERATION OF THE DIRECTORS OF PIRELLI & C. The Board of Directors includes: arising from the related damages, as established under the provisions of the applicable national collective labour contract and the legislation on mandate, excluding the cases of fraud or gross negligence. 10. REMUNERATION OF THE DIRECTORS HOLDING SPECIAL OFFICES As regards the Directors not holding special offices, no Upon their appointment or during the first following meeting, insurance, or welfare or pension cover is provided in addition the Remuneration Committee proposes to the Board of (i) Directors holding special offices who may also be assigned specific duties; to the statutory ones. Directors the remuneration due to the Directors holding (ii) Directors not holding special offices. special offices. 2 6 4 The mere assignment to Directors of powers for emergency cases only does not, by itself, configure them as Directors holding special offices. The Shareholders’ Meeting of Pirelli held on 01 August 2017, upon the appointment of the Board of Directors, defined an overall 9. THE BOARD OF AUDITORS In the case where the Director holds special offices, but no special responsibilities are appointed to him (as of the date of 5 6 2 consideration - pursuant to art. 2389 paragraph 1 ICC - for the remuneration of the Directors appointing to the Board of Directors the The remuneration of this control body is established by the this Report, the Chairman, Mr. Ren Jianxin), his remuneration task to establish the allocation thereof. Namely, the Shareholders’ Meeting approved an overall gross annual salary of Euro 2 million Shareholders’ Meeting as a fixed annual sum. In particular, as Director consists only of a gross annual fixed component; which was then allocated by the Board of Directors as follows: during Year 2015, in occasion of the renewal of the Board the Board of Directors granted to the Chairman Mr. Ren Corporate Body Board of Directors Office Gross Annual Salary other members at Euro 50 thousand. Member of the Board 60 thousand Euro As regards the Directors not holding special offices who of Statutory Auditors, the gross annual fixed salary of its Jianxin a gross remuneration for his office amounting to the Chairman was set at Euro 75 thousand and the salary of the gross yearly sum of 400 thousand Euro. Control, Risks, Sustainability and Corporate Governance Committee Remuneration Committee Strategies Committee Appointments and Succession Committee Committee for the Transactions with Related Parties Supervisory Body Chairman Member Chairman Member 30 thousand Euro 25 thousand Euro 30 thousand Euro 25 thousand Euro Chairman 50 thousand Euro Member 30 thousand Euro Chairman 50 thousand Euro Member 30 thousand Euro Chairman 60 thousand Euro Member 40 thousand Euro Chairman 60 thousand Euro Member 40 thousand Euro Director in charge for the sustainability matters 70 thousand Euro For the Auditor appointed as a member of the Supervisory are not vested with special responsibilities no insurance, Body, the Board of Directors, following its renewal, set his or welfare or pension cover is provided in addition to the gross Annual Salary at Euro 40 thousand. statutory ones. ANNUAL REPORT 2017ANNUAL REPORT 2017 Remuneration reportRemuneration report The remuneration of the Directors holding special offices who are also vested with special responsibilities is established according to the following criteria. ANNUALIZED STRUCTURE OF THE REMUNERATION OF THE EXECUTIVE VICE CHAIRMAN AND CEO Component Criterion Fixed component for all the offices held in Pirelli - established by the Board of Directors for the whole mandate at an overall annual sum, which includes therefore also any fixed component for other executive offices in the Pirelli Group; - Not exceeding one third of the Annual Total Direct Compensation at Target. - Access Threshold: 75% of the MBO at target; Yearly incentive (MBO) - MBO at target: 125% of the remuneration; - MBO Max (cap): 200% of the MBO at target. - Access Threshold: 75% of the LTI at target; LTI Incentive - LTI at target: 250%; Annualized medium-to-long term grant of an increase of the whole accrued MBO in function of the variable component level of achievement of the MBO during the following year; - LTI Max (cap): 200% of the LTI at target. - consisting of the LTI bonus and of the annual rolling mechanism for the deferred payment of the portions of the accrued MBO and Achievement of the objectives at access threshold Achievement of the objectives at target Achievement of the objectives at maximum level (cap) Fixed component Annual variable component (MBO) Annualized medium-to-long term variable component Total 40% 27% 33% 100% 30.9% 27.8% 41.3% 100% 16.8% 30.2% 53% 100% Based on the deferral by 12 months of the payment of a portion of the MBO bonus with the risks and opportunities recalled in paragraph 1 and specified in paragraph 5, the accrual of a portion of the medium-to-long term variable component stated in the chart is subject to the level of achievement of the results of Year 2019 and will be, if required, paid during 2020. Furthermore, for the Directors holding special offices and vested with special responsibilities, in the case where are not employed As of the date of this Report the Executive Vice Chairman and CEO Mr. Marco Tronchetti Provera is the only director holding special  > The payment of a Directors’ Severance Indemnity (T.F.M.) under art. 17, 1st paragraph, letter c) of T.U.I.R. (the Italian Consolidated 2 6 6 offices who also has special responsibilities. Law on Income Tax) no. 917/1986 whose features are similar to those of the Employees’ Severance Indemnity (TFR) under art. 2120 ICC which the Law requires to pay to the Italian executives of Pirelli Group and including the welfare contributions charged 7 6 2 - not lower than 50% of the overall variable component. under an executive labour contract (as of the date of this report the Executive Vice Chairman and CEO Mr. Marco Tronchetti Provera), the Board of Directors provided, with an approach which is similar to the one followed in the statutory provisions and/or in the National Collective Contract for the Italian executives of the Group: During 2018, the structure of the remuneration for the Executive Vice Chairman and CEO Mr. Marco Tronchetti Provera was reviewed to the employer which are due to Welfare Institutions or Funds in case of an executive labour contract; with a reduction of the fixed component in consideration of an increase of the variable component seeking to achieve a further  > a policy providing cover for (i) any accident which may involve him during the performance of his duties and (ii) any extra- strengthening of the alignment of the interests of the management with those of the shareholders. professional accidents whose premiums shall be borne by the Company;  > an indemnity for total disability and death due to illness; The gross annual fixed component of the Executive Vice Chairman and CEO Mr. Marco Tronchetti Provera was fixed at Euro 2,400,000.  > additional benefits which are typical of the office and currently granted to managers with strategic responsibilities and/or Senior This remuneration for the main executive office is increased by the remuneration for the offices of Member of the Board of Pirelli Managers within the Group (company car). & C. S.p.A. (Euro 60,000) and Chairman of the Appointments and Succession and Strategies Committees (jointly, Euro 100,000)37. The Remuneration Committee and the Board of Directors with the support of independent companies specializing in Executive Compensation carry out the analysis of the positioning, of the composition and more in general of the competitiveness of the As regards the weight of the different components, the structure of the compensation package of the Executive Vice Chairman and remuneration of the Directors holding special offices based on methodological approaches which allow a thorough assessment, CEO in case of achievement of the MBO annual objectives for 2018, 2019 and 2020 and the three-year objectives of the LTI Plan 2018- even if within the typical limitations of the benchmarking analyses, the complexity of the roles from an organizational perspective, 2020 (i) at the Access Threshold, (ii) at target and (iii) at maximum level is reported below. in the light of the special responsibilities vested and also of the impact of the individual on the final business results. EXECUTIVE VICE CHAIRMAN AND CEO - ENTRY LEVEL EXECUTIVE VICE CHAIRMAN AND CEO - TARGET EXECUTIVE VICE CHAIRMAN AND CEO - MAX which is updated on an yearly basis. In particular, reference is made to different components (industry, location, etc.) in defining the panel of benchmark companies 27.0% MBO 40.00% Fixed 33,0% LTI 27.8% MBO 30.9% Fixed 41.3% LTI 30.2% MBO 16.8% Fixed 53.0% LTI The sample of benchmark companies used for the analysis of the competitiveness and for reviewing the remuneration of the Executive Vice Chairman and CEO of Pirelli & C. consists, on one hand, of 8 Companies of the “Car and Tyre” industry and on the other of 28 European “Large Cap” companies. The 8 companies which form the “Car and Tyre” panel are: 37 Up to 31 December 2017, the structure of the remuneration of the Executive Vice Chairman and CEO Mr. Marco Tronchetti Provera was structured as follows: (i) fixed component; in Pirelli & C. S.p.A. Euro 900,000; (ii) fixed component in Pirelli Tyre S.p.A. Euro 2,000,000; (iii) to which the remunerations or the offices of Member of the Board in Pirelli & C. S.p.A. (Euro 60,000) and Chairman of the Appointments and Succession and Strategies Committees (jointly, Euro 100,000) were added. The MBO variable component with Access Threshold 75% of the MBO at target; MBO at target 100% of the remuneration received in Pirelli Tyre S.p.A.; maximum MBO (cap): 250% of the MBO at target. The LTI variable component with Access Threshold 75% of the LTI at target; MBO at target 250% of the remuneration received in Pirelli Tyre S.p.A.; maximum LTI (cap): 200% of the LTI at target. BMW Continental Daimler Fca Michelin Peugeot Renault Volkswagen ANNUAL REPORT 2017ANNUAL REPORT 2017 Remuneration reportRemuneration report The 28 companies which form the “Large Cap Europe” panel are: As regards the Managers with strategic responsibilities, the Remuneration Committee measures the alignment of the remuneration Burberry Group Carrefour Continental Danone Heineken Henkel MAN Michelin Hermes Intl. Pernod-Ricard Iberdrola Peugeot Philips Electrolux Imperial Tobacco Group E ON Fca Linde Luxottica Reckitt Benckiser Group Reed Elsevier Renault Repsol YPF Richemont Rolls-Royce Telecom Italia Volvo WPP 11. MANAGERS WITH STRATEGIC RESPONSIBILITIES As of the date of publication of the Policy the following Managers with strategic responsibilities are in office: Executive Vice President and Chief Financial Officer Francesco Tanzi; Executive Vice President and Chief Planning and Controlling Officer Maurizio Sala; Executive Vice President and Chief Human Resources Officer Gustavo Bracco; Executive Vice President and Strategic Advisor Technology Maurizio Boiocchi; Executive Vice President and Chief Commercial Officer Roberto Righi; Senior Vice President Manufacturing Francesco Sala; Executive Vice President Business Unit Prestige & Motorsport & COO Region Europe Andrea Casaluci; Executive Vice President Pirelli Digital Luigi Staccoli As of the date of publication of the Policy no General Managers are in offices. In establishing the remuneration and its single components, the following criteria were considered: 2 6 8 with the Policy. As regards the weight of the different components, the structure of the compensation package of the Managers with strategic responsibilities in case of achievement of the MBO annual objectives for 2018, 2019 and 2020 and the three-year objectives of the LTI Plan 2018-2020 (i) at the Access Threshold, (ii) at target and (iii) at maximum level is reported below. MANAGERS WITH STRATEGIC RESPONSIBILITIES - ENTRY LEVEL MANAGERS WITH STRATEGIC RESPONSIBILITIES - TARGET MANAGERS WITH STRATEGIC RESPONSIBILITIES - MAX 29.1% LTI 16.7% MBO 54.2% Fixed 36.9% LTI 18.4% MBO 44.7% Fixed 23.7% MBO 28.8% Fixed 47.5% LTI ANNUALISED STRUCTURE OF THE REMUNERATION OF MANAGERS WITH STRATEGIC RESPONSIBILITIES Achievement of the objectives at access threshold Achievement of the objectives at target Achievement of the objectives at maximum level (cap) Fixed component Annual variable component (MBO) Annualized medium-to-long term variable component Total 54.2% 16.7% 29.1% 100% 44.7% 18.4% 36.9% 100% 9 6 2 28.8% 23.7% 47.5% 100% Role Component Criterion Gross annual fixed component new responsibilities, the evolution of the remuneration market - established at the time recruitment, may be updated on a regular basis in order to take in due consideration the performance, any concerning the position held by the specific individual; - Not exceeding 50% of the Annual Total Direct Compensation at Target. Yearly incentive (MBO) - Access Threshold: 75% of the MBO at target; - MBO at target: from 50% to 75% of the GAS; - MBO Max (cap): 200% of the MBO at target. Managers with strategic responsibilities LTI Incentive - LTI at target: from 167% to 200% of the GAS; - Access Threshold: 75% of the LTI at target; - LTI Max (cap): 200% of the LTI at target. Based on the deferral by 12 months of the payment of a portion of the MBO bonus with the risks and opportunities recalled in paragraph 1 and specified in paragraph 5, the accrual of a portion of the medium-to-long term variable component stated in the chart is subject to the level of achievement of the results of Year 2019 and will be, if required, paid during 2020. Also the analysis of the remuneration of Managers with strategic responsibilities is carried out with the support of independent companies specializing in Executive Compensation whose definition is reviewed on a yearly basis and disclosed in occasion of the annual Report on remunerations. In particular, reference is made to different components (industry, location, etc.) in defining the panel of benchmark companies which is updated on an yearly basis. As regards the Managers with strategic responsibilities, the reference market employed for assessing the competitiveness of their respective remunerations includes more than 200 Companies of the following European Countries: Belgium, France, Germany, Italy, Annualized medium-to-long term variable component Not lower than 60% of the overall variable component Spain, Netherlands, UK. Benefits - Benefits typically granted to the Pirelli Executives Other components - supplementary pension funds which provide for the Company the payment to a pension fund of a sum equal to 4% of the gross annual salary received up to a gross cap of Euro 150 thousand; - health and life insurance policy which are additional to the cover provided under the National Collective Labour Contract for Executives of Manufacturing and Service Companies. 12. SENIOR MANAGERS AND EXECUTIVES The remuneration of Senior Managers and more in general of Executives consists of the following elements:  > a gross annual fixed component (the so-called GAS);  > an annual variable component (so-called MBO);  > a medium-to-long term variable component (consisting of the LTI bonus and of the annual rolling mechanism for the deferred payment of the portions of the accrued MBO and grant of an increase of the whole accrued MBO in function of the level of ANNUAL REPORT 2017ANNUAL REPORT 2017 Remuneration reportRemuneration report achievement of the MBO during the following year);  > benefits which are granted under the corporate practice (i.e. cars) Furthermore, the following is granted to the Executives and the Senior Managers with Italian labour contract:  > supplementary pension funds which provide for the Company the payment to a pension fund of a sum equal to 4% of the gross annual salary received up to a gross cap of Euro 150 thousand;  > health and life insurance policy which are additional to the cover provided under the National Collective Labour Contract for Executives of Manufacturing Goods and Service Companies. In establishing the remuneration and its individual components of Senior Managers and Executives, Pirelli Group takes in consideration the following criteria: EXECUTIVE - ENTRY LEVEL EXECUTIVE - TARGET EXECUTIVE - MAX 15.4% LTI 9.6% MBO 75.00% Fixed 11.4% MBO 21.5% LTI 67.1% Fixed 17.2% MBO 32.3% LTI 50.5% Fixed a. the fixed component: (i) for Senior Managers its weight is generally 60% of the Annual Total Direct Compensation at Target and ANNUALIZED STRUCTURE OF THE REMUNERATION OF EXECUTIVES (ii) for Executives its weight generally does not exceed 75% of the Annual Total Direct Compensation at Target; b. an accrued yearly incentive (MBO) which, at target, represents a percentage of the GAS which is no lower of 20% of said remuneration; c. the weight of the annualized medium-to-long term variable component is not lower than 60% of the overall variable component. As regards the LTI bonus a cap to the maximum attainable incentive equal to 2 times the bonus at target is provided. We provide below the structure of the remuneration for Senior Managers and Executive (globally intended) highlighting the weight of the different components (which are annualized) of their compensation package, in case of achievement of the MBO annual objectives for 2018, 2019 and 2020 and the three years objectives of the LTI Plan 2018-2029 (i) at access threshold, (ii) at target and (iii) at maximum level. Achievement of the objectives at access threshold Achievement of the objectives at target Achievement of the objectives at maximum level (cap) Fixed component Annual variable component (MBO) Annualized medium-to-long term variable component Total 75% 9.6% 15.4% 100% 67.1% 11.4% 21.5% 100% 50.5% 17.2% 32.3% 100% SENIOR MANAGER - ENTRY LEVEL SENIOR MANAGER - TARGET SENIOR MANAGER - MAX 2 7 0 26.9% LTI 12.7% MBO 60.4% Fixed 14.4% MBO 34.3% LTI 51.3% Fixed 19.4% MBO 34.5% Fixed 46.1% LTI Based on the deferral by 12 months of the payment of a portion of the MBO bonus with the risks and opportunities recalled in paragraph 1 and specified in paragraph 5, the accrual of a portion of the medium-to-long term variable component stated in the chart is subject to the level of achievement of the results of year 2019 and will be, if required, paid during 2020. 1 7 2 Also the analysis of the remuneration of Executives and Senior Managers is carried out with the support of independent companies specializing in Executive Compensation which considers the position held by the single Manager and the relevant Country. As regards the Head of Internal Audit, please note that, in line with the best practices, the Board of Directors at the proposal of the Control, Risks, Sustainability and Corporate Governance Committee provided a higher weight of the fixed component over ANNUALIZED STRUCTURE OF THE REMUNERATION OF THE SENIOR MANAGERS the variable component. By the way, the Head of Internal Audit (and, generally, the Managers of the Internal Audit department) Achievement of the objectives at access threshold Achievement of the objectives at target Achievement of the objectives at maximum level (cap) Fixed component Annual variable component (MBO) Annualized medium-to-long term variable component Total 60.4% 12.7% 26.9% 100% 51.3% 14.4% 34.3% 100% 34.5% 19.4% 46.1% 100% are not part of the LTI Incentive Plan, but he is merely a beneficiary of the annual incentive plan linked to mainly quality objectives whose assessment is a responsibility of the Control, Risks, Sustainability and Corporate Governance Committee and of the Board of Directors, at the proposal of the Director in charge of supervising the internal control system. 13. CHANGES TO THE POLICY FROM THE PREVIOUS FINANCIAL YEAR The Policy was prepared on the base of the previous application experiences and takes in due consideration the statutory requirements adopted by CONSOB, and the adoption, occurred in 2018 of a new Long Term Incentive Cash Plan for 2018-2020 (“LTI Plan”) and of a Retention Plan intended to provide support for the new Industrial Plan, which was disclosed to the market at the time of the Listing of Pirelli. Furthermore the Policy takes in due account the review of the structure of the remuneration of the Executive Vice Chairman and CEO with a reduction of the fixed component in consideration of an increase of the variable component. This Policy is submitted to the Shareholders’ Meeting of Pirelli for the first time after the admission to listing of the Company which was granted on 04 October 2017, and, therefore, it is not possible to measure any change from the Policy of the previous term. ANNUAL REPORT 2017ANNUAL REPORT 2017 Remuneration reportRemuneration report 14. OTHER INFORMATION Under the resolution issued by Consob no. 18049 of 23 December 2011 please note that:  > the Company did not receive any support from any advisory company and/or external experts in preparing the 2018 Policy;  > Pirelli does not currently provide any financial incentive scheme;  > Pirelli, in defining the 2018 Policy, did not use any specific remuneration policies of other companies as a benchmark. As regards the structure of the remuneration for each role the criteria for selecting the reference benchmark are stated. The chart no. 7-bis, adopted by the CONSOB resolution no. 18049 of 23 December 2011 provides that the Report on Remuneration, in the section provided by art. 123-ter on the members of the governing bodies and the Managers with strategic responsibilities, includes at least the information listed in the above mentioned chart. The table below provides the required information and the section of the Report which includes them: Information required under chart 7-bis a) bodies or individuals involved in the preparation and approval of the Policy on remuneration, specifying their respective roles, as well as the bodies or individuals in charge of the correct implementation of said Policy. b) the possible action of a Remuneration Committee or any other committee responsible for the matter, providing a description of its composition (naming the non-executive and independent members), responsibilities and the operation procedures; Paragraphs which - namely - provide the required information 2. “Process” for defining and implementing the policies and involved entities 3. Remuneration Committee 2. “Process” for defining and implementing the policies and involved entities 3. Remuneration Committee c) the names of any independent advisor involved in the preparation of the Policy on Remuneration; 14. Other Information 2 7 2 d) the purposes sought with the Policy on Remuneration, 1. Principles and review of the risks its founding principles and any change of the policy on 13. Changes to the Policy on remuneration remuneration from the previous financial year; from the previous financial year. The structure of the remuneration of the various individuals is described in the paragraphs providing a description of the different fixed/variable weights; short term variable/medium-to-long term variable Information required under chart 7-bis Paragraphs which - namely - provide the required information j) the terms for the accrual of the rights (the so-called vesting period), any deferred payment system, stating the deferral period and the criteria employed for establishing said periods and, if provided, the ex post correction mechanisms; Pirelli does not currently provide any financial incentive scheme. As regards the deferral mechanisms for the monetary variable components please refer to Paragraph: 5. MBO and LTI PLAN k) information on the optional provision of clauses for keeping the financial instruments in the portfolio after their acquisition, stating the retention periods and the criteria employed for establishing such periods; Pirelli does not currently provide any stock incentive scheme l) the policy concerning the indemnities in case of termination 6. Indemnity in case of resignation, dismissal of the office or of the labour contract, specifying which or termination of the contract circumstances may lead the right to arise and any link between 7. Covenants to not compete and Retention Plan said obligations and the performance of the company; m) information on the provision of any insurance, welfare 9. The Board of Auditors or pension covers, which are not the statutory covers; 10. Remuneration of the Directors holding special offices Paragraphs for the different roles 8. The remuneration of the Directors of Pirelli & C. 11. Managers with strategic responsibilities 12. Senior Managers and Executives n) the remuneration policy optionally followed as regards: (i) to independent Directors, (ii) the participation to committees 8. The remuneration of the Directors of Pirelli & C. (iii) specific offices (chairman, vice chairman, etc.); o) whether the remuneration policy was defined by taking the remuneration policies of other companies as reference, and if 14. Other Information positive the criteria employed for selecting said companies 3 7 2 e) the description of the policies on fixed and variable components 5. MBO and LTI PLAN of the remuneration, with special regards to the specification of the 8. The remuneration of the Directors of Pirelli & C. relevant weight within the overall remuneration and making a distinction 9. The Board of Auditors between variable components of short and medium-to-long term; 10. Remuneration of the Directors holding special offices 2017 REMUNERATION REPORT 11. Managers with strategic responsibilities 12. Senior Managers and Executives The following paragraphs provides a detail of the operation of the variable components of the remuneration: Paragraphs for the different roles 8. The remuneration of the Directors of Pirelli & C. f) the policy followed for the non-monetary benefits; 10. Remuneration of the Directors holding special offices 11. Managers with strategic responsibilities 12. Senior Managers and Executives g) as regards the variable components, a description of the performance objectives based on which they are assigned, making a distinction between short term and medium-to-long term variable components and information on 5. MBO and LTI PLAN the link between the change in results and the change in remuneration; h) the criteria employed for assessing the performance objectives based on which shares, options, other financial instruments or 5. MBO and LTI PLAN other variable components of the remuneration are based; 1. Principles and review of the risks 5. MBO and LTI PLAN i) information intended to highlight the alignment And also for the different roles of the Policy on Remuneration with the achievement of 8. The remuneration of the Directors of Pirelli & C. the long-term interests of the company and with the risk 9. The Board of Auditors management policy, in the case where it is formalized; 10. Remuneration of the Directors holding special offices 11. Managers with strategic responsibilities 12. Senior Managers and Executives 1. PRINCIPLES The 2017 Remuneration Report sets out the Policy implemented by the Pirelli Group during the 2017 financial year with reference to remuneration and provides actual amounts of remunerations in relation to the various persons concerned, without prejudice to the transparency obligations envisaged by other applicable legal or regulatory provisions. It is recalled that the Company’s ordinary shares were listed on 4 October 2017. Therefore, it should be noted that with reference to 2017, when the Company was not listed, the Company had not formally adopted a Remuneration Policy pursuant to Article 123-ter of the Consolidated Finance Act (TUF - Testo Unico della Finanza), and therefore, it is not possible to duly express a consistent judgement with the Policy approved in the previous year. However, it should be noted that the Pirelli Remuneration structure for 2017, as from 4 October 2017, is generally consistent with the principles contained in the Policy for 2018. ANNUAL REPORT 2017ANNUAL REPORT 2017 Remuneration reportRemuneration report 2. THE “TABLE”: REMUNERATION SCHEME FOR MEMBERS OF THE ADMINISTRATIVE AND CONTROL BODIES, GENERAL MANAGERS AND EXECUTIVES WITH STRATEGIC RESPONSIBILITIES The following tables set out: In particular, it should be noted that, as mentioned above: Taking into account the events occurred during the year 2017 (among which, in particular: the capital increase by Marco Polo  > those who were Directors of the Company during the International Italy SpA, the refinancing, the completion of the segregation of the industrial business, the discontinuation of the 2017 year, accrued/received (on an accruals basis) a industrial business result, the beginning and the completion of the listing process), the report about the total incentive is shown salary established in accordance with the criteria set below without evidence of the original target and the related result, taking into account the adjustments made to these values in out in paragraph 6 of the 2018 Policy; moreover, for the order to sterilize (in positive and negative) the effects of the aforementioned extraordinary transactions not included in the 2017 period going from January 1st 2017 and October 3, 2017 budget at the time of its approval, in order to reward the actual performance. remuneration of Directors amounted to an attendance fee of € 1,000 for each meeting of the Company’s governing  > by name, remuneration paid to Directors, Statutory bodies they have taken part in; EXECUTIVE VICE CHAIRMAN AND CEO AND KEY MANAGERS Auditors and General Managers;  > those who, during 2017, were Directors holding special  > in aggregate form, remuneration to Executives with offices (Vice Chairman and Chief Executive Officer and Objectives strategic responsibilities38. As of 31 December 2017 the Chairman) accrued/received (on an accruals basis) a Group PFN before dividends following Executives held positions with strategic salary established in accordance with the criteria set out responsibilities: Maurizio Boiocchi (EVP and Strategic in paragraph 10 of the 2018 Policy; Advisor Technology), Andrea Casaluci (EVP Business Unit  > Executives with strategic responsibilities received/accrued Prestige & Motorsport and COO Region Europe), Roberto Righi salaries pertaining to the 2017 year in accordance with the (EVP and Chief Commercial Officer), Francesco Sala (Senior criteria set out in paragraph 11 of the 2018 Policy; Vice President Manufacturing), Maurizio Sala (EVP and Chief  > each member of the Supervisory Body, in office up to August Planning and Controlling Officer), Luigi Staccoli (EVP Pirelli 30, 2017 received/accrued a salary pertaining to the 2017 Digital), Francesco Tanzi (EVP and Chief Financial Officer), year amounting to EUR 25,000 gross per annum and the Gustavo Bracco (EVP and Chief Human Resources Officer), Chairman compensation equal to EUR 40,000 gross per Group EBIT (after restructuring costs) Group Net Cash Flow (before dividends) Group Ebt Giorgio Luca Bruno (EVP M&A, Corporate Development and annum. With effect from August 31, 2017, the Board of Executive Vice Chairman and CEO 2 7 4 Diversified Businesses)39. Directors, as reported in the 2018 Policy, approved a salary  > Salaries are reported on an accruals basis and evidence is for the Chairman of the Supervisory Board of EUR 60,000 provided, in the notes to the tables, of the appointment gross per annum and EUR 40,000 gross per annum for Office 2017 MBO plan structure Incentive score - access threshold: 75% of the incentive at target - At target: 100% of the remuneration for the most important executive office (in Pirelli Tyre S.p.A) 164.97 - Cap: 250% of the target incentive - access threshold: 75% of the incentive at target 5 7 2 Weight on/off condition 30% 50% 20% (for example, where a Director participates in more than each board member; Key Managers - At target: from 50% to 75% of the GAS 139.97 one Board Committee) for which the salary is received  > each member of the Board of Statutory Auditors received/ and the subsidiary and/or Associate Company (with the accrued a salary pertaining to the 2017 year in line with exception of those waived or transferred to the Company). that provided for by the Shareholders’ Meeting at the time of appointment (in addition to a gross annual salary - CAP: 200% of the target incentive The tables include all persons who, following admission of EUR 40,000 paid to the Serving Auditor called upon to In line with the structure of the variable incentive described in the Policy, only 75% of the accrued 2017 MBO bonus is paid, while to official listing, held these positions during the 2017 year, be a member of the Supervisory Body); the payment of the remaining 25% is deferred by 12 months and is subject to the achievement of the MBO objectives for 2018, even if for a fraction of the year. Board Directors who ceased  > Senior Managers and Executives received/accrued salaries and in particular: to hold office before the start of trading of the Company’s pertaining to the 2017 year in accordance with the criteria a) in the event that no MBO is accrued in 2018, the deferred and accrued share of the 2017 MBO would be definitively lost; shares on the Telematic Stock Exchange (Mercato Telematico set out in paragraph 12 of the 2018 Policy. b) in the event that the 2018 MBO is accrued at “entry threshold” level, the accrued and deferred 2017 MBO share shall be paid; Azionario) are not included. In this regard, it should be noted It should be noted that for Executives with strategic lastly, if the 2018 MBO is accrued at least at target performance level - in addition to payment of the accrued and deferred 2017 MBO that the above mentioned Directors are entitled to receive responsibilities and more generally for other members of share - an additional amount would be paid, equal to a percentage of the entire accrued 2017 MBO. This percentage would vary from an attendance fee amounting to € 1,000 for each meeting of the Group’s Senior Management, Pirelli has introduced non- a minimum of 20% (if the 2018 MBO is accrued at target performance level) to a maximum of 40% (if the 2018 MBO is accrued at the Company’s governing bodies they have taken part in. competition agreements to protect strategic and operational maximum performance level), with linear interpolation between the two extremes. Non-monetary benefits, where they are received, are also hold a non-competition agreement. know-how. The Executive Vice Chairman and CEO does not identified on an accruals basis, and reported in relation to the “taxable income criteria” of the assigned benefit. 38 Point b) of Section II of Schedule 7-bis of Annex 3 A of the so-called Issuers’ Regulations provides that the so-called Remuneration Report is structured into two parts: a) salaries of members of the administrative and control bodies and General Managers; b) salaries of any other Executives with strategic responsibilities who have received, in the reporting year, an overall salary (obtained by adding monetary salaries and salaries based on financial instruments) greater than the highest overall salary attributed to the persons indicated in point a). For Executives with strategic responsibilities other than those indicated in point b) information is provided at aggregate level in special tables, identifying the number of persons to whom it refers instead of names”. 39 Starting from 1st January, 2018 Giorgio Luca Bruno no longer qualifies as Executive with strategic responsibilities. LTI Plan Following the Board of Directors’ resolution of July 28, 2017, the LTI Plan 2016-2018 was closed in advance due to the Company’s listing. The Board of Directors therefore re-proportioned the objectives for the two-year period 2016-2017 and, as for the 2017 MBO, neutralized the positive and negative effects of the extraordinary transactions that particularly occurred during the year 2017. Following the final balance after the end of the 2017 financial year, an incentive equal to 16.67% of the target performance bonus was recognized to the participants of the plan, considered that the on/off condition (Creation of positive value) was achieved. ANNUAL REPORT 2017ANNUAL REPORT 2017 Remuneration reportRemuneration report First name and surname Position Period of the position covered End of term of office date Fixed compensation Compensation for participation in committees Non equity variable compensation Bonuses and other incentives Profit- sharing Non monetary benefits Other compensation Total Fair Value of equity compensation Indemnity for end of term of office or of employment relationship Marco Tronchetti Provera Executive Vice Chairman and Chief Executive Officer 01/01/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2019 2,927,630.00 24,384.00 4,671,359.00 0.00 140,902.00 0.00 7,764,275.00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 927,630.00 (1) 24,384.00 (3) 140,902.00 (4) Of which is compensated by Subsidiaries and Affiliates 2,000,000.00 (2) 4,671,359.00 1,092,916.00 6,671,359.00 Ren Jianxin The Chairman 01/01/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2019 420,630.00 7,315.00 0.00 427,945.00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 420,630.00 (5) 7,315.00 (6) Of which is compensated by Subsidiaries and Affiliates Yang Xingqiang Director 01/01/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2019 427,945.00 (7) 0.00 22,630.00 7,315.00 0.00 0.00 0.00 0.00 29,945.00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 22,630.00 (8) 7,315.00 (9) 29,945.00 (7) Of which is compensated by Subsidiaries and Affiliates Bai Xinping Director 01/01/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2019 30,630.00 20,726.00 0.00 0.00 0.00 0.00 51,356.00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 30,630.00 (10) 20,726.00 (11) 51,356.00 (7) Of which is compensated by Subsidiaries and Affiliates 2 7 6 Giorgio Luca Bruno Director 01/01/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2019 627,630.00 7,315.00 648,075.00 0.00 16,600.00 47,068.00 1,346,688.00 0.00 0.00 7 7 2 Of which is compensated in Pirelli & C. S.p.A. 627,630.00 (12) 7,315.00 (9) 648,075.00 16,600.00 (13) 47,068.00 (14) 1,346,688.00 Of which is compensated by Subsidiaries and Affiliates Laura Cioli Director 31/08/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2019 18,630.00 12,192.00 0.00 0.00 0.00 0.00 30,822.00 0.00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 18,630.00 (15) 12,192.00 (16) 30,822.00 Of which is compensated by Subsidiaries and Affiliates Domenico De Sole Director 31/08/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2019 18,630.00 21,945.00 0.00 0.00 0.00 0.00 40,575.00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 18,630.00 (15) 21,945.00 (17) 40,575.00 Of which is compensated by Subsidiaries and Affiliates Fan Xiaohua Director 31/08/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2019 18,630.00 7,315.00 0.00 0.00 0.00 0.00 25,945.00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 18,630.00 (15) 7,315.00 (18) 25,945.00 Of which is compensated by Subsidiaries and Affiliates Ze'ev Goldberg Director 01/01/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2019 27,630.00 7,315.00 0.00 0.00 0.00 0.00 34,945.00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 27,630.00 (19) 7,315.00 (8) 34,945.00 Of which is compensated by Subsidiaries and Affiliates Marisa Pappalardo Director 31/08/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2019 18,630.00 9,753.00 0.00 0.00 0.00 0.00 28,383,00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 18,630.00 (15) 9,753.00 (20) 28,383.00 Of which is compensated by Subsidiaries and Affiliates ANNUAL REPORT 2017ANNUAL REPORT 2017 Remuneration reportRemuneration reportFirst name and surname Position Period of the position covered End of term of office date Fixed compensation Compensation for participation in committees Non equity variable compensation Bonuses and other incentives Profit- sharing Non monetary benefits Other compensation Total Fair Value of equity compensation Indemnity for end of term of office or of employment relationship Cristina Scocchia Director 31/08/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2019 18,630.00 15,849.00 0.00 0.00 0.00 0.00 34,479.00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 18,630.00 (15) 15,849.00 (21) 34,479.00 Of which is compensated by Subsidiaries and Affiliates Tao Haisu Director 31/08/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2019 17,630.00 7,315.00 0.00 0.00 0.00 0.00 24,945.00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 17,630.00 (22) 7,315.00 (23) 24,945.00 Of which is compensated by Subsidiaries and Affiliates Giovanni Tronchetti Provera Director 31/08/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2019 112,732.00 7.315,00 30,754.00 0.00 9,328.00 0.00 160,129.00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 18,630.00 (15) 7,315.00 (6) Of which is compensated by Subsidiaries and Affiliates 94,102.00 (25) 30,754.00 9,328.00 (25) 25,945.00 134,184.00 Wei Yintao Director 31/08/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2019 18,630.00 7,315.00 0.00 0.00 0.00 0.00 25,945.00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 18,630.00 (15) 7,315.00 (9) 25,945.00 Of which is compensated by Subsidiaries and Affiliates 2 7 8 Executives with strategic responsibilities (27) / 4,988,379.00 0.00 5,145,397.00 0.00 106,347.00 257,750.00 10,497,873.00 0.00 0.00 9 7 2 Of which is compensated in Pirelli & C. S.p.A. Of which is compensated by Subsidiaries and Affiliates 1,925,724.00 (27) 3,062,655.00 1,783,485.00 3,361,912.00 47,768.00 (28) 62,750.00 (29) 3,819,727.00 58,579.00 (28) 195,000.00 (29) 6,678,146.00 Francesco Fallacara Chairman of the Board of Statutory Auditors 01/01/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2017 75,000.00 0.00 0.00 0.00 0.00 0.00 75,000.00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 75,000.00 75,000.00 Of which is compensated by Subsidiaries and Affiliates Antonella Carù Standing Auditor 01/08/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2017 20,959.00 30,014.00 0.00 0.00 0.00 0.00 50,973,00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 20,959.00 30,014.00 (30) 50,973.00 Of which is compensated by Subsidiaries and Affiliates Fabio Artoni Standing Auditor Of which is compensated in Pirelli & C. S.p.A. Of which is compensated by Subsidiaries and Affiliates Luca Nicodemi Standing Auditor 01/01/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2017 05/09/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2017 57,000.00 0.00 0.00 0.00 0.00 0.00 57,000.00 0.00 0.00 50,000.00 7,000.00 (31) 50,000.00 7,000.00 16,164.00 0.00 0.00 0.00 0.00 0.00 16,164.00 0.00 0.00 Of which is compensated in Pirelli & C. S.p.A. 16,164.00 Of which is compensated by Subsidiaries and Affiliates Alberto Villani Standing Auditor 05/09/2017 - 31/12/2017 Shareholders' Meeting to approve the financial statement for the year ended 31 December 2017 Of which is compensated in Pirelli & C. S.p.A. 16,164.00 Of which is compensated by Subsidiaries and Affiliates 16,164.00 0.00 16,164.00 0.00 0.00 0.00 0.00 0.00 16,164.00 0.00 0.00 16,164.00 0.00 ANNUAL REPORT 2017ANNUAL REPORT 2017 Remuneration reportRemuneration report First name and surname Position Period of the position covered End of term of office date Fixed compensation * * * * * Compensation for participation in committees Non equity variable compensation Bonuses and other incentives Profit-sharing Non monetary benefits Other compensation Total Fair Value of equity compensation Indemnity for end of term of office or of employment relationship Total compensated in Pirelli & C. S.p.A. 4,308,831.00 193,383.00 Total compensated by Subsidiaries and Affiliates 5,163,757.00 Total 9,472,588.00 193,383.00 2,431,560.00 8,064,025.00 10,495,585.00 205,270.00 109,818.00 7,248,862.00 67,907.00 195,000.00 13,490,689.00 273,177.00 304,818.00 20,739,551.00 (1) Of which: EUR 14,630 as Director of Pirelli & C. S.p.A.; EUR 900,000 as Executive Vice Chairman and Chief Executive Officer of Pirelli & C. S.p.A. and EUR 13,000 as attendance fees for participation in corporate bodies meetings from 1/1/2017 to 3/10/2017 (2) As Chairman and Chief Executive Officer of Pirelli Tyre S.p.A.. (3) Of which: EUR 12,192 as Chairman of the Appointments and Successions Committee of Pirelli & C. S.p.A. and EUR 12,192 as Chairman of the Strategies Committee of Pirelli & C. S.p.A. (4) Of which EUR 126,318 referring to an insurance policy in line with what indicated in the 2018 remuneration policy, EUR 5,632.00 referring to Company car, EUR 6,000 referring to payments for supplementary pension, and EUR 2,952 referring to payments for health insurance. (5) Of which EUR 400,000 as Chairman of Pirelli & C. S.p.A., EUR 14,630 as Director of Pirelli & C. S.p.A.and EUR 6,000 as attendance fees for participation in corporate bodies meetings from 1/1/2017 to 3/10/2017 (6) As a member of the Appointments and Successions Committee of Pirelli & C. S.p.A. (7) Compensation paid back to the company concerned (8) Of which EUR 8,000 as attendance fees for participation in corporate bodies meetings from 1/1/2017 to 3/10/2017 and EUR 14,630 as Director of Pirelli & C. S.p.A. from 4/10/2017 to 31/12/2017 (9) As a member of the Strategies Committee of Pirelli & C. S.p.A. (10) Of which EUR 16,000 as attendance fees for participation in corporate bodies meetings from 1/1/2017 to 3/10/2017 and EUR 14,630 as Director of Pirelli & C. S.p.A. from 4/10/2017 to 31/12/2017 (11) Of which EUR 6,096 as a member of the Compensation Committee of Pirelli & C. S.p.A. and EUR 7,315 as a member of the Appointments and Successions Committee of Pirelli & C. S.p.A. and EUR 7,315 as a member of the Strategies Committee of Pirelli & C. S.p.A (12) Of which EUR 13,000 as attendance fees for participation in corporate bodies meetings from 1/1/2017 to 3/10/2017 and EUR 14,630 as Director of Pirelli & C. S.p.A. as of 4/10/2017 and EUR 600,000 as Executive with strategic responsibilities for Pirelli & C. S.p.A. (until 31/12/2017). It should be noted that this does not include the remuneration received from Prelios S.p.A., a company that at 31 December 2017 did no longer appear among the Affiliates companies (13) Of which EUR 3,132 relating to an insurance policy, EUR 4,516 relating to the Company car, EUR 6,000 relating to contributions for supplementary pension and EUR 2,952 relating to payments of a health insurance (14) of which EUR 17,068 as Director in charge of Sustainability and EUR 30,000 as a pro-quota payment for non-competition agreement as long as the employment relationship is on-going (15) Of which: EUR 4,000 as attendance fees for participation in corporate bodies meetings from 31/8/2017 to 3/10/2017 and EUR 14,630 as Director of Pirelli & C. S.p.A. as from 4/10/ 2017. 2 8 0 (16) Of which EUR 6,096 as a member of the Committee for Audit, Risks, Sustainability and Corporate Governance ("CCRSCG") and EUR 6,096 as a member of the Compensation Committee (17) Of which EUR 7,315 as a member of the Strategies Committee and EUR 14,630 as Chairman of the Related-Party Transactions Committee ("RPTC") (18) As Chairman of the CCRSCG (19) Of which EUR 13,000 as attendance fees for participation in corporate bodies meetings from 1/1/2017 to 3/10/2017 and EUR 14,630 as Director of Pirelli & C. S.p.A. as from 4/10/ 2017. (20) As a member of the RPTC (21) Of which EUR 6,096 as a member of the CCRSCG and EUR 9,753 as a member of the RPTC (22) Of which: EUR 3,000 as attendance fees for participation in corporate bodies meetings from 31/8/2017 to 3/10/2017 and EUR 14,630 as Director of Pirelli & C. S.p.A. as from 4/10/ 2017. (23) As Chairman of the Committee for Audit, Risks, Sustainability and Corporate Governance of Pirelli S.p.A. (24) As manager of Pirelli Tyre S.p.a. during the fiscal year 2017 (25) Of which: EUR 2,612 for the Company car, EUR 3,764 referring to payments for supplementary pension and EUR 2,952 referring to payments for healt insurance (26) At 31 December 2017 the Executives with strategic responsibilities were: Maurizio Boiocchi, Gustavo Bracco, Giorgio Luca Bruno, Andrea Casaluci (appointed on 6 November 2017), Roberto Righi, Francesco Sala, Maurizio Sala, Luigi Staccoli, and Francesco Tanzi. Giuliano Menassi was Key Manager until 6 November 2017 and therefore the remuneration the latter received for the year is indicated. The remuneration paid to Andrea Casaluci (appointed Key manager on 6 November 2017) is included in the table and related to the whole year. It should be noted that the remuneration paid to Giorgio Luca Bruno is not included in this item, in that it is indicated in the table under his name. (27) In the total amount are summed EUR 11,000 paid to Gustavo Bracco as attendance fees for participation in corporate bodies meetings from 01/01/2017 to 31/08/2017 (28) These amounts refer to an insurance policy, health insurance policy, Company car, housing, and payments to supplementary pension funds. (29) These amounts refer to the pro-quota payment set forth in the non-competition agreement as long as the employment relationship is on-going. (30) As member of the Supervisory Board from 1/1/2017. (31) As Statutory Auditor of Pirelli Industrie Pneumatici S.r.l. and Driver Italia S.p.A. 1 8 2 ANNUAL REPORT 2017ANNUAL REPORT 2017 Remuneration reportRemuneration report 3. MONETARY INCENTIVE PLANS FOR MEMBERS OF THE BOARD OF DIRECTORS AND EXECUTIVES WITH STRATEGIC RESPONSIBILITIES For a description of the monetary incentive plans, see paragraph 5 of the Remuneration Policy. 4. SCHEDULE RELATING TO EQUITY INVESTMENTS OF THE MEMBERS OF THE ADMINISTRATIVE AND CONTROL BODIES AND EXECUTIVES WITH STRATEGIC RESPONSIBILITIES The table below provides disclosures on any equity investments held in Pirelli & C. S.p.A. and in its Subsidiary Companies, by those The variable incentive scheme of Pirelli envisages that the payment of 25% of any MBO accrued is deferred by 12 months and is who, even for a fraction of the year, have held the position of: subject to the achievement of MBO objectives for the following year. In particular:  > member of the Board of Directors;  > in the event that no MBO has matured in the following year, the deferred MBO share of the previous year is definitively "lost";  > member of the Board of Statutory Auditors;  > in the event that the MBO has matured in the following year at the level of the access threshold, the MBO share deferred from  > Executive with strategic responsibilities. the previous year is returned; In particular, it indicates, for each member of the Board of Directors and Board of Statutory Auditors and cumulatively for other  > in the event of the MBO achieving between the target level and the maximum level in the following year, payment - in addition to Executives with strategic responsibilities, with regard to each company in which shares are held, the number of shares, by category: the return of the MBO share deferred from the previous year - of an additional amount between 20% and 40% of the entire MBO  > held at the end of the prior year; matured in the previous year (for results earned in the following year between the target and maximum levels, the increase in  > purchased during the reporting year; the previous year MBO bonus shall be calculated by linear interpolation).  > sold during the reporting year;  > held at the end of the reporting period. In this regard, the title of possession and the manner in which it is held are also specified. First name and surname Position Plan Bonus for the year Bonus for the previous year Payable/ Paid out Deferred Deferment period No longer payable Payable/ Paid out Still deferred Other bonuses It includes all the persons who, during the reporting year, held40 positions as members of the administrative and control bodies or as Executives with strategic responsibilities, even for a fraction of the year. 2 8 2 Marco Tronchetti Provera Executive Vice Chairman and Chief Executive Officer Giorgio Luca Bruno Director (2) Giovanni Tronchetti Provera Director (3) Key managers Director (4) MBO 2017 3,013,016.00 824,843.00 LTI Plan 2016-2018 (1) 833,500.00 0.00 MBO 2017 387,201.00 104,976.00 LTI Plan 2016-2018 155,898.00 0.00 MBO 2017 19,304.00 5,199.00 LTI Plan 2016-2018 6,251.00 0.00 MBO 2017 2,939,660.00 829,397.00 LTI Plan 2016-2018 998,425.00 0.00 (I) Compensation in the company preparing the financial report (5) (II) Compensation from Subsidiaries and Affiliates MBO 2017 1,294,675.00 379,665.00 LTI Plan 2016-2018 379,305.00 0.00 MBO 2017 5,064,506.00 1,384,750.00 LTI Plan 2016-2018 1,614,769.00 0.00 (III) Total 8,353,255.00 1,764,415.00 - - - - - - - - - - - - - - - - - - - - - - - - - - 469,680.00 - 64,543.00 - 3,709.00 - 402,829.00 - 139,032.00 - 801,729.00 - 940.761,00 - - - - - - - - - - - - - 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (1) The 2016-2018 LTI Plan was closed ahead of time following a deliberation of the Board of Directors on 28 July 2017 and the pro-quota payment of the award matured. (2) Giorgio Luca Bruno is included in the MBO and LTI variable incentive plans as Executive with strategic responsibilities for Pirelli & C. S.p.A. until 31 December 2017. (3) Giovanni Tronchetti Provera is included in the variable incentive MBO and LTI Plans as Executive of Pirelli Tyre S.p.A.. (4) As of 31 December 2017 the following were Executives with strategic responsibilities: Maurizio Sala, Francesco Tanzi, Giorgio Luca Bruno, Luigi Staccoli, Maurizio Boiocchi, Gustavo Bracco, Roberto Righi, Francesco Sala and Andrea Casaluci. It should be noted that Giuliano Menassi was an Executive with strategic responsibilities from 1/1/2017 to 6/11/2017 and therefore the amount includes the variable incentive paid to the latter. It should also be noted that Giorgio Luca Bruno no longer qualifies as Executive with strategic responsibilities as of 1 January 2018 and the amount referring to the variable component in the remuneration of the latter is not included in the total amount herein, in that it is indicated in the table under his name, as a Director of the Company. 1) SHAREHOLDINGS OF THE MEMBERS OF THE ADMINISTRATIVE AND CONTROL BODIES AND GENERAL MANAGERS 3 8 2 Surname and first name Position Company in which share is held No of shares held at 31/12/2016 No of shares purchased/ underwritten No of shares sold No of shares held at 31/12/2017 Giorgio Luca Bruno Director Pirelli & C. 0 500* - 500 * Shares purchased at the listing of the Company on 4 October 2017 2) SHAREHOLDINGS OF OTHER EXECUTIVES WITH STRATEGIC RESPONSIBILITIES Number of Key Managers Company in which share is held No of shares held at 31/12/2016 No of shares purchased/ underwritten No of shares sold No of shares held at 31/12/2017 - - (1) - - - 40 The Directors who have ceased to hold office before the start of trading of the Company’s shares on the Telematic Stock Exchange (Mercato Telematico Azionario) are not included. These Directors are entitled to receive an attendance fee amounting to € 1,000 for each meeting of the Company’s governing bodies they have taken part in. ANNUAL REPORT 2017ANNUAL REPORT 2017 Remuneration reportRemuneration report ARIANNA VULPIANI DEMETER Established by two agricultural entrepreneurs and a finance expert, Demeter exploits blockchain technology to establish direct relationships between consumers and farmers worldwide to the benefit of eco-sustainable crops. AGRICULTURE 4.0, THE ULTIMATE FARM-TO-TABLE of all, the soil. This is the connection that two young Italian entrepreneurs have made the cornerstone of their partnership. An idea that brings agriculture to the 4.0 stage, creating a I nnovation, in the guise of blockchain technology, combined with the most ancient element cultivated by the local farmer under the directions of the customer, who can then decide whether to or line that enables people to rent a portion of land anywhere in the world, a “micro-field” direct connection between growers and consumers. It’s called Demeter.life, and is a platform personally pick up the products or to have them sent. The project was launched in 2016 by two friends in their thirties, Marco Mettimano and Luigi Tonti, respectively CEO and Platform Advisor of Demeter.life. In 2013 Mettimano lived in China, where he was involved in investment activities in the automotive and photovoltaic industries. For his part Tonti took over his family’s farming business in Puglia two years ago, and in doing so he realised that the majority of earnings in this sector are taken by the intermediation system. «This led to the idea of the platform which, by cutting out the middle men, would ensure higher profits for farmers, lower prices for buyers and at the same time a relationship based on trust», says Mettimano. It was a dream with very genuine roots, but it still lacked an important piece of the jigsaw. Producers, even if in good faith, could have been able to modify the production process without letting consumers know, or - even worse - could have falsified the products. «We needed to find a guarantee system – admits Mettimano – and this is where the blockchain came in». It’s the same underlying technology as that used by cryptocurrencies like Bitcoin, and is developing strongly in the agrifoods sector. It works like a database that stores information online in a sort of ledger, impeding any kind of manipulation, and through this the activities of producers on their micro-fields are monitored at every stage. The startup has launched its own cryptocurrency called Demeter Token, which can be used to purchase all the services offered on the platform. «It’s a indispensable tool both for the supply chain and for self- financing», comments Tonti. Adding expertise in the healthy nutrition sector is Arianna Vulpiani, the startup’s Business Development Manager. In 2017 Vulpiani founded the BioFarm Orto project, a sort of garden produce sharing system that enables consumers to rent remotely and then personally harvest vegetables grown by small farms. This too led to the idea of the micro-field, which was then developed by the Demeter portal using the blockchain. Prior to the beginning of enrolment requests have already come in from 23 countries, from Asia to South America And in Italy there are already a number of farmers, accounting for a total area of about a thousand hectares, who are ready to use the platform. It’s an example of how technology is enabling a small revolution in the way we think of, consume and experience our food every day. CONSOLIDATED STATEMENT OF FINANCIAL POSITION (In thousands of euro) CONSOLIDATED INCOME STATEMENT (In thousands of euro) Property, plant and equipment Intangible assets Investments in associates and J.V. Other financial assets Deferred tax assets Other receivables Tax receivables Derivative financial instruments Non-current assets Inventories Trade receivables Other receivables Securities held for trading Cash and cash equivalents Tax receivables Derivative financial instruments Current assets Assets held for sale Total Assets 2 9 4 Note 12/31/2017 of which related parties (note 42) 12/31/2016 of which related parties (note 42) 2,980,294 5,893,704 17,480 229,519 111,553 3,556,635 6,496,889 47,010 198,691 147,964 27,318 878 9,464,797 940,668 11,864 - 10,685,921 1,055,639 652,487 62,731 679,321 400,538 36,482 275,622 2,790 6,184 9 10 11 12 13 15 16 27 17 14 15 18 19 16 27 33,027 1,118,437 35,461 27,770 3,208,388 1,904,375 2,035,991 176,392 60,251 60,936 (685) 4,177,009 3,897,089 74,435 127,124 1,216,635 274,037 2,399 54,963 5,646,682 559,168 48,597 1,532,977 60 64,395 23,989 3,680,540 - 14,366,461 3,134,085 1,342,281 1,656,741 135,063 140,773 128,211 12,562 3,274,858 87,421 170,992 1,452,169 368,100 3,374 - 8,028,055 204,051 12,007 226,868 6,641 Raw materials and consumables used (net of change in inventories) (1,859,837) (46,536) (1,540,516) Personnel expenses 31 (1,034,647) (11,004) (986,308) (8,954) Revenues from sales and services Other income - of which non-recurring events Changes in inventories of unfinished, semi-finished and finished products Note 2017 of which related parties (note 42) 2016* of which related parties (note 42) 29 30 5,352,283 10,833 4,976,396 628,533 230,618 696,225 3,468 2,279 - 140,258 41,734 (22,406) Net income (loss) from equity investments 34 (6,855) - share of net income (loss) of associates and j.v. (8,252) (8,252) (1,227) (1,227) - of which non-recurring events Amortisation, depreciation and impairment Other costs - of which non-recurring events Increase in fixed assets for internal work Operating income (loss) - gains on equity investments - losses on equity investments - dividends Financial income Financial expenses - of which non-recurring events Net income (loss) before tax (2,578) (371,457) - (342,584) (2,184,660) (374,951) (2,096,733) (29,703) 32 33 5,997 (14,434) 9,834 8,297 (33,739) 6,650 35 36 128,540 35,320 42,806 209 (491,150) (41,070) (469,996) 5 9 2 (70,076) 3,110 673,583 (61,244) 304,118 (23,728) 2,378 686,452 (20,019) (25,390) 239,243 (75,256) 1,280 163,987 Equity attributable to owners of the Group: 20.1 4,116,758 38 60,729 12,733,914 - Share capital - Reserves - Net income (loss) for the period Equity attributable to non-controlling interests: 20.2 - Reserves - Net income (loss) for the period Total Equity Borrowings from banks and other financial institutions Other payables Provisions for liabilities and charges Provisions for deferred tax liabilities Employee benefit obligations Tax payables Derivative financial instruments Non-current liabilities Borrowings from banks and other financial institutions Trade payables Other payables Provisions for liabilities and charges Tax payables Derivative financial instruments Current liabilities Liabilities held for sale Total Liabilities and Equity 20 23 25 21 13 22 26 27 23 24 25 21 26 27 Tax 37 (40,848) - of which non-recurring events Net income (loss) from continuing operations 103,881 263,270 5,945,999 561 Net income (loss) from discontinued operations 38 (87,563) (9,547) (16,362) Total net income (loss) 175,707 147,625 Attributable to: Owners of the parent company Non-controlling interests Total earnings/(loss) per share (in euro per share) 39 Earnings/(loss) per share related to continuing operations 176,392 (685) 0.206 0.309 (0.103) 135,063 12,562 0.191 0.219 (0.028) 642,047 772 (in euro per share) 1,673,642 197,954 1,498,492 22,586 Earnings/(loss) per share related to discontinued operations 565,254 16,437 783,079 (in euro per share) 45,833 48,416 17,910 2,910,223 - 12,733,914 45,987 9,895 41,773 52,170 3,063,548 - 14,366,461 * Figures related to the Industrial Business have been reclassified in the item "Net income (loss) from discontinued operations" in accordance with IFRS 5 accounting principle. ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (In thousands of euro) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AT 12/31/2017 (In thousands of euro) 2017 2016 Attributable to the Parent Company A Net income (loss) for the period 175,707 147,625 Other components of comprehensive income: B - Items that will not be reclassified to income statement: - Net actuarial gains (losses) on employee benefits - Tax effect (14,656) (9,291) (23,947) (46,567) 3,289 (43,278) Total B C - Items reclassified / that may be reclassified to income statement: Exchange differences from translation of foreign financial statements - Gains / (losses) for the period (166,763) (177,769) - (Gains) / losses reclassified to income statement - Tax effect Fair value adjustment of other financial assets available for sale: - Gains / (losses) for the period - (Gains) / losses reclassified to income statement Fair value adjustment of derivatives designated as cash flow hedges: 2 9 6 - Gains / (losses) for the period - (Gains) / losses reclassified to income statement - Tax effect Share of other comprehensivie income related to associates and JVs net of tax Total C D Total components of comprehensive income (B+C) A+D Total comprehensive income (loss) for the period Attributable to: - Owners of the parent company - Non-controlling interests Attributable to owners of the parent company: - Continuing operations - Discontinued operations Total attributable to owners of the parent company 80,208 - 40,486 1,439 (59,757) 45,265 2,983 (2,915) (59,054) (83,001) 92,706 93,793 (1,087) 101,148 (7,355) 93,793 - 12,598 (16,487) (26) (1,428) 4,325 (1,449) 2,707 (177,529) (220,807) (73,182) (50,940) (22,242) 125,065 (176,005) (50,940) Share Capital Translation reserve Total IAS Reserves * Other reserves/ retained earnings Total attributable to the Parent Company Non controlling interests Total Total at 12/31/2016 1,342,281 (204,778) (61,629) 2,058,211 3,134,085 140,773 3,274,858 Other components of comprehensive income - (86,153) 3,554 - (82,599) (402) (83,001) Net income (loss) for the period - - - 176,392 176,392 (685) 175,707 Total conprehensive income (loss) - (86,153) 3,554 176,392 93,793 (1,087) 92,706 Share capital increase 558,994 Annulment of treasury shares 3,100 Dividends paid - - - - - - - 630,381 1,189,375 - 1,189,375 (3,100) - - - - - (7,446) (7,446) Disposal of 38% Pirelli Industrial to Cinda fund Assignment of Pirelli Industrial to Marco Polo Acquisition of non-controlling interests (Brazil) Other - 70,307 (5,085) (63,704) 1,518 264,500 266,018 - - - - (6,958) (282,480) (289,438) (326,679) (616,117) - - - (12,843) (12,843) (9,580) (22,423) (147) 415 268 (230) 38 Total at 12/31/2017 1,904,375 (220,624) (70,265) 2,503,272 4,116,758 60,251 4,177,009 7 9 2 Breakdown of IAS reserves * Reserve for fair value adjustment of available-for-sale financial assets Reserve for cash flow hedge Reserve for actuarial gains/losses Tax effect Total IAS reserves (In thousands of euro) Balance at 12/31/2016 (19,282) 1,038 (44,023) 638 (61,629) Other components of comprehensive income Assignment of Pirelli Industrial Other changes 39,010 (14,492) (14,656) (6,308) 3,553 - (318) - - (602) (11,441) (12,043) 171 - (147) Balance at 12/31/2017 19,410 (13,454) (59,110) (17,111) (70,265) ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsCONSOLIDATED STATEMENT OF CHANGES IN EQUITY AT 12/31/2016 (In thousands of euro) CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands of euro) Attributable to the Parent Company Share Capital Translation reserve Total IAS Reserves * Other reserves/ retained earnings Total attributable to the Parent Company Non controlling interests Total Total at 12/31/2015 (°) 10,196 (61,814) (18,590) 3,279,803 3,209,595 72,041 3,281,636 Other components of comprehensive income Net income (loss) for the financial year Total conprehensive income (loss) - (142,964) (43,039) - (186,003) (34,804) (220,807) - - - 135,063 135,063 12,562 147,625 - (142,964) (43,039) 135,063 (50,940) (22,242) (73,182) Dividends paid - - - - - (2,053) (2,053) - - (10,380) (10,380) 81,129 70,749 (1,150) (1,150) 16,462 15,312 Note 2017 of which related parties (note 42) 2016* of which related parties (note 42) Net income (loss) before taxes Reversals of amortisation, depreciation, impairment losses and restatement of property, plant and equipment and intangible assets Reversal of Financial expenses Reversal of Financial income Reversal of Dividends Reversal of gains/(losses) on equity investments Reversal of share of net income from associates and joint ventures Ordinary taxes Change in Inventories Change in Trade receivables Change in Trade payables 32 36 35 34 34 34 17 14 24 304,118 371,457 491,150 (128,540) (9,834) 8,437 8,252 (135,500) (109,768) 239,243 342,584 469,996 (42,806) (6,650) 25,442 1,227 (104,456) 48,280 73,644 90,561 144,917 447,385 86,227 201,845 Change in Other receivables/Other payables (39,423) 70,469 (38,462) - (6,894) (6,894) (3,995) (10,889) Other changes A Net cash flows provided by / (used in) operating activities Change in Provisions for employee benefit obligations and Other provisions (102,010) (41,734) 1,137,634 - (5,449) (5,449) - (5,449) Investments in property, plant and equipment 9 (470,381) (155,502) (39,482) 1,086,176 (363,466) Disposal of property, plant and equipment 73,505 61,000 91,626 - (1,332,782) (697) (569) (1,266) Investments in intangible assets 10 (18,969) Total at 12/31/2016 1,342,281 (204,778) (61,629) 2,058,211 3,134,085 140,773 3,274,858 Acquisitions of investments in subsidiaries Repayment of share capital and reserves from associates (°) the figures refer to the restated consolidated financial statements of Marco Polo Industrial Holding S.p.A. following the completion of the PPA Disposals (Acquisition) of investments in associates and JV (In thousands of euro) Disposal of 38% of Pirelli Industrial to Cinda fund Disposals (Acquisition) of financial assets Breakdown of IAS reserves * Reserve for fair value adjustment of available-for-sale financial assets Reserve for cash flow hedge Reserve for actuarial gains/losses Tax effect Total IAS reserves Disposal of 10% of Pirelli Industrial Acquisition of 80% of Jiaozou Aeolus Tyre Co. Ltd (net of cash acquired) Dividends received B Net cash flows provided by / (used in) investing activities (398,376) Increase (reduction) in equity 20 1,189,375 (15,639) 8,556 17,183 (2,465) - - - 9,834 (8,717) - 9 9 2 8,556 100,353 100,353 - (4,692) (4,692) 9,145 266,200 70,749 (53,395) 6,650 114,453 - Disposal of 10% Pirelli Industrial S.r.l. Acquisition of 80% Jianzou Aeolus Tyre Effect of purchase of special shares for withdrawal Purchase of special treasury shares for redemption - - - - 2 9 8 Effect of the incorporation of Marco Polo Industrial Holding 1,332,085 S.p.A / Other - - - - - Balance at 12/31/2015 (4,538) (2,797) 2,544 (13,799) (18,590) Change in Financial payables (2,060,304) (345,966) Other components of comprehensive income (14,744) 3,835 (46,567) 14,437 (43,039) Change in Financial receivables/Securities held for trading 218,037 190,000 (44,332) Balance at 12/31/2016 (19,282) 1,038 (44,023) 638 (61,629) Financial income / (expenses) Dividends paid Net cash flows provided by / (used in) financing activities Net cash flows provided by (used in) discontinued operations (**) Total cash flows provided / (used) during the period (A+B+C+D) Cash and cash equivalents at the beginning of the period Exchange differences from translation of cash and cash equivalents (280,832) (12,742) (946,466) (135,597) (342,805) 1,523,928 (71,483) Cash and cash equivalents at the end of the period (E+F+G) (°) 1,109,640 C D E F G H (°) of which: cash and cash equivalents passive current accounts 19 1,118,437 (8,797) - (321,853) (2,053) (714,204) 29,869 516,294 1,094,457 (86,823) 1,523,928 1,532,977 (9,049) (*) Figures related to the Industrial Business have been reclassified in the item "Net cash flows provided by (used in) discontinued operations" in accordance with IFRS 5 accounting principle. (**) the figures refer to cash and cash equivalents of the Industrial business subject to assignment 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 42 of the Explanatory Notes for further detail. ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements EXPLANATORY NOTES 1. GENERAL INFORMATION partially exercised on November 2, 2017 for a total of 18,904,836 directly in the Statement of Comprehensive Income and not in Group, at the same time, holds: shares. With the inclusion of the Greenshoe Option, the Offer of the Explanatory Notes.  > the power of decision making, or the ability to direct the Sale therefore concerned 368,904,836 ordinary Pirelli shares and, relevant activities of the subsidiary, that is activities that consequently the total proceeds deriving from the Offer of Sale, The Statement of Changes in Equity sets forth, in addition have a significant influence on the results of the subsidiary; which were exclusively due to Marco Polo International Italy to the total gains/losses of the period, the amounts from  > the right to the variable results (positive or negative) S.p.A., amounted to approximately euro 2.4 billion. As a result transactions with equity holders and the changes which resulting from the investment in the entity; Pirelli & C. S.p.A. is a corporation organised under the laws of of the partial exercise of the Greenshoe Option, Marco Polo occurred during the period in the reserves.  > the capacity to use its own power of decision making to the Republic of Italy. International Italy S.p.A. holds 631,095,164 ordinary Pirelli shares determine the amounts of the results arising from the which correspond to approximately 63.11% of the share capital. In the Statement of Cash Flows, the financial flows derived investment in the entity. Founded in 1872, Pirelli & C. S.p.A. is - also by way of its from operating activities are presented using the indirect subsidiaries in Italy and abroad - a Pure Consumer Tyre Company Pirelli & C. S.p.A. is directly controlled by Marco Polo method, by way of which the gains or losses for the period have The financial statements of subsidiaries are included in the (which includes tyres for cars, motorcycles and bicycles) whose International Italy S.p.A. - following the merger which been adjusted for the effects of non-monetary transactions, consolidated Financial Statements as of the date when control particular focus is on the High Value tyre market, that is, occurred during June 2017 with its subsidiary Marco Polo by any deferment or accrual of past or future collections or is assumed until such time as when control ceases to exist. products created to reach the highest levels of performance, International Holding Italy S.p.A. - and is in turn therefore payments for operating activities, and by any revenue or cost The equity and the net income (loss) and attributable to non- safety, quietness and adherence to the road surface. indirectly controlled by China National Chemical Corporation items connected with the financial flows arising from any controlling interests were separately reported respectively (“ChemChina”), a state-owned enterprise (SOE) governed by investment or financing activities. in the consolidated Statement of Financial Position and The registered Head Office of the Company is located in Milan, Chinese law with registered office in Beijing, and which reports Italy at address Viale Piero e Alberto Pirelli n. 25. to the Central Government of the People’s Republic of China. With effect from October 4, 2017, the shares of Pirelli & C. S.p.A. are On February 26, 2018 the Board of Directors authorised the Discontinued operations As a result of the assignment by Pirelli & C. S.p.A. of the TP Industrial Holding S.p.A. shares, All companies for which the Group can exercise significant consolidated Income Statement, and the Consolidated Statement of Comprehensive Income. listed on the MTA (Mercato telematico azionario or screen-based publication of these consolidated Financial Statements. the company into which almost all of Pirelli’s Industrial assets influence as defined by the IAS 28 – Investments in Associates 3 0 0 stock exchange), organised and managed by Borsa Italiana S.p.A.. These Financial Statements have been prepared using the Euro as the reporting currency with all values rounded to the nearest thousand Euro unless otherwise indicated. 2. BASIS OF PRESENTATION The audit of the Financial Statements has been entrusted Financial Statements The consolidated Financial Statements at December 31, 2017 consist of the Statement of were merged, to Marco Polo International Holding Italy S.p.A., the Industrial business qualified as a “discontinued operation”. Pursuant to the provisions of IFRS 5, the results for the period for the “discontinued operations” were reclassified to the Income Statement as a single item, “net income (loss) related to discontinued operations” and includes the financial data for the first quarter of 2017 for the Industrial Business, which no longer comes under the and Joint Ventures, are considered associates. This influence is legally presumed to exist when the Group holds a percentage of voting rights of between 20% and 50%, or when - even in the case of a lower share of voting rights – it has the power to participate in determining financial and operating policies by virtue of specific legal relationships, such as, for example, participation in shareholders’ agreements together with other 1 0 3 to PricewaterhouseCoopers S.p.A. pursuant to article 159 Financial Position, the Income Statement, the Statement of scope of the Group as a result of the assignment, as well as the forms of significant exercise of governance rights. of Italian Legislative Decree No.58 of February 24, 1998 and Comprehensive Income, the Statement of Changes in Equity, twelve month results for some of the residual Industrial activities taking account of the CONSOB recommendation of February the Statement of Cash Flows and the Explanatory Notes, and currently in the process of being separated. In accordance with Joint arrangements are agreements through wich two more 20, 1997, in executing the resolution of the Shareholders’ are accompanied by the Directors’ Report on Operations. the relevant accounting standards, the comparative 2016 Income partners have a joint control established by an agreement. Meeting of August 1, 2017, which appointed said company as Statement figures have been subjected to restatement. Joint control is the shared control of a business activity, the auditor for the closing of each of the nine years between The format adopted for the Statement of Financial Position established by agreement and only exists when decisions December 31, 2017 and December 31, 2025. provides for the distinction of assets and liabilities according It should be noted that for transactions between the industrial relative to the activity require the unanimous consent of all to whether they are current or non-current. business, qualified as “discontinued operation”, and other parties who share control. These agreements may give rise to Just two years after the Public Offer promoted by ChemChina activities of the Pirelli Group (“continuing business”), it was joint ventures or joint operations. together with Camfin shareholders, Pirelli returned to the stock The Group has opted to present the components of gains/losses used a so called “post disposal” presentation in the Income market on October 4, 2017 following a reorganisation process for the financial year in a separate Income Statement, rather Statement. Specifically, ongoing commercial transactions A joint venture is an agreement for the joint control of an which led to the separation of the Industrial business and to the than include these components directly in the Statement of have been represented as “continuing business” in the Income entity whereby the parties that have joint control, have focus on the Consumer business, enriched with new proficiencies Comprehensive Income. The Income Statement framework Statement, thus presenting a result that takes into account rights to the net assets of the said entity. Joint ventures also through the creation of new business departments adopted provides for the classification of costs by nature. such components and recording the related inter-eliminations are distinguished from joint operations that are configured (Consumer Marketing, Digital, Data Science, Cyber and Velo). within the “discontinued operation”. instead as agreements that give the parties of the agreement, With the start of trading all management and coordination The Statement of Comprehensive Income includes the results for activities previously exercised by Marco Polo International Italy the period and, for the homogeneous categories, income and costs S.p.A. ceased. As part of the Global Offer of Sale, 350 million are recognised directly in equity, in accordance with the IFRS. ordinary shares were offered at a price of euro 6.5 per share Scope of consolidation The scope of consolidation includes the subsidiaries, associates and agreements for joint relating to the agreement. In the case of joint operations, the assets, liabilities, costs and revenues of the agreement must which have joint control of the initiative, the rights to individual assets and the obligations for individual liabilities for a capitalisation of euro 6.5 billion. The Greenshoe Option, The Group has opted for the presentations of tax effects, as control, i.e. joint arrangements. mandatorily be recognised in accordance with the applicable granted as part of the transaction by Marco Polo International well as the reclassifications to the Income Statement of gains/ accounting standards. The Group does not currently have any Italy S.p.A. to a placement consortium for 50 million shares, was losses which were recognised in equity in previous years, Subsidiaries are defined as all the companies over which the agreements for joint operations. ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsThe principal changes in the scope of consolidation for the 2017 financial year refer to the Industrial activities which no longer come Non-controlling interests in the subsidiaries of the Group are > > in the case of a shareholding acquired after the under the scope of the Group as a result of the assignment in March 2017 by Pirelli & C. S.p.A, of the TP Industrial Holding S.p.A. shares, not relevant either individually or in aggregate form. assumption of control, any difference between the company into which almost all of Pirelli’s Industrial assets were merged, to Marco Polo International Holding Italy S.p.A. As a result of the assignment the following companies were deconsolidated as of March 31, 2017:  > Prometeon Tyre Deutschland GmbH  > Prometeon Tyre Group S.r.l.  > TP Industrial Holding S.p.A.  > Newco TP S.r.l.  > Prometeon Tyre Group Polska Sp. z o.o.  > Prometeon Tyre Group UK Limited Consolidation Principles For consolidation purposes, the Financial Statements of the companies included in the the purchase cost and the corresponding share of equity acquired is recognised in equity; similarly, the effects deriving from the disposal of non-controlling interests without loss of control are also recognised scope of consolidation prepared at the reporting date of the in equity. Financial Statements of the Parent Company were adjusted  > investments in associates and joint ventures are accounted to conform to the IAS/IFRS standards as applied by the Group. for under the equity method, on the basis of which the carrying amount of the investments is adjusted by:  > Prometeon Tyre Group Espana Y Portugal S.L. - Sociedad Unipersonal The Financial Statements expressed in foreign currencies > > the investor’s share of the financial results of the  > Prometeon Tyre Group (Suisse) SA  > Prometeon Turkey Endüstriyel ve Ticari Lastikler A.S.  > Prometeon Tyre Group Commercial Solutions LLC  > Prometeon Tyre Group Inc.  > Prometeon Tyre Group Industrial Brasil Ltda  > Prometeon Tyre Group Colombia S.A.S.  > Prometeon Tyre Group Servicios Mexico S.A. de C.V.  > Prometeon Tyre Group Mexico S.A. de C.V.  > Prometeon Tyre Egypt Co. S.A.E.  > International Tire Company Ltd have been translated into Euro at the period-end exchange subsidiary realised after the acquisition date; rates for the items in the Statement of Financial Position, and > > the share of gains and losses are recognised directly at the average exchange rates for the Income Statement, with in the equity of the subsidiary, in accordance with the exception, where applicable, of the Financial Statements the applicable standards; of companies operating in high-inflation countries whose > > dividends are paid by the subsidiary; Income Statements have been translated at the period-end > > when the Group’s share in the losses of the associate/ exchange rates. joint venture exceeds the carrying amount of the investment in the Financial Statements, the The differences arising from the conversion of the opening carrying amount of the investment is reset to zero equity at period-end exchange rates have been recognised and the share of any further losses is recognised  > TP (Tianjin) Enterprise Management Consulting Co., Ltd. in the reserve for translation differences, together with the under “Provisions for liabilities and charges”, to the 3 0 2 Information on subsidiaries The consolidated Financial Statements include the assets and liabilities of approximately 97 legal entities. The following is a list of the significant subsidiaries: difference arising from the translation of the result for the extent to which the Group has a contractual or period at period-end exchange rates instead of the average implicit obligation to cover the losses; 3 0 3 exchange rate. The reserve for translation differences is > > the gains emerging from sales made by subsidiaries reversed to the Income Statement at the time of the disposal to joint ventures or associates are eliminated in of the company which generated the reserve. proportion to the share of ownership held by the acquiring entity. Headquarter 12/31/2017 12/31/2016 % group % non- controlling interests % group % non- controlling interests The criteria for consolidation may be summarised as follows:  > subsidiaries are consolidated using the line-by-line method on the basis of which: > > the assets and liabilities, revenues and expenses 3. ADOPTED ACCOUNTING STANDARDS Pirelli Tyre Co. Ltd Yanzhou (China) 90.00% 10.00% 90.00% 10.00% of the Financial Statements of subsidiaries are Pursuant to Regulation No. 1606 issued by the European Pirelli Deutschland GmbH Breuberg/Odenwald (Germany) 100.00% Pirelli Tyre S.p.A. Milano (Italy) Pirelli Industrie Pneumatici S.r.l. Settimo Torinese (Italy) Pirelli Neumaticos S.A. de C.V. Silao (Mexico) 100.00% 100.00% 100.00% Pirelli International plc Burton on Trent (United Kingdom) 100.00% Pirelli Pneus Ltda Santo Andrè (Brazil) Pirelli Comercial de Pneus Brasil Ltda Sao Paulo (Brazil) 100.00% 100.00% Pirelli UK Tyres Ltd Burton on Trent (United Kingdom) 100.00% Pirelli Tire LLC Rome (USA) S.C. Pirelli Tyres Romania S.r.l Slatina (Romania) 100.00% 100.00% Limited Liability Company Pirelli Tyre Russia Moscow (Russia) 99.98% 0.02% 99.98% 0.02% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% assumed in their entirety, regardless of the Parliament and the European Council in July 2002, the percentage of investment held; consolidated Financial Statements of the Pirelli & C. Group > > the carrying amount of investments is eliminated have been prepared in accordance with the International against the related share of equity; Financial Reporting Standards (IFRS) in force as issued by > > the financial and operating transactions between the International Accounting Standards Board (IASB) and companies consolidated on a line-by-line basis, approved by the European Union at December 31, 2017, including dividends distributed within the Group, as well as the provisions issued in the implementation of 64.00% 36.00% are eliminated; Article 9 of Legislative Decree No.38/2005. IFRS means the 100.00% 100.00% 100.00% > > non-controlling interests are reported under equity, IFRS international accounting standards in force as issued and the share of gain or loss attributable to non- by the International Accounting Standards Board (IASB) and controlling interests is similarly shown separately approved by the European Union at December 31, 2017, as in the Income Statement; well as all the revised International Accounting Standards > > at the time of disposal of the subsidiary and the (IAS) and all the interpretations of the International Financial consequent loss of control, in determining the gain Reporting Interpretations Committee (IFRIC), formerly the The complete list of subsidiaries is contained in the attachment “Scope of consolidation - list of companies included in consolidation using or loss arising from the disposal, any goodwill that Standing Interpretations Committee (SIC). the line by line method”. can be allocated to the subsidiary is taken into account; The consolidated Financial Statements have been prepared ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statementsusing the historical costs method with the exception of difference between the net proceeds from disposal and the derivative financial instruments, securities held for trading carrying amount of the asset. Research and development costs Research costs for new products and/or processes are expensed as they occur. There were no development costs that satisfied the requisites for capitalisation as provided for by IAS 38. and financial assets available for sale, which have been evaluated which at their fair value. Business combinations Corporate acquisitions are accounted for under the acquisition method. Goodwill Goodwill is an intangible asset with an indefinite useful life and is therefore not subject to amortisation. Goodwill Property, plant and equipment Property, plant and equipment are recognised at their purchase or production cost, which includes any directly attributable incidental expenses. is subjected to impairment test at least on an annual basis in Any costs incurred subsequent to the acquisition of goods, plus the cost of replacing certain parts of property, plant and equipment, order to identify any loss of value, or whenever there are any are capitalised only if they increase the future economic benefits inherent to the asset. All other costs are recognised in the Income When a controlling interest in a company is acquired, indications of a loss of value, and as such it is allocated to the Statement as they occur. When the cost of replacing certain parts of property, plant and equipment is capitalised, the residual value goodwill is initially recognised at cost and calculated as the cash generating units for this purpose. For the purposes of the of the replaced parts is recognised in the Income Statement. difference between: impairment test, goodwill is allocated to the cash generating Property, plant and equipment are recognised at cost net of any accumulated depreciation and impairment, except for land which is  > the fair value of the price plus any non-controlling interests in units or group of cash generating units in compliance with the not depreciated but is recognised at cost net of any accumulated impairment. the acquired company, measured at fair value (if this option maximum aggregation limit which cannot exceed that of the Depreciation is recorded starting from the month in which the asset is available for use or is potentially capable of providing the was chosen for the acquisition in question) or in proportion operating segment identified pursuant to IFRS 8. The criteria financial benefits associated with it. to the share of the non-controlling interest in the net assets used in the allocation of goodwill coincides with the sole sector of Depreciation is charged on a straight-line basis once per month at rates that allow for the depreciation of assets until the end of of the acquired company; activity in which the Group operates, being Consumer Activities, their useful life or, in the case of disposal, until the last month of use.  > the fair value of the acquired assets and liabilities. and takes the minimum level at which goodwill is monitored into In cases where the aforesaid difference is negative, the difference consideration, for internal management control purposes. Depreciation rates were as follows: is immediately recognised as income in the Income Statement. In the case of the acquisition of control of a company in which a non-controlling interest is already held (step acquisition), Trademarks and licenses Trademarks and licenses for which the conditions for classification as intangible assets 3 0 4 the previously held investment is measured at fair value, and with an indefinite useful life have not been met, are evaluated the effects of this adjustment are recognised in the Income at cost, net of the accumulated amortisation and impairment. Statement. This cost is amortised for the duration of the agreement or the duration of the useful life of the asset, whichever is shorter. Buildings Plant Machinery Equipment Furniture Costs relating to business combinations are recognised in the The trademarks for which the conditions for classification Motor vehicles Income Statement. as intangible assets with an indefinite useful life have been met, are not systematically amortised but are subjected to an 3%-10% 7%-20% 5%-20% 10%-33% 10%-33% 10%-25% 5 0 3 Contingent considerations, that is, the obligations of the impairment test at least once a year. During 2016 financial year a Purchase Price Allocation was completed, following the acquisition of the Pirelli Group by Marco acquiring company to transfer additional assets or shares to the seller in cases where certain future events occur or specific conditions are fulfilled, are recognised at fair value at the acquisition date as part of the amount transferred in Software Software expenses, are capitalised and recognised in the Financial license costs, incidental including Polo, which resulted in the recognition of higher value for the Group’s productive assets due mainly to their optimally maintained condition which resulted in an extension of their residual lives. The assets subject to evaluation for the purposes of the Purchase Price Allocation were depreciated, starting as of the date of acquisition of control by Marco Polo Industrial Holding S.p.A. on the basis of the new remaining useful lives determined at the time of the evaluation. exchange for the acquisition itself. Any subsequent changes in Statements net of any amortisation and net of any accumulated the fair value of these agreements are normally recognised in impairment. Software is amortised on the basis of its useful life. Government grants related to property, plant and equipment are recognised as deferred income and accredited to the Income the Income Statement. Statement for the duration of the depreciation of the relevant assets. Intangible assets Intangible assets with finite useful lives are measured at cost, net of any accumulated amortisation Customer relationships Customer relationships mainly refer to intangible assets acquired in a business combination and are recognised in the Financial Statements at their fair value at Leasehold improvements are classified as tangible assets, in keeping 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. and impairment. the purchase date and amortised on the basis of their useful life. Spare parts of significant value are capitalised and depreciated for the duration of the estimated useful life of their respective assets. Amortisation is calculated on a straight-line basis and begins when the asset is available for use or is capable of operating in the opinion of management and ceases on the date when Technology The value of technology refers mainly to product technology, process technology as well as product development the asset is classified as held for sale or is de-recognised from technology identified during the Purchase Price Allocation. It is Any dismantling costs are estimated and added to the cost of the property, plant and equipment with a corresponding accrual to the provision for liabilities and charges when the conditions for accruing the provision are met. They are then depreciated for the duration of the remaining useful life of their respective assets. the accounts. recognised in the Financial Statements at fair value at the date Assets acquired under finance lease agreements, through which essentially all the risks and rewards of ownership are transferred Capital gains and capital losses resulting from the divestment of acquisition, and is amortised on the basis of its useful life. to the Group, are recognised as property, plant and equipment at their fair value or, if lower, at the current value of the minimum or disposal of an intangible asset are determined as the lease payments, with a corresponding entry for the relevant financial payable. The lease payment is separated into two components; ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statementsas a financial expense which is recognised in the Income In order to evaluate a loss of value or impairment, assets are of the associate or joint venture, and the amount that will be Statement, and as the reimbursement of capital and is aggregated at the lowest level at which their independent received for the final disposal of the investment (known as the Inventories Inventories are valued either at cost determined under the FIFO (first in first out) method, or their estimated recorded as a reduction of the financial payable. cash flows are separately identifiable (cash generating units). Discounted Cash Flow – asset side). net realisable value, whichever is lower. The evaluation of inventories includes the direct costs of Leases in which the lessor essentially retains all the risks Specifically, goodwill must be allocated to the cash generating When there is evidence that any impairment recognised in materials and labour as well as indirect costs. The impairment and rewards associated with the ownership of the asset units or group of cash generating units in compliance with the previous financial years may no longer exist or may have provisions for obsolete and slow moving inventories are are classified as operating leases. Costs associated with an maximum aggregation limit which cannot exceed that of the been reduced, the recoverable amount of the investment is calculated by taking their estimated future use and their operating lease are recognised as an expense on a straight- operating segment. estimated again, and if it is results as higher than the amount net realisable value into account. The netrealisable value is line basis in the Income Statement for the duration of the of the investment, then the latter amount is increased up to the estimated selling price, net of all costs estimated for the leasing agreement. In the presence of indications that any impairment recognised and not exceeding the recoverable amount. completion of the asset including any sales and distribution Property, plant and equipment are de-recognised from the or intangible assets other than goodwill, may no longer The reversal of an impairment loss may not exceed the value The cost is increased by incremental expenses similarly to that Statement of Financial Position at the time of disposal or exist or may have been reduced, the recoverable amount is of the investment that would have been determined (net of described with respect to property, plant and equipment. in previous financial years for property, plant and equipment costs that will be incurred. permanent retirement from use and, as a consequence no estimated again. If it results as higher than the net carrying impairment) had no loss of value been recognised in previous future economic benefits is expected can be derived from their amount, then the net carrying amount is increased up to, but financial years. disposal or use. not exceeding, the recoverable amount. The reversal of an impairment loss on investments in associates Receivables Receivables are initially recognised at their fair value, which normally corresponds to the consideration Any capital gains or capital losses resulting from the The restatement of a value must not exceed the carrying and joint ventures is recognised in the Income Statement. agreed or to the present value of the amount that will be disinvestment or disposal of property, plant and equipment amount that would have been determined (net of impairment, are determined as the difference between the net proceeds depreciation or amortisation) had no loss of value been from disposal and the carrying amount of the asset. detected in previous financial years. 3 0 6 Impairment of assets The restatement of the value of an asset other than goodwill is recognised in the Income Statement. collected. They are subsequently measured at amortised cost, which is reduced in the case of impairment. Amortised Financial assets available for sale This item includes investments in entities other than subsidiaries, associates and joint cost is calculated by using the effective interest rate method, which is equivalent to the discount rate that, when applied ventures, and other securities not held for trading. They are recorded in the Statement of Financial Position as “Other financial assets”. They are measured at fair value, if this can be reliably determined. to future cash flows, renders the present value of such cash flows equal to the initial fair value. Impairment losses on receivables are calculated according to the counter-party 7 0 3 Property, plant and equipment and intangible assets Whenever there are specific indicators of a loss of value, at least annually for intangible assets with an indefinite An impairment which has been detected for goodwill cannot Gains and losses deriving from changes in fair value are default risk, which is determined by taking the available be restated in subsequent financial years. recognised in a specific equity reserve. information on the solvency of the counter-party plus their When a reduction in fair value has been recognised directly historical data into consideration. The carrying amount useful life, including goodwill, and both property, plant and Any loss due to a reduction of value recorded for goodwill in equity and there is objective evidence that the asset was of receivables is reduced indirectly by the recognition of a equipment and intangible assets, are subjected to impairment on the interim (half year) Financial Statements cannot be impaired, the losses recognised up to that time in equity are provision. Significant individual positions that are objectively tests in order to verify any loss of value. restated in subsequent financial years. reversed in the Income Statement. detected to be partially or wholly uncollectable are subject The test consists of an estimate of the recoverable amount for the asset compared to its carrying amount. Investments in associates and joint ventures Following the application of the equity method, in the presence A prolonged (meaning more than 12 months) or significant loss reflects the estimate of future recoverable flows and the (meaning more than 50% for securities issued by entities applicable date of collection, recovery costs and expenses, and of impairment indicators, the value of investments in associates operating in banking sector and more than one-third for the fair value of guarantees, if any. Any positions that are not The recoverable amount of an asset is either its fair value less the and joint ventures is tested for impairment. The recoverable securities issued by entities operating in other sectors) subject to individual impairment are included in groups with costs to sell, or its value in use, whichever is higher, where the latter amount corresponds to the higher amount between the fair reduction in the fair value of equity securitiescompared to similar characteristics in terms of credit risk, and are impaired is the current value of estimated future financial flows arising from value less the costs of the sale, and the value in use. their cost is considered an indicator of impairment. on a collective basis in accordance with the rising percentages the use of the asset plus those deriving from its disposal at the end For the purposes of impairment testing, the fair value of Any impairment of a financial asset available for sale recognised for overdue periods. This collective impairment procedure of its useful life, net of taxes, plus the application of a discount rate, an investment in an associate or joint venture with shares in the Income Statement may be restated in the Income is also applied to receivables not yet due. The impairment net of taxes, which reflects the current market assessment of the listed on an active market is always equal to its market value, Statement, with the exception of any impairment detected for percentages are determined on the basis of historical time value of money and the risks specific to the asset. It is not irrespective of the percentage of ownership. In the case of stock securities classified as available for sale, which instead experience as well as statistical data. necessary to estimate both amounts in order to verify the absence investments in unlisted companies, the fair value is determined may not be restated with effect on the Income Statement. When the conditions of impairment of receivables no longer of a loss of value as it is sufficient that one of the two configured using estimates based on the best available information. Financial assets available for sale, whether debt or equity exist, the impairment losses recorded in previous financial years amounts is higher than the carrying amount. instruments for which fair value is not available, are accounted are restated as credits to the Income Statement, up to but not If the recoverable amount of an asset is lower than the carrying associate or joint venture, an estimate is made of the share best market information available at the reporting date. had no impairment loss been recognised. amount, the latter is reduced and adjusted to the recoverable owned of the current value of future cash flows which are The acquisitions and sales of financial assets available for sale Receivables in currencies other than the functional currency amount. This reduction in value constitutes an impairment estimated will be generated by the associate or joint venture, are recorded at the settlement date. of the individual companies are adjusted to the financial which is then recorded in the Income Statement. including financial flows deriving from the operating activities year-end exchange rates and also recorded in the Income For the purposes of determining the value in use of an for at cost, reduced by any impairment losses based on the exceeding the amortised cost that would have been determined to individual impairment. The amount of the impairment ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements 3 0 8 Statement. Receivables are derecognised when the right to receive cash flows is expired, when all the risks and rewards Provisions for liabilities and charges Provisions for liabilities and charges include accruals for current obligations designation and documentation of the hedging The acquisitions and sales of derivative financial instruments relationship between the hedging derivative and the are recorded at the settlement date. connected with holding the receivable substantially have (legal or implicit) deriving from a past event, the fulfilment of hedged item; been transferred, or in cases when the receivable is considered which will likely require the necessary use of resources, and  > it is expected that the hedging instrument will be highly definitively irrecoverable after all the necessary recovery whose amounts can be estimated in a reliable manner. effective; Fair value of financial instruments The fair value of financial instruments traded on an active market is based on procedures have been completed. When the receivable is Changes in estimates are recognised in the Income Statement  > its effectiveness can be reliably measured; listed market prices at the reporting date. The listed market derecognised, the relative provision is also reversed if the for the financial year in which the change occurs.  > hedge coverage is highly effective throughout the various price used for financial assets is the bid price, while for financial receivable had previously been impaired. If the effect of discounting is significant, provisions are stated financial reporting periods to which it is designated. liabilities it is the ask price. The fair value of instruments at their current value. These derivative instruments are recognised at fair value. that are not traded on an active market is determined by 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 Employee Benefits Employee benefits paid after termination of the employment relationship under defined of the type of coverage: reporting date.  > Fair value hedge – if a derivative financial instrument is The following accounting treatments are applied on the basis and assumptions that are based on market conditions at the using measurement techniques with a variety of methods subsequently valued at the amortised cost. Amortised cost is benefit plans and other long-term benefits are subject to designated as a hedge against exposure to changes in the The fair value of interest rate swaps is calculated as the calculated by using the effective interest rate method, which actuarial measurements. The liability recognised in the fair value of an asset or liability attributable to a specific present value of expected future cash flows. is equivalent to the discount rate that, when applied to future Financial Statements is the present value of the Group’s risk, the gain or loss resulting from subsequent changes in cash flows, renders the present value of such cash flows equal obligation, net of the fair value of any plan assets. fair value of the hedging instrument is recognised in the The fair value of forward exchange contracts is determined by to the initial fair value. Payables in currencies other than the For defined benefit plans, the actuarial gains and losses Income Statement. For the portion attributable to the using the forward rate at the reporting date. functional currency of the individual companies are adjusted deriving from adjustments based on past experience and any hedged risk, the gain or loss on the hedged item modifies to the financial year-end exchange rates and are also recorded changes in the actuarial assumptions are fully recognised in the carrying amount of that item (basis adjustment), and in the Income Statement. Payables are de-recognised from equity for the financial year in which they occur. it too is recognised in the Income Statement; Financial Statements when the specific contractual obligation For other long-term benefits, the actuarial gains and losses  > Cash flow hedge – if a derivative instrument is designated as Income taxes Current taxes are determined on the basis of a realistic forecast of the charges payable under the current is extinguished. are immediately recognised in the Income Statement. a hedge against exposure to the variable financial flows of tax regulations of the country. Financial assets carried at fair value recorded in the Income Statement This category includes securities mainly purchased to be sold in the short term and classified under current assets as “Securities held for trading”, financial assets that are initially recognised at fair value through Income Statement, 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 provision for employees’ leaving indemnities (TFR) for an asset or liability recognised in the Financial Statements, Deferred taxes are calculated according to the temporary Italian companies with at least 50 employees, is considered or against a highly probable future transaction, the differences which exist between the asset and liability amounts in a defined benefit plan only for the portions accrued prior effective portion of the change in the fair value of the the Financial Statements and their tax value (full liability method), to January 1, 2007 (and not yet paid at the reporting date), hedging instrument is recognised directly in equity, while and are classified under non-current assets and liabilities. whereas the portions accrued subsequent to that date are the ineffective portion is immediately recognised in the Deferred tax assets on tax losses carried forward, as well as considered a defined contribution plan. Income Statement. The amounts recognised directly in on temporary differences, are only recognised when there is a The net interest calculated on net liabilities is classified under equity are reclassified to the Income Statement for the likelihood of future recovery during the time frame covered by financial expenses. financial year in which the hedged item produced an the forecasts of the business plans. The costs relating to defined contribution plans are recognised effect on the Income Statement. Deferred tax assets and liabilities are calculated by the in the Income Statement as they are occur. When a hedging instrument expires or is sold, terminated, applying tax rates that are expected to be applicable during In the event that the defined benefit assets exceed the liabilities, exercised, or no longer meets the conditions to be designated as the financial year in which the asset will be realised or the the Income Statement. Additional costs are expensed in the the asset is recognised to the extent that the financial benefit, a hedging instrument, or if designation is revoked voluntarily, liability settled, based on the tax legislation in force at the Income Statement. in the form of a reimbursement or the reduction of future hedge accounting is discontinued. The fair value adjustments closing of the financial year. The acquisitions and sales of financial assets available for sale contributions is available to the Group in accordance with the accumulated in equity remain in suspended equity until the Current and deferred tax assets and liabilities are compensated are recorded at the settlement date. regulations of the plan itself and to the provisions in force in the hedged item manifests an impact on the Income Statement. when the income taxes are levied by the same taxation Cash and cash equivalents Cash and cash equivalents include bank deposits, postal deposits, cash and cash equivalents on hand, and 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 jurisdiction in which the plan operates. Subsequently they are reclassified to the Income Statement authority and when there is a legally enforceable right to In the case of the purchase of qualifying insurance policies for the financial years during which the acquired financial offset. Deferred tax assets and liabilities are determined at the through the use of plan assets, any additional contributions asset or the assumed financial liability manifests an impact on tax rates that are expected to be applicable to taxable income requested by the insurance company are recognised in equity. the Income Statement. in the respective jurisdictions in which the Group operates, for Derivative financial instruments designated as hedging instruments In accordance with the provisions of IAS 39, financial hedging instruments are accounted for When the hedged item is no longer expected to have any the financial years during which the temporary differences impact on the Income Statement, the fair value adjustments will arise or be settled. accumulated in equity are immediately reversed in the Income With regard to taxable temporary differences associated with Statement. investments in subsidiaries, associates and joint ventures, For the derivative instruments that do not satisfy the the related deferred tax liabilities are not recognised in cases changes are recognised in the Income Statement. according to the methods established for hedge accounting prerequisites established by IAS 39 for adoption of hedge where the investing entity is able to control the reversal of the only when: accounting, please refer to the section “Financial assets at fair temporary differences and it is probable that it will not occur  > at the commencement of hedging there is the formal value through Income Statement”. in the foreseeable future. 9 0 3 ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsDeferred taxes are not discounted.  > it is likely that the business will enjoy the financial benefits Deferred tax assets and liabilities are credited or debited to of the transaction; Foreign transactions are recorded at the prevailing exchange rates currency operations Foreign currency in a single item at the end of the Income Statement separately from the result for continuing operations. equity if they refer to items that have been credited or debited  > the stage of completion of the transaction at the reporting on the date of the transaction. Monetary foreign currency It is to be noted that with regard to transactions between the directly in equity during the financial year or during previous date can be reliably measured; assets and liabilities are translated at the prevailing exchange Industrial business, which qualifies as a “discontinued operation” financial years.  > the costs incurred for the transaction and the costs to be rates at the reporting date. Exchange rate differences arising and the other activities of the Pirelli Group (“continuing incurred to complete it can be reliably determined. from the settlement or extinction of monetary items or business”), for the Income Statement it was decided to opt Financial income and expenses Financial income and expenses are recognized on an accrual their translation at rates, other than those of their initial for the so called “post disposal” treatment. In particular, with recognition at the beginning of the financial year or to those reference to transactions of a continuous commercial nature, of previous financial year-end, are recognised in the separate it was decided to represent these transactions in the Income basis. consolidated Income Statements. Statement data for the “continuing business”, and consequently Equity Treasury shares Treasury shares are deducted from equity. If they are sold, reissued or cancelled, the resulting gains or losses are recognised in equity. Royalties Royalties are recognised on an accrual basis, according to the Whenever the conditions set out in IAS 21.15 for the designation a result was recorded that takes these components into of inter-company monetary items such as Net Investment in account, as well as the recognition of the relative inter- Foreign Operations are met, in accordance with the provisions eliminations within the item “discontinued operations”. Costs of capital transactions Costs that are directly attributable to the capital transactions of the Parent Company are recorded as reductions in equity. Recognition of revenues Revenue is measured at the fair value of the amount received for the sale of products or rendered services. Sales of products Revenue from sales of products is recognised when all the following conditions are met: 3 1 0 substance of the relevant agreement. of IAS 21.32, the exchange rate differences as of the date of The cash flows for discontinued operations are shown Dividends Dividends are recognised when the right to collect is established, which normally corresponds to a resolution approved by the Shareholders for the distribution of dividends. Earnings (losses) per share Earnings (losses) per share - Basic earnings (losses) per share the designation are recognized directly in the Consolidated separately in the Statement of Cash Flows. Statement of Comprehensive Income. The aforesaid information is also presented for the comparative period. Non-current assets held for sale and Groups under disposal Non-current assets and disposal groups are classified as held for sale if their carrying amount is recoverable mainly through their sale rather than through 3.1 Accounting standards and interpretations approved and in force as of January 1, 2017 In accordance with IAS 8 “Accounting Policies, Changes in are calculated by dividing the income (loss) attributable to the their continuous use. This occurs if the non-current asset or Accounting Estimates and Errors”, the IFRS effective as of 1 1 3 Group by the weighted average number of outstanding shares disposal group is available for sale under current conditions January 1, 2017 are as follows: during the financial year excluding treasury shares. and the sale is highly probable, or if a binding program for sale  > Amendment to IAS 7 - Disclosure Initiative has already begun, or activities to find a buyer have already The goal of these changes is to improve disclosures  > the significant risks and rewards of ownership of the goods Earnings (losses) per share - diluted: Diluted earnings per share commenced and it is expected that the sale will be completed regarding the net cash flow generated/absorbed by are transferred to the buyer; the income (loss) attributable to the Group by the weighted within one year following their classification date. investing activities and the entity’s liquidity, especially  > the effective control over the goods and the normal average number of outstanding shares during the financial In the consolidated Statement of Financial Position, the non- in the presence of restrictions on the use of cash and continuing level of activities associated with ownership year excluding treasury shares. For the purposes of calculating current assets held for sale and the current and non-current cash equivalents in the Statement of Cash Flows. The have ceased; the diluted earnings per share, the weighted average number assets/liabilities of the disposal group are presented as a amendments also require the disclosure of changes in  > the value of revenue can be reliably determined; of shares outstanding is adjusted based on the assumption separate item from other assets and liabilities, and their totals assets/liabilities by distinguishing those that are monetary  > it is likely that the economic benefitsassociated with the of all the assignees rights for the financial year which could are reflected in current assets and liabilities, respectively. from the non-monetary items (e.g. changes caused by transaction will flow to the seller; potentially have a dilutive effect, while the Group’s net income Non-current assets classified as held for sale and disposal the acquisition or by the loss of control of subsidiaries or  > the costs incurred or to be incurred can be reliably is adjusted to take into account of any effects, net of taxes, for groups are measured at the lower between carrying amount other businesses, the effect of exchange rate fluctuations determined. the financial year pertinent to the aforesaid of rights. and fair value less costs to sell. and changes in fair value). These changes are reflected in In cases where the nature and extent of involvement of the seller are such to cause 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 the transfer can Operating segments The operating segment is one part of the Group that engages in business activities from which Property, plant and equipment and intangible assets classified the disclosures for the Financial Statements. Reference as held for sale are not depreciated or amortised. should be made to Note 23 – “Borrowings from banks and other financial institutions”.  > Amendments to IAS 12 - Recognition of Deferred Tax Assets be considered to have taken place. it may earn revenues and incur costs, and whose operating results are periodically reviewed by the Chief Executive Officer, Discontinued operations A discontinued operation is a component that has been disposed of or classified as held for Unrealised Losses These amendments clarify how to account for deferred Rendering of services Revenue from the rendering of services is recognised only in his role as Chief Operating Decision Maker (CODM) for the for sale and represents an important independent business tax assets related to debt instruments measured at fair purpose of taking decisions on resources to be allocated to unit or geographical area of activity, and pertains to a single, value. when the results of the transaction can be reliably estimated, the sector, and the evaluation of results, for which financial coordinated disposal programme. These changes were not applicable to the Group. with reference to the state of completion of the transaction at information is available. On the consolidated Income Statement for the period, the  > Improvements to IFRS 2014-2016 (issued by the IASB in the reporting date. The business carried out by the Group is identifiable as a single Net income (loss) of the discontinued operations, as well as December 2016). The results of a transaction can be reliably estimated only operating “Consumer Activities” segment. the gain or loss resulting from fair value measurement net The IASB has issued a series of amendments to three when all the following conditions have been satisfied:  > the amount of revenue can be determined reliably; of the costs of sale or from disposal of the assets or disposal standards in force, regarding the following aspects in groups constituting the discontinued operation are combined particular: clarification regarding the application of IFRS 12 ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements- Disclosure of Interests in Other Entities - in the presence a new and unique impairment model based on the designated at fair value recognised in the Income With the application of the new standard, it will be of entities falling within the scope of IFRS 5 - Non-Current recognition of the expected losses of an entity. This Statement. necessary, however, to recognise certain amounts, now Assets Held for Sale and Discontinued Operations; the model does not apply to equity instruments and 2. Impairment of financial instruments: based on the accounted for under costs, with the reduction in revenues evaluation of associates and joint ventures at fair value in provides for operational simplifications for trade valuations made, the adoption of the approach or other income mainly due to the new provisions for the presence of investment entities in IAS 28 - Investment receivables; based on expected losses (instead of realised losses) “principal vs agent” and “consideration paid or payable to a in Associates; and the elimination of short-term > > Hedge accounting- based on a more flexible approach will not entail any change in the provision for trade costumer”. exemptions for those who adopt the IFRS for the first than that contained in IAS 39. receivables, in that the current Group policy already The restatement of these amounts, which does not alter time in IFRS 1 - First Time Adoption of the International This standard, approved by the European Union, was provides for the assessment of credit risk associated the Group’s operating income (loss) or equity, is currently Financial Reporting Standards. applicable as of January 1, 2018. The Group will apply the with customers, similar to the concept of expected being defined. The amendments to IFRS 12 had no impact on the new standard using the retrospective application method losses of the IFRS 9. It is instead probable that there  > Amendments to IFRS 2 - Share-based Payment disclosures of the Group. and making use of the practical expedient granted by the will be an increase in the provision for bad debts due The aim of these amendments is to clarify the accounting The amendments to IFRS1 and IAS 28 in force as of January standard, on the basis of which the 2017 comparative data to certain financial receivables. treatment of certain share-based payments. 1, 2018 were not applicable to the Group. will not be subject to restatement. 3. Hedge accounting: The Group will adopt the new These amendments, which came into force as of January 3.2 International Accounting Standards and/ or interpretations that had been issued but had not yet been approved and/or entered into force during 2017 Pursuant to IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors - the new The Group has revised the financial assets and liabilities rules for hedge accounting as provided for by IFRS 1, 2018, have not yet been approved by the European and the evaluation of the effects deriving from the 9 as of January 1, 2018. The hedging relationships Union. The future application of these amendments is application of the new accounting standard has been in place at December 31, 2017 meet the conditions not expected to have any impact on the Group’s Financial substantially completed. As was expected and has been provided for in IFRS 9 for the adoption of hedge Statements. previously stated, no significant impacts were foreseen accounting.  > Amendments to IFRS 4 - Application of IFRS 9 Financial as regards income, equity and the main performance  > IFRS 15 - Sales from contracts with customers and Instruments with IFRS 4 Insurance Contracts indicators of the Group at the date of the first application clarifications regarding IFRS 15. These changes govern the implementation of the new 3 1 2 standards and interpretations that have been issued but (January 1, 2018). The analysis also showed that there were The new IFRS 15 standard defines the criteria for standard on Financial Instruments, the IFRS 9, and prior have not yet come into force or have not yet been endorsed no organisational impacts or impacts on information recognising and evaluating revenues deriving from to that the IFRS 4 to which the IASB is making further by the European Union at December 31, 2016, and which are systems, also considering the limited number of contracts with customers. changes. therefore not applicable, along with any expected impacts on transactions that fall within the scope of IFRS 9. In particular, the IFRS 15 requires that revenue These amendments which have been approved by the the consolidated Financial Statements. The main impacts deriving from the adoption of the new recognition be based on the following 5 steps: (i) the European Union, and became applicable as of January 1, 3 1 3 None of these standards and interpretations has been adopted standard are summarised as follows: identification of the contract with the customer; (ii) the 2018, are not applicable to the Group. in advance by the Group. 1. Classification and measurement: the equity identification of the performance obligations (that is the  > IFRS 16 – Leases  > Amendments to IFRS 10 and IAS 28 - Sales or contributions instruments currently classified as financial assets contractual promises to transfer goods and/or services The new standard on leases, which will replace the of Assets between an Investor and its Associate/Joint available for sale, will be, in substantial continuity to a customer); (iii) the determination of the transaction current IAS 17, provides a single accounting model for the Venture with respect to the accounting treatment adopted price; (iv) the allocation of the transaction price to lessee under which all leases will have to be recognised in The IASB issued these amendments to eliminate any in accordance with IAS 39, designated as financial the performance obligations identified on the basis of the Statement of Financial Position. In fact the concept of inconsistency between IFRS 10 and IAS 28, stating that assets, with any changes in their fair value recorded the stand-alone selling price of each good or service; operational leasing has disappeared. if the assets sold/transferred constitute a business as in equity, with the sole exception of the investment and (v) the recognition of revenue when the relative The lessee must recognise the asset being leased in the defined by IFRS 3, the possible gains or losses must be fully in Mediobanca S.p.A, which was disposed of during performance obligation has been satisfied. Statement of Financial Position under the item property, recognised, and any gains or losses shall be recognised the first days of January 2018, for which the changes Furthermore, the IFRS 15 integrates the disclosures for plant and equipment and must simultaneously recognise pro-rata: only for the pertinent portion. in fair value will be recognised in the Income Financial Statements which are to be provided with financial liabilities equal to the present value of future These amendments, which came into force have been Statement. It is to be noted that the fair value reference to the nature, amounts, timing and uncertainty payments. deferred indefinitely, and have not yet been endorsed adjustment reserve for the assets available for sale of revenues and the relative cash flows. The only allowed exceptions are the short-term leases by the European Union. No effects are expected on outstanding at December 31, 2017 (positive to the This standard, approved by the European Union, became (with a duration of less than or equal to 12 months) and the the Financial Statements due to the future application amount of euro 19,410 thousand) will be reclassified applicable as of January 1, 2018. The Group will apply the leasing of small assets (e.g. office furniture, computers, of these amendments since the current accounting to a new reserve under equity for the investments new standard by using the “modified” application method, etc.) for which the accounting treatment is similar to that treatment adhered to by the Group is already compliant. designated as financial assets, with changes in their that is, by accounting for the cumulative effect of the currently used for operating leases. If a leasing contract  > IFRS 9 – Financial Instruments fair value recognised in equity, while there will initial application as of January 1, 2018. includes the provision of a service, the latter may not be IFRS 9, which will replace IAS 39 – Financial Instruments: be a reclassification to retained earnings for the capitalised. Detection and measurement, is divided into 3 parts: investment in Mediobanca S.p.A. These reserves The evaluation of the effects deriving from the This standard, approved by the European Union, shall > > Classification and measurement of financial will not be reversed to the Income Statement if the application of the new accounting standard has been apply as of January 1, 2019. The Group will apply the new instruments based on the entity’s business model, investment is disposed of. substantially completed, and no significant impacts standard as of the date of its entry into force. and the characteristics of the cash flows generated The new rules for the classification and were foreseen for income, equity and the main The new standard will mainly impact the accounting by the financial instruments themselves; measurement of financial liabilities have no impact performance indicators of the Group at the date of the treatment of leasing contracts currently classified as > > Impairment of financial instruments on the basis of on the Group, as the Group has no financial liabilities first application on January 1, 2018. operating leases pursuant to IAS 17. The main impacts can ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements3 1 4 be summarised as follows: is possible to reclassify a real estate asset from within or applicable to the Group and has no impact as the Group of financial resources on the market (liquidity risk). > > Entry under the item property, plant and equipment, from outside the category of Investment Property. already applies this accounting treatment. Financial risk management is an integral part of the of the current value of the leasing instalments which, These amendments, which came into force as of January  > Amendments to IAS 28 - Investments in Associates and Group’s business management and is performed centrally on the basis of the contractual agreements have the 1, 2018, have not yet been approved by the European Joint Ventures Long-term interests in associates and joint in accordance with the guidelines issued by the finance characteristics of being considered non-cancellable, Union and are not applicable to the Group’s Financial ventures department as part of risk management strategies which are and the contextual recognition of an increase in the Statements. These amendments have clarified that, in the event that more generally defined by the Managerial Risk Committee. financial liabilities. The assets will be depreciated  > IFRIC 23 – Accounting for Uncertainties in Income Taxes investments in associates and joint ventures are not based on the duration of the contract; This interpretation clarifies the criteria to be applied for evaluated using the equity method (IAS 28) they must be > > The cost of the leasing instalments currently recorded the recognition and measurement of current and deferred evaluated in accordance with the provisions of IFRS 9. 4.1 Types of Financial Risks under the item “other costs” will be substituted by tax assets/pre-paid tax in the event of uncertainty These amendments, which will come into force as the recognition of the depreciation of the assets regarding tax treatments, i.e. situations in which it is not of January 1, 2019, have not yet been approved by recorded as per previous point. A financial component certain that a specific treatment will be accepted by the the European Union. Impacts on the Group financial Exchange rate risk The geographical distribution of Group production and will also be included in the item “financial expenses”. tax authorities (e.g. the deductibility of certain costs or statements are not foreseen, as investments in associates commercial activities entails exposure to exchange rate risks At December 31, 2017, the Group had non-cancellable the exemption of certain income), but also uncertainty and joint ventures are evaluated using the equity method. such as transaction risk and translation risk. commitments to operating leases amounting to euro regarding the determination of taxable income, the tax  > Improvements to IFRS 2015-2017 (issued by the IASB in 504,752 thousand (Refer to Note 9). bases for assets and liabilities, tax losses and the tax rates December 2017). a) Transaction risk The Group will calculate the part of payments relating to be applied. The IASB issued a series of changes to 4 principles in force, This risk is generated by the commercial and financial to short-term contracts and contracts which concern The accounting treatment depends on the likelihood as to including, in particular, to the following aspects: transactions of the individual companies which are carried assets of low value (“small assets”) in order to assess as to whether the tax authorities will accept the tax treatment > > IFRS 3 Business combinations: obtaining control out in currencies other than the functional currency of the whether to avail themselves of the exemption granted by or not. In the case of a low probability, the uncertainty is of a business that is classified as a joint operation Company. Exchange rate fluctuations between the time when the principle for the non-capitalisation of such contracts. recognised by recording additional tax liabilities or by the must be accounted for as business combination in the commercial or financial relationship is established and The Group has not yet assessed the potential impact of application of a higher tax rate. phases, and the previously held investment must be the time when the transaction is completed (collection or other adjustments that may be necessary, such as the This amendment, which will come into force as of January remeasured at fair value at the date of acquisition. payment) may generate exchange rate gains or losses. change in the definition of the duration of contracts, the 1, 2019, has not yet been approved by the European Union. > > IFRS 11 – Joint arrangements: in the case of obtaining The Group aims to minimise the impact of transaction risk different accounting treatment of variable payments The impacts on the Group’s financial statements are control of a business which is classified as a joint related to exchange rate volatility. In order to achieve this and the options for renewal and/or early settlement. currently being analysed. operation, the previously held investment must be objective, the Group’s procedures provide that the Operating Consequently, it is not yet possible to determine the  > Amendments to IFRS 9 - Financial Instruments: prepayment remeasured at fair value. Units are responsible for the collection of all information amount of financial assets and liabilities that will have to features with negative compensation and changes in financial > > IAS 12 - Income taxes: the accounting treatment inherent to positions subject to transaction risk, whose be recognised under the new standard and how this latter liabilities of the tax effects of dividends on financial coverage is then provided in the form of forward contracts will impact on the Income Statement and the Statement These amendments are with regard to the following: instruments classified as equity must follow that which are entered into with the Group Treasury. of Cash Flows. > > financial assets (financial receivables and debt of the transactions or events that generated the The positions subject to managed exchange rate risk are With regard to the transition, the Group is evaluating securities) which, in the presence of certain distributable dividend. mainly represented by receivables and payables in foreign as whether to apply the simplified approach which characteristics, can be measured at the amortised > > IAS 23 – Borrowing costs: in the event that the currency. makes it possible to not carry out the restatement of the cost, whereas previously they had to be measured specific financing relating to a qualifying asset is The Group Treasury is responsible for hedging the resulting comparative period in the first year of application. at fair value and recorded in the Income Statement; still in place at the time when the asset is ready net position for each currency and, in accordance with the  > IFRIC 22 - Foreign Currency Transactions and Advance > > accounting treatment in the presence of changes for use or sale, the same becomes part of general established guidelines and predetermined restrictions, it in Consideration to the financial liabilities which do not lead to generic financing. turn closes all risk positions by trading derivative hedging The aim of this interpretation is to determine the exchange their elimination from the Financial Statements: These amendments, which will come into force as of January 1, contracts on the market which typically take the form of rate to be used in the conversion of advance payments in such situations, a gain or loss calculated as the 2019, have not yet been approved. Any impacts on the Group’s forward contracts. paid or received in foreign currency. In the presence of difference between the contractual cash flows of Financial Statements are currently being analysed. For such contracts, the Group did not consider it necessary paid or received advance payments, the exchange rate to the original liability and the modified cash flows be used to convert assets, liabilities, revenues or expenses both discounted at the original effective interest recognised at a later date is the same used to convert the rate, must be recognised in the Income Statement. advance payment. These amendments, which will come into force as of This amendment, which came into force as of January 1, January 1, 2019, have not yet been approved by the 4. FINANCIAL RISK MANAGEMENT POLICIES to avail itself of the option for hedge accounting as provided for by IAS 39, in that the representation of the impacts on the Income Statement and the Statement of Financial Position of a hedging strategy for transaction risk is nevertheless substantially guaranteed even without availing itself of the 2018, has not yet been approved by the European Union. European Union. With regard to the change relating to The Group is exposed to financial risks which are principally aforementioned option. The impact of this interpretation on the Group’s financial financial assets, assessments are under-way to verify their associated with foreign exchange rates, with fluctuations Furthermore, as part of the annual and three-year planning statements is currently being analysed. applicability to the Group; the change in the accounting in interest rates, with the price of financial assets held as process, the Group makes exchange rate forecasts by using  > Amendments to IAS 40 - Transfers of Investment Property treatment of financial liabilities in the event of changes investments, with the ability of customers to meet their the best information available on the market. The fluctuation These changes further clarify the situations in which it which do not lead to their accounting elimination is obligations to the Group (credit risk), and with the procurement in exchange rates between the time when the forecast is made 5 1 3 ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statementsand the time when the commercial or financial transaction occurs represents the transaction risk for future transactions. The table below shows the effects on the net income (loss) resulting 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: From time to time the Group assesses the opportunity to engage in currency hedging on future transactions for which it typically makes use of either forward buy or sell operations, or optional operations such as risk reversal (for example; zero cost collars). Hedge accounting, as provided for by IAS 39, is activated if and when the requirements are met. b) Translation risk The Group owns controlling interests in companies that prepare their Financial Statements in currencies other than the Euro, which is the currency 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 translation risk are constantly monitored, however it is not currently deemed necessary to adopt specific (In thousands of euro) +0,50% -0,50% 12/31/2017 12/31/2016 12/31/2017 12/31/2016 Impact on Net income (loss) (12,513) (19,785) 12,513 19,785 policies to hedge this exposure. The effects on the Group’s equity resulting from the changes in the LIBOR and EURIBOR rates calculated on the hedging instruments Approximately 57.1% of the total consolidated equity at December 31, 2017 was expressed in Euros (compared to approximately for interest rates which were outstanding at December 31, 2017 are detailed in Note 27, “Derivative instruments”. 44.8% at December 31, 2016). The most important currencies for the Group other than the Euro were the Brazilian Real (8.8%; 13.7% at December 31, 2016), the Turkish Lira (0.7%; 4.6% at December 31, 2016), the Chinese Renminbi (12.8%; 15.3% at December 31, 2016), the Romanian Leu (9.0%; 8.8% at December 31, 2016), the British Pound (3.4%; 3.6% at December 31, 2016), the US Dollar (3.3%; 3.0% at 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, which December 31, 2016), the Mexican Peso (2.5%; 4.1% at December 31, 2016), and the Russian Rouble (at 1.0%). constituted approximately 2.1% of the total consolidated assets at December 31, 2017 (1.7% at December 31, 2016). These assets are The effects on consolidated equity which derive from a hypothetical appreciation/depreciation of the above listed currencies against No derivatives were put in place to cover the volatility risk for these assets. the Euro, with all other conditions being equal, were as follows: Financial assets available for sale are represented by listed securities which amounted to euro 179,205 thousand (euro 141,496 thousand classified as financial assets available for sale and as securities held for trading. (In thousands of euro) at December 31, 2016) and those represented by securities indirectly associated with listed securities (Fin. Priv. S.r.l.) amounted to euro 19,908 thousand, (euro 19,200 thousand at December 31, 2016, also including the investment in Emittenti Titoli S.p.A.) These financial 3 1 6 Appreciation of 10% Depreciation of 10% assets constitute 75.8% of the total financial assets subject to price risk (65% at December 31, 2016). A positive change of +5% in the prices of the aforesaid listed securities all other conditions being equal, would result in a positive change to the Group’s equity of euro 7 1 3 Brazilian Real Turkish Lira Chinese Renminbi Romanian Leu Russian Rouble Egyptian Pound British Pound Argentinian Pesos US Dollar Mexican Pesos 12/31/2017 12/31/2016 12/31/2017 12/31/2016 8,960 thousand (a positive change to the Group’s equity of euro 7,073 thousand at December 31, 2016) while a negative change of -5% in 40,903 3,420 59,309 41,610 4,868 49,933 16,622 55,707 32,108 (33,466) (40,854) (2,798) (13,600) (48,526) (45,579) (34,045) (26,271) (3,983) the prices of the aforesaid listed securities, all other conditions being equal, would result in a negative change to the Group’s equity of euro 8,960 thousand (a negative change to the Group’s equity of euro 7,073 thousand at December 2016). Credit risk Credit risk represents the Group’s exposure to potential losses resulting from the non-fulfilment of the commercial and financial obligations undertaken by counter-parties. - (5,448) - 4,458 For the purposes of limiting this risk, as far as commercial counterparties are concerned, Pirelli has put in place procedures to assess 15,681 13,075 (12,830) (10,698) the potential and financial creditworthiness of their customers and to monitor expected collection flows in order to take recovery Total on consolidated equity 192,607 189,057 (157,588) (154,683) - 15,168 11,648 892 11,078 15,090 - (730) (12,411) (9,064) (9,530) (12,346) action if necessary. The aim of these procedures is to define customer credit limits. Further supplies are suspended when those limits are exceeded. In some cases customers are asked to provide guarantees. These mainly consist of bank guarantees issued by parties of the highest credit or personal standing. Less frequently, mortgage guarantees may be requested. Another main instrument used by the Group for the management of commercial credit risk is the stipulation of insurance policies. As of January 2012, the company signed a master agreement which expired in December 2017, with a leading insurance company for worldwide coverage for credit risk mainly related to sales on the Replacement channel (with an approximate 68% acceptance rate at December 2017). Interest rate risk Interest rate risk is represented by the exposure to any change in the fair value or the future cash flows of a financial asset or liability due to fluctuations in the market interest rates. The insurance coverage has been extended to also cover 2018. During the course of 2017, the general situation for trade receivables remained essentially consistent with that at the closing of the previous financial year. As regards the management of its temporarily surplus resources or the trading of derivative instruments, the Group operates only with financial counter-parties with a high credit Based on market circumstances the Group evaluates whether to set up derivative contracts for hedging interest rate risk, for which standing. Pirelli does not hold public debt instruments of any European country, and constantly monitors its net credit exposure to the hedge accounting is activated when the requisite conditions as provided for by IAS 39 are met. banking system, and does not show significant concentrations of credit risk. The disclosure regarding the maximum exposure to credit risk is represented by the gross value of receivables and is contained in subsequent Notes 14 and 15 which relate respectively to trade receivables and other receivables. ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsLiquidity risk Liquidity risk represents the risk that the Company’s available financial resources may be insufficient to meet its financial and commercial obligations pursuant to the contractual terms and conditions. 5. INFORMATION ON FAIR VALUE The principal instruments used by the Group to manage liquidity risk are comprised of its one and three year financial plans, and its treasury plans. These allow for the complete and correct detection and measurement of incoming and outgoing cash flows. The 5.1 Fair value measurement In relation to financial instruments measured at fair value, the following table shows the classification of these instruments on the basis of the hierarchy of levels pursuant to IFRS 13, which reflects the significance of the differences between the plans and actual data are constantly analysed. inputs used in determining the fair value. The levels are defined as follows: The Group has implemented a centralised system for the management of cash flows and payments in compliance with various local  > level 1 – unadjusted prices quoted on an active market for assets or liabilities subject to valuation; currency and tax regulations. Banking relationships are negotiated and managed centrally, in order to ensure coverage for short and  > level 2 – inputs different from the aforesaid prices quoted at the preceding level, which are observable on the market either medium-term financial needs at the lowest possible cost. Even the procurement of medium and long-term resources on the capital directly (as in the case of prices) or indirectly (because they are derived from prices); market is optimised through centralised management.  > level 3 – inputs that are not based on observable market data. The prudent management of the aforesaid risk requires the maintenance of an adequate level of cash or cash equivalents and/ or highly liquid short-term financial instruments, the availability of funds obtainable through an adequate amount of committed The following table shows assets and liabilities carried at fair value at December 31, 2017, subdivided into the three levels as defined above: lines of credit and/or the use of the capital market, and the diversification of products and deadlines in order to seize the best opportunities available. At December 31, 2017 the Group had, aside from cash and securities held for trading to the amount of euro 1,151,464 thousand (euro 1,581,574 thousand at December 31, 2016), unused credit facilities for euro 700,000 thousand (euro 1,000,000 thousand at December 31, 2016) maturing in the second quarter of 2022. Maturities for financial liabilities at December 31, 2017 were composed as follows: Note Carrying amount at 12/31/2017 Level 1 Level 2 Level 3 (In thousands of euro) FINANCIAL ASSETS: Financial assets carried at fair value in the Income Statement: within 1 year 1 to 2 years 2 to 5 years over 5 years Total Financial hedging instruments: 3 1 8 Trade payables Other payables Financial instruments 1,673,642 565,254 17,910 - 5,329 23,893 - 17,320 31,070 Borrowings from banks and other financial institutions 643,243 708,980 3,495,823 - 1,673,642 Non-current financial derivative instruments 51,786 639,689 Financial assets available-for-sale: - - 72,873 4,848,046 Other financial assets Securities and shares Investment funds 2,900,049 738,202 3,544,213 51,786 7,234,250 (In thousands of euro) Securities held for trading Current financial derivative instruments 18 27 27 33,027 27,770 878 - - - 33,027 27,770 878 - - - 9 1 3 214,250 179,204 19,908 15,138 15,269 - 15,269 - 12 229,519 179,204 35,177 15,138 TOTAL ASSETS 291,194 179,204 96,852 15,138 Maturities for financial liabilities at December 31, 2016 were composed as follows: within 1 year 1 to 2 years 2 to 5 years over 5 years Total Statement: Financial liabilities carried at fair value in the Income (In thousands of euro) FINANCIAL LIABILITIES: Trade payables Other payables Financial instruments 1,498,492 783,079 52,170 - 8,253 - Borrowings from banks and other financial institutions 813,110 2,218,305 4,168,169 - - 1,498,492 Current financial derivative instruments 10,138 69,030 870,500 Financial hedging instruments: - - - 52,170 7,199,584 Non-current derivative financial instruments TOTAL LIABILITIES 27 27 (17,910) - (17,910) (54,963) (72,873) - - (54,963) (72,873) - - - 3,146,851 2,226,558 4,178,307 69,030 9,620,746 It is to be noted that on June 27, 2017, Pirelli & C. S.p.A. and Pirelli International Plc subscribed to an unsecured loan (“Facilities”) for euro 4.1 billion (originally for the amount of euro 4.2 billion), of which euro 3,277,477 thousand had been utilised at December 31, 2017. The financing was achieved at a lower overall cost of less than 1.85% with maturities in three and five years. This financing which had first been subscribed to by three underwriters was subsequently the subject of syndication by a pool of 18 credit institutions on July 7, 2017. ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsThe following table shows assets and liabilities carried at fair value at December 31, 2016, subdivided into the three levels as defined above: The item increases refers mainly to the capital increase The fair value of financial instruments traded on active markets (in thousands of euro) related to the investment in Alitalia – Compagnia Area Italiana is based on the price quotations published at the reporting date. S.p.A. (euro 781 thousand). These instruments, included in level 1, primarily comprise equity FINANCIAL ASSETS: Financial assets carried at fair value in the Income Statement: Securities held for trading Current financial derivative instruments Financial hedging instruments: Current financial derivative instruments Financial assets available-for-sale: Other financial assets Securities and shares Investment funds Note Carrying amount at 12/31/2016 Level 1 Level 2 Level 3 18 27 27 48,597 17,122 - - 48,597 17,122 6,867 - 6,867 - - - 184,055 141,496 19,200 23,359 14,636 - 14,636 - 12 198,691 141,496 33,836 23,359 TOTAL ASSETS 271,277 141,496 106,422 23,359 The item impairment refers mainly to the investments in The fair value of financial instruments not traded on active Pirelli de Venezuela C.A. (euro 7,616 thousand), in Equinox Two markets (e.g. derivatives) is determined by the use of S.C.A. (euro 3,062 thousand), and the devaluation of the capital evaluation techniques widely used in the financial sector, increase carried out for Alitalia-Compagnia Area Italiana S.p.A which maximise the utilisation of observable and available (euro 781 thousand). market data: investments classified as financial assets available for sale.  > Market prices for similar instruments; During the course of the 2017 financial year, there were no  > the fair value of interest rate swaps is calculated by transfers from level 1 to level 2 or vice versa, while there was a discounting estimated future cash flows based on transfer from level 2 to level 3 following the sale by Emittenti observable yield curves; Titoli S.p.A. of its investment stake in the listed company the  > the fair value of foreign exchange derivatives (forward London Stock Exchange. The fair value of Emittenti Titoli S.p.A. contracts) is determined by using the forward exchange was in fact determined by also considering the transparency of rate at the reporting date. the fair value of the shares held in the London Stock Exchange by Emittenti Titoli S.p.A.. 3 2 0 FINANCIAL LIABILITIES: Financial liabilities carried at fair value in the Income Statement: Current financial derivative instruments Financial hedging instruments: Current derivative financial instruments TOTAL LIABILITIES 27 27 (51,844) - (51,844) (326) (52,170) - - (326) (52,170) - - - The following table shows the changes in the financial assets that occurred in level 3 during the course of 2017: Opening balance Translation differences Increases / Subscription of capital Impairment recognised in the Income Statement Fair value adjustments recognised in Equity Transfer from level 2 Other changes Closing balance (In thousands of euro) 12/31/2017 23,359 (110) 781 (11,957) 363 2,729 (27) 15,138 These financial assets are mainly represented by equity investments in the European Institute of Oncology (euro 6,599 thousand), Equinox Two S.C.A. (euro 601 thousand), in Tlcom I LP (euro 186 thousand) and the investment in Pirelli de Venezuela C.A. (euro 2,610 thousand). 1 2 3 ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements5.2 Categories of financial assets and liabilities The table below shows the carrying amounts for each class of financial assets and liabilities as identified by IAS 39: (In thousands of euro) Note Carrying amount at 12/31/2017 Carrying amount at 12/31/2016 FINANCIAL ASSETS Financial assets carried at fair value in the income statement Securities held for trading Current financial derivative instruments Loans and receivables Other non-current receivables Current trade receivables Other current receivables Cash and cash equivalents Financial assets available-for-sale Other financial assets Financial hedging instruments 3 2 2 Current financial derivative instruments Non-current financial derivative instruments TOTAL FINANCIAL ASSETS FINANCIAL LIABILITIES Financial liabilities carried at fair value in the income statement Current financial derivative instruments Financial liabilities valuated at amortised cost Non-current borrowings from banks and other financial institutions Other non-current payables Current borrowings from banks and other financial institutions Current trade payables Other current payables Financial hedging instruments Current financial derivative instruments Non-current financial derivative instruments TOTAL FINANCIAL LIABILITIES 18 27 15 14 15 19 12 27 27 27 23 25 23 24 25 27 27 6. CAPITAL MANAGEMENT POLICY which a change in the conditions underlying the assumptions used may have a significant impact on the consolidated The Company’s objective is to maximise the return on the net Financial Statements, or for which there exists a risk that invested capital while maintaining the capacity to operate over significant adjustments to the carrying amount of assets and time, in order to ensure adequate returns for its shareholders liabilities may emerge during the financial year subsequent to and benefits for other stakeholders, and also providing for the that of the Financial Statements. gradual de-leveraging of the financial structure of the Group which is to be achieved over a short to medium-term period. The main indicator that the Group uses for its capital management is the R.O.I (calculated as the ratio between the Goodwill In accordance with the accounting standards adopted for the preparation of the Financial Statements, EBIT adjusted and the average net invested capital which does goodwill is tested annually for impairment. In particular, the not include the equity investments and fixed assets identified impairment test involves the allocation of goodwill to the during the PPA process). cash generating units (which for the group coincide with The R.O.I. for the 2017 financial year was equal to 28% which the business sector or the Consumer Activities) and the compares with an R.O.I. of 27% for the previous financial year. subsequent determination of the relative recoverable amount, 7. ESTIMATES AND ASSUMPTIONS being the higher amount between either the fair value and the value in use. If the recoverable amount proves to be lower than the carrying amount of the cash generating units, an impairment The preparation of the consolidated Financial Statements is recognised for the goodwill allocated to them. requires management to make estimates and use assumptions The configuration of the value used to determine the recoverable which, under certain circumstances are based on complex amount of the Consumer Activities at December 31, 2017 is the and subjective evaluations and estimates based on historical fair value determined using the stock market capitalisation experience, as well as assumptions that are from time to time of the Parent Company at the date of the impairment test 3 2 3 33,027 27,770 60,797 48,597 17,122 65,719 204,051 226,868 652,487 679,321 400,538 275,622 1,118,437 1,532,977 2,375,513 2,714,788 229,519 198,691 - 878 6,867 - 2,666,707 2,986,065 considered reasonable and realistic in light of the circumstances. (December 31, 2017), where the stock market capitalisation is 17,910 51,844 3,897,089 5,945,999 74,435 87,421 It is possible that the actual results could therefore differ from calculated on the number of outstanding shares without taking these estimates. The estimates and assumptions are reviewed any control premium into consideration and adjusted upwardly periodically and the effects of any changes made to them are or downwardly as per the fair value of the financial statement reflected in the Income Statement for the period in which the items not included in the carrying amount of the Consumer estimate is revised. If such estimates and assumptions, based on Activities, mainly the net financial position. the best valuation available at the time, should differ from actual The impairment test at December 31, 2017 did not show any circumstances, they are modified accordingly for the period impairment loss, as the fair value of the Consumer Activities in which the change of circumstances occurred. The estimates was significantly higher than the carrying amount. 559,168 642,047 and assumptions refer mainly to evaluation of the recoverability 1,673,642 1,498,492 of goodwill and intangible assets with an indefinite useful life, 565,254 783,079 6,769,588 8,957,038 - 54,963 326 - 6,842,461 9,009,208 to the definition of the useful lives of the intangible assets as well as property, plant and equipment, to the recoverability of receivables, to the determination of taxes (current and deferred), Pirelli Brand (intangible fixed assets with an indefinite useful life) The Pirelli Brand is an intangible fixed asset with an indefinite useful life not subject to amortisation, to the evaluation of pension plans and other post-employment but pursuant to IAS 36, is tested for impairment annually or obligations, and to the recognition / valuation of the provisions more frequently, if specific events or circumstances arise that for liabilities and charges. may indicate a reduction in value. ESTIMATES REQUIRING SUBJECTIVITY THAT ARE MATERIAL TO THE FINANCIAL STATEMENTS The impairment test at December 31, 2017 was performed using the assistance of an independent third-party professional. The configuration for the recoverable amount for impairment testing purposes at December 31, 2017 is the fair value, calculated on the basis of the income approach (the so-called Level 3 of the hierarchy of IFRS 13 – Fair Value measurement) and is based on: The following is a brief description of the accounting standards  > the consensus forecasts by equity analysts with respect to the which, more than others, require that management exercise forecast revenues for the period 2018-2020 in that they were greater subjectivity in the preparation of estimates, and for more prudent than the projections made by management; ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements > an evaluation criterion is obtained by the sum of parts carrying amount and tax values. In particular, deferred tax The following are the revenues from sales and services according to geographical area: which also takes into account the contribution of royalties assets are recognised to the extent to which it is probable that from the Prometeon Tyre Group for the use the Pirelli future taxable income will be available against which they can trademark in relation to the industrial segment; be recovered. The evaluation of the recoverability of deferred  > the royalty rate applied to the revenues of the Consumer tax assets, recorded in relation both to tax losses that may High Value and Consumer Standard evaluation units was be used in subsequent financial years, and to temporary deduced from the royalty rates implicit in the valuations deductible differences, takes into account the estimate of made by an independent entity relative to the main future taxable income and is based on prudent tax planning. brands of the listed companies of the Tyre sector, and was equal to an average royalty rate of 4.6%. With reference to the contribution in terms of royalties from the Prometeon Tyre Group, the royalty rate used as provided for by the Pension funds The companies of the Group have in place, pension plans, health insurance plans and other defined benefit license agreement was equal to 2%; plans for their employees, primarily in the United Kingdom  > a discount rate of 9.0%, which included a premium and the United States. These funds have been closed to new Europe Russia and CIS NAFTA South America Asia\Pacific (APAC) Middle East\Africa\India (MEAI) Total (in thousands of euro) 2017 2016 2,237,962 2,092,701 159,590 162,979 983,859 934,559 915,677 824,252 806,247 712,563 248,948 249,342 5,352,283 4,976,396 determined on the basis of the risk of the specific asset; contributions and therefore the actuarial risk relates only to The following are the non-current assets by geographic area which are allocated on the basis of the country where the assets are located:  > a growth rate of g in the terminal value assumed to be the previous deficit. Management uses different actuarial equal to zero; assumptions to calculate the liabilities and assets servicing  > the TAB (Tax Amortisation Benefit) that is, the tax benefit these pension plans. The actuarial assumptions of a financial that could potentially benefit the market participant due nature are concerned with the discount rate, the rate of to the possibility of fiscally amortising the asset. inflation and the trend in medical costs. For the purposes of impairment testing, the recoverable amount The actuarial assumptions of a demographic nature are essentially of the Pirelli Brand cum-TAB was compared with the carrying concerned with mortality rates. The Group has identified discount Europe Russia & CSI NAFTA 3 2 4 amount of the Brand cum-TAB and no losses in value emerged. rates which it has deemed are reasonable, given their context. Central and South America Asia/Pacific Middle Est/Africa/India (in thousands of euro) 12/31/2017 12/31/2016 5,504,481 62.03% 5,728,035 56.98% 192,382 373,950 435,488 487,560 2,773 2.17% 4.21% 4.91% 5.49% 0.03% 192,717 323,334 801,085 588,466 68,624 1.92% 3.22% 7.97% 5.85% 0.68% 5 2 3 Property, plant and equipment In accordance with the accounting standards, property, plant and equipment and Provisions for liabilities and charges In view of legal and tax liabilities, provisions for the risk of of unfavourable outcomes intangible assets are tested in order to ascertain whether have been recognised. The value of provisions recognised in there has been a loss of value when there are indicators that the Financial Statements relative to these risks represent the difficulties are to be expected for the recovery of their relative best estimate to date made by management for legal and tax Non-current unallocated assets 1,877,363 21.16% 2,351,263 23.39% Total 8,873,999 100.00% 10,053,524 100.00% net carrying amount through their use. The verification of issues regarding a vast range of issues that are subject to the The allocated non-current assets reported above consist of property, plant and equipment and intangible assets, excluding the existence of the aforesaid impairment indicators requires jurisdiction of several countries. This estimate requires the use goodwill. The unallocated non-current assets pertain to goodwill. that the Directors make subjective judgements based on the of assumptions which depend on factors that may change over information available from both internal and external sources time and which could therefore have a significant impact on as well as on historical experience. In addition, if it is determined the current estimates made by management in preparing the that a potential loss of value may have been generated, the loss consolidated Financial Statements. is then defined using the appropriate valuation techniques. The correct identification of the indicators of a potential loss in value, as well as the estimates used to determine the impairment, depend on a subjective evaluation as well 8. OPERATING SEGMENTS as on factors that may change over time and influence the IFRS 8 - Operating segments defines an operating segment as valuations and estimates made by management. a component:  > which involves entrepreneurial activities that generate revenues and costs; Income taxes (current and deferred) Income taxes (current and deferred) are determined in each country in which  > whose operating results are periodically reviewed by the Chief Executive Officer, in his role as Chief Operating the Group operates according to a prudent interpretation of Decision Maker (CODM); the tax regulations in force. This process sometimes involves  > for which separate financial data is available. complex estimates in determining the taxable income and the For the purposes of IFRS 8, the activity performed by the temporary deductible and taxable differences between the Consumer Activities is identifiable as a single operating sector. 9. PROPERTY, PLANT AND EQUIPMENT The composition and changes for property, plant and equipment were as follows: (in thousands of euro) 12/31/2017 12/31/2016 Gross Value Accumulated Depreciation Net Value Gross Value Accumulated Depreciation Net Value Land Buildings 201,216 - 201,216 326,216 - 326,216 773,903 (107,466) 666,437 776,003 (45,462) 730,541 Plant and machinery 2,175,308 (354,350) 1,820,958 2,384,295 (236,794) 2,147,501 Industrial equipment Other assets Total and trade 385,301 (148,028) 237,273 378,662 (77,755) 300,907 111,722 (57,312) 54,410 70,643 (19,173) 51,470 3,647,450 (667,156) 2,980,294 3,935,819 (379,184) 3,556,635 ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements(in thousands of euro) The changes which occurred were composed as follows: NET VALUE 12/31/2016 Change in scope Assets held Translation for sale differ. Increases Decreases Reclassif. Depreciation Other 12/31/2017 Land 326,216 (111,043) - (14,806) 545 - 356 - (52) 201,216 Buildings 730,541 (92,196) - (42,348) 61,071 (1,319) 35,332 (25,414) 770 666,437 12/31/2017 12/31/2016 Cost Accumulated Depreciation Net value Cost Accumulated Depreciation Net value (in thousands of euro) Plant and machinery Industrial and trade equipment 2,147,501 (293,363) (55,879) (103,156) 336,637 (6,859) (57,169) (147,769) 1,015 1,820,958 Leased buldings 330 (330) 300,907 (60,558) - (14,492) 48,183 (4,034) 32,152 (66,077) 1,192 237,273 Other leased assets 2,286 (2,001) Leased plant and machinery 266 (107) Other assets 51,470 (6,139) - (3,768) 23,945 (292) (10,671) (11,413) 11,278 54,410 Total 2,882 (2,438) - 285 159 444 1,925 (1,354) 2,118 (2,043) 92 (92) 4,135 (3,489) 571 75 - 646 Total 3,556,635 (563,299) (55,879) (178,570) 470,381 (12,504) - (250,673) 14,203 2,980,294 NET VALUE 12/31/2015 PPA 12/31/2015 Change in Translation restated scope differ. Increases Decreases Reclassif. Depreciation Other 12/31/2016 The total minimum future payments due for non-cancellable operating lease contracts amounted to euro 504,752 thousand, of which: Land 95,599 239,450 335,049 7,139 (1,939) 70 (13,628) (57) - (418) 326,216  > euro 78,537 thousand were due within one year, (In thousands of euro) Payables for financial leases are included in financial payables (refer to Note 23). Buildings 593,816 116,961 710,777 39,641 14,600 29,625 (37,814) 3,759 (32,940) 2,893 730,541 Plant and machinery Industrial and trade equipment 1,504,359 494,016 1,998,375 75,738 (922) 269,499 - (21,701) (170,453) (3,035) 2,147,501 177,659 92,669 270,328 9,910 6,160 43,836 - 23,652 (56,442) 3,463 300,907 10. INTANGIBLE ASSETS  > euro 258,872 thousand were due between one and five years, and  > euro 167,343 thousand were due beyond five years. 3 2 6 Other assets 48,020 1,085 49,105 4,614 (746) 20,436 (446) (5,653) (13,987) (1,853) 51,470 Total 2,419,453 944,181 3,363,634 137,042 17,153 363,466 (51,888) - (273,822) 1,050 3,556,635 The composition and changes for intangible assets were as follows: 7 2 3 (In thousands of euro) The column change in scope for 2017 mainly details the value of assets attributable to the Prometeon Group that were transferred following the assignment transaction by Pirelli & C. S.p.A. to Marco Polo International Holding Italy S.p.A. (subsequently merged by incorporation into Marco Polo International Italy S.p.A.) of the shares of TP Industrial Holding S.p.A. TP Industrial Holding S.p.A. is the company into which Pirelli’s Industrial assets were merged. The item increases, totalling euro 470,381 thousand, were primarily aimed at increasing the capacity of the High Value segment 12/31/2016 Change in scope Translation differences Increase Amortisation Reclassif. Other 12/31/2017 Concessions/licenses/ trademarks - finite life 71,520 Pirelli Brand - indefinite life 2,270,000 - - Goodwill 2,351,263 (473,900) - - - - - - (506) 359 (4,560) 754 230 67,797 in Europe and the NAFTA area, the strategic reconversion of the capacity of the Standard segment into High Value in Brazil, the Customer relationship 431,595 (22,417) (136) 2,635 (34,435) transformation of the production of Aeolus brand products into Pirelli brand products, and the continuous improvement of the Technology 1,347,867 - - - (71,850) - - - - - - - - 2,270,000 1,877,363 377,242 1,276,017 quality and mix in all manufacturing plants. The ratio of investments to amortisations for the 2017 financial year was equal to 1.88 (1.46 for the 2016 financial year). Property, plant and equipment in progress at December 31, 2017, included in the individual fixed asset categories amounted to euro 227,509 thousand (euro 178,424 thousand at December 31, 2016). It is to be noted that, in the context of financing stipulated in Brazil, the companies of the Group have pledged as guarantee their own plants and machinery as guarantees for a total value of euro 1,638 thousand. The value of the buildings and other assets for which the Company has entered into a financial leasing agreement is included in the respective categories of property, plant, and equipment. Software applications 17,527 (4,128) (152) 13,473 (7,210) 1,059 175 20,744 Other intangible assets 7,117 - (416) 2,502 (2,142) (1,813) (708) 4,541 Total 6,496,889 (500,445) (1,210) 18,969 (120,196) - (303) 5,893,704 ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements(in thousands of euro) The recoverable amount is defined as the higher amount more prudent than the projections made by management; 12/31/2015 PPA 12/31/2015 Translation restated differences Increase Decrease Amortisation Reclassif. Other 12/31/2016 2 - 2 - - - (2) - - - 41,632 33,226 74,858 (1,594) 633 (7) (4,308) - 1,938 71,520 Patents and intellectual property rights Concessions/licenses/ trademarks - finite life Concessions/ licenses/trademarks 5,832 2,264,168 2,270,000 - indefinite life Goodwill 5,978,589 (3,627,326) 2,351,263 - - Customer relationship 7,563 459,616 467,179 (521) Technology - 1,414,717 1,414,717 Software applications 14,031 - 14,031 - 8 - - - - - - - - - - (35,645) (66,850) - - - - - 2,270,000 - 2,351,263 582 431,595 - 1,347,867 2,877 (17) (9,209) 9,860 (23) 17,527 Other intangible assets 20,355 (7,127) 13,228 (2,714) 5,207 (35) (2,539) (9,860) 3,830 7,117 Total 6,068,004 537,274 6,605,278 (4,821) 8,717 (59) (118,553) 0 6,327 6,496,889 between its value in use (current value of the expected cash  > the evaluation criterion is composed as sum of parts which flows) and the fair value less the costs of disposal (equivalent also takes into account the contribution of royalties value net of sales costs). from the Prometeon Tyre Group for the use the Pirelli The value configuration used to determine the recoverable trademark in relation to the industrial segment; value of the Consumer Activities at December 31, 2017 is  > the royalty rate applied to the revenues of the Consumer the fair value which is determined using the stock market High Value and Consumer Standard segment was deduced capitalisation of the Parent Company at the date of the from the royalty rates implicit in the valuations made impairment test (December 31, 2017), where the stock by an independent entity relative to the main brands of market capitalisation is calculated on the number of the listed companies of the Tyre sector and was equal to outstanding shares, without taking any control premium into an average royalty rate of 4.6%. With reference to the consideration, and adjusted either upwardly or downwardly contribution in terms of royalties from the Prometeon for the fair value of items recorded in the Financial Statement Tyre Group, the royalty rate used as provided for by the which have not been included in the carrying amount of the license agreement was equal to 2%; Consumer Activities (mainly the net financial position).  > a discount rate of 9.0%, which included a premium The impairment test at December 31, 2017 did not show any determined on the basis of the risk of the specific asset; impairment loss, as the fair value of the Consumer Activities  > a growth rate of g in the terminal value assumed to be was significantly higher than the carrying amount. equal to zero; The column change in scope for 2017 details for the value of goodwill and other intangible assets attributable to the Prometeon The difference between the recoverable amount and the  > the TAB (Tax Amortisation Benefit) that is, the tax benefit Group and which were transferred following the assignment transaction by Pirelli & C. S.p.A. of the shares of TP Industrial Holding carrying amount of the group of CGUs relative to the that could potentially benefit the market participant due S.p.A., the company into which Pirelli’s Industrial assets were merged, to Marco Polo International Holding Italy S.p.A. (subsequently Consumer Activities resulted in a zero balance due to a to the possibility of fiscally amortising the asset. merged by incorporation into Marco Polo International Italy S.p.A.). potential contraction of 44% in the stock market price of Pirelli For the purposes of impairment testing, the recoverable 3 2 8 Intangible assets are composed mainly of the value of the assets identified during the course of the 2016 financial year following the completion of the allocation of the price paid by Marco Polo Industrial Holding S.p.A. for the acquisition of the Pirelli Group at fair value of the Pirelli assets and liabilities acquired (Purchase Price Allocation or PPA) and recognised into the consolidated Financial Statements following the merger by incorporation of the holding company Marco Polo Industrial Holding S.p.A. into Pirelli, which took place during the same 2016 financial year. It mainly consists of: & C S.p.A. ordinary shares. amount of the Pirelli Brand cum-TAB was compared with the Impairment test of the Pirelli Brand (intangible fixed asset with an indefinite useful life) The Pirelli Brand amounting to euro 2,270,000 thousand is an intangible carrying amount of the Brand cum-TAB and no impairment loss has been identified. A sensitivity analysis was also carried out in relation to the Key Assumptions used in the valuation of the royalty rate (for the 9 2 3  > the value of the Pirelli Brand (asset with an indefinite useful life) amounting to euro 2,270,000 thousand. The assessment of fixed asset with an indefinite useful life and as such is not Consumer evaluation unit and for the contribution in terms of the useful life of brands is based on a number of factors including competitors, market share, brand history, product lifecycle, subject to amortisation, but pursuant to IAS 36, is tested for royalties from the Prometeon Group); the discount rate, and operational plans and macroeconomic scenario of the countries in which relating products are sold. Specifically, the useful life impairment annually or more frequently, if specific events or the g growth factor. The fair value remained higher than the of the Pirelli Brand has been evaluated as indefinite on the basis of its over one hundred year successful history (born in 1872) as circumstances arise that may indicate a reduction in value. carrying amount even assuming the following changes in the well as the intention and ability of the group to continue investing in supporting and upholding the brand; The impairment test as at December 31, 2017 was carried out sole Key assumption:  > the value of the Metzeler Brand (useful life of 20 years) amounting to euro 59,183 thousand; with the assistance of an independent third party professional.  > a downwardly change in the royalty rates for the Consumer  > product and process Technology and In-Process R&D to the amount of euro 1,181,017 thousand and euro 95,000 thousand The configuration of the recoverable amount for impairment evaluation units of 50 basis points and the simultaneous respectively. The useful life of the product and process Technology has been determined as equal to 20 years, while the useful testing purposes at December 31, 2017 was calculated on the zero balance for royalties from the license agreement life for In-Process R&D as equal to 10 years;  > residual Goodwill amounting to euro 1,877,363 thousand. Impairment test of goodwill Pursuant to IAS 36, goodwill is not subject to amortisation but is tested for any reduction of value (impairment) annually or more frequently, if specific events or circumstances arise that may indicate a reduction in value. For the purposes of such impairment testing, goodwill is allocated to the cash generating units (CGUs) or group of CGUs in compliance with the maximum aggregation limit which cannot exceed that of the operating segment identified pursuant to IFRS 8. The impairment test consists of comparing the recoverable value of the CGU to which the goodwill is allocated with the carrying amount that includes the operating assets and goodwill. Goodwill, amounting to euro 1,877,363 thousand, was allocated to the CGU group “Consumer Activities”, which it represents the only sector of activity in which the Group operates and which it considers to be the minimum level at which goodwill should be monitored for the purposes of internal management control. basis of the income approach (the so-called Level 3 of the with Prometeon Tyre Group; hierarchy of IFRS 13 – Fair Value measurement) and is based on:  > an upwardly change in the discount rate of 150 basis points;  > the consensus forecasts by equity analysts with respect to the  > a downwardly change in the g growth rate of 150 basis points. forecast revenues for the period 2018-2020 in that they were ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements11. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES The item impairment mainly refers to the investment in Focus Investments S.p.A. which was carried out in order to align the carrying amount following the application of the equity method to the fair value represented by the pro-rata equity of the associate. Changes in investments in associates and joint ventures were as follows: The impairment of the investment in Fenice S.r.l of euro 215 thousand was attributable to the adjustment of the carrying amount (In thousands of euro) calculated using the equity method in order to align it to its fair value inclusive of the liquidation preference. 12/31/2017 12/31/2016 The pro-rata share of net income (positive at euro 1,361 thousand) refers mainly to the investment in Fenice S.r.l. which was positive to the amount of euro 5,002 thousand and which directly included the results from the disposal of the investment held in Prelios Associates JV Total Associates JV Total S.p.A. which was offset by the negative pro-rata results of Prelios S.p.A. of euro 3.118 thousand and Focus Investments S.p.A. of euro Opening balance 32,446 14,564 47,010 144,260 23,088 167,348 759 thousand. Decreases Increases Distribution of dividends Impairment Restatement (10,410) 1,496 (8,556) (754) - - - - - - (10,410) (11,161) 1,496 4,692 (8,556) (100,553) (754) (20,987) - 7,364 - - - - - (11,161) 4,692 (100,553) (20,987) 7,364 Share of net income (loss) 1,361 (9,613) (8,252) 7,297 (8,524) (1,227) Share of other components recognised in Equity Reclassifications and other (2,915) (139) - - (2,915) 1,534 (139) - - - 1,534 - The Financial Statements of Prelios S.p.A. used in applying the equity method refer to a different closing date than that of December 31, 2017, and include the pro-rata loss for the fourth quarter of 2016 and for the first nine months of 2017. The investments in associated companies which were evaluated using the equity method are not relevant in terms of the impact on the total for consolidated assets either individually or in aggregate form. 11.2 Investments in joint ventures The Group holds an investment of 60% in PT Evoluzione Tyres, an entity which operates in Indonesia and is active in tyre production. Even though the company is 60% owned, as a result of the contractual agreements between shareholders it falls under the definition of a joint venture since the governance regulations explicitly require unanimous Closing balance 12,529 4,951 17,480 32,446 14,564 47,010 consensus for significant business decisions. The investment is evaluated using the equity method. 3 3 0 11.1 Investments in associates The item Investments in associates was composed as follows: The share of net income (loss) which was negative to the amount of euro 9,613 thousand refers to the pro rata amount of the losses for the 2017 financial year. The investment which was evaluated using the equity method is not relevant in terms of the impact on the total of consolidated assets. 1 3 3 (In thousands of euro) 12. OTHER FINANCIAL ASSETS 12/31/2016 Decreases Increases dividends Impairment net income Distrib. of Share of and reserves (loss) Share of other components Reclass. recognised and other 12/31/2017 in Equity These amounted to euro 229,519 thousand compared to euro 198,691 thousand at December 31, 2016 and refer to financial assets available for sale, measured at fair value, with any changes to the fair value recognised in equity. The changes which occurred during the financial year are as follows: Eurostazioni S.p.A. 6,271 - Prelios S.p.A. 13,642 (10,397) - - - - - - - - (3,118) (127) Fenice S.r.l. 9,048 Focus Investments S.p.A. 2,650 - - - - (8,556) (215) 5,002 (2,802) - - (539) (759) - 236 - 14 - - - - 6,271 - 2,477 1,352 Other Group companies 835 (13) 1,496 (139) 2,429 Opening balance Total 32,446 (10,410) 1,496 (8,556) (754) 1,361 (2,915) (139) 12,529 Translation differences With reference to the investment in Fenice S.r.l., as in the previous financial year, even though the percentage of ownership exceeded 50% of the capital (69.88%), the situation did not entail control for Pirelli over the company, due to the provisions of the Shareholders’ Agreements. The item decreases refers to the disposal of the investment in Prelios S.p.A. on December 28, 2017 to Lavaredo S.p.A., a newly established joint stock company designated by the Burlington fund who was counterparty in the transaction. The sale generated a capital gain of euro 5,809 thousand. The item distribution of dividends and reserves refers to the reduction in the capital of Fenice S.r.l. effected through the distribution to shareholders of the amount collected by Fenice S.r.l. for the disposal of the investment held in Prelios S.p.A. to the Burlington fund, in accordance with the preferential allocation criteria as provided for by the Articles of Association. Increases Decreases Impairment Fair value adjustments recognised in Equity Other Closing balance (In thousands of euro) 12/31/2017 12/31/2016 198,691 225,121 (120) 2,465 (715) 12,594 (11) (10,761) (11,975) (11,067) 40,486 (16,513) (17) 32 229,519 198,691 ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsThe composition of the item according to individual securities is as follows: 13. DEFERRED TAX ASSETS AND PROVISION FOR DEFERRED TAX LIABILITIES Mediobanca S.p.A. RCS Mediagroup S.p.A. Other companies Total listed securities Fin. Priv. S.r.l. Fondo Anastasia Istituto Europeo di Oncologia S.r.l. Euroqube Tlcom I LP Emittenti Titoli Equinox Two SCA Pirelli De Venezuela C.A. Other companies Total unlisted securities Total other financial assets (In thousands of euro) 12/31/2017 12/31/2016 149,027 122,167 30,177 19,307 Their composition is as follows: - 22 Deferred tax assets 179,204 141,496 Provision for deferred tax liabilities 19,908 16,471 Total (In thousands of euro) 12/31/2017 12/31/2016 111,553 147,964 (1,216,635) (1,452,169) (1,105,082) (1,304,205) 15,269 14,636 6,599 6,231 12 186 2,748 601 2,610 2,382 12 570 2,729 3,757 10,226 2,563 50,315 57,195 229,519 198,691 Deferred tax assets and deferred tax liabilities were offset where a legal right existed that allowed for the offset of current tax assets and current tax liabilities. The deferred taxes refer to the same legal entity and the same taxation authority. The provision for deferred taxes mainly refers to the tax effect recognised on the value of the assets identified during the course of the 2016 financial year following the completion of the allocation of the price paid by Marco Polo Industrial Holding S.p.A. for the acquisition of the Pirelli Group at fair value of the Pirelli assets and liabilities acquired (Purchase Price Allocation or PPA), and recorded in the consolidated Financial Statements following the merger by incorporation of the holding company Marco Polo Industrial Holding S.p.A. into Pirelli, which took place during 2016. The gross amounts for compensations carried out were as follows: 3 3 2 (In thousands of euro) 3 3 3 With reference to the investment in Pirelli de Venezuela C.A., consistently with the previous financial year, even though the percentage of ownership exceeded 50% of the capital (96.22%), due to the significant restrictions on relevant activities of the company, that cannot be considered temporary, it was deemed that conditions requested by IFRS 10 for control of the company were not met. Deferred tax assets - of which within 12 months - of which beyond 12 months The item increases refers mainly to the acquisition of 1,559,250 shares of the company RCS Mediagroup S.p.A. for euro 1,678 thousand Provision for deferred tax liabilities - of which within 12 months - of which beyond 12 months Total and the subscription to 74,555,289 new shares in addition to the existing investment in Alitalia-Compagnia Aerea Italiana S.p.A. for the amount of euro 781 thousand. The item impairment mainly refers to the investment in Pirelli De Venezuela C.A. (euro 7,616 thousand), whose fair value is substantially represented by the impaired liquidity present in the country due to the depreciation recorded during the course of 2017 of the Venezuelan Bolivar against the US Dollar. The item refers mainly to the impairment of investments in Equinox Two S.C.A. (euro 3,062 thousand) and in Alitalia-Compagnia Aerea Italiana S.p.A. (euro 781 thousand). It is to be noted that during the year the Equinox Two S.C.A. fund made partial repayments relating to the share premium which in the past had been subscribed to by each shareholder in the form of dividends for an amount substantially equivalent to the impairment recorded. The fair value adjustment recognised in Equity, which amounted to a positive net value of euro 40,486 thousand, mainly refers to the positive fair value adjustment recorded for the investments in Mediobanca S.p.A. (euro 26,859 thousand) in Fin. Priv. S.r.l. (euro 3,437 thousand), in the RCS Mediagroup S.p.A. (euro 9,193 thousand), in Fondo Anastasia (euro 633 thousand) and in the Istituto Europeo di Oncologia S.r.l. (euro 368 thousand). The fair value of listed financial instruments corresponds to the stock market price as at December 31, 2017. The fair value of unlisted financial instruments was determined by making estimates on the basis of the best information available . 12/31/2017 12/31/2016 288,944 243,993 75,345 54,882 213,599 189,111 (1,394,026) (1,548,198) (37,569) (11,193) (1,356,457) (1,537,005) (1,105,082) (1,304,205) ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsThe tax effect of temporary differences and of tax losses carried forward which make up the item is shown in the following table: Of the total tax losses with no expiration, the amount euro 51,376 thousand mainly refers to losses attributable to the English (In thousands of euro) subsidiary Pirelli UK Ltd for which sufficient taxable income was not expected in order to justify the recoverability thereof. Deferred tax assets: Provisions for liabilities and charges Employee benefit obligations Inventories Tax losses carried forward Trade receivables and other receivables Trade payables and other payables Derivatives Other Total Provision for deferred tax liabilities: Property, plant and equipment and intangible assets Other Total 12/31/2017 12/31/2016 The tax effect of gains and losses recognised directly in equity was negative to the amount of euro 6,308 thousand (positive to the amount of euro 14,438 thousand for 2016) and are shown in the Statement of Comprehensive Income. These changes were mainly due to tax effects connected to actuarial gains/losses on employee benefits and to the fair value adjustment of derivatives in cash 64,277 63,038 72,359 111,869 27,357 24,542 51,159 12,957 23,541 28,064 951 - 341 703 49,300 2,479 288,944 243,993 (1,313,032) (1,506,688) (80,994) (41,510) (1,394,026) (1,548,198) flow hedging. 14. TRADE RECEIVABLES Trade receivables were analysed as follows: 12/31/2017 12/31/2016 Total Non-current Current Total Non-current Current Customers 919,573 Provision for bad debts (267,086) Total 652,487 - - - 919,573 965,948 (267,086) (286,627) 652,487 679,321 - - - 965,948 (286,627) 679,321 (In thousands of euro) 3 3 4 At December 31, 2017 the value of deferred tax assets not recognised on temporary differences amounted to euro 57,114 thousand gross of the provision for bad debts, euro 382,196 thousand are overdue (euro 441,483 thousand at December 31, 2016). The expired (euro 97,905 thousand at December 31, 2016), while those related to tax losses amounted to euro 43,791 thousand (euro 125,231 receivables refer to euro 212.656 thousand due from Pirelli de Venezuela C.A. which had been fully impaired in previous financial years thousand at December 31, 2016). (euro 229.304 thousand at December 31, 2016). Of the total trade receivables which amounted to euro 919,573 thousand (euro 965,948 thousand at December 31, 2016) and recorded 5 3 3 The value of the tax losses reallocated according to maturities, for which deferred tax assets were not recognised, were as follows: Receivables which were past due (expired) and not yet due were evaluated according to the Group’s policy described in the section (In thousands of euro) on adopted accounting standards. Year of maturity 12/31/2017 12/31/2016 Receivables on which provision has been recorded include both significant individual positions subject to individual impairment and positions with similar credit risk characteristics that were grouped together and impaired on a collective basis. 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 without maturity date Total 6,082 7,374 3,545 6,271 4,284 6,432 3,030 1,818 5,053 3,648 10,093 7,696 3,626 6,382 4,354 6,022 3,075 1,818 5,053 - 131,929 428,928 179,466 477,047 The changes in the provision for bad debts were as follows: Opening balance Change in scope Translation differences Accruals Decreases Other Closing balance (In thousands of euro) 12/31/2017 12/31/2016 286,627 265,808 (2,777) - (21,865) 11,060 17,659 18,173 (12,453) (8,474) (105) 60 267,086 286,627 The significant reduction in tax losses against which deferred tax assets were not recognised was mainly attributable to the use of Accruals to the provision for bad debts are recognised in the Income Statement as “Other costs” (Refer to Note 33). tax losses during the course of the financial year as well as to the recognition of deferred tax assets on the residual tax losses as at December 31, 2017 of Pirelli & C. S.p.A. in light of their foreseeable recoverability on the part of the Italian companies of the Group. The carrying amount for trade receivables is considered to approximate their fair value. ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements15. OTHER RECEIVABLES Other receivables were analysed as follows: 12/31/2017 12/31/2016 from previous financial years recorded for Pirelli & C. S.p.A. to the amount of euro 6,578 thousand. (In thousands of euro) current) compared to euro 76.259 thousand at December 31, 2016 (of which euro 11,864 thousand was non-current). In more details, this mainly refers to receivables for advance payments on taxes for the financial year and to corporate income tax (IRES) receivables The item tax receivables relates to income taxes which amounted to euro 62.779 thousand (of which euro 27.318 thousand was non- 16. TAX RECEIVABLES Total Non-current Current Total Non-current Current Financial receivables 131,096 94,585 36,511 125,665 95,714 29,951 Trade accruals and deferrals Receivables from employees 34,548 6,974 1,513 1,225 33,035 44,589 5,749 9,355 2,618 1,273 41,971 8,082 17. INVENTORIES Inventories were analysed as follows: Receivables from social security and welfare institutions Receivables from tax authorities not related to income taxes 5,535 - 5,535 6,037 - 6,037 247,015 13,521 233,494 138,841 9,975 128,866 Other receivables 181,808 93,207 88,601 180,455 117,288 63,167 Provision for bad debts (2,387) - (2,387) (2,452) - (2,452) Total 604,589 204,051 400,538 502,490 226,868 275,622 606,976 204,051 402,925 504,942 226,868 278,074 Raw and auxiliary materials and consumables Sundry materials Work in progress and semi-finished products Finished products Advances to suppliers Total (In thousands of euro) 12/31/2017 12/31/2016 147,645 229,218 5,197 48,782 6,780 72,672 737,558 744,393 1,485 2,576 940,668 1,055,639 3 3 6 The item non-current financial receivables (euro 94,585 thousand) refers mainly to euro 41,535 thousand in sums deposited as guarantees for tax and legal disputes in relation to the subsidiary Pirelli Pneus Ltda (Brazil) and remunerated at market rates, to Reversal of impairment on inventories amounted to euro 7,486 thousand (impairments for euro 2,700 thousand at December 31, 2016). 7 3 3 euro 18,372 thousand in sums deposited into escrow accounts in favour of the pension funds of Pirelli UK Ltd and Pirelli UK Tyres Ltd, to euro 4,638 thousand relative to the non-current portion of insurance premiums paid in advance during the financial year for the Inventories were not subjected to any guarantee pledges. issuance of guarantees in favour of the same pension funds, and to euro 12,007 thousand relative to the non-current portion of loans disbursed to the Indonesian joint venture PT Evoluzione Tyres. The item current financial receivables (euro 36,511 thousand) refers to euro 3,713 thousand, being the short-term portion of insurance 18. SECURITIES HELD FOR TRADING premiums paid in advance for the issuance of guarantees in favour of the same pension funds, to euro 5,837 thousand, being the Securities held for trading amounted to euro 33,027 thousand compared to euro 48,597 thousand at December 31, 2016, with a short-term portion of loans disbursed to the Indonesian joint venture PT Evoluzione Tyres, and to euro 5,679 thousand accrued on decrease of euro 15,570 thousand mainly due to the cash requirements for the period. This item is almost exclusively comprised of derivative cross currency interest swaps relative to the unsecured syndicated Facilities loan granted to Pirelli International Plc. unlisted floating rate bonds. The item receivables from tax authorities not related to income taxes (euro 247.015 thousand) is mainly comprised of receivables The fair value of unlisted securities was determined by making estimates on the basis of the best available information. for IVA (value added tax) and other indirect taxes. This increase, if compared to December 31, 2016, was mainly attributable to an increase in indirect tax receivables in Brazil. Changes in fair values for the financial year were recognised in the Income Statement as “financial expenses”. The item other non-current receivables (euro 93,207 thousand) mainly refers to amounts deposited as guarantees for legal and tax disputes involving the Brazilian entities (euro 73,161 thousand), to receivables for guarantees in Pirelli’s favour which may be exercised in the event of contingent liabilities arising in relation to the acquisition occurred in previous year of the company Campneus Lider 19. CASH AND CASH EQUIVALENTS de Pneumaticos Ltda (Brazil) for euro 2,446 thousand. Cash and cash equivalents went from euro 1,532,977 thousand at December 31, 2016 to euro 1,118,437 thousand at December 31, 2017. The item other current receivables (euro 88,601 thousand) mainly includes advances to suppliers for euro 44,459 thousand, These were concentrated in the Group holding companies and in companies that generate liquidity and use it locally. These receivables from the disposal of property not used for industrial operations in Brazil for euro 2,519 thousand. were essentially invested on the short-term maturity deposits market through leading banking counter-parties at interest rates For other current and non-current receivables the carrying amount is considered to approximate their fair value. consistent with the prevailing market conditions. In the Statement of Cash Flows, the balance of cash and cash equivalents has been stated net of passive current accounts and amounted to euro 8,797 thousand at December 31, 2017 (euro 18,411 thousand at December 31, 2016). ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements 20. EQUITY International Italy S.p.A. on June 29, 2017, of euro 1,189,375 thousand, of which euro 558,994 thousand to be allocated 21. PROVISIONS FOR LIABILITIES AND CHARGES to share capital and euro 630,381 thousand to the share The changes that occurred during the financial year are shown below: 20.1 Attributable to the Parent Company The equity attributable to the Parent Company went from euro 3,134,085 premium reserve, through the issue of 429,005,680 new ordinary shares, without nominal value. (In thousands of euro) thousand at December 31, 2016 to euro 4,116,758 thousand at  > the grouping of the company’s ordinary shares into PROVISION FOR LIABILITIES AND CHARGES - NON-CURRENT PORTION 12/31/2017 December 31, 2017. This increase was substantially due to the 1,000,000,000 against 1,461,509,840 outstanding shares capital increase, equal to euro 1,189,375 thousand including as of August 1, 2017. the premium, subscribed to in June 2017 by Marco Polo International Italy S.p.A. (the direct shareholder following the merger with Marco Polo International Holding Italy S.p.A.), 20.2 Attributable to non-controlling interests The equity attributable to non-controlling interests went from to the fair value adjustment of the investments available euro 140,773 thousand at December 31, 2016 to euro 60,251 for sale (positive to the amount of euro 40,486 thousand) thousand at December 31, 2017. The decrease was mainly due and to the net income for the financial year (positive at euro to the non-controlling interests of the Industrial Activities, 176,392 thousand) which was offset by: the reduction linked subjected to assignment. Overall, non-controlling interests to the assignment of all TP Industrial Holding S.p.A. shares recorded a net decrease of euro 80,552 thousand euro as a (parent company of the Industrial business) for the amount result of the following main effects: of euro 289,440 thousand, the difference from the translation  > increase equal to euro 264,500 thousand resulting from Opening balance Change in scope Translation differences Increases Uses Reversals Other Closing balance 170,992 (31,005) (6,893) 9,915 (15,092) (534) (259) 127,124 of foreign financial statements (negative at euro 86,153 the sale of 38% of the capital of Pirelli Industrial S.r.l The non-current portion mainly refers to provisions made by the subsidiary Pirelli Pneus Ltda, with its headquarters in Brazil, for thousand), the actuarial losses on pension funds (negative (now Prometeon Tyre Group S.r.l) to Cinda on January 13, tax and legal disputes (euro 22,069 thousand) and for labour lawsuits (euro 12,708 thousand), and to provisions made by the parent at euro 14,656 thousand), and the fair value adjustment of 2017 under the agreement signed on December 28, 2016 company Pirelli & C. S.p.A. for tax disputes (euro 4,574 thousand), for commercial risks, site remediation and labour disputes (euro derivatives designated as cash flow hedges (negative at euro between Pirelli Tyre S.p.A and Cinda. The value of the sale 5,504 thousand), and for occupational diseases litigation (euro 14,657 thousand), to provisions made by Italian subsidiaries for tax 3 3 8 14,492 thousand). was approximately euro 266 million; risks (euro 8,910 thousand).  > decrease equal to euro 326,679 thousand resulting from The item also includes contingent liabilities (whose outlay is not considered likely) which were identified during the Purchase Price 9 3 3 The subscribed and paid up share capital at December 31, 2017 the deconsolidation of the Industrial business, which took Allocation and were mainly attributable to the European Commission decision made at the conclusion of the antitrust investigation amounted to euro 1,904,375 thousand and was represented by place in march 2017, due to the assignment of the total regarding the energy cable business, which foresaw sanctions against Prysmian S.p.A. of approximately euro 104 million, of which a 1,000,000,000 registered ordinary shares without indication shares of TP Industrial Holding S.p.A., previously held part (euro 67 million), Pirelli was held as being jointly liable with Prysmian S.p.A. despite having been found to not have been involved of their nominal value. by Pirelli & C. S.p.A, to the sole shareholder Marco Polo in the alleged cartel, based solely on the application of the principle of so-called parental liability, in that during part of the period of The share capital went from euro 1,345,381 thousand gross International Holding Italy S.p.A. TP Industrial Holding the alleged infringement, Prysmian S.p.A. was a subsidiary of Pirelli & C. S.p.A. This meant the joint and several liability with Prysmian of treasury shares in portfolio (euro 1,342,281 thousand net S.p.A. holds 52% of the share capital of Pirelli Industrial S.p.A. for the amount provisioned for 50% of the risk (euro 33,500 thousand). of treasury shares held in portfolio), divided into 207,625,214 S.r.l (now Prometeon Tyre Group S.r.l), company in which shares at December 31, 2016, to euro 1,904,375 thousand, Pirelli’s Industrial assets were converged; The item increases mainly refers to accruals for labour disputes within the subsidiary Pirelli Pneus Ltda (Brazil), and to tax risks. divided into 1,000,000,000 shares at December 31, 2017.  > decrease equal to euro 9,580 thousand resulting from the The change in the number of shares was determined by the Comercial e Importadora de Pneus Ltda following the exercise pending litigations against Pirelli Tyre S.p.A. and Pirelli C. S.p.A. for disputes relating to occupational diseases. acquisition of a 36% stake in the subsidiary company The item uses were for costs incurred mainly due to the labour disputes of the subsidiaries Pirelli Pneus Ltda (Brazil), and for settling following transactions: by the shareholder Distribudora Automotiva S.A. (“DASA”) of  > the conversion of all outstanding special shares into the a put option with respect to the Group concerning DASA’s corresponding number of ordinary shares, the annulment entire shareholding in Comercial e Importadora de Pneus PROVISION FOR LIABILITIES AND CHARGES - CURRENT PORTION of all the 351,590 ordinary treasury shares and all 772,792 Ltda. Following this acquisition the Group owns 100% of special treasury shares without reducing the share capital Commercial e Importadora de Pneus Ltda; and the splitting of shares into 1,032,504,160 shares;  > decrease equal to euro 7,446 thousand resulting from the  > a capital increase, fully subscribed by Marco Polo distribution of dividends during the fiscal year. Opening balance Change in scope Translation differences Increases Uses Reversals Other Closing balance (In thousands of euro) 12/31/2017 45,987 (7,629) (1,701) 23,149 (9,458) (4,661) 146 45,833 ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsThe current portion mainly includes provisions for product claims and warranties (euro 10,932 thousand), for the remediation of The following table shows the composition of pension funds at December 31, 2016: disused areas (euro 6,156 thousand) and work accident insurance relative to the English subsidiary (euro 3,439 thousand). The item increases mainly refers to provisions for product claims and product guarantees, to the remediation of disused areas, to risks related to rendering factories work safe, to tax risks, to labour disputes and work accidents. The item uses was mainly attributable to claims received from the various units of the Group to costs incurred for the remediation Funded funds of disused areas and for the settlement of tax disputes. (In thousands of euro) 12/31/2016 Germany Sweden Total unfunded pension funds USA UK Other countries Total funded pension funds The reversals of surplus provisions mostly concerned disputes, claims, the remediation of environmental areas and insurance risks. Present value of funded liabilities 153,495 1,297,199 7,034 1,457,728 Fair value of plan assets Unfunded funds (122,338) (1,182,241) (6,786) (1,311,365) Present value of unfunded liabilities 93,410 3,378 96,788 Net liabilities recognised 93,410 3,378 96,788 31,157 114,958 248 146,363 22. EMPLOYEE BENEFIT OBLIGATIONS The item is composed as follows: Pension funds: - funded - unfunded 3 4 0 Employee leaving indemnities (TFR - Italian companies) Healthcare plans Other benefits Total (In thousands of euro) The characteristics of the main pension funds in place at December 31, 2017 were as follows:  > Germany: a non-funded defined benefit plan based on the last salary. This fund guaranteed a pension in addition to the state 12/31/2017 12/31/2016 pension. The plan was closed in October 1982. Consequently the participants to this plan are employees whose employment had 92,144 91,035 33,083 18,885 38,890 146,363 96,788 38,194 20,761 65,994 274,037 368,100 begun prior to that date;  > USA: a funded defined benefit plan based on the last salary. This fund guaranteed a pension in addition to the state pension and was administered by a Trust. The plan was closed in 2001 and frozen in 2003 for employees who then transferred to a defined contribution scheme. All participants to this plan have since retired;  > UK: a funded defined benefit plan based on the last salary. It guarantees a pension in addition to the state pension and is administered internally by a Trust. The plans managed by the subsidiary Pirelli Tyres Ltd were closed in 2001 to new participants and frozen during 2010 for employees hired prior to 2001, who were then offered a transfer to a defined contribution plan. The plan was operated by the subsidiary Pirelli UK Ltd, which included the employees in the Cables and Systems sector which was 1 4 3 sold in 2005, and was already frozen at the date of the disposal;  > Sweden: a defined benefits plan (ITP2), which is closed to new participants. The only participants are retired employees and the Pension funds The following table shows the composition of pension funds at December 31, 2017: recipients of deferred pensions.  > (In thousands of euro) 12/31/2017 Germany Sweden Total unfunded pension funds USA UK Other countries Total funded pension funds Funded funds Present value of funded liabilities 132,483 1,137,456 36,067 1,306,006 Fair value of plan assets Unfunded funds (111,813) (1,071,079) (30,970) (1,213,862) Present value of unfunded liabilities 87,773 3,262 91,035 Net liabilities recognised 87,773 3,262 91,035 20,670 66,377 5,097 92,144 ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsChanges for the 2017 financial year in the net liabilities of defined benefits (refers to funded and non-funded pension funds) Changes for the 2016 financial year in the net liabilities of defined benefits (refers to funded and non-funded pension funds) were as follows: were as follows: Opening balance Translation difference Movements through income statement: - current service cost - cost of services rendered for previous years - earnings from settlement - interest expense / (income) Remeasurements recognized in equity: - actuarial (gains) / losses from change in demographic assumptions - actuarial (gains) / losses from change in financial assumptions - experience adjustment (gains) losses - return on plan assets, net of interest income Additonal employer contributions - Buy in Employee contributions Incentivised exit from benefits fund Benefits paid Other Closing balance 3 4 2 Employer contributions - (43,690) (In thousands of euro) (In thousand of euro) Present value of gross liabilities Fair value of plan assets Total net liabilities Present value of gross liabilities Fair value of plan assets Total net liabilities 1,554,516 (1,311,365) 243,151 Opening balance at January 1, 2015 1,507,833 (1,257,045) 250,788 (63,468) 56,428 (7,040) Translation difference (183,676) 167,003 (16,673) 1,538 (5,559) (1,375) 40,590 35,194 237 25,746 (7,940) 18,043 - - - (35,554) (35,554) - - - (3,277) (3,277) 250 (77,085) (69,404) (1,004) (18,674) (250) 77,085 63,254 2,180 1,538 (5,559) (1,375) 5,036 (360) 237 25,746 (7,940) (3,277) 14,766 (43,690) (18,674) - - (6,150) 1,176 Movements through income statement: - current service cost - interest expense / (income) Remeasurements recognized in equity: - (gain)/loss from change in demographic assumptions - (gain)/loss from change in financial assumptions - experience (gains) losses 989 50,661 51,650 1,816 272,810 (22,656) - (43,766) (43,766) - - - 989 6,895 7,884 1,816 272,810 (22,656) - return on plan assets, net of interest income - (205,275) (205,275) Employer's contributions Employee contributions Benefits paid Other 251,970 (205,275) 46,695 - 24 (72,838) (447) (41,035) (41,035) (24) 66,766 2,011 - (6,072) 1,564 3 4 3 Closing balance at December 31, 2016 1,554,516 (1,311,365) 243,151 The current and previous cost for services rendered by employees and the gains generated from settlements are included in the item 1,397,042 (1,213,863) 183,179 “Personnel expenses” (Refer to Note 31), and the net interests payable are included in “Financial expenses” (Refer to Note 36). During the course of the 2017 financial year a series of exercises were initiated, defined as Liability Management Exercises, as a further measure to reduce the risks for the Group in exchange for incentives and greater flexibility. These exercises are subdivided into two types:  > Pension Increase Exercises (PIE): these consisted of offers made to retirees to swap annuities which were (partially) indexed to inflation with higher amounts initially but with reduced indexation. The reduction of this indexation, besides representing a measure of risk management, allows for the redefinition of past performance costs, with a positive effect of euro 5,335 thousand;  > Enhanced Transfer Value (ETV): these consisted of offers made to retirees for an incentivised exit from defined benefit funds. This is also primarily a risk management measure, namely to combat the exposure of the company to all pension risks (not just inflation risks, but also rates, longevity and investment risks) linked to retirement benefits amounts matured by those who accept these offers. The estimated earnings generated from extinction (euro 1,375 thousand) were mainly related to the (downward) trend in interest rates between the date of the offer and the end date of the financial year. In addition, at the end of October 2017, with reference to three UK minor pension funds – the Pirelli General Executive Pension and Life Assurance Fund, Pirelli Tyres Limited Executive Retirement Benefits Scheme and Pirelli General Overseas Retirement Benefits Scheme - which together had recorded a gross liability at December 31, 2017 equal to euro 85,512 thousand, certain so-called “buy in” had been entered into which consisted of the purchase of insurance policies (so-called “bulk annuities”). The purchase was entirely finalised by using all the plan assets, with the addition of an additional contribution at December 31, 2017 of euro 18,674 thousand which was recognised in equity. ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsThe policies were stipulated on an individual basis (for each member of the funds) but on a collective basis (one for each of the three represents the value of assets - through the use of debt instruments such as government bonds and derivatives; pension funds) with the intention of replicating the financial profile of their respective liabilities, in order to thus relieve the Group  > the management of exchange rate risk which aims at covering at least 70% of the exposure to foreign currencies held in the of all the aforementioned risks. portfolio through the use of forward contracts. At December 31, 2017, these insurance policies were recognised in the Financial Statements as assets servicing the plans and were on Polo Industrial Holding S.p.A. and the impact deriving from the covenants of the Group, an agreement (the Pension Framework Agreement) Furthermore, during the course of 2016, following the increase in financial leverage resulting from the merger of Pirelli & C. S.p.A. with Marco the same basis as the liabilities to which they refer. was entered into from within the refinancing process with the UK pension funds, through which, a package of measures (entered into with a pool of insurance companies, the so called Credit Support Guarantees, comprising of limited payments by way of restricted deposits into The composition of funded pension fund assets was as follows: escrow accounts, and the definition of an accelerated contributions plan limited to a period of extraordinary leverage) was put in place to (In thousand of euro) guarantee the “synthetic” restoration of these covenants to levels which existed prior to the acquisition of the Pirelli Group by Marco Polo Industrial Holding S.p.A., for the purposes of continuing the work of the gradual settlement of the relative deficits previously imposed. 12/31/2017 12/31/2016 listed unlisted total % listed unlisted total % 2020. In the United States funding evaluations are carried out on an annual basis. In the UK, the funding arrangements and funding policies are revised every three years. The next funding evaluation is expected in Shares Bonds 66,421 73,535 - - 66,421 73,535 Insurance policies 87,717 6,040 93,757 5.5% 6.1% 7.7% 71,493 347,644 419,137 141,921 28,405 170,326 - 6,786 6,786 Deposits 339,083 - 339,083 27.9% 306,869 (50,795) 256,074 Balanced funds 16,813 596,829 613,642 50.6% 6,279 307,740 314,019 Real Estate Derivatives Other Total 3 4 4 1,258 - 1,258 879 4,120 4,999 21,168 - 21,168 0.1% 0.4% 1.7% - - - - 81,549 81,549 10,301 53,172 63,473 606,874 606,989 1,213,863 100.0% 536,864 774,501 1,311,365 100.0% 32.1% 13.0% 0.5% 19.5% 23.9% 0.0% 6.2% 4.8% The contributions which are expected to be paid into the unfunded pension funds during the 2018 financial year amounts to euro 6,177 thousand, while for funded pension funds the amount expected is euro 32,463 thousand. Employees’ leaving indemnities (TFR) Changes for the financial year for the employees’ leaving indemnities provision were as follows: The principal risks to which the Group is exposed in relation to the pension funds are detailed as follows:  > the volatility of the pension fund assets: in order to be able to balance liabilities, the investment strategy cannot limit its horizons exclusively to risk free assets. This implies that certain investments, such as listed securities represent high volatility for the Remeasurements recognized in equity: short-term, and that this exposes the plans to risks such as the reduction in value of the assets in the short-term, and to the - actuarial (gains)/losses arising from changes in demographic assumptions consequent increase in imbalances. However, this risk is mitigated by diversifying investments into numerous investment - actuarial (gains)/losses arising from changes in financial assumptions classes, through different investment managers, through different investment styles and with exposures to multiple factors which are not perfectly correlated to each other. Moreover, the investments are continuously revised in response to market conditions, and adjusted in order to maintain the overall risk at acceptable levels;  > changes in the bond yields and in the forecast inflation: the expectations of declining bond yields and/or rising inflation brings about an increase in the value of liabilities. The plans reduce this risk through investments in liability hedging assets. In the United Kingdom, the protection guaranteed by a portfolio of this type has been built up over the last few years, and as of the second quarter of 2014 it had reached a coverage which oscillates between 100% and 115% of the value of the liabilities covered by assets; - experience (gains)/losses Indemnities/advanced payments Other Closing balance Opening balance Industrial assignment Movements through Income Statement: - current service cost - interest expense (In thousands of euro) 12/31/2017 12/31/2016 38,194 38,625 (1,949) - 5 4 3 302 552 (488) 581 (2,510) (1,083) (516) 629 814 - 1,974 - (3,587) (261) 33,083 38,194  > life expectancy: the increase in life expectancy entails an increase in the value of a plan’s liabilities. The UK plans were completed The current cost for services rendered by employees is included in the item “Personnel expenses” (Refer to Note 31) while interest during the course of 2016, a process which allowed them to be, through the so-called longevity swaps, stipulated with a pool of payables are included in the item “Financial expenses” (Refer to Note 36). insurance companies, to cover approximately 50% of the risks. Residual risks are evaluated by using prudent hypotheses whose adequacy is revised periodically. In the UK the management of pension fund assets has been delegated, under the supervision and within a precise mandate attributed Healthcare plans This item refers exclusively to the healthcare plan in place in the United States. by the Trustees, to a Fiduciary Manager who operates in accordance with a model of Liability Driven Investment (LDI), namely using the liability benchmark as a reference so as to minimise the volatility (and thus the risk) of the deficit, which in fact has been reduced to approximately one third compared to the levels which existed prior to its introduction (at the beginning of 2011). The key parameters of this mandate were as follows:  > a mix of assets subject to dynamic management over time, rather than a fixed allocation strategy;  > a hedge which covers approximately 100% - 115% of the risk associated with interest rates and inflation - where the percentage Liabilities recognised in the Financial Statements at 12/31/2017 Liabilities recognised in the Financial Statements at 12/31/2016 (In thousands of euro) USA 18,885 20,761 ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsThe following changes occurred during the period: The following table presents an analysis of the payment deadlines relative to post-employment benefits: Opening balance Translation differences Movements through income statement: - current service cost - interest expense Remeasurements recognised in equity: - actuarial (gains) losses arising from changes in financial assumptions - actuarial (gains) losses arising from changes in demographic assumptions - experience adjustment (gains) losses Benefits paid Closing balance (In thousands of euro) 12/31/2017 12/31/2016 within 1 year 1 to 2 years 3 to 5 years over 5 years Total (In thousands of euro) 20,761 21,449 Pension funds 63,915 64,258 194,778 (2,553) 638 Employees' leaving indemnities (TFR) Healthcare plan 2,707 1,425 2,404 1,417 7,459 4,202 65,316 10,850 6,466 388,267 23,420 13,510 4 749 691 4 792 266 132 347 (1,114) (1,350) (1,170) 18,885 20,761 68,047 68,079 206,439 82,632 425,197 The weighted average term for bonds for post-employment benefits is equal to 15.29 years (16.17 years at December 31, 2016). The sensitivity analysis for the relevant actuarial assumptions at the end of the 2017 financial year was as follows: Impact on post employment benefits Change in assumptions Increase in assumptions Decrease in assumptions (in %) The cost for the service is included in the item “Personnel expenses” (Refer to Note 31), and net interests payable is included in “Financial expenses” (Refer to Note 36). Discount rate 0.25% decrease of 3.61% increase of Inflation rate (only UK plans) 0.25% increase of 2.46% decrease of 3 4 6 The contributions which are expected to be paid into the healthcare plan during the 2018 financial year amount to euro 1,425 thousand. At the end of the 2016 financial year the situation was as follows: 3.83% 2.23% (in %) 7 4 3 Additional information regarding post-employment benefits Net actuarial losses accrued during the 2017 financial year and recognised directly in equity amounted to euro 14,656 thousand. Impact on post employment benefits Change in assumptions Increase in assumptions Decrease in assumptions The main actuarial assumptions used at December 31, 2017 were as follows: Discount rate 0.25% decrease of 6.53% increase of Inflation rate (only UK plans) 0.25% increase of 3.47% decrease of 4.17% 2.77% Italy Germany Netherlands Sweden UK USA Switzerland Discount rate Inflation rate 1.60% 1.50% 1.60% 1.50% 2.15% 1.60% 2.25% 1.75% 2.50% 3.10% 3.50% N/A 0.70% 1.00% The main actuarial assumptions used at December 31, 2016 were as follows: Italy Germany Netherlands Sweden UK USA Switzerland Discount rate Inflation rate 1.50% 1.00% 1.50% 1.50% 1.50% 1.50% 2.15% 1.50% 2.70% 3.18% 3.90% N/A 0.70% 1.00% The sole purpose of the analysis outlined above was to estimate the changes in liability in relation to changes in the discount rates and inflation rates in the UK by using the central hypothesis on the rates themselves, rather than referring to an alternative set of hypotheses. The sensitivity analysis on the liabilities related to post-employment benefits is based on the same methodology used to calculate the liability recognised in the Financial Statements. Other long-term benefits The composition of other benefits is as follows: Long-term incentive plans Jubilee awards Leaving indemnities Other long-term benefits Total (In thousands of euro) 12/31/2017 12/31/2016 - 15,072 19,262 12,974 6,654 38,890 18,303 25,778 6,841 65,994 ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements The item “Long-term Incentive Plans” at December 31, 2016 included the amount earmarked for the new three-year 2016 Long- 20,000 thousand reported under current borrowings from banks, while the residual part of euro 10,000 thousand has been term Incentive Plan intended for the Group’s management. In order to maintain the alignment of the interests of management reported under non-current borrowings from banks; with the interests of Shareholders, also in consideration of the launch of the new 2017-2020 strategic plan as well as Pirelli’s listing,  > euro 51,528 thousand refers in particular to certain loans classified as current borrowings from banks granted to the Mexican subsidiaries; this incentive plan was closed early during the course of the financial year. As a result of the early closure, the matured liability was  > euro 31,004 thousand representing the two long term loans granted to the subsidiary Pirelli Otomobil Lastikleri (Turkey) and reclassified under the item “payables to employees” at December 31, 2017. classified as current borrowings from the banks; 23. BORROWINGS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS Borrowings from banks and other financial institution were as follows:  > bank finance and the use of credit facilities at local level in Russia (euro 8,762 thousand), in Japan (euro 5,925 thousand) and in Sweden (euro 5,075 thousand), classified entirely as current borrowings from banks. At December 31, 2017 the Group recorded a liquidity margin equal to euro 1,851.5 million composed of euro 700 million in the form of a non-utilised nominal credit facility and euro 1,151.5 million in cash and cash equivalents and securities held for trading. (In thousands of euro) The change in the total borrowings from banks and other financial institutions was follows: 12/31/2017 12/31/2016 Opening balance Total Non-current Current Total Non-current Current Drawdowns of secured financing (Senior Facilities) Bonds 596,280 596,280 - 594,314 594,314 - Reimbursements of secured financing (Senior Facilities) Borrowings from banks 3,787,428 3,298,717 488,711 5,932,336 5,349,503 582,833 Drawdowns of unsecured financing (Facilities) Borrowings from other financial institutions 50,267 1,176 49,091 24,300 1,567 22,733 Reimbursements of unsecured financing (Facilities) Financial leasing payables 428 324 104 78 Accrued financial expenses and deferred financial income 18,175 30 18,145 29,253 18 36 60 29,217 3 4 8 Total 4,456,257 3,897,089 559,168 6,588,046 5,945,999 642,047 Other financial payables 3,679 562 3,117 7,765 561 7,204 Reimbursement of BEI borrowing Net cash flow from Industrial assignment Amortized cost for the period Translation differences and other movements for the period Closing balance (In thousands of euro) 6,588,046 673,937 (5,899,338) 4,226,064 (863,405) (20,000) (49,960) 81,336 (280,423) 4,456,257 9 4 3 The item bonds refers to the unrated bond, placed by Pirelli International Plc on the Eurobond market in November 2014 for the Accrued financial expenses and deferred financial income (euro 18,175 thousand) mainly refers to the accrual of interest on loans nominal amount of euro 600 million, with a fixed coupon of 1.75%. from banks to the amount of euro 16,784 thousand (euro 24,902 thousand at December 31, 2016), and to the accrued interest matured On February 23, 2018 Pirelli International Plc decided to exercise the option for early repayment and the subsequent cancellation of the bond. The early repayment, which will cover the entire loan, and which responds to the objective announced for the constant Current and non-current financial payables backed by secured guarantees (pledges and mortgages) totalled euro 676 thousand optimisation of the Group’s financial structure, will take place through the exercise of the “Make Whole Issuer Call” which is provided (euro 5,290,188 thousand at December 31, 2016). The amount at December 31, 2016 refers mainly to the secured “Senior Facilities” for by the current Terms and Conditions of the loan. The operation is expected to be finalised by March 31, 2018. financing granted to Pirelli & C. S.p.A. and Pirelli International Plc. on bonds to the amount of euro 1,237 thousand (euro 1,237 thousand at December 31, 2016). The item borrowings from banks, which amounted to euro 3,787,428 thousand, mainly refers to: On June 29, 2017, the real guarantees constituted on all the assets granted as collateral by the Pirelli Group were unconditionally  > the use of the unsecured (“Facilities”) financing granted to Pirelli & C. S.p.A. and Pirelli International Plc for the amount of euro 3,277,477 and irrevocably cancelled against the euro 6.4 billion financing subscribed to on July 25, 2016 which was fully repaid on June 29, 2017. thousand. The contractual refinanced total of the operation subscribed to on June 27, 2017, (with a closing date of June 29, 2017) amounted to euro 4.1 billion (it had originally amounted to euro 4.2 million). This refinancing was achieved at a lower overall cost of less than 1.85% The carrying amount for current financial payables is considered to approximate their fair value. The table below compares the fair with maturities in three and five years. This financing which had first been subscribed to by three underwriters was subsequently the value of non-current financial payables with their carrying amount: subject of syndication by a pool of 18 credit institutions on July 7, 2017. It is to be noted that at December 31, 2016 the Pirelli Group was financed by secured credit facilities of which the amount of euro 5,280,746 thousand had been used, against the contractual credit amount of euro 6,289,820 thousand, which had originally been euro 6.4 billion. On June 27, 2017, Marco Polo International Italy S.p.A. subscribed to a share capital increase for Pirelli & C. S.p.A. of approximately euro 1.2 billion, which allowed the Group to reduce its bank debt by the same amount through the new financing operation. The refinancing involved the recognition of the extinction of the secured loan and the subsequent reversal to the Income Statement of the portion of costs not amortised at the reporting date (Refer to Note 36 – “Financial 12/31/2017 12/31/2016 Carrying amount Fair value Carrying amount Fair value (In thousands of euro) Pirelli International Plc bonds 596,280 613,998 594,314 609,888 expenses”). This financing has been entirely classified under long-term borrowings from banks; Borrowings from banks 3,298,717 3,355,453 5,349,503 5,349,925  > euro 372,981 thousand relative to loans disbursed in Brazil by local banking institutions of which euro 10,746 thousand has been Other financial payables 2,092 2,092 2,182 2,182 classified as non-current borrowings from banks;  > loans granted by the European Investment Bank (EIB) in favour of S.C. Pirelli Tyres Romania S.r.l. for local industrial investments for a total amount of euro 30,000 thousand (euro 50,000 thousand at December 31, 2016), which were fully used, with euro Total 3,897,089 3,971,543 5,945,999 5,961,995 ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsThe public bond issued by Pirelli International Plc is listed and its relative fair value has been measured on the basis of prices at financial year-end. It has therefore been classified in level 1 of the hierarchy provided for by IFRS 13 – Fair Value Measurement. The apportionment of borrowings from banks and other financial institutions according to the currency of origin for the debt, at December 31, 2017 and December 31, 2016 was as follows: 24. TRADE PAYABLES Trade payables were composed as follows: (In thousands of euro) (In thousands of euro) 12/31/2017 12/31/2016 12/31/2017 12/31/2016 Total Non-current Current Total Non-current Current EUR USD (US Dollar) BRL (Brasilian Real) MXN (Mexican Peso) TRY (Turkish Lira) Other Currencies Total 2,270,509 4,439,989 1,968,909 1,786,734 105,471 265,122 51,528 31,004 28,836 47,351 37,737 11,113 4,456,257 6,588,046 Suppliers Bill and notes payable Total 1,634,950 38,692 1,673,642 - - - 1,634,950 1,463,888 38,692 34,604 1,673,642 1,498,492 - - - 1,463,888 34,604 1,498,492 The carrying amount of trade payables is considered to approximate their fair value. At December 31, 2017 there were derivative hedging instruments for interest rates and exchange rates on floating rate debts in foreign currency. 25. OTHER PAYABLES Other payables were as follows: The Group’s exposure to changes in interest rates on financial payables, both in terms of the type of interest rate and in terms of the 3 5 0 date of the renegotiation of the same (resetting) was subdivided as follows:  > a floating rate payable to the amount of euro 3,441,453 thousand, whose interest rate is subject to renegotiation within the first six months of 2018;  > a fixed rate payable to the amount of euro 1,014,804 thousand, whose interest rate is not subject to renegotiation until the natural maturity of the debt to which it refers (euro 414,116 thousand) due in the following 12 months and euro 600,688 thousand euro due in over 12 months. The average cost of debt during the 2017 financial year was equal to 5.36% (5.82% for 2016). With regard to the existence of financial covenants, it is to be noted that the refinancing operation (“Facilities”) granted to Pirelli & C. S.p.A. and Pirelli International Plc provides for the compliance with the maximum ratio (“Total Net Leverage”) between net 12/31/2017 12/31/2016 1 5 3 Total Non-current Current Total Non-current Current (In thousands of euro) Accrued expenses and deferred income 75,787 43,995 31,792 81,215 42,046 39,169 Tax payables not related to income taxes 120,100 5,730 114,370 107,991 5,868 102,123 Payables to employees 115,835 817 115,018 138,390 - 138,390 Payables to social security and welfare intitutions Dividends payable Other payables 71,058 21,332 49,726 86,677 36,467 50,210 338 - 338 6,442 - 6,442 256,571 2,561 254,010 449,786 3,040 446,745 indebtedness and the gross operating margin as reported in the consolidated Financial Statements of Pirelli & C. S.p.A. Total 639,689 74,435 565,254 870,500 87,421 783,079 The failure to comply with the financial covenant is identified as an event of default, which if exercised within the terms and conditions of the contract by a certain number of the lending banks, whereby they represent at least 66 2/3% of the total commitment, will result in the early repayment (either partial or total) of the loan with the simultaneous cancellation of the related commitment. This The item non-current accrued expenses and deferred trade income refers to euro 41,290 thousand in capital contributions received parameter results as having been complied with at December 31, 2017. for investments in Mexico and Romania, whose benefits are recognised in the Income Statement in proportion to the costs for which The refinancing operation provides for a Negative Pledge clause whose terms and conditions are consistent with the market the contribution was disbursed, to euro 2,180 thousand in costs for trade initiatives in Brazil. standards for this type of credit facility. The other outstanding financial payables do not contain financial covenants. The item current accrued expenses and deferred trade income includes euro 10,090 thousand for various trade initiatives realised in Germany and Brazil, euro 9,275 thousand in government grants and incentives received mainly in Italy, Romania and Brazil, and It is to be noted that on January 22, 2018 as part of the EMTN (Euro Medium Term Note) program approved by the Board of Directors euro 2,525 thousand for costs related to insurance coverage in some European countries, Argentina and Turkey. at the end of 2017 and subscribed to on January 10, 2018, Pirelli placed a bond loan with international institutional investors for a nominal amount of euro 600 million with a five year duration at a fixed rate. The item tax payables for taxes not related to income is mainly comprised of payables for VAT and other indirect taxes, withholding tax for employees and taxes not related to income. The item payables to employees mainly includes amounts accrued during the financial year but not yet paid, as well as payables from the three year Long-Term Incentive plan 2016-2018 intended for the Group’s management, and closed early during the course of the 2017 financial year to the amount of euro 8,717 thousand. ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements The item other current payables (euro 254,010 thousand) mainly includes: The composition of the items by type of derivative instrument is as follows:  > euro 24,979 thousand in advance payments (euro 307,270 thousand at 31 December 2016). At December 31, 2016 the item included the amount of euro 265,045 thousand as advance payment on December 30, 2016 from the Cinda fund for the disposal of the 38% share of Pirelli Industrial finalised during the course of January 2017;  > euro 105,431 thousand for the purchase of property, plant and equipment (euro 66,789 thousand at December 31, 2016); Current assets  > euro 21,111 thousand for costs incurred in relation to the IPO process; (In thousands of euro) 12/31/2017 12/31/2016  > euro 18,589 thousand relative to the residual debt payable to the minority shareholder Distribudora Automotiva S.A., for the purchase of a 36% stake in the subsidiary Comercial and Importadora, a Group company which owns a network of points of sale in Brazil. Following the transaction, Comercial and Importadora de Pneus Ltda was wholly owned by the Group; Forward foreign exchange contracts - fair value recognised in the Income Statement 27,770 17,122 Average rate forward - cash flow hedge Futures - cash flow hedge 1,196 5,671  > euro 18,459 thousand in payables to representatives, agents, professionals and consultants (euro 21,367 thousand at December Total current assets 27,770 23,989 31, 2016);  > euro 14,872 thousand in withholding taxes on income (euro 12,476 thousand at December 31, 2016);  > euro 15,000 thousand in payables to companies in the Prometeon group;  > euro 7,857 thousand in payables to directors, auditors and supervisory bodies (euro 7,617 thousand at December 31, 2016);  > euro 2,638 thousand for debts relating to customs duties, import and transport expenses. Non current assets Interest rate swaps - cash flow hedge Current liabilities Total non current assets 878 878 - For other current and non-current payables, the carrying amount is considered to approximate their fair value. 26. TAX PAYABLES 3 5 2 Tax payables were for the most part related to national and regional income taxes in different countries and amounted to euro 50,815 thousand (of which euro 2,399 thousand was for non-current liabilities), compared to euro 45,147 thousand at December 31, 2016 (of which euro 3,374 thousand was for non-current liabilities). 27. DERIVATIVE FINANCIAL INSTRUMENTS The item includes the fair value of derivative instruments and is composed as follows: Forward foreign exchange contracts - fair value recognised in the Income Statement (17,910) (51,845) Futures - cash flow hedge - (325) Total current liabilities (17,910) (52,170) Non current liabilities Cross currency interest rate swaps - cash flow hedge Total non current liabilities (54,963) (54,963) - - Derivative financial instruments not in hedge accounting The value of foreign currency derivatives included in assets and liabilities corresponds to the fair value of forward currency purchases/sales outstanding at the closing date of the period. These were hedge operations for the commercial and financial transactions of the Group for which hedge accounting option was not adopted. The fair value was determined by using the forward exchange rate at the reporting date. 3 5 3 (In thousands of euro) 12/31/2017 12/31/2016 Non current assets Current assets Non current liabilities Current liabilities Current assets Current liabilities Derivative financial instruments with the adoption of hedge accounting The value of interest rate derivatives recorded as non current assets to the amount of euro 878 thousand refers to the fair value of three forward start interest rate swaps with a notional amount of euro 250 million traded in September 2017, with start dates of June 2019 and maturing in June 2022, which exchange a fixed rate against a 6-month EURIBOR. The objective of these derivatives, for which hedge accounting of the cash flow hedge type was adopted, is to hedge a future transaction represented by interest flows on a fixed rate liability which is considered highly probable. The change in fair value for the - - 6,357 21,413 878 - - - - - - (54,963) (6,662) 13,403 (16,102) period, positive at euro 878 thousand has been entirely suspended in equity. (11,248) 3,718 (35,742) A change of +0.5% in the EURIBOR curve, all other conditions being equal, would result in a positive change of euro 3,567 thousand in the equity of the Group, while a change of -0.5% in the EURIBOR curve, all other conditions being equal, would result in a negative change of euro 3,692 thousand in the equity of the Group. 1,196 - - - - 5,672 (326) 878 27,770 (54,963) (17,910) 23,989 (52,170) Without adoption of hedge accounting Exchange rate derivatives - commercial positions Exchange rate derivatives - included in net financial position Hedge accounting adopted - cash flow hedge: Exchange rate derivatives - commercial positions Interest rate derivatives Other derivatives Total - Total derivatives included in net financial position - 21,413 (54,963) (11,248) 3,718 (35,742) ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements3 5 4 5 5 3 The value of other derivatives, detected amongst non-current liabilities to the amount of euro 54,963 thousand, refers to the fair another case under consideration by the Brazilian Supreme of Technology) specifically commissioned by Pirelli Pneus who value valuation of 11 cross currency interest rate swaps with the following characteristics: Court, which will have to express its legal position through a concluded their analysis by equating, in light of their similar Derivative Notional amount Notional amount (USD million) (Euro million) Start date Maturity CCIRS CCIRS CCIRS CCIRS forward start Total 1,079 922 July 2017 July 2019 pay floating EURIBOR / receive floating LIBOR 284 682 2,045 1,079 3,124 243 July 2017 June 2020 pay floating EURIBOR / receive floating LIBOR 582 July 2017 June 2022 pay floating EURIBOR / receive floating LIBOR 1,747 920 July 2019 June 2022 pay fix EURIBOR / receive floating LIBOR 2,667 sentence with binding scope for everyone, on the impossibility characteristics, the tyres discussed with those used for heavy for a Federal State to penalise the tax payer for the use of industrial vehicles. credits granted by law by another Federal State, even if The risk is estimated at approximately euro 38 million, inclusive that law did not observe constitutional rules. According to of tax, interests and penalties. a previous jurisprudence of the Supreme Court, this dispute The risk of losing has not been assessed as probable and, should be managed by the Federal States, and without unduly therefore, no provision has been made in the Financial penalising the tax payer. Statements for this dispute. In addition to the above, a legislative provision (Complementary Law No. 160) came into force on August 8, 2017, which should put an end to this dispute between the various states in Brazil. This legislation establishes that the aforementioned States Disputes concerning transfer pricing with respect to certain intra-group transactions Pirelli Pneus is involved in a dispute with the Brazilian tax may, on a voluntary basis, sign an agreement (the so-called authorities concerning corporate income tax (IRPJ - Imposto The objective of these derivatives, for which hedge accounting of the cash flow hedge type was adopted, was to hedge the Group “convênio”) which given certain conditions is able to validate the de Renda Pessoa Jurídica) and social contribution (CSLL - against the risk of fluctuations in cash flows associated with changes in the LIBOR rate and changes in the USD/ EUR exchange incentives which up to now have been considered illegitimate, Contribuição Social sobre o Lucro Líquido) payable by the company rate, generated by a floating rate liability in USD for a notional amount of USD 3,124 million, equivalent to euro 2,667 million. The and therefore also extinguish the related sanctions imposed for the fiscal periods of 2008, 2011 and 2012 with reference to change in the fair value for the period was negative at euro 54,963 thousand, and was suspended in equity to the amount of euro by the Brazilian tax authorities. To date there are still some the application of the so-called transfer pricing regulations for 13,384 thousand, while euro 41,579 thousand was recognised in the Income Statement under the item “Valuation at fair value of foreign implementative aspects to be defined before this new import dealings with related parties. currency derivatives”. (Refer to Note 35). provision can be applied to the case in question, however there Based on the assessment notices sent to the company during A parallel change of +0.5% in the EURIBOR and LIBOR curves, all other conditions being equal, would result in a positive change of is a clear indication of the commitment by the Brazilian States 2013, 2015 and 2016, the Brazilian tax authorities are mainly euro 12,178 thousand in the equity of the Group, while a change of -0.5% in the same curves, all other conditions being equal, would to put an end to these forms of objections and to prevent new contesting the incorrect application by the company of the result in a negative change of euro 12,613 thousand in the equity of the Group ones in the future. methodology provided for by the administrative practice then 28. COMMITMENTS AND RISKS Commitments for the purchase of property, plant and equipment The commitments to purchase property, plant and equipment amounted to euro 141,153 thousand and refer mainly to companies in Romania, Brazil, Russia and Mexico. Commitments for the purchase of equity investments/fund shares These refer to commitments to purchase shares in Equinox Two S.c.a., a private equity company, for an amount equal to a maximum of euro 1,784 thousand. Other RISKS Tax disputes in Brazil The subsidiary Pirelli Pneus is involved in tax disputes and litigations as described as follows. Disputes concerning the ICMS tax receivables assigned by the State of Santa Catarina The risk is estimated at approximately euro 173 million, in force (IN - Instrução Normativa 243 or normative instructions) inclusive of taxes, interests and penalties. for the evaluation of transfer prices applied to the importation The risk of losing has not been assessed as probable and, of goods from related parties. To date, the claim motioned by therefore, no provision has been made in the Financial the company is pending before the competent administrative Statements for this dispute. tax courts. Even though the first administrative ruling issued Litigation concerning the IPI tax rate applicable to certain types of tyres proved unfavourable to Pirelli Pneus, the Group nevertheless maintains that it has a good chance of winning having assessed the intra-group transactions in question pursuant The subsidiary Pirelli Pneus is involved in a tax disputes with the to the provisions of the legislation in force for the time being, Brazilian tax authorities concerning the IPI tax with particular which should prevail over the aforementioned administrative reference to the tax rate applicable to the production and practice (IN 243) of the Brazilian tax authorities. importation of tyres for the Sport Utility Vehicle (SUV), Vans The risk is estimated at approximately euro 35 million, inclusive and other industrial transportation vehicles (such as, for of tax, interests and penalties. example, trucks). The risk of losing has not been assessed as probable and, According to statements by the Brazilian tax authorities in the therefore, no provision has been set aside in the Financial tax assessment notices issued during the course of 2015 and Statements for this dispute. 2017, the aforementioned tyres should have been subjected to the IPI tax rate for the production and importation of tyres for cars – an applicable rate of 15% - instead of the 2% rate Disputes concerning the IPI tax rate with respect to the sale of tyres to the automotive sector Pirelli Pneus is involved in a dispute concerning the IPI tax rate, With reference to the dispute concerning the ICMS tax receivables (Imposto Sobre Operações Relativas à Circulação or state value applied by Pirelli Pneus, as provided for the production and added tax) assigned by the State of Santa Catarina, Pirelli Pneus Ltda received notices of assessment which disavowed the ICMS tax importation of tyres for heavy industrial use vehicles. To date, (Imposto sobre Produtos Industrializados or tax on industrialised receivables. The claim was motioned by the State of São Paulo, according to which Pirelli Pneus benefited from the ICMS tax credits the dispute is pending before the competent administrative products) also with reference to a case of the sale of assigned by the State of Santa Catarina, but which were deemed to have been unlawful from the start in that they were assigned by and tax commissions and, despite a first unfavourable decision components to companies operating in the automotive sector. the latter in violation of the Brazilian Constitution, in the absence of a previous agreement between the various States. The dispute regarding the assessment relating to the 2015 fiscal period, According to the Brazilian tax authorities claim as stated in a has been presented before the competent administrative and tax commissions and, despite the first decisions not being favourable the Group maintains that it has a good chance of winning. notice of assessment issued in 2013, Pirelli Pneus should not to Pirelli Pneus, the Group maintains that it has a good chance of winning the next court of law. This position is also supported by an appraisal prepared by a benefit, with reference to its secondary office established in This assessment was based on an orientation in favour of the tax payer whose legal position is strengthening, in particular, as with Brazilian government institution (the INT - National Institute the city of Ibiritè in the Federal State of Minas Gerais, form ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statementsthe IPI tax rate exemption as provided for by law in the case to the Brazilian tax authorities, should not benefit from of sales of certain components to companies operating in the the provision for tax exemption - approximately euro 11 INCOME STATEMENT automotive sector. million inclusive of taxes, interests and penalties; As mentioned in preceding Note 2, it is to be noted that as a result of the assignment by Pirelli & C. S.p.A. of the TP Industrial Holding The Group maintains that it has well founded reasons to (ii) the so called “Desenvolve” dispute, and a dispute relative S.p.A. shares, the company into which almost all of Pirelli’s Industrial assets were merged, to Marco Polo International Holding Italy object to the tax administration’s claim. In particular, both the to a fiscal incentive which is recognised by the Federal S.p.A., the Industrial business qualified as a “discontinued operation”. Pursuant to the provisions of IFRS 5, the results for the period legislation applicable to this case regarding the IPI tax rate, State of Bahia but which, as claimed by the Brazilian tax for the “discontinued operation” were reclassified to the Income Statement as a single item, “net income (loss) related to discontinued and the precedences in case law for similar cases appear to authorities was incorrectly calculated by Pirelli Pneus - operations”. The comparative 2016 figures were appropriately reclassified pursuant to IFRS 5. support this position. The risk is estimated at approximately approximately euro 9 million inclusive of taxes, penalties euro 21 million, inclusive of tax, interests and penalties. and interest; The risk of losing has not been assessed as probable and, (iii) a dispute relating to import customs costs for natural therefore, no provision has been set aside in the Financial rubber which, in the opinion of the Brazilian tax authorities, 29. REVENUES FROM SALES AND SERVICES Statements for this dispute. was underestimated by not taking into account the value Revenues from sales and services were as follows: Other Pirelli Pneus disputes of the intra-group royalties paid - approximately euro 10 million inclusive of taxes, penalties and interest. Pirelli Pneus is involved in three other tax disputes concerning For all three of the aforementioned disputes, also on the basis federal taxes and excises (such as the IPI, the PIS and the of the results of the first levels of judgement, the risk of losing Revenues from sales of goods COFINS) as well as the ICMS. In particular, Pirelli Pneus is has not been assessed as probable and, therefore, no provision involved in certain administrative and judicial proceedings has been made in the Financial Statements for these disputes. Revenues from services Total aimed at ensuring that their own reasons prevail over those of the tax authorities, with reference to: (i) the so called “Operação Vulcano” with regard to the exportation of goods to Paraguay in which, according 3 5 6 30. OTHER REVENUES The item is composed as follows: Other income from Prometeon Group Sales of Industrial products Gains on disposal of property, plant and equipment Rent income Insurance indemnities and other refunds Recoveries and reimbursements Government grants Other income Total (In thousands of euro) 2017 2016 5,202,962 4,829,120 149,321 147,276 5,352,283 4,976,396 (In thousands of euro) 2017 2016 223,542 223,482 1,865 3,759 18,118 59,871 8,596 89,300 211,773 282,526 43,835 7,000 9,713 73,179 6,875 61,324 628,533 696,225 7 5 3 The item other income from the Prometeon Group mainly includes sales of raw materials for the amount of euro 112,522 thousand, semi-finished products and materials for the amount of euro 29,077 thousand, and services rendered for the amount of euro 43,228 thousand paid to the companies of the Prometeon Group. Refer also to Note 42 – “Related party transactions”. The item sales of industrial products mainly refers to revenues and income generated by the sale of tyres for buses and trucks carried out by way of a distribution network controlled by the Group. The item gains on the disposal of property, plant and equipment at December 31, 2016 referred mainly to the sale of real estate in Milan, Italy used for R&D for euro 27,199 thousand, in Basel, Switzerland for euro 12,336 thousand and in San Donato, Italy for euro 2,199 thousand. ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsThe item insurance indemnities and other refunds includes an amount received in respect of a settlement agreement linked to the closing of an insurance policy in Italy for euro 6,815 thousand. The item recoveries and reimbursements includes, in particular:  > refunds of taxes and duties for a total of euro 27,321 thousand, received in Italy amounting to euro 10,673 thousand, and in Germany amounting to euro 3,334 thousand in grants for tyre disposals and gas and energy purchases, and in Brazil amounting to euro 12,099 thousand in refunds for IVA (value added tax) credits;  > tax refunds totalling euro 9,933 thousand arising from tax incentives obtained in Argentina and in the state of Bahia, Brazil for commercial exports;  > proceeds from the sale of tyres and scrap materials obtained from the United Kingdom for a total of euro 5,283 thousand;  > income from the sale of tyres for testing and the recovery of transport expenses incurred in Germany for euro 2,718 thousand;  > rebates from utilities (electricity) of euro 2,243 thousand. 32. DEPRECIATION, AMORTISATION AND IMPAIRMENTS The item is composed as follows: Amortisation Depreciation Impairment of property, plant and equipment (In thousands of euro) 2017 2016 120,196 250,673 588 114,961 227,623 - Total 371,457 342,584 The item other income includes income from sporting activities amounting to euro 32,963 thousand. 33. OTHER COSTS Other income for the previous financial year included non-recurring events amounting to euro 41,734 thousand (6% of the total) The item is subdivided as follows: which referred to capital gains from real estate. (Refer to Note 41). 31. PERSONNEL EXPENSES The item is composed as follows: Selling costs Purchases of goods for resale Purchases of natural rubber for Prometeon Group 3 5 8 (In thousands of euro) Fluids and energy Wages and salaries Social security and welfare contributions Costs for employee leaving indemnities and similar Costs for defined contribution pension funds Costs for defined benefit pension funds Costs for jubilee awards Costs for defined contribution healthcare plans Other costs Total 2017 2016 787,798 181,660 17,177 21,689 (5,928) 3,748 20,457 8,046 746,492 169,447 17,291 20,889 799 5,044 18,861 7,485 Advertising Consultants Maintenance Warehouse operating costs Lease, rental and lease installments Outsourcing Travel expenses IT expenses Key managers compensations Other provisions 1,034,647 986,308 Duty stamps, duties and local taxes The item personnel expenses for 2017 includes non-recurring events for a total of euro 2,578 thousand (0.2% of the total) for the retention plan (Refer to Note 41). Canteen Bad debts Insurance Cleaning expenses Waste disposal Security expenses Telephone expenses Other Total 9 5 3 (In thousands of euro) 2017 2016 306,108 478,745 106,331 159,830 286,178 56,656 56,112 70,381 285,162 491,093 88,602 150,143 272,091 62,481 54,545 59,165 121,984 114,854 73,643 57,461 33,547 9,610 33,063 36,422 18,101 17,659 30,937 15,892 18,302 10,773 11,098 65,753 53,859 30,609 7,388 20,622 33,799 15,881 16,619 27,060 14,422 17,568 10,863 10,723 175,827 193,431 2,184,660 2,096,733 The item other costs for 2017 includes non-recurring events for a total of euro 70,146 thousand (3.2% of the total) mainly refers to costs incurred for the IPO process. (Refer to Note 41). ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements34. NET INCOME (LOSS) FROM EQUITY INVESTMENTS 34.1 Share of the net income (loss) from equity investments in associates and joint ventures The share of the net income (loss) from equity investments in associates and joint ventures was evaluated using the equity method and was negative to the amount of euro 8,252 thousand, and refers mainly to investments in Prelios S.p.A. (negative at euro 3,118 thousand), in Focus Investments S.p.A. (negative at euro 759 thousand), and in the joint venture PT Evoluzione Tyres in Indonesia (negative at euro 9,613 thousand) and offset by the positive pro-rata results for Fenice S.r.l at euro 5,002 thousand. For further details reference should be made to preceding Note 11 “Investments in Associates and Joint Ventures”. 34.2 Gains on equity investments 35. FINANCIAL INCOME The item is composed as follows: Interest Other financial income Net gains on exchange rates Total (In thousands of euro) 2017 2016 17,098 9,285 102,157 128,540 32,254 10,552 - 42,806 (In thousands of euro) The item interest includes euro 5,752 thousand for interest on fixed income securities, euro 3,918 thousand for interest receivables 2017 2016 due from financial institutions, and euro 1,734 thousand for interest on trade receivables. Capital gain on disposal of investment in Prelios S.p.A. Release of Fenice S.r.l. impairment Other gains on equity investments Total 5,809 - 188 5,997 - 7,364 933 8,297 The item other financial income mainly includes euro 8,944 thousand for interest matured on tax credits (tax receivables) and on security deposits provided by the Brazilian subsidiaries as a guarantee for legal and tax disputes. The item net gains (losses) on exchange rates which amounted to euro 102,157 thousand (losses on exchange rates amounted to euro 1,501,768 thousand and gains which amounted to euro 1,603,925 thousand) refers to the adjustment at end of period exchange rates to items expressed in currencies other than the functional currency and still outstanding at the reporting date, and to the net 3 6 0 Gains on equity investments amounted to euro 5,997 thousand and refer mainly to capital gains following the disposal of the gains realised on items closed during the course of the financial year. investment in Prelios S.p.A. (euro 5,809 thousand). For further details reference should be made to preceding Note 11 “Investments in 1 6 3 associates and Joint Ventures”. 34.3 Losses on equity investments Impairment of investments in associates Impairment of available-for-sale financial assets Other losses on equity investments Total (In thousands of euro) 2017 2016 754 13,416 264 14,434 20,987 11,067 1,685 33,739 36. FINANCIAL EXPENSES The item is composed as follows: Interest Commissions Other financial expenses Net losses on exchange rates Net interest costs on employee benefit obligations Valuation at fair value of securities held for trading This item for the financial year amounted to euro 14,434 thousand and refers mainly to the investments in Pirelli de Venezuela C.A. Valuation at fair value of exchange rate derivatives (euro 7,616 thousand), in Equinox Two S.C.A. (euro 3,062 thousand), in Emittenti Titoli S.p.A. (euro 1,441 thousand) and in Alitalia Valuation at fair value of other derivatives (In thousands of euro) 2017 2016 255,096 330,742 29,587 9,250 - 7,295 - 189,922 - 58,187 8,694 18,100 9,547 12 38,744 5,970 S.p.A. (euro 781 thousand). Total 491,150 469,996 34.4 Dividends This item amounted to euro 9,834 thousand and mainly includes dividends received from Mediobanca S.p.A. to the amount of euro 5,829 thousand (euro 4,253 thousand for 2016), from Equinox Two S.C.A. to the amount of euro 3,049 thousand, The item interest includes euro 47,070 thousand relative to the new unsecured (Facilities) financing granted to Pirelli & C. S.p.A. and from Fin. Priv. S.r.l. to the amount of euro 757 thousand (euro 554 thousand for 2016). and Pirelli International Plc subscribed to on June 27, 2017 and euro 154,323 thousand relative to the new secured (Senior Facilities) financing granted to Pirelli & C. S.p.A. and Pirelli International Plc, which was repaid early on June 29, 2017, of which euro 61,244 thousand refers to the consequent reversal to Income Statement of the portion of costs not amortised at the closing date. The item also includes euro 14,045 thousand for net interest income on hedging instruments on interest rates and exchange rates (Cross Currency Interest Rate Swap). For further details reference should be made to Note 27 “Derivative financial instruments”. ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsThe item also includes euro 12,466 thousand relative to the bond placed by Pirelli International Plc on the Eurobond market in November 2014. The reconciliation between theoretical and effective taxes is as follows: The item commissions includes in particular euro 10,680 thousand relative to costs for operations for the assignment of receivables with pro-soluto clauses mainly in LatAm, Italy and Germany, and euro 5,969 thousand for commitment fees incurred by Pirelli & C. S.p.A. and Pirelli International Plc for the revolving credit facility. The item valuation at fair value of exchange rate derivatives refers to the purchase/sale of the forward exchange rate hedge contracts to cover commercial and financial transactions in accordance with the exchange rate risk management policy of the Group. For transactions still open at the end of the financial year, the fair value was determined using the forward exchange rate at the reporting date. The valuation at fair value is composed of two elements: the interest component which is tied to the interest A) Net income (loss) before taxes B) Theoretical taxes Main causes for changes between estimated and effective taxes: Tax incentives foreign subsidiaries Non-deductible costs rate spread between the currencies which are subject to the individual hedges, equal to a net cost of euro 53,324 thousand, and the Deferred tax assets recognised on tax losses and other items related to previous periods exchange rate component at a net cost of euro 136,598 thousand. In comparing the net losses on exchange rates, which totalled euro 102,157 thousand, with the valuation at fair value of the exchange rate component of derivatives for hedging exchange rates which totalled to a net cost of euro 136,598 thousand, there results a negative imbalance of euro 34,441 thousand. The foreign exchange loss was mainly incurred in Argentina, where, compared to the impairment of the Argentine peso of approximately 15% compared to the previous financial year, the costs of coverage would have been equal to approximately 25% of the exposure in foreign currency. The item other financial expenses include non-recurring events for a total of euro 61,244 thousand (12.5% of the total) relative to the early closure of secured funding (“Senior Facilities”) as described in the item entitled interest. During the 2016 financial year, the Use of Italian prior years tax losses on which no deferred tax assets were recognised Change in tax rates on deferred taxes recognized due to change in nominal tax rates Taxes not related to income Other C) Effective taxes Theoretical tax rate (B/A) Effective tax rate (C/A) (In thousands of euro) 2017 304,118 82,112 (10,700) 33,600 (80,552) (37,600) 9,300 23,600 21,088 40,848 27% 13% amount of euro 25,390 thousand (5.4% of the total) referred to the “Make Whole Issuer Call” fee for the financial year in relation to the The Group’s theoretical tax burden is calculated taking into account the nominal tax rates of the countries where the Group’s 3 6 2 early closure of the USD Private Placement bond (Refer to Note 41). principal companies operate, as shown below: 37. TAXES Taxes were composed as follows: Current taxes Deferred taxes Total (In thousands of euro) 2017 2016 162,382 120,980 (121,534) (45,724) 40,848 75,256 Tax expenses for 2017 amounted to euro 40,848 thousand against pre-tax earnings of euro 304,118 thousand. The tax rate for 2017 was positively impacted by the detection of deferred tax assets on tax losses and other temporary differences recognised during the financial year (surplus gross operating income for the share of interest payables which were not deducted and the ACE tax concession) pertinent to the Italian companies. Non-recurring events to the amount of euro 103,881 thousand were included under taxes, and mainly refer to the recognition of the deferred tax assets (pre-paid taxes) of the Italian companies (Refer to Note 41). Europe Italy Germany Romania Great Britain Turkey Russia NAFTA USA Mexico Central and South America Argentina Brazil Asia / Pacific China (In thousands of euro) 3 6 3 2017 2016 27.90% 30.00% 16.00% 19.00% 20.00% 20.00% 38.00% 30.00% 35.00% 34.00% 31.40% 30.00% 16.00% 20.00% 20.00% 20.00% 38.00% 30.00% 35.00% 34.00% 25.00% 25.00% ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsThe share of taxes paid by geographical area was as follows: 39. EARNINGS/(LOSSES) PER SHARE  > 44% Europe;  > 21% LatAm;  > 23% Apac;  > 9% NAFTA;  > 3% Russia and MEAI. The earnings/(losses) per share are given by the ratio between the earnings/losses attributable to the Parent Company and the weighted average of the number of ordinary shares outstanding during the period, with the exclusion of treasury shares. (In thousands of euro) 2017 2016 263,955 853,232 0.309 154,809 706,464 0.219 The term paid taxes refers to the total amount of income taxes effectively paid during the tax period by the Group companies to the respective jurisdictions of tax residence, to income tax payments paid in 2017, to income taxes paid during the course of 2017 but relative to previous financial years (e.g. income tax balances relative to 2016) or to payments relative to tax assessments for previous annuities. The taxes paid also include withholding taxes incurred on the cross-border payments of dividends, interest and royalties which have been reported in the tax residence jurisdictions of the recipient. Net income attributable to the Parent Company related to continuing operations Weighted average number of ordinary shares outstanding (in thousands) Earnings/(loss) per share related to continuing operations (in euro per share) 38. ASSETS AND LIABILITIES HELD FOR SALE AND DISCONTINUED OPERATIONS As a result of the assignment by Pirelli & C. S.p.A of TP Industrial Holding S.p.A. shares, to Marco Polo International Holding Italy Net income attributable to the Parent Company related to discontinued operations (87,563) (19,746) Weighted average number of ordinary shares outstanding (in thousands) Earnings/(loss) per share related to discontinued operations (in euro per share) 853,232 (0.103) 706,464 (0.028) S.p.A., which occurred on March 15, 2017, the Industrial business qualified as a “discontinued operation”. The table below shows the It is to be noted that the number of shares used to calculate earnings per share reflects all the transactions detailed in Note 20 “Equity”. Income Statement figures for 2017 for the first quarter for the Industrial business, as well as the results for the twelve months for certain residual Industrial activities currently undergoing separation. The comparable financial data for 2016 was appropriately It is also to be noted that the earnings/(loss) per base share and per diluted share are the same as there was no potential issue of reclassified pursuant to IFRS 5. shares with dilutive effects on the results. 3 6 4 (In thousands of euro) 2017 2016 40. DIVIDENDS PER SHARE 5 6 3 Revenues from sales and services Other income Changes in inventories of unfinished, semi-finished and finished products Raw materials and consumables used (net of change in inventories) Personnel expenses Amortisation, depreciation and impairment Other costs Increase in fixed assets for internal work Operating income (loss) Financial income Financial expenses Net income (loss) before tax Tax Net income (loss) Reversal of reserve on foreign currency translation Total net income (loss) from discontinued operations 232,801 156,187 49,550 (184,027) (71,558) (18,772) (161,863) 46 2,364 1,670 860,264 59,692 (21,614) (473,445) (231,470) (49,220) (106,702) 197 37,702 8,370 (10,200) (21,385) (6,166) (1,189) (7,355) (80,208) (87,563) 24,687 (41,049) (16,362) - (16,362) The value of the “assets held for sale” (euro 60,729 thousand) is mainly attributable to the Industrial production plants held by the Chinese controlled company, which will be sold to the Prometeon Group during the course of 2018. In 2017, Pirelli & C. S.p.A did not distribute any dividends to its shareholders. 41. NON-RECURRING EVENTS Pursuant to CONSOB Notification No. DEM/6064293 of July 28, 2006, the impact on the Group’s income, financial position and equity for non-recurring events and operations, was as follows: Financial statement (a) Operating costs Financial expenses Tax Total impact non recurring items (b) Total adjusted (a-b) Equity Net income (loss) for the financial year Cash flows (millions of euro) 4,177.0 (72.7) (61.2) 103.9 (30.0) 4,207.0 175.7 (72.7) (61.2) 103.9 (30.0) 205.7 (342.8) (31.2) 0.0 0.0 (31.2) (311.6) ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsThe impact on the individual items of the consolidated Income Statement was as follows: 42. RELATED PARTY TRANSACTIONS (millions of euro) The following table summarises the items from the Statement of Financial Position and the Income Statement and which include 2017 2016 related party transactions and their relative impact. Other revenues: - Gain on disposal of property, plant and equipment - 41.7 Personnel expenses : - Retention Plan Other costs: - Industrial Reorganization - IPO costs - Other Impact on operating income Financial expenses: - Refinancing impact June 2017 transaction costs - Fee related to the "Make Whole Issuer Call" for the anticipated closing of USD Private Placement bond loan Impact on net income (loss) before tax Tax: (2.6) (2.1) (61.9) (6.1) (72.7) (61.2) - (133.9) - - - (23.7) 18.0 - (25.4) (7.4) - Recognition of deferred tax assets of italian companies and operating income adjustments and financial expenses 103.9 1.3 3 6 6 Impact on net income (loss) from continuing operations Impact on net income (loss) (30.0) (30.0) (6.1) (6.1) The impact of non-recurring events on the operating income (loss) for the 2017 financial year amounted to a total of euro 72.7 million and differs from the value reported in Directors’ Report on Operations relative to non-recurring and restructuring expenses (euro 93.2 million), in that it did not include restructuring expenses which amounted to a total of euro 20.6 million euros. STATEMENT OF FINANCIAL POSITION 12/31/2017 of which related parties % incidence 12/31/2016 Non current assets (In millions of euro) of which related parties % incidence Other receivables 204.1 12.0 5.88% 226.9 6.6 2.93% Current assets Trade receivables Other receivables Income tax receivables Non-current liabilities Borrowings from banks and other financial institutions Current liabilities Borrowings from banks and other financial institutions Trade payables Other payables Income tax payables 652.5 400.5 35.5 62.7 36.5 0.1 9.61% 9.11% 0.17% 679.3 275.6 64.4 2.8 6.2 - 0.41% 2.24% 0.0% 3,897.1 - - 5,946.0 0.6 0.01% 559.2 - - 642.0 0.8 0.12% 1,673.6 198.0 565.3 48.4 16.4 9.9 11.83% 2.91% 20.44% 1,498.5 22.6 1.51% 783.1 41.8 - - - - 7 6 3 INCOME STATEMENT 2017 of which related parties % incidence 2016 of which related parties % incidence (in millions of euro) Revenue from sales and services 5,352.3 10.8 0.20% 4,976.4 Other income 628.5 230.6 36.69% 696.2 Raw materials and consumables used (1,859.8) (46.5) 2.50% (1,540.5) Personnel expenses (1,034.6) (11.0) 1.06% (986.3) Other costs (2,184.7) (375.0) 17.16% (2,096.7) Financial income 128.5 35.3 Financial expenses (491.2) (41.1) 27.48% 8.36% 42.8 (470.0) 3.5 2.3 - (9.0) (29.7) 0.2 - Net income (loss) from equity investments Net income (loss) from discontinued operations (6.9) (8.3) 120.38% (20.0) (1.2) (87.6) (9.5) 10.90% (16.4) - 0,00% 0.07% 0.33% 0.00% 0.91% 1.42% 0.49% 0.0% 6.13% ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements(in millions of euro) TRANSACTIONS WITH OTHER RELATED PARTIES (In millions of euro) With reference to the transactions with Prometeon Group the economic values reported on the table refer to the whole 2017 even if the Prometeon Group became related party starting from March the 15th, 2017, when Pirelli & C S.p.A. assigned the shares of TP Industri Holding S.p.A. to Marco Polo International Holding Italy S.p.A.. Revenues from sales and services 8.4 Tyre S.p.A. (euro 1.9 million) and Pirelli Pneus Ltda (euro 4.1 million) and This item mainly refers to the sale of goods and services rendered by Pirelli CASH FLOW 2017 of which related parties % incidence 2016 of which related parties % incidence Net cash flows operating activities: Trade receivables Trade payables Other receivables/payables Net cash flows investing activities: 73.6 447.4 (39.4) 90.6 86.2 70.5 122.97% 19.27% 144.9 201.8 n.s. (38.5) Disposal of property, plant and equipment 73.5 61.0 82.99% 91.6 - - - - - - - - Repayment of share capital and reserves from associates Disposals (Acquisition) of investments in associates and JV Net cash flows financing activities: Change in Financial receivables/ Securities held for trading 8.6 8.6 100.00% 100.4 100.4 100.00% Other income 230.6 17.2 - - (4.7) (4.7) 100.00% 218.0 190.0 87.14% (44.3) - - services rendered to the Hangar Bicocca Foundation (euro 1.9 million). It referes to royalties from Aeolus related to the licence contract signed on 2016 (euro 7 million). In addition, it refers to other income from Prometeon Group for: - Natural rubber sales: euro 112.5 million - Raw material sales of Pirelli Pneus Ltda to Prometeon Group (euro 26 million) to be transformed under Toll manufacturing contract. - Long term service agreement: euro 18.9 million - Royalties related to brand licence contract: euro 18.4 million - Finished and semifinished product sales: euro 18 million - Logistic services: euro 12.8 million - Transitional service agreement: euro 4.4 million - Other: euro 11.1 million This item mainly includes costs from the Prometeon Group for: - Direct/consumable materials and compound purchases: euro 24.4 million Raw materials and consumables used 46.5 - Semifinished product purchases: euro 13 million - Natural and synthetic rubber purchases: euro 8 million - Other: euro 0.4 million The effects of the related party transactions contained in the Income Statement and the Statement of Financial Position, on the consolidated data for the Pirelli & C. Group at December 31, 2017 were as follows: 3 6 8 TRANSACTIONS WITH ASSOCIATES AND JOINT VENTURES (In millions of euro) Other costs 328.0 This item includes contributions to Fondazione Hangar Bicocca and Fondazione Pirelli (euro 3.2 million) and other costs related to purchases from Prometeon Group for: - Truck product purchases: euro 163 million of which Comercial e Importadora de Pneus Ltda (euro 151 million), for the brasilian sales and distribution network, and other group's companies (euro 12 million). - Car/Moto and semifinished product purchases: euro 151 million of which Pirelli Otomobil Lastikleri A.S. (euro 97.8 million) related to Off-take contract and Pirelli Pneus Ltda (euro 45.8 million) related to Toll manufacturing contract and other (euro 7.4 million) - Externalization: euro 0.2 million - Other: euro 10.6 million 9 6 3 Revenues from sales/services and other income. 2.4 The amount refers mainly to rental income and related rental property management fees received from the Prelios Group (euro 0.5 million), and for services rendered to PT Evoluzione Tyres (euro 0.4 million) and sales of materials and services rendered to Joint Stock Company "Kirov Tyre Plant" (euro 1.4 million). Financial expenses Other costs 37.3 of products from PT Evoluzione Tyres (euro 15.6 million ) and the supply of services by the consortium CORIMAV (euro 0.3 million) and costs for the purchases of materials from Joint Stock Company "Kirov Tyre Plant" (euro 0.3 million) Current trade receivables This item includes acquisition costs for the purchase of energy and machine hire Financial income from Industriekraftwerk Breuberg GmbH (euro 21 million), costs for the acquisition 41.0 34.4 61.0 This item includes financial expenses payables to the Prometeon Group and refers mainly to losses on exchange arising on hedging transactions (euro 38.4 million). This item includes financial income receivables from the Prometeon Group and refers mainly to gains on exchange arising on hedging transactions (euro 29.5 million). This item includes receivables for royalties from Aeolus Tyre Co., Ltd (euro 7 million) and trade receivables to the amount of euro 53.6 million from the Prometeon Group. Financial income 0.9 The amount refers to interest on the loan granted by Pirelli International Plc and Pirelli Tyre S.p.A. to PT Evoluzione Tyres. Financial expenses 0.1 This item mainly refers to expenses payable to International Media Holding S.p.A. Other non-current receivable 12.0 This item refers to the loan granted by Pirelli Tyre S.p.A. to PT Evoluzione Tyres. Current trade receivables 1.8 This item includes receivables for services rendered to Joint Stock Company "Kirov Tyre Plant" (euro 0.4 million) and to PT Evoluzione Tyres (euro 1.4 million). Other current receivables 14.8 The amount refers to a loan granted by Pirelli International Plc to PT Evoluzione Tyres (euro 5.8 million) and to advances received from PT Evoluzione Tyres (euro 4.3 million), and sales of materials and molds to Joint Stock Company "Kirov Tyre Plant" (euro 4.7 million) Current trade payables The amount mainly refers to payables for the purchase of energy 24.0 from Industriekraftwerk Breuberg GmbH and trade payables to PT Evoluzione Tyres and Joint Stock Company "Kirov Tyre Plant" Other current trade payable 0.4 Other payables refers mainly to the acquisition of equipments from Joint Stock Company "Kirov Tyre Plant" Net cash flow investing activities 8.6 The amount refers to the dividends received by Fenice S.r.l.. Current tax receivables 0.1 This item refers mainly to receivables from the companies of the Prometeon Group Other current receivables 21.7 This item refers mainly to receivables from the companies of the Prometeon Group (euro 19.8 million) Trade payables 174.0 This item refers mainly to trade payables to the Prometeon Group (euro 173.9 million) Other current payables 16.1 This item refers mainly to trade payables to the Prometeon Group (euro 16 million) Current tax payables 9.9 This item refers to the companies of the Prometeon Group for tax consolidation interrupted in 2017. Other income discontinued operations 56.4 Sales of Industrial product of Pirelli Tyre Co., Ltd to Prometeon Group Other costs discontinued operations 65.9 Costs for acquisition of Industrial product of Pirelli neumaticos S.A.I.C. from Prometeon Group Net cash flow operating activities 247.3 Working capital change towards Prometeon Group Net cash flow investing activities 61.0 The amount refers to the cash in received for the sale of the know-how license to Prometeon Group. Net cash flow financing activities 190.0 The amount refers to the collection of financial receivables from Prometeon Group. ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsDuring the course of the financial year, the process of separating the Industrial business from the Consumer business was completed. It was implemented as part of the industrial License agreements stipulated in the context of industrial reorganisation In the context of the Industrial Reorganisation, during the course of the 2016 financial year, evaluation and reorganisation project, as provided for by Pirelli Tyre signed a number of licensing agreements with the sale and purchase and co-investment agreement signed, Aeolus and the PTG aimed at allowing them (i) access to the amongst others, by ChemChina, Camfin and LTI in March Premium technology developed by Pirelli in the activities 2015, aimed at strengthening the plans for the development relative to Industrial Tyres, and (ii) the use of some of the of Pirelli’s Consumer Activities and the protection of trademarks owned by the Pirelli Group. geographically strategic areas, as well as to separate and give independent importance to the activities related to the production and commercialisation in Italy and/or abroad of License agreement with Aeolus On June 28, 2016, Pirelli Tyre signed a patent and know-how As described in the following table, the Aeolus License Agreement provides for the payment of royalties as a percentage of turnovers with fixed minimum and pre-fixed maximum amounts which are subject to an annual adjustment, starting from 2019, on the basis of the Euro HICPC index. The royalties percentage may be updated every five years based on certain predetermined performance indicators. If and when Aeolus holds more than 50% of the share capital of PTG If and when Aeolus holds less than 50% of the share capital of PTG Royalty amounts 2016 0 Maximum amount - Royalty amounts 0 Maximum amount - The highest amount between (i) 1% of annual net revenues from sales and (ii) The highest amount between 1% of tyres for heavy vehicles for industrial or agricultural use, or for licensing agreement with Aeolus as well as for technical 2017 euro 7 million from net annual revenues euro 12 million annual net revenues from sales and euro 12 million passenger transport (hereinafter “Industrial Reorganisation”). assistance relative to Industrial Tyres (“Industrial Products”) As a result of the Industrial Reorganisation, the Prometeon with a duration of up until December 31, 2030 with an Tyre Group S.r.l. (formerly Pirelli Industrial S.r.l.), of which automatic bi-annual renewal unless cancelled (the “Aeolus 52% is currently held by Marco Polo International Italy S.p.A. License Agreement”). (“Marco Polo”) through TP Industrial Holding S.p.A. (“TPIH”), of Under the Aeolus License Agreement, the licensee company shall which 38% is currently held by High Grade (HK) Investment have the right to develop, manufacture and sell the Industrial Management Limited, and of which10% is currently held by Tyres, with the right to sub-license to the companies it controls. Aeolus Tyre Co. Ltd., previously included in the Pirelli Financial The license is non-exclusive and Pirelli has undertaken to Statements for 2016 as a direct subsidiary of Pirelli & C. S.p.A., not grant third parties licenses for the production of similar from sales which do not include sales pertaining to PTG and its subsidiaries. The highest amount between (i) 2% of annual net revenues from sales a fixed amount of euro 7 million. 2018 to PTG and its subsidiaries and 1% euro 36 million annual net revenues from sales and euro 20 million which do not include sales pertaining The highest amount between 2% of of annual net revenues from sales pertaining to PTG and its subsidiaries and (ii) euro 25 million. a fixed amount of euro 15 million. The highest amount between (i) 2% of The highest amount between 2% of 2019-2020 annual net revenues from sales and (ii) euro 49 million annual net revenues from sales and euro 22 million a fixed amount of euro 38 million. a fixed amount of euro 17 million. has been classified in the present Financial Statements as Industrial Products which are subject to the Aeolus License The highest amount between (i) The highest amount between 2% of 3 7 0 a Pirelli related party in that it is controlled by ChemChina Agreement for commercial purposes, and therefore to allow (through, amongst others, TPIH and Marco Polo), a company for the creation of a new competitor in the operative sector of which also indirectly controls Pirelli & C. S.p.A.. the licensee company. For the duration of the Aeolus License Agreement, Pirelli shall As of 2021 2% of annual net revenues from euro 54 million annual net revenues from sales and euro 22 million sales and (ii) euro 38 million. a fixed amount of euro 17 million. 1 7 3 The following are the main existing agreements between the provide technical assistance to Aeolus and its subsidiaries, It also provides that the risks associated with the production of tyres (as well as any other business risk) remain the liability of the companies which belong to the Pirelli Group and the group by providing a minimum of twenty and a maximum of thirty licensee, who undertakes to indemnify and hold Pirelli Tyre S.p.A. and its affiliated companies harmless against any damage that may headed by the Prometeon Tyre Group S.r.l. (“PTG”) and the personnel per year for the first five years. arise. This license is limited to the Industrial tyres only as the use of Pirelli technology for different products is excluded. Aeolus Tire Co., Ltd. (“Aeolus”). These agreements were the subject of the disclosure included as part of the Registration Document filed with CONSOB on September 15, 2017, following the notification of authorisation by way of Protocol No. 0106982/17 dated September 15, 2017 drawn up on the occasion of the admission to listing of Pirelli shares, on the Mercato Telematico Azionario (screen-based stock exchange), organised and managed by Borsa Italiana S.p.A.. *** License agreement for know-how with PTG In 2016, Pirelli Tyre signed two know-how licensing agreements with the PTG which concern: (i) the first, effective as of April 1, 2016, is a know-how license relative to the installation and management of plants and machinery which fall under the scope of the PTG, and to the production and quality systems. This license remains effective as long as the relevant know-how does not become public and entails the payment of a one-off royalty fee of approximately euro 61 million, determined on the basis of an evaluation conducted by an independent expert; (ii) the second, effective as of January 1, 2016, is a license for know-how and for patents relative to Industrial processes and products. The license is valid until 2030 with automatic renewals of 5 years unless cancelled. This license provides for the payment of royalties from 2018 onwards. In particular, the royalties expected for 2018 are the higher amount between 1% of the annual net revenues of the PTG and its subsidiaries and euro 10 million, and from 2019 onwards the higher amount between 2% of the annual net revenues of the PTG and its subsidiaries and euro 21 million. On the basis of the provisions of the License Agreement with Aeolus, the license granted to the PTG will cease to have effect following the acquisition of control of the PTG by Aeolus, after which the royalties established by the Aeolus License Agreement shall apply. It also provides that the risks associated with the production of tyres (as well as any other business risk) remain the liability of the licensee, who undertakes to indemnify and hold Pirelli Tyre S.p.A. and its affiliated companies harmless against any damage that may arise. This license is limited to the Industrial tyres only as the use of Pirelli technology for different products is excluded. Brand license agreement with PTG In 2017 Pirelli Tyre signed a new license agreement, which terminated and substituted the previous 2016 agreement, with the PTG for a period of 10 years effective as of January 1, 2017 (with an annual automatic renewal unless cancelled) concerning the non-exclusive ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements3 7 2 license of some of the Pirelli Group’s brands, including the to the PTG and/or its subsidiaries during the phase following PIRELLI and FORMULA brand, for the production and sale of the separation. products relative to the Industrial activities, with the right Business relationships in place with PTG Supply agreements, both active and passive, exist between the (in the Gravatai plant) for Pirelli Pneus Ltda, a Brazilian company controlled by Pirelli, has a duration of up until companies of the Pirelli Group and the PTG or companies December 31, 2018, and is renewable, with financial terms to sub-license to the subsidiaries of the PTG and, from the In Colombia and Turkey, some residual services are rendered controlled by it, concerning raw materials (i.e., natural rubber and conditions which provide for a purchase price which moment when the PTG will be controlled by Aeolus, to Aeolus by the PTG’s local subsidiaries for the benefit of the Pirelli and carbon black) or finished products. These agreements is equal to the cost of production increased by a margin and its other subsidiaries. Group’s local companies, due to temporary needs arising were signed during the course of the 2016 financial year as of 5%, subject to a quarterly review in lieu of any changes This agreement provides for the payment of royalties from the implementation of the segregation process in the part of the Industrial Reorganisation. It is maintained that in the production cost, using a calculation matrix agreed corresponding to 2% of the net sales of the licensee and the pertinent countries. In particular: these relationships do not construe a situation of dependence between the parties; production volumes are determined sub-licensees of the products bearing the licensed trademarks  > in Colombia, the services rendered by the PTG’s local and that, therefore, the interruption or non-renewal of the on the basis of non-binding annual forecasts, agreed by with a minimum guaranteed annual amount of (i) euro 15 subsidiaries for the benefit of the Pirelli Group companies same would not impact the Pirelli Group’s business continuity. the end of November of the previous year, followed by million for 2017 and 2018 and (ii) euro 21 million as of 2019. include, amongst other things, administration and control, binding orders on a monthly basis according to the actual The trademarks subject to licensing may be used only for the treasury, financial coordination, tax management, planning The following is a description of the main supply contracts needs of the customer. The manufacturer guarantees production and commercialisation of tyres related to the and reporting; control of human resources management, stipulated during 2016 by the Pirelli Group in the context of the that the products are free from defects and comply with Industrial activities (any use for products other than those legal labour law support, recruiting, occupational Industrial Reorganisation: the specifications. In the case of serious breaches which licensed is prohibited). The methods of use of the brands must health; and management of claims, for a variable fee (i) the Off-Take contract (i.e. the production on behalf of the the producer is not able to remedy, the customer has the be approved by Pirelli Tyre, and with regard to the PIRELLI commensurate with the actual use of resources, which is customer of products having characteristics as requested right to terminate the contract at short notice. It is to be brand, in the promotional and marketing activities a logo will paid on an annual basis; by the customer, using raw materials purchased by the noted that these supplies are temporary as it is expected be used with different colours compared to that used by Pirelli  > in Turkey, the services rendered by the PTG’s local subsidiaries manufacturer which are specially processed) for the that as of 2018 production will return to being carried out Tyre its Consumer Activities. for the benefit of the Pirelli Group companies include, production of Consumer tyres and some semi-finished by a Pirelli Group company. The license agreement includes specific provisions for the among other things, control activities of human resources, products used by Pirelli for the production of racing tyres, (iii) agreements for the supply of semi-finished products by TP control and approval of the use of the trademarks by Pirelli legal labour law support, recruiting, payroll services, by the Izmit Turkish plant owned by the PTG for Pirelli Endustriyel ve Ticari Lastikler A.S., a company of the PTG, Tyre as regards the quality of the products bearing the industrial relations, sales management for the Original Otomobil Lastikleri A.Ş., a Turkish subsidiary of Pirelli. to various Pirelli Group companies located in Romania and licensed trademarks placed on the market by the licensee (and Equipment channel, marketing, industrial planning, This contract has a duration of up until December 31, Italy, which ceased on December 31, 2017. sub-licensees). PTG and sub-licensees may use the trademarks warehouse planning, quality control, for a variable fee 2018, and is renewable for subsequent 12 month periods, (iv) agreements for the supply of natural rubber from Pirelli licensed only on the products approved by Pirelli Tyre S.p.A. commensurate with the actual use of resources, which is with financial terms and conditions determined on the International Plc to the Alexandria Tire Company SAE, who also has the right to carry out inspections at the locations paid on an annual basis. basis of the production cost which is increased by a Prometeon Turkey Endustriyel ve Ticari Lastikler Anonim of the PTG and its sub-licensees for the verification of the In more detail, the following types of agreements have been margin of 7%. In order to ensure that the characteristics Şirketi, and TP Industrial de Pneus Brasil Ltda, respectively correct compliance with contractual obligations. It also signed: of the products meet the specifications indicated, Pirelli Egyptian, Turkish and Brazilian companies controlled by provides that the risks associated with the production of (i) the so called Long Term Services Agreements (LTA), has reserved the right to carry out quality controls during the PTG, which have a duration of up until December tyres (as well as any other business risk) remain the liability relative to the supply of services in the fields of Information the various processing phases. The producer cannot 31, 2017, are renewable and provide financial terms and of the licensee, who undertakes to indemnify and hold Pirelli Technology, purchasing and logistics. These contracts sub-contract production to third parties and must conditions determined by using the share price of the raw Tyre S.p.A. and its affiliated companies harmless against any have a multi-year duration and unless otherwise agreed manufacture only at the plants approved by the client; material increased by a spread in order to remunerate damage that may arise. between the parties, will cease to be effective respectively, only products that meet the agreed specifications can the assets and risks borne by the supplier. This trade Withdrawal clauses are not included in the license agreement. at December 31, 2020 for IT services and purchasing, and at bear the Pirelli trademark; any non-conforming products relationship ended in 2017. There are termination clauses for the failure to fulfil obligations December 31, 2019 for logistics related services; shall be destroyed; production volumes are determined (v) agreements for the supply of carbon black between the and resolution clauses protecting Pirelli Tyre for situations (ii) the so called Transitional Services Agreements (TSA) for on the basis of non-binding annual forecasts, agreed International Tire Company LLC, a company belonging to concerning the quality of the products, the unauthorised use the provision of a wider range of services for different areas by November of the previous year, followed by binding the group headed by the PTG, to Pirelli Tyres Romania S.r.l., of trademarks, and in case the separate license for the use of and sectors for each country depending on and within the orders on a monthly basis according to the actual needs to Pirelli Deutschland GmbH and to Pirelli UK Tyres Ltd, the technology granted by Pirelli Tyre is terminated. limits of the specific needs there present, (e.g. staff, finance, of the customer. The manufacturer guarantees that respectively Romanian, German and English companies administration and control, HR, sales and marketing, and the products are free from defects and comply with the controlled by Pirelli, all of which had a duration of up until quality control). These contracts are renewable annually. specifications. In the case of serious breaches which the December 31, 2017, and were further renewable. Service contracts stipulated in the context of the Industrial Reorganisation Again, during the course of the 2016 financial year, in context of the separation from the The next expiry has been fixed as December 31, 2018. producer is not able to remedy, the customer has the The aforesaid Off-Take and Toll Manufacturing agreements Both the LTA and TSA provide for payment at market conditions right to terminate the contract at short notice. provide that the information obtained in the execution of determined by the value enhancement of services on a cost- (ii) the Toll Manufacturing contract (i.e. the production on the contract may also only be used only for the purposes of Pirelli Group of the activities relative to Industrial Tyres, the plus basis. The fee due for each service was determined based behalf of the customer of products having characteristics the contract, and exclude any license or right to use the same Pirelli Group, on the one hand, and the PTG and some of its on the estimate of the cost of resources dedicated to providing as requested by the customer, using raw materials information to produce Consumer products outside the two subsidiaries on the other, signed several service contracts the service. The cost-plus principle corresponds to the cost of supplied by the same customer to the manufacturer for existing contracts. There are no provisions with non-compete of different duration aimed at the temporary supply on human resources increased by a profit percentage expressly the purpose of the execution of the contract) for the or exclusive obligations. the part of the Pirelli Group of wide-ranging services and reported in each contract. production of motorcycle tyres by TP Industrial de Pneus It is also be noted that during the course of the 2016 financial assistance in order to guarantee full operational continuity Brasil Ltda, a Brazilian company controlled by the PTG year, as part of the Industrial Reorganisation, the International 3 7 3 ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsTire Company LLC and Pirelli Tyre (Suisse) S.A., a Swiss company limited to “Qualified Institutional Buyers” pursuant to Rule 144 A of The LTI (Long Term Incentive) Plan was approved – also in Executive Vice President and Chief Commercial Officer Roberto controlled by Pirelli, signed a distribution contract for Consumer the United States Securities Act of 1933, through an accelerated accordance with article 2389 of the civil code – at the proposal Righi; the Senior Vice President Manufacturing, Francesco Sala; tyres, for the import and distribution of Pirelli Consumer tyres book-building procedure. On January 11, 2018 Pirelli announced of the Remuneration Committee and with the favourable the Executive Vice President Business Unit Prestige & Motorsport on a non-exclusive basis by International Tire Company LLC in that it had successfully completed the disposal – through opinion of the Board of Statutory Auditors, in relation to the & COO Region Europe, Andrea Casaluci and the Executive Vice the Egyptian territory. This contract, with an annual duration is the aforesaid procedure - of 15,753,367 ordinary shares held in subjects for whom this opinion is requested. In the part linked President Pirelli Digital, Luigi Staccoli. The LTI plan also applies automatically renewable from year to year unless cancelled by Mediobanca - which corresponded to approximately 1.8% of to Total Shareholder Return, the LTI Plan will be submitted for to senior managers and Executives of the Group (including way of written notification with at least 90 days notice, provides the share capital with voting rights, and which represented approval at the Shareholders’ meeting called to approve board member Giovanni Tronchetti Provera) and can be for the purchase price of the products as covered by the contract the entire investment held directly by Pirelli in Mediobanca. results for the 12 months ended on 31 December 2017. also extended to those who, during the course of the 3-year (i.e. Consumer tyres) which is equal to that indicated in the The total net income for Pirelli derived from the operation The LTI Plan, in line with the mechanisms of variable period, assume, either through internal career growth or Pirelli price list on the date of the order. It is expected that this amounted to approximately euro 152.8 million. retribution adopted at the international level, is also based new hiring, an Executive position. commercial relationship will end during the 2018 financial year. on the performance of Pirelli shares (Total Shareholder Return) Even after the separation of the Pirelli Group from the Industrial On January 22, 2018 as part of the EMTN (Euro Medium Term allowing in this way the alignment of management and The LTI Plan is also aimed at retention. In the event that activities, some residual activities relative to Industrial tyres Note) program approved at the end of 2017 and subscribed to shareholder interests. the employee relationship ends before the end of the 3-year were still held by the Pirelli Group itself, particularly in Argentina on January 10, 2018, Pirelli placed a bond loan with international The LTI Plan – as in the past totally self-financed, in so far as period, with the exception of natural circumstances, the and China. institutional investors for a nominal amount of euro 600 the relative charges are included in the economic figures of recipient’s ceases to participate in the LTI Plan and as a In addition, there remain the following residual commercial million with a five-year duration at a fixed rate. The issue, the industrial plan – includes an on/off condition, represented consequence the LTI premium will not be provided, not even relationships involving the supply of Industrial Tyres: (a) the with a yield of 110 basis points based on the official reference by the company’s deleveraging (Net Financial Position/Ebitda pro-quota. In the case of Board Members holding particular PTG’s Brazilian subsidiary, TP Industrial de Pneus Brasil Ltda, sells rate, allowed for the debt to be optimised by lengthening Adjusted ratio below 2 times on 31 December 2020) and the roles to whom specific attributions are delegated (it is the case to Pirelli’s Argentinian subsidiary, Pirelli Neumaticos S.A.I.C., (b) maturities and reducing the cost of the debt. As evidence of following targets: of the Executive Vice Chairman and Chief Executive Officer the PTG’s Brazilian subsidiary, TP Industrial de Pneus Brasil Ltda investor confidence towards Pirelli, at closing, the loan saw the  > Group Return on Sales (ROS), with a weight at target of Mr. Marco Tronchetti Provera) who cease in the role because sells to Pirelli’s Chilean subsidiary, Pirelli Neumaticos Chile Ltda, collection of orders amounting to euro 2.4 billion on the part 30% of the LTI premium; their mandate has been completed and are not subsequently (c) Pirelli’s Chinese subsidiary Pirelli Tyre Co., Ltd, sells to the PTG, of 280 international investors. The effective yield at maturity  > Group “absolute” Total Shareholder Return, with a weight nominated, not even as board members, pro-quota payment (d) the PTG’s Swiss subsidiary, Prometeon Tyre Group (Suisse) is set as equal to 1.479%. The securities have been listed on the at target of 40% of the LTI premium; of the LTI premium is foreseen. SA, sells to Pirelli’s Australian subsidiary, Pirelli Tyres Australia Luxembourg Stock Exchange. Furthermore, during the course  > Group “relative” Total Shareholder Return compared with a For further information on the functioning of the LTI Plan, Pty Ltd, (e) the PTG’s Brazilian subsidiary, TP Industrial de Pneus of the first weeks of January, Pirelli initiated an operation to selected panel of peers, with a weight at target of 20% of one may refer to the Remuneration Report which will be Brasil Ltda, sells to Comercial e Importadora de Pneus Ltda, (f) amend the financial terms and conditions of the Group’s main the LTI premium; submitted (for the part relative to Policy in relation to the PTG’s German subsidiary, Prometeon Tyre Deutschland banking facilities - regarding a total notional amount of euro  > Position of Pirelli on the Dow Jones Sustainability World Index Pirelli remuneration for 2017) for a consultative vote of the GMBH sells to Pneumobil Reifen KFZ-Technik GmbH, and (g) the 4.2 billion which includes a revolving credit facility of euro 700 ATX Auto Components sector, with a weight at target of Shareholders’ meeting called to approve results for the year PTG sells to Dackia Aktiebolag. million - which will see an applied reduction to the interest 10% of the LTI premium. ended 31 December 2017, as well as the illustrative report and BENEFITS FOR KEY MANAGERS OF THE COMPANY margin of 30 basis points. The LTI Plan terminates on 31 December 2020 and sets in the the information document relative to the LTI Plan which will second quarter of 2021 the date of the eventual payment of be made available to the public, under the conditions and On February 23, 2018 Pirelli International Plc (a subsidiary of the medium/long term incentive matured, on condition that, modes called for by prevailing law, and also regulation. Pirelli) decided to exercise the option of early repayment and on 31 December 2020, the relationship as an employee of the the subsequent cancellation of the “Pirelli International Plc Euro participant has not ended. The participants in the LTI plan At December 31, 2017 the remuneration payable to key 600,000,000 1.750 per cent. Guaranteed Notes due November 18, include, among others, the Executive Vice Chairman and Chief managers totalled euro 20,614 thousand. The portion relative 2019”, listed on the Luxembourg Stock Exchange and maturing Executive Officer of Pirelli & C., Marco Tronchetti Provera, the to employee benefits was recognised in the Income Statement on November 18, 2019 (the “Notes 2019”). The early repayment, Executive Vice President and Chief Financial Officer, Francesco under “Personnel expenses” for the amount of euro 11,004 which will cover all of the 2019 Notes, and which responds Tanzi; the Executive Vice President and Chief Planning and thousand and under the item “Other Costs” for euro 9,610 to the objective announced for the constant optimisation of Controlling Officer, Maurizio Sala; the Executive Vice President 44. OTHER INFORMATION Research and development expenses Research and development expenses for the 2017 financial year amounted thousand, also in the Income Statement. the Group’s financial structure, will take place through the and Strategic Advisor Technology, Maurizio Boiocchi; the to euro 221.5 million and represented 4.1% of sales. 5 7 3 3 7 4 43.SIGNIFICANT EVENTS SUBSEQUENT TO THE END OF THE YEAR exercise of the “Make Whole Issuer Call” which is provided for by the current Terms and Conditions of the loan. The operation is expected to be finalised by March 31, 2018. On February 26, 2018 the Board of Directors of Pirelli, in line On January 10, 2018 Pirelli launched the sale of the ordinary with that which was announced during the IPO, approved the shares held in Mediobanca S.p.A. and reserved for “qualified adoption of a new 3-year 2018-2020 monetary incentive plan investors” in Italy and institutional investors abroad, pursuant (LTI Plan) – destined to all management (about 290 people) – to Regulation S of the United States Securities Act of 1933 as correlated to the targets for the period 2018/2020 contained in subsequently amended, and in the United States of America the 2017/2020 industrial plan. ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsRemuneration for Directors and Statutory Auditors The compensation paid to the Directors and Statutory Auditors was as follows: Unusual and/or exceptional transactions Pursuant to CONSOB Notice No.6064293 of July 28, 2006, it should be noted that during the 2017 financial year that the Company did not carry out any unusual and/or exceptional transactions as defined in the (In thousands of euro) aforesaid Notice. Directors Statutory Auditors Total 2017 2016 7,554 296 7,850 6,594 280 6,874 Employees The breakdown by category of the average consolidated headcount of employees is as follows: Executives and white collar staff Blue collar staff Temporary workers Total (In thousands of euro) 2017 2016 6,611 22,412 1,621 30,644 6,268 21,121 1,568 28,957 3 7 6 Remuneration for Independent Auditors Pursuant to the applicable laws, the total fees for the 2017 financial year for auditing services and for services other than auditing services rendered by the company PricewaterhouseCoopers S.p.A. and by other entities belonging to its network were as follows. (In thousands of euro) Company that provided the service Company that received the service Partial fees Total fees Independent auditing services (1) PricewaterhouseCoopers S.p.A. Pirelli & C. S.p.A. 1,920 PricewaterhouseCoopers S.p.A. Subsidiaries Network PricewaterhouseCoopers Subsidiaries Independent certification services (2) PricewaterhouseCoopers S.p.A. Pirelli & C. S.p.A. PricewaterhouseCoopers S.p.A. Subsidiaries Network PricewaterhouseCoopers Subsidiaries Services other than auditing (3) PricewaterhouseCoopers S.p.A. Pirelli & C. S.p.A. PricewaterhouseCoopers S.p.A. Subsidiaries Network PricewaterhouseCoopers Subsidiaries Total 708 1,351 1,973 63 43 405 297 759 3,979 53% 2,079 28% 1,461 19% 7,519 100% (1) the item "Independent auditing services" includes 1.850 thousands of euro paid for the audit of the Interim carve out consolidated financial statements of the Consumer Business of Pirelli Group included in the Registration Document released for the IPO of Pirelli & C. S.p.A. in the Milan Stock Exchange, successfully completed on October 4, 2017. (2) the item "Independent certification services" includes mainly amounts paid for certification services for the IPO of Pirelli & C. S.p.A. in the Milan Stock Exchange, successfully completed on October 4, 2017 (1.973 thousands of euro). (3) the item "Services other than auditing" include amounts paid for services other than auditing mainly (1.444 thousands of euro) awarded before October 4, 2017, date of completion of the IPO of Pirelli & C. S.p.A. In the Milan Stock Exchange. Exchange rates The main exchange rates used for consolidation were as follows: Period-end exchanges rates Average exchange rates 12/31/2017 12/31/2016 Change in % 2017 2016 Change in % (local currency vs euro) Swedish Krona Australian Dollar Canadian Dollar Singaporean Dollar U.S. Dollar Taiwan Dollar Swiss Franc 9.8438 1.5346 1.5039 1.6024 1.1993 9.5525 1.4596 1.4188 1.5234 3.05% 5.14% 6.00% 5.19% 1.0541 13.77% 35.6588 34.0748 1.1702 1.0739 Egyptian Pound 21.3245 20.1624 Turkish Lira (new) New Romanian Leu 4.5155 4.6597 3.7099 4.5411 Argentinian Peso 22.3658 16.7497 Mexican Peso 23.6250 21.5539 South African Rand 14.8054 14.4570 Brazilian Real Chinese Renminbi Russian Ruble British Pound Japanese Yen 3.9693 7.8365 3.4042 16.60% 7.3123 68.8668 63.8111 0.8872 0.8562 135.0100 123.4000 4.65% 8.97% 5.76% 21.71% 2.61% 33.53% 9.61% 2.41% 7.17% 7.92% 3.63% 9.41% 9.6339 1.4729 1.4646 1.5587 1.1295 9.4694 1.4880 1.4655 1.5275 1.1069 1.74% (1.01%) (0.06%) 2.04% 2.04% 34.3737 35.7006 (3.72%) 1.1115 1.0902 20.2283 11.0216 4.1174 4.5676 3.3406 4.4898 18.7185 16.3620 21.3756 20.6984 15.0433 16.2618 3.6094 7.6269 3.8603 7.3514 1.95% 83.53% 23.25% 1.73% 14.40% 3.27% (7.49%) (6.50%) 3.75% 65.8497 74.1209 (11.16%) 0.8766 0.8195 126.6909 120.1972 6.97% 5.40% 7 7 3 ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements NET FINANCIAL POSITION SCOPE OF CONSOLIDATION (Alternative performance indicator not provided for by the accounting standards) COMPANIES CONSOLIDATED LINE-BY-LINE Note 12/31/2017 12/31/2016 (In thousands of euro) Current borrowings from banks and other financial institutions Current derivative financial instruments (liabilities) Non-current borrowings from banks and other financial institutions Non current derivative financial instruments (liabilities) Total gross debt Cash and cash equivalents Securities held for trading Current financial receivables and other assets Current derivative financial instruments (assets) Net financial debt * Non-current financial receivables and other assets 23 27 23 27 19 18 15 27 15 559,168 11,248 642,047 35,742 3,897,089 5,945,999 4,522,468 6,623,788 (1,118,437) (1,532,977) (33,027) (36,511) (21,413) (48,597) (29,951) (3,718) 3,313,080 5,008,545 (94,585) (95,714) 54,963 - Belgium Total net financial (liquidity)/debt position 3,218,495 4,912,831 * 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". 3 7 8 Company EUROPE Austria Business Headquarter Currency Share Capital % holding Held by Pirelli GmbH Tyre Wien Euro 726,728 100.00% Pirelli Tyre (Suisse) S.A. Pirelli Tyre (Suisse) S.A. Pirelli Tyres Belux S.A. Tyre Brussels Euro 700,000 100.00% France Pneus Pirelli S.A.S. Tyre Villepinte Euro 1,515,858 100.00% Pirelli Tyre S.p.A. Germany Deutsche Pirelli Reifen Holding GmbH Tyre Breuberg / Odenwald Euro 7,694,943 100.00% Pirelli Tyre S.p.A. Drahtcord Saar Geschaeftsfuehrungs GmbH I.L (in liquidation) Tyre Merzig Dm 60,000 50.00% Driver Handelssysteme GmbH Pirelli Deutschland GmbH Tyre Tyre Pirelli Personal Service GmbH Tyre PK Grundstuecksverwaltungs GmbH Tyre Driver Reifen und KFZ-Technik GmbH (ex Pneumobil Reifen und KFZ-Technik GmbH) Tyre Greece Elastika Pirelli C.S.A. Tyre Breuberg / Odenwald Breuberg / Odenwald Breuberg / Odenwald Hoechst / Odenwald Breuberg / Odenwald Elliniko- Argyroupoli Euro Euro Euro Euro Euro 26,000 100.00% 23,959,100 100.00% 25,000 100.00% 26,000 100.00% 259,225 100.00% Pirelli Deutschland GmbH Deutsche Pirelli Reifen Holding GmbH Deutsche Pirelli Reifen Holding GmbH Deutsche Pirelli Reifen Holding GmbH Deutsche Pirelli Reifen Holding GmbH Deutsche Pirelli Reifen Holding GmbH 9 7 3 Euro 11,630,000 99.90% Pirelli Tyre S.p.A. 0.10% Pirelli Tyre (Suisse) S.A. Pirelli Hellas S.A. (in liquidation) Tyre Athens The Experts in Wheels - Driver Hellas C.S.A. Tyre Elliniko- Argyroupoli US $ Euro 22,050,000 79.86% Pirelli Tyre S.p.A. 100,000 72.80% Elastika Pirelli C.S.A. ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsCOMPANIES CONSOLIDATED LINE-BY-LINE COMPANIES CONSOLIDATED LINE-BY-LINE Business Headquarter Currency Share Capital % holding Held by Company Business Headquarter Currency Share Capital % holding Held by Company Italy Driver Italia S.p.A. Driver Servizi Retail S.p.A. Tyre Tyre Milan Milan HB Servizi S.r.l. Services Milan Maristel s.r.l. Services Milan Pirelli & C. Ambiente S.r.l. Sustainable mobility Milan Pirelli Industrie Pneumatici S.r.l. Tyre Settimo Torinese (To) Pirelli Servizi Amministrazione e Tesoreria S.p.A. Services Milan Pirelli Sistemi Informativi S.r.l. Beijing Industrial Holding S.r.l.(ex Pirelli Industrial S.r.l.) Pirelli Tyre S.p.A. Information Systems Tyre Tyre Milan Milan Milan Poliambulatorio Bicocca S.r.l. Services Milan Servizi Aziendali Pirelli S.C.p.A. Services Milan Euro Euro Euro Euro Euro Euro Euro Euro Euro Euro Euro Euro 3 8 0 350,000 71.48% Pirelli Tyre S.p.A. CTC 2008 Ltd Tyre Burton on Trent British Pound 100,000 100.00% Pirelli UK Tyres Ltd United Kingdom 120,000 100.00% Pirelli Tyre S.p.A. 10,000 100.00% Pirelli & C. S.p.A. 1,020,000 100.00% Pirelli & C. S.p.A. 10,000 100.00% Pirelli & C. S.p.A. 40,000,000 100.00% Pirelli Tyre S.p.A. 2,047,000 100.00% Pirelli & C. S.p.A. 1,010,000 100.00% Pirelli & C. S.p.A. 10,000 100.00% Pirelli Tyre S.p.A. 558,154,000 100.00% Pirelli & C. S.p.A. 10,000 100.00% Pirelli Tyre S.p.A. 104,000 91.32% Pirelli & C. S.p.A. 2.95% Pirelli Tyre S.p.A. 0.95% Poliambulatorio Bicocca S.r.l. 0.95% Driver Italia S.p.A. 0.98% Pirelli Industrie Pneumatici S.r.l. Pirelli Servizi 0.95% Amministrazione e Tesoreria S.p.A. 0.95% Pirelli Sistemi Informativi S.r.l. 0.95% HB Servizi S.r.l. Pirelli Cif Trustees Ltd Financial Burton on Trent British Pound 4 25.00% Executive Pension Pirelli General Trustees Ltd Pirelli General & 25.00% Overseas Pension Trustees Ltd 25.00% Pirelli Tyres Executive Pension Trustees Ltd 25.00% Pirelli Tyres Pension Trustees Ltd Pirelli International plc Financial Burton on Trent Euro 250,000,000 100.00% Pirelli Tyre S.p.A. Pirelli Motorsport Services Ltd Tyre Burton on Trent British Pound 1 100.00% Pirelli Tyre S.p.A. Pirelli General Executive Pension Trustees Ltd Pirelli General & Overseas Pension Trustees Ltd Pirelli Tyres Executive Pension Trustees Ltd Financial Burton on Trent British Pound 1 100.00% Pirelli UK Ltd Financial Burton on Trent British Pound 1 100.00% Pirelli UK Ltd Financial Burton on Trent British Pound 1 100.00% Pirelli Tyres Ltd Pirelli Tyres Ltd Tyre Burton on Trent British Pound 16,000,000 100.00% Pirelli UK Tyres Ltd Pirelli Tyres Pension Trustees Ltd Financial Burton on Trent British Pound 1 100.00% Pirelli Tyres Ltd Pirelli UK Ltd Financial Burton on Trent British Pound 163,991,278 100.00% Pirelli & C. S.p.A. Pirelli UK Tyres Ltd Tyre Burton on Trent British Pound 85,000,000 100.00% Pirelli Tyre S.p.A. 1 8 3 Slovakia Pirelli Slovakia S.R.O. Tyre Bratislava Euro 6,639 100.00% Pirelli Tyre S.p.A. Romania S.C. Pirelli & C. Eco Technology RO S.r.l. Sustainable mobility Slatina Rom. Leu 40,002,000 100.00% Pirelli Tyre S.p.A. The Netherlands S.C. Pirelli Tyres Romania S.r.l. Tyre Slatina Rom. Leu 853,912,300 100.00% Pirelli Tyre S.p.A. E-VOLUTION Tyre B.V. Tyre Rotterdam Euro 170,140,000 99.98% S.p.A. (65% Pirelli Tyre Russia Pirelli China Tyre N.V. Pirelli Tyres Nederland B.V. Tyre Tyre Rotterdam Rotterdam Poland Driver Polska Sp. z o.o. Tyre Warsaw Pirelli Polska Sp. z o.o. Tyre Warsaw Euro Euro Pol. Zloty Pol. Zloty diritto di Voto) 38,045,000 100.00% Pirelli Tyre S.p.A. 18,152 100.00% Pirelli Tyre (Suisse) S.A. 100,000 65.50% Pirelli Polska Sp. z o.o. 625,771 100.00% Pirelli Tyre S.p.A. Closed Joint Stock Company "Voronezh Tyre Plant" Tyre Voronezh Joint Stock Company "Scientific- Research Study Center of New Technologies & Materials "ATOM" Tyre Moscow Limited Liability Company Pirelli Tyre Services Tyre Moscow Limited Liability Company "AMTEL-Russian Tyres" Tyre Moscow Limited Liability Company "Industrial Complex Kirov Tyre" Tyre Kirov Limited Liability Company Pirelli Tyre Russia Tyre Moscow Russian Rouble Russian Rouble Russian Rouble Russian Rouble Russian Rouble Russian Rouble 1,520,000,000 100.00% Company Pirelli Limited Liability Tyre Russia Limited Liability 312,411,000 54.78% Company Pirelli 54,685,259 95.00% Tyre Russia Pirelli Tyre (Suisse) S.A. 5.00% Pirelli Tyre S.p.A. 10,000 100.00% Company Pirelli Limited Liability Tyre Russia Limited Liability 348,423,221 100.00% Company Pirelli Tyre Russia 4,000,000 99.91% E-VOLUTION Tyre B.V. 0.09% OOO Pirelli Tyre Services ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsCOMPANIES CONSOLIDATED LINE-BY-LINE COMPANIES CONSOLIDATED LINE-BY-LINE Company Spain Business Headquarter Currency Share Capital % holding Held by Company Business Headquarter Currency Share Capital % holding Held by Pirelli Neumaticos CENTRAL/SOUTH AMERICA Argentina Euro Driver Car S.L. Tyre Valencia Euro 960,000 58.44% S.A. - Sociedad Pirelli Neumaticos S.A.I.C. Tyre Buenos Aires Arg. Peso 101,325,176 66.50% Pirelli Tyre S.p.A. Omnia Motor S.A. - Sociedad Unipersonal Pirelli Neumaticos S.A. - Sociedad Unipersonal Tyre & Fleet S.L. - Sociedad Unipersonal Sweden Tyre Valencia Euro 1,502,530 100.00% S.A. - Sociedad Unipersonal Unipersonal 0.31% Omnia Motor S.A. - Sociedad Unipersonal Pirelli Neumaticos Prometeon Tyre Group de Argentina S.A.U. TP Industrial Tyres S.A. Tyre Tyre Buenos Aires Arg. Peso 100,000 100.00% Pirelli Neumaticos S.A.I.C. Buenos Aires Arg. Peso 100,000 95.00% Pirelli Tyre S.p.A. 28.50% Prometeon Tyre Group S.r.l. 5.00% Pirelli Pneus Ltda Tyre Valencia Euro 25,075,907 100.00% Pirelli Tyre S.p.A. 5.00% Pirelli Pneus Ltda Tyre Valencia Euro 20,000 100.00% S.A. - Sociedad Comercial e Importadora de Pneus Ltda Tyre Sao Paulo Bra. Real 101,427,384 100.00% Unipersonal CPA - Comercial e Importadora de Pneus Ltda Tyre Sao Paulo Bra. Real 200,000 100.00% Pirelli Neumaticos Brazil Pirelli Comercial de Pneus Brasil Ltda Comercial e Importadora de Pneus Ltda Dackia Aktiebolag Tyre Taby Inter Wheel Sweden Aktiebolag Tyre Karlstad Pirelli Tyre Nordic Aktiebolag Tyre Bromma 3 8 2 Switzerland Pirelli Group Reinsurance Company SA Reinsurance Basel Pirelli Tyre (Suisse) SA Tyre Basel Turkey Pirelli Otomobil Lastikleri A.S. Tyre Istanbul Hungary Pirelli Hungary Tyre Trading and Services Ltd Tyre Budapest NORTH AMERICA Canada Pirelli Tire Inc. Tyre U.S.A. Pirelli North America Inc. Tyre St-Laurent (Quebec) New York (New York) Swed. Krona Swed. Krona Swed. Krona Swiss Franc Swiss Franc Turkey Lira Hun. Forint 31,000,000 100.00% Pirelli Tyre S.p.A. Ecosil - Industria Quimica do Brasil Ltda Tyre Meleiro Bra. Real 9,699,055 97.88% Pirelli Pneus Ltda Pirelli Comercial de Pneus Brasil Ltda Tyre Sao Paulo Bra. Real 509,328,303 85.00% Pirelli Tyre S.p.A. 1,000,000 100.00% Dackia Aktiebolag 15.00% Pirelli Latam Participaçoes Ltda 950,000 100.00% Pirelli Tyre S.p.A. Pirelli Latam Participaçoes Ltda Tyre Sao Paulo Bra. Real 115,344,668 100.00% Pirelli Tyre S.p.A. 8,000,000 100.00% Pirelli & C. S.p.A. 15.00% Pirelli Latam Participaçoes Ltda 1,000,000 100.00% Pirelli Tyre S.p.A. Comércio e Importação Multimarcas de Pneus Ltda (ex-Pirelli Properties Ltda) Tyre Sao Paulo Bra. Real 3,691,500 85.00% Pirelli Tyre S.p.A. Pirelli Ltda Financial Santo Andrè Bra. Real 14,000,000 100.00% Pirelli & C. S.p.A. Pirelli Pneus Ltda Tyre Santo Andrè Bra. Real 241,698,354 85.00% Pirelli Tyre S.p.A. 3 8 3 85,000,000 100.00% Pirelli Tyre S.p.A. RF Centro de Testes de Produtos Automotivos Ltda TLM - Total Logistic Management Serviços de Logistica Ltda Tyre Tyre Elias Fausto (Sao Paulo) Bra. Real 6,812,000 100.00% Pirelli Pneus Ltda Santo Andrè Bra. Real 3,074,417 99.99% Pirelli Pneus Ltda 3,000,000 100.00% Pirelli Tyre S.p.A. Chile 0.01% Pirelli Ltda Pirelli Neumaticos Chile Ltda Tyre Santiago Chile Peso/000 1,918,450,809 84.98% Pirelli Comercial de Pneus Brasil Ltda 15.00% Pirelli Latam Participaçoes Ltda Can. $ 6,000,000 100.00% Pirelli Tyre (Suisse) SA US $ 10 100.00% Pirelli Tyre S.p.A. Colombia Pirelli Tyre Colombia S.A.S. Tyre Santa Fe De Bogota Col. Peso/000 222,522 85.00% Pirelli Comercial de Pneus Brasil Ltda 15.00% Pirelli Latam Participaçoes Ltda 15.00% Pirelli Latam Participaçoes Ltda 0.02% Pirelli Ltda Pirelli Tire LLC Tyre Rome (Georgia) US $ 1 100.00% Pirelli North America Inc. Prestige Stores LLC Tyre Wilmington (Delaware) US $ 10 100.00% Pirelli Tire LLC Mexico Pirelli Neumaticos de Mexico S.A. de C.V. Tyre Silao Mex. Peso 35,098,400 99.98% Pirelli Tyre S.p.A. 0.02% Pirelli Ltda Pirelli Neumaticos S.A. de C.V. Tyre Silao Mex. Peso 3,249,016,500 99.40% Pirelli Tyre S.p.A. Pirelli Servicios S.A. de C.V. Tyre Silao Mex. Peso 50,000 99.00% Pirelli Tyre S.p.A. 0.60% Pirelli Latam Participaçoes Ltda 1.00% Pirelli North America Inc. ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsCOMPANIES CONSOLIDATED LINE-BY-LINE INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD Company AFRICA Egypt Business Headquarter Currency Share Capital % holding Held by Company EUROPE Germany Business Headquarter Currency Share Capital % holding Held by Pirelli Egypt Tyre Trading S.A.E. Tyre Cairo Egy. Pound 250,000 98.00% Pirelli Tyre S.p.A. Industriekraftwerk Breuberg GmbH Cogeneration Hoechst / Odenwald Euro 1,533,876 26.00% Pirelli Deutschland GmbH 1.00% Pirelli Industrie Pneumatici S.r.l. 1.00% Pirelli Tyre (Suisse) S.A. Pirelli Egypt Consumer Tyre Distribution S.A.E. Tyre Cairo Egy. Pound 5,000,000 98.00% Pirelli Egypt Tyre Trading S.A.E. 1.00% Pirelli Tyre S.p.A. 1.00% Pirelli Tyre (Suisse) S.A. South Africa Pirelli Tyre (Pty) Ltd Tyre Centurion S.A. Rand 1 100.00% Oceania Australia Pirelli Tyres Australia Pty Ltd Tyre Sydney Aus. $ 150,000 100.00% 3 8 4 New Zealand Pirelli Tyres (NZ) Ltd Tyre Auckland N.Z. $ 100 100.00% Pirelli Tyre (Suisse) S.A. Pirelli Tyre (Suisse) S.A. Pirelli Tyres Australia Pty Ltd Greece Eco Elastika S.A. Tyre Athens Euro 60,000 20.00% Italy Consorzio per la Ricerca di Materiali Avanzati (CORIMAV) Financial Milan Euro 103,500 100.00% Eurostazioni S.p.A. Financial Rome Euro 160,000,000 32.71% Fenice S.r.l. Financial Milan Focus Investments S.p.A. Financial Milan Euro Euro 19,116,893 69.88% 183,333 25.00% Slovakia ELT Management Company Slovakia S.R.O. Tyre Bratislava Euro 132,000 20.00% Romania S.C. Eco Anvelope S.A. Tyre Bucarest Rom. Leu 160,000 20.00% Elastika Pirelli C.S.A. Pirelli & C. S.p.A. Pirelli & C. S.p.A. Pirelli & C. S.p.A. Pirelli & C. S.p.A. Pirelli Slovakia S.R.O. S.C. Pirelli Tyres Romania S.r.l. Russia Joint Stock Company "Kirov Tyre Plant" Tyre Kirov Russian Rouble 5,665,418 20.00% Company Pirelli Limited Liability Tyre Russia 5 8 3 Pirelli China Tyre N.V. Pirelli China Tyre N.V. Beijing Industrial Holding S.r.l.(ex Pirelli Industrial S.r.l.) Signus Ecovalor S.L. Tyre Madrid Euro 200,000 20.00% S.A. - Sociedad Pirelli Neumaticos ASIA Indonesia PT Evoluzione Tyres Tyre Subang $ USA 68,000,000 60.00% Unipersonal Pirelli Tyre S.p.A. ASIA China Pirelli Tyre (Jiaozuo) Co., Ltd. (ex-Jiaozuo Aeolus Tyre Co., Ltd) Tyre Jiaozuo Pirelli Tyre Co., Ltd Tyre Yanzhou Ch. Renminbi Ch. Renminbi 350,000,000 80.00% Pirelli Tyre S.p.A. Spain 1,721,150,000 90.00% Pirelli Tyre Trading (Shanghai) Co., Ltd Tyre Shangai US $ 700,000 100.00% TP Trading (Beijing) Co., Ltd Tyre Beijing Yanzhou HIXIH Ecotech Environment Co., Ltd Sustainable mobility Yanzhou Korea Ch. Renminbi Ch. Renminbi 2,000,000 100.00% 130,000,000 100.00% Pirelli Tyre Co. Ltd Pirelli Korea Ltd Tyre Seoul Korean Won 100,000,000 100.00% Pirelli Asia Pte Ltd Japan Pirelli Japan Kabushiki Kaisha Tyre Tokyo Jap. Yen 2,200,000,000 100.00% Pirelli Tyre S.p.A. Singapore Pirelli Asia Pte Ltd Tyre Singapore Sing. $ 2 100.00% Taiwan Pirelli Taiwan Co. Ltd Tyre New Taipei City N.T. $ 10,000,000 100.00% Pirelli Tyre (Suisse) S.A. Pirelli Tyre (Suisse) S.A. ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial StatementsOTHER INVESTMENTS CONSIDERED Company Belgium Business Headquarter Currency Share Capital % holding Held by Euroqube S.A. (in liquidation) Services Brussels Euro 84,861,116 17.79% France Aliapur S.A. Tyre Lion Euro 262,500 14,17% Pirelli & C. S.p.A. Pneus Pirelli S.A.S. 0.11% Pirelli Tyre S.p.A. Italy Fin. Priv. S.r.l. Financial Milan Euro 20,000 14.29% Poland Centrum Utylizacji Opon Organizacja Odzysku S.A. United Kingdom Tyre Warsaw Pol. Zloty 1,008,000 14.29% Pirelli & C. S.p.A. Pirelli Polska Sp. ZO.O. Tlcom I Ltd Partnership Financial London Euro 1,154 10.83% Pirelli UK Ltd Czech Republic ELT Management Company Czech Republic S.R.O. Venezuela (*) 3 8 6 Tyre Brno Czech crown 5,940,000 16.67% Pirelli Tyre (Suisse) S.A. Pirelli de Venezuela C.A. Tyre Valencia Ven. Bolivar/000 20,062,679 96.22% Pirelli Tyre S.p.A. (*) Subsidiary deconsolidated at 31.12.2015 with 96.22% of share capital in possession 7 8 3 ANNUAL REPORT 2017ANNUAL REPORT 2017 Consolidated Financial StatementsConsolidated Financial Statements STATEMENT OF FINANCIAL POSITION (in euro) INCOME STATEMENT (in euro) Note 12/31/2017 of which related parties (Note 37) 12/31/2016 of which related parties (Note 37) Note 2017 of which related parties (Note 37) 2016 of which related parties (Note 37) Property, plant and equipment 8 41,335,010 43,420,596 Revenues from sales and services Intangible assets 9 2,274,121,987 2,275,835,098 Other income Investments in subsidiaries 10 4,568,309,362 4,930,701,308 > of which non recurring events 26 27 36 28 29 36 30 31 36 32 33 34 36 35 36 42,084,384 41,349,034 55,991,047 55,269,739 105,778,332 99,323,081 149,849,089 110,523,686 - (183,120) 29,398,345 (209,409) (26,709,830) (4,779,614) (26,826,868) (4,482,334) (1,691,015) (4,899,942) (9,241,257) (167,059,757) (18,618,209) (106,343,413) (9,245,923) (62,390,073) (50,989,933) 204,415,855 (7,250,000) 63,219,189 172,447,821 2,752,299 2,564,250 463,795 (13,833,292) (11,479,999) (107,159,101) (104,344,529) 215,496,848 208,870,744 279,143,127 272,562,738 116,744,745 10,680,847 49,939,161 49,714,098 (240,118,416) (103,275,015) (286,870,074) (6,878,318) (41,966,793) 30,052,251 140,798,667 96,107,664 170,850,918 - (1,263,903) 69,741,174 (6,954,500) 68,477,271 1 9 3 Investments in associates Other financial assets Other receivables Non-current assets Trade receivables Other receivables Cash and cash equivalents Tax receivables Derivative financial instruments Current assets Total assets Equity: > Share capital > Other reserves > Retained earnings reserve > Net income (loss) for the year 3 9 0 11 10,204,402 12 224,593,085 13 14,819,551 33,077,976 182,561,819 14,829,806 Raw materials and consumables used Personnel expenses > of which non recurring events 7,133,383,397 7,480,426,603 Amortisation, depreciation and impairment 52,045,402 43,721,766 61,691,992 56,915,412 Other costs 45,164,222 13,972,980 651,850,183 635,261,974 > of which non recurring events 1,749,490 1,805,342 Operating income (loss) 14 13 15 16 17 110,632,072 104,054,274 84,621,445 94,846 94,846 515,329 77,839,951 515,329 209,686,032 800,484,291 7,343,069,429 8,280,910,894 1,904,374,936 1,342,280,641 2,163,146,083 1,490,073,812 - 170,850,918 305,401,651 68,477,271 Net income (loss) from equity investments > gains on equity investments > losses on equity investments > dividends Financial income Financial expenses > of which non recurring events Net income (loss) before taxes Taxes > of which non recurring events Total net income (loss) for the year Total Equity 18 4,238,371,937 3,206,233,375 Borrowings from banks and other financial institutions 19 2,331,646,999 4,103,995,774 560,914 Other payables Provisions for liabilities and charges Employee benefit obligations 23 20 21 211,511 45,677,712 2,071,744 310,771 45,950,392 3,964,639 Provision for deferred tax liabilities 24 554,828,134 633,330,000 Derivative financial instruments 17 29,715,928 29,715,928 - Non-current liabilities 2,964,152,028 4,787,551,576 Borrowings from banks and other financial institutions Trade payables Other payables Provisions for liabilities and charges Tax payables Derivative financial instruments 19 22 23 20 25 17 16,856,013 9,411,654 192,055,076 6,452,639 29,694,193 4,819,768 32,425,237 1,581,870 75,212,817 27,491,367 37,125,846 14,875,883 - 5,476,807 18,636,545 18,407,661 20,042,977 19,814,093 145,896 145,896 - Current liabilities 140,545,464 287,125,943 Total Liabilities and Equity 7,343,069,429 8,280,910,894 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. STATEMENT OF COMPREHENSIVE INCOME (in euro) STATEMENT OF CHANGES IN EQUITY (in euro) A - Net income (loss) 170,850,918 68,477,271 Total at 12/31/2015 1,343,285,421 152,113,517 - 12,466,897 - 96,531,260 - 311,232,731 (1,701,751) 1,913,928,076 2017 2016 Share Legal Surplus Concentr. Other Capital Reserve Reserve Reserve Reserve IAS Reserves (*) Merger Reserve Reserve from results carried forward Net result of the year Total Other components of comprehensive income: B - Items that will not be reclassified to income statement: > Net actuarial gains (losses) on employee benefits Total B C - Items reclassified/that may be reclassified to income statement: Fair value adjustment of derivatives designated as cash flow hedge > Gains/(losses) arising from adjustment to fair value > (Gains)/losses reclassified to income statement > Tax effect Fair value adjustment of other financial assets available for sale: 17,555 17,555 (55,913) (55,913) (7,117,489) (270,006) 1,708,197 - - - Breakdown of result as per resolution of April 27, 2016 > Dividend > Legal reserve > Retained earnings Other changes - - - - Purchase special shares (1,004,780) Merger Marco Polo Industrial Holding S.p.A. Other items of the comprehensive income statement - - - - - - - - - - - - - > Gains/(losses) arising from adjustment to fair value 40,486,365 (16,509,969) Result for the year > (Gains)/losses reclassified to income statement 1,439,103 (3,225) Total comprehensive income/ (loss) for the year Total C 36,246,170 (16,513,194) Total at 12/31/2016 1,342,280,641 152,113,517 B+C Total other components of comprehensive income 36,263,725 (16,569,107) A+B+C Total comprehensive income (loss) for the year 207,114,643 51,908,164 3 9 2 Board resolution of 6 March, 2017 Reserve distribution assignment TP Industrial Breakdown of result as per resolution of April 27, 2017 > Dividend > Legal reserve > Retained earnings - 116,962,590 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (1,701,750) 1,701,750 - - - - 92,534,791 (92,264,785) - 314,418 - 584,424 - - (4,443,748) - (5,448,528) - - - - - - - - 1,245,261,239 - (16,569,107) - - - (16,569,107) - - - - - - - 1,245,261,239 - (16,569,107) 68,477,271 68,477,271 - 68,477,271 51,908,164 12,466,897 92,534,791 (12,302,632) 1,245,261,239 305,401,651 68,477,271 3,206,233,375 - - - - - - - - - - - - - - - - - - - (116,962,590) - - (175,912,021) (188,439,061) (364,351,082) 3 9 3 - - - - - - - - - - - - 68,477,271 (68,477,271) (3,099,893) - - - - - 1,189,375,001 - (46,421,503) (65,377,378) - - - 36,263,725 - - - 36,263,725 - - - - - 36,263,725 - 170,850,918 170,850,918 - 170,850,918 207,114,643 Annulment treasury shares 3,099,893 Share capital increase 558,994,402 - 630,380,599 Board resolution of August 1, 2017 Other items of the comprehensive income statement Result for the year Total comprehensive income/ (loss) for the year - 111,798,881 - - - - - - - - - - Total at 12/31/2017 1,904,374,936 380,874,988 630,380,599 12,466,897 92,534,791 23,961,093 1,022,927,715 - 170,850,918 4,238,371,937 Breakdown of IAS Reserves* Reserve for fair Value Reserve for adjustment of available- actuarial for-sale financial assets gains/losses Cash flow hedge reserve Tax effect Total (in euro) Balance at 12/31/2015 94,464,885 2,066,375 Other components of comprehensive income (16,513,194) (55,913) - - - 96,531,260 - (16,569,107) Other movements Balance at 12/31/2016 (92,534,791) - 270,006 - (92,264,785) (14,583,100) 2,010,462 270,006 - (12,302,632) Other components of comprehensive income 41,925,468 17,555 (7,387,495) 1,708,197 36,263,725 Balance at 12/31/2017 27,342,368 2,028,017 (7,117,489) 1,708,197 23,961,093 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.STATEMENT OF CASH FLOWS (in euro) Note 2017 of which related parties (Note 37) 2016 of which related parties (Note 37) EXPLANATORY NOTES Result before taxes Reversal depreciation, amortization and write-downs 30,052,251 4,899,942 (1,263,903) 9,241,257 1. GENERAL INFORMATION Significant Events 2017 The following significant events took place during 2017:  > On March 15, 2017, the Ordinary Shareholders’ Meeting of Pirelli & C. S.p.A. resolved the assignment to the sole shareholder Marco Polo International Holding Italy S.p.A. of all the 32,870,380 shares held in TP Industrial Holding Reversal financial expenses 240,118,416 103,275,015 286,870,074 6,878,318 Reversal financial income (116,744,745) (10,680,847) (49,939,161) (49,714,098) Pirelli & C. S.p.A. (hereinafter also Pirelli, the “Company” or the S.p.A. TP Industrial Holding S.p.A. is the company that “Parent Company”) is a corporation organised under the laws holds 52% of the share capital of Pirelli Industrial S.r.l. (now Reversal result from investments (204,415,855) (199,954,995) (172,447,821) (168,218,210) of the Republic of Italy. Prometeon Tyre Group S.r.l), a company that includes the Taxes paid - - Industrial assets of Pirelli. Change in trade receivables 9,646,590 13,193,646 (20,004,841) (19,599,381) Change in trade payables (2,731,044) 3,237,898 (8,507,227) 139,636 Change in other receivables/other payables 22,708,000 12,585,217 (6,010,830) 5,048,548 Change in tax receivables/tax payables 22,393,548 36,366,068 (36,461,826) 23,265,705 Founded in 1872, it is a holding company that manages, > At the end of June, Marco Polo International Italy coordinates and funds the activities of subsidiaries (hereinafter S.p.A. - direct shareholder of Pirelli after the merger by Pirelli Group). incorporation of Marco Polo International Holding Italy S.p.A. - subscribed a capital increase, including share The registered office of the Company is in Viale Piero e Alberto premium, of approximately euro 1.2 billion. It is also Change in personnel provisions and other provisions (2,165,575) 38,542,093 Pirelli 25 – Milan. (Gains)/losses from sales of tangible and intangible assets 11,240 (29,398,345) A Net cash generated/(used) by operating activities 3,772,768 Investments in tangible assets 8 (338,274) Disposal of property, plant & equipment 26,639 10,619,470 (539,000) 75,180,000 With effect from October 4, 2017, the shares of Pirelli & refinancing contract on an unsecured basis for a total C. S.p.A. are listed on the Mercato Telematico Azionario amount of euro 4.2 billion with a syndicate of leading (MTA), managed by Borsa Italiana S.p.A. With the start of international banks, whose first draw-downs were used, negotiations, the management and coordination activities of together with the proceeds deriving from the capital noted that on June 27, 2017 (with closing on June 29), Pirelli & C. S.p.A. and Pirelli International Plc signed a new Investments in intangible assets 9 (1,550,850) (2,073,000) Marco Polo International Italy S.p.A. ceased. The subject of the increase indicated above, to fully repay on June 29, 2017 3 9 4 Disposal of intangible assets 750,000 Investments in shareholdings in subsidiaries 10 (9,705,361) (9,705,361) (1,600,000) (1,600,000) Investments in shareholdings in associated companies - (4,692,000) (4,692,000) Investments in other financial assets 12 (2,459,092) Disposal of other financial assets Disposal of shareholdings in subsidiaries 2,365 7,938 (2,394,000) 11,221,403 Global Sale Offer was 350 million ordinary shares, at a price of the financing entered into in 2016 for an amount of euro euro 6.5 per share for a capitalization of euro 6.5 billion. 6.4 billion and consequently cancel all the real guarantees 5 9 3 The Greenshoe option, granted as part of the transaction completed on improved terms compared to the previous by Marco Polo International Italy S.p.A. to the placement loan completed in 2016, in particular by reducing the all- consortium for 50 million shares, was partially exercised in cost but also thanks to the extension of its average provided for this financing. The new refinancing was Disposal of shareholdings in associated companies 11 17,209,724 17,209,724 - shares. Including the Greenshoe option, the Sale Offer of Pirelli. Dividends received 32 215,496,848 208,870,744 279,143,127 272,562,738 B Net cash generated/(used) by investment activities 219,439,937 354,261,530 Increase in share capital 18 1,189,375,000 Redemption special shares Dividends paid - - (1,240,000) - therefore concerned 368,904,836 Pirelli ordinary shares and, > At the end of July 2017, Burlington Loan Management consequently, the total proceeds deriving from the Sale Offer DAC, an Irish investment vehicle managed by Davidson and exclusively due to the Selling Shareholder amount to Kempner Capital Management LP, signed a contract approximately euro 2.4 billion. As a result of the partial exercise with Pirelli, Intesa Sanpaolo S.p.A., UniCredit S.p.A. and of the Greenshoe Option, Marco Polo International Italy S.p.A. Fenice S.r.l. for the purchase of 44.86% of the capital held holds 631,095,164 Pirelli ordinary shares corresponding to about by the latter in Prelios S.p.A. for a total of 611,910,548 7,938 15,000 15,000 on November 2, 2017 for a total of 18,904,836 million life, thus contributing to improving the financial profile Change in financial receivables 13 629,710,507 629,710,507 335,915,901 335,915,901 63% of the share capital. C D E F G Change in financial payables 19 (1,884,066,984) 9,000,000 (488,263,988) Financial income/(financial expenses) 32 (158,287,080) (53,865,315) (236,930,723) 6,619,562 Net cash generated/(used) by financing activities (223,268,557) (390,518,810) Total net cash generated/(used) in the year (A+B+C) (55,852) (25,637,810) Cash and cash equivalents at the beginning of the year 1,805,342 146,152 shares. The price for the purchase and sale was set at euro 0.116 per share, equal to a total of euro 70.9 million, Pirelli & C. S.p.A. is directly controlled by Marco Polo of which approximately euro 17.2 million due to Pirelli, International Italy S.p.A., (after the merger with Marco Polo approximately euro 24.5 million to Fenice, vehicle invested International Holding Italy S.p.A.) and indirectly controlled by in by Pirelli and the remaining part - in proportion to China National Chemical Corporation (“ChemChina”), a “state- the investment held - to Intesa Sanpaolo and UniCredit. owned enterprise” (SOE) under Chinese law, with registered The closing of the purchase and sale transaction - with Cash and cash equivalents of Marco Polo Industrial Holding S.p.A. - 27,297,000 office in Beijing, referring to the Central Government of the simultaneous collection - was finalized on December 28, Cash and cash equivalents at the end of the year (D+E+F) 1,749,490 1,805,342 People’s Republic of China. 2017. On February 26, 2018, the Board of Directors authorized Stock Exchange on the Mercato Telematico Azionario publication of these Financial Statements (“Financial (MTA), organized and managed by Borsa Italiana S.p.A., as Statements or Separate Financial Statements”). previously described.  > On October 4, 2017, Pirelli shares were listed on the Milan ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. > On December 21, 2017, the Board approved an EMTN (euro Medium Term Note) program for the issue of senior Financial Statements The Separate Financial Statements at December 31, 2017 consist of the Statement of Financial  > the dividend distributed by the investee exceeds the total undistributed profits of the investment from the date of unsecured non-convertible bonds for a maximum value Position, the Income Statement, the Statement of purchase; International accounting standards and/or interpretations issued but not yet in force Pursuant to IAS 8 “Accounting standards, changes in accounting of euro 2 billion. The adoption of the EMTN program Comprehensive Income, the Statement of Changes in Equity,  > the operating result achieved by the investee company estimates and errors”, the following are the new Standards or responds to the objective of constant optimization of the Statement of Cash Flows and the Explanatory Notes, and is significantly lower than the amount expected in the Interpretations that have been issued but have not yet come the Pirelli financial structure and allows timely seizing are accompanied by the Directors’ Report on Operations. management plan, if this indicator can be considered into force or have not yet been endorsed by the European favourable windows on the bond market. As part of this significant for the reference company; Union at December 31, 2017, and which are therefore not program, the Board of Directors authorized the issue, to The Company has chosen to represent the Income Statement  > there are expectations of significantly decreasing operating applicable, and the foreseeable impacts on the Separate be executed by January 31, 2019, of one or more bonds, by nature of expense, assets and liabilities in the Statement results for future years; Financial Statements. to be placed with institutional investors, for a total of Financial Position are divided into current and non-current  > existence of changes in the technological, market, economic maximum amount of up to euro 1.0 billion. and the Cash Flow Statement has been prepared using the or regulatory environment in which the investee operates None of these standards and interpretations have been 2. BASIS FOR PREPARATION indirect method. that may generate significant negative economic effects adopted in advance. on the company’s results.  > IFRS 9 – Financial Instruments It shall also be noted that the Group has applied the provisions The impairment test consists of comparing the carrying This standard, endorsed by the European Union, is of Consob Resolution no. 15519 of July 27, 2006 in regard to amount and the recoverable value of the investment. applicable from January 1, 2018. The Company will apply The 2017 financial statements represent the separate the formats of financial statements and Consob Notice no. the new standard starting from the mandatory effective financial statements of the Parent Company Pirelli & C. S.p.A.. 6064293 of July 28, 2006 in regard to corporate disclosure. If the recoverable amount of an investment is lower than date, using the retrospective application method and the carrying amount, the latter is reduced to the recoverable choosing to apply the practical expedient allowed by the These Financial Statements have been prepared on a going In order to provide greater clarity and comparability of the amount. This reduction constitutes an impairment loss standard, based on which the 2017 comparative figures concern assumption since the Directors have verified the financial statement items, the amount of the corresponding recognized in the Income Statement. will not be restated. The Company reviewed the financial absence of financial, operational or other types of indicators items of the previous year were adjusted where necessary. assets and liabilities and has substantially completed the that could indicate critical issues regarding the ability of the The recoverable amount of an investment is identified as assessment of the effects deriving from the application of Company to meet its obligations in the foreseeable future All amounts included in the Notes, unless otherwise specified, the greater of fair value and value in use. The value in use the new accounting standard. No significant impacts are and in particular in the next 12 months. The description of are in thousands of euro. of an investment is the present value of future cash flows expected on the result, shareholders’ equity and the main 7 9 3 3 9 6 the ways in which the Company manages financial risks is contained in Chapter 4 Financial risk management policy and 6 Capital management policy of these Explanatory Notes. 3. ACCOUNTING STANDARDS In line with the requirements of Legislative Decree of The accounting standards used in the preparation of Separate expected to originate from a cash-generating investment. performance indicators of the Company on the date of first The value in use reflects the effects of factors that may be application (January 1, 2018). The analysis also showed that entity specific, factors that may not be applicable to any there are substantially no impacts in terms of application entity. and organization, also considering the limited number of transactions that fall within the scope of IFRS 9. February 28, 2005, no. 38, “Exercise of the options provided Financial Statements are the same as those used for the With specific reference to the investment in the subsidiary The main impacts deriving from the adoption of the new for by art. 5 of regulation (EC) no. 1606/2002 on international purposes of preparing the consolidated financial statements Pirelli Tyre S.p.A., the recoverable value to be used, if it standard are summarized below: accounting standards”, issuers are required to prepare not where applicable, except in relation to the assessment of were necessary to proceed with an impairment test, would 1 classification and measurement: the equity only the consolidated financial statements but also the investments in subsidiaries and associate companies and correspond to the fair value, and would be obtained starting instruments currently classified as financial assets financial statements of the Company in compliance with dividends, as indicated below. from the fair value of Pirelli & C. S.p.A. equal to its Stock available for sale, in substantial continuity with the international accounting standards (IFRS) issued by the International Accounting Standards Board (IASB) and published in the Official Journal of the European Community (GUCE). IFRS include all International Financial Reporting Standards, International Accounting Standards (IAS), all interpretations Investments in subsidiaries and associated companies Investments in subsidiaries and associates are recognized at cost, net of any impairment losses. of the International Financial Reporting Interpretations In the presence of specific impairment indicators, the value Market capitalization without considering any control respect to the accounting treatment adopted premium, adjusted downwards for the fair value of the assets in accordance with IAS 39, will be designated of Pirelli & C. S.p.A. other than the investment in Pirelli Tyre as financial assets with changes in fair value S.p.A. (for example, the Pirelli brand), and upwards for the recognized in equity with the sole exception of the fair value of the liabilities of Pirelli & C. S.p.A. (mainly its Net investment in Mediobanca S.p.A., sold in the first Financial Position). days of January 2018, for which the changes in fair value will be recognized in the Income Statement. Committee (IFRIC), formerly the Standing Interpretations of investments in subsidiaries and associated companies, If the reason for impairment ceases to exist, the carrying It is noted that the fair value adjustment reserve Committee (SIC). determined based on the historical cost basis, is tested for amount of the investment is restored up to the original cost. related to assets available for sale outstanding The Financial Statements have been prepared on the basis of the conventional historical cost criterion, except for the The indicators are as follows: impairment. financial assets available for sale and derivative instruments  > the book value of the investment in the separate financial Dividends Dividend income is recognized in the income statement when the right to receive payment is established, at December 31, 2017 (positive for euro 27,342 thousand) will be reclassified to a new reserve in other comprehensive income for investments designated as financial assets with the changes measured at fair value. statements exceeds the book value of the investee’s which normally corresponds to the resolution approved by the in fair value recognized in other comprehensive net assets (inclusive of any goodwill) expressed in the Shareholders’ Meeting for the distribution of dividends. income, while it will be reclassified in profits carried consolidated financial statements; forward for the investment in Mediobanca S.p.A.. ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.3 9 8 These reserves will not be reversed to the income At December 31, 2017, the Company has non-cancellable Statement if the investment is sold. The new rules commitments for operating leases of euro 112,239 thousand Exchange rate risk This risk is generated by the commercial and financial transactions that are executed in currencies other than the euro. Exchange rate fluctuations between the time when the commercial or financial relationship is established and for the classification and measurement of financial (see note 8). when the transaction is completed (collection or payment) may generate foreign exchange gains or losses. liabilities have no impact on the company, as the The Group’s objective is to minimise the effects on the Income Statement of foreign exchange rate risk related to volatility. To company has no financial liabilities designated at The Company will calculate the portion of payments related achieve this objective, Group procedures make the Operating Units responsible for collecting complete information about the fair value through the income statement; to short-term contracts and to contracts that concern “small assets and liabilities that are subject to transaction exchange rate risk. This risk is hedged with forward contracts made with the 2 impairment of financial instruments: based on the assets” to assess whether to use the exemption granted by Group Treasury. valuations made, the adoption of the approach the standard for non-capitalization of such contracts. based on expected losses (instead of realized losses) The items subject to exchange rate risk are mainly represented by receivables and payables denominated in foreign currency. will not entail any change in the bad debt provision The Company has not yet assessed the potential impact for trade receivables; of other adjustments that may be necessary, such as the The Group Treasury is responsible for hedging the net position for each currency and, in accordance with established guidelines 3 hedge accounting: the Company will adopt the new change in the definition of the duration of contracts, the and restrictions, it closes all risk positions by trading derivative contracts on the market, which typically take the form of forward rules for hedge accounting required by IFRS 9 different accounting treatment of variable payments and contracts. starting from January 1, 2018. Hedging relations options for renewal and/or early settlement. As a result, it is outstanding at December 31, 2017 meet the not yet possible to determine the amount of financial assets The Group has decided not to opt for hedge accounting pursuant to IAS 39, insofar as the representation of the economic and financial conditions required by IFRS 9 for the adoption of and liabilities that will have to be recognized under the new effects of the hedging strategy on foreign exchange rate risk is still substantially guaranteed even without adopting such option. hedge accounting. standard and how the latter will impact the income statement  > IFRS 15 – Revenues from contracts with customers and and statement of cash flows. Furthermore, it shall be noted that as part of the annual and three-year planning process, exchange rate forecasts are made using clarifications regarding IFRS 15 the best information available on the market. The fluctuation in exchange rates between the time when the forecast is made and the This standard, endorsed by the European Union, is With regard to the transition, the Group is evaluating time when the commercial or financial transaction occurs represents the exchange rate risk on future transactions. applicable from January 1, 2018. The Company will apply whether to apply the simplified approach that allows not the new standard using the “modified” application considering the restatement of the comparative period in From time to time, the Group assesses the need to engage in hedging transactions on future transactions for which it typically uses method, i.e. accounting for the cumulative effect of the the first year of application. both forward and optional purchase or sale transactions such as risk reversal (i.e., zero cost collar). initial application as of January 1, 2018. The assessment of the effects deriving from the application of the new accounting standard has been substantially completed and significant impacts on the result, shareholders’ equity and the main performance 4. FINANCIAL RISK MANAGEMENT POLICY The Company enters into derivative contracts, cross currency interest rate swaps, to hedge for which hedge accounting is activated when the conditions set out in IAS 39 are fulfilled. indicators of the Company at the date of first application The measurement and management of the financial risks of are not expected (January 1, 2018). Pirelli & C. S.p.A. are consistent with as defined by the Group 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.  > IFRS 16 – Leases policies. The Group assesses based on market circumstances whether to enter into derivative contracts, typically interest rate swaps, to This standard, endorsed by the European Union, is hedge for which hedge accounting is activated when the conditions set out in IAS 39 are fulfilled. applicable from January 1, 2019. The Group plans to apply The Pirelli Group is exposed to financial risks. These the new standard starting from the date of entry into force. are principally associated with foreign exchange rates, At December 31, 2017, the Company had a negative net financial position, with all financial payables at variable rates. The new standard will mainly impact the accounting fluctuations in interest rates, the price of financial assets treatment of leasing contracts currently classified as held as investments, the ability of customers to meet their In other conditions being equal, a hypothetical increase or a decrease of 0.50% in the level of interest rates would result, year on year, operating leases according to IAS 17. The main impacts obligations to the Group (credit risk), and raising funds on the respectively in a net negative and positive impact on the Income Statement of euro 8,920 thousand. can be detailed as follows: market (liquidity risk). > > recognition in the item tangible assets of the current value of lease fees that on the basis of Financial risk management is an integral part of Group contractual agreements have the characteristics to business management and is handled directly by the be considered as non-eliminable and simultaneous headquarters in accordance with guidelines issued by the recognition of an increase in financial liabilities. Finance Department on the basis of general risk management Assets will be depreciated based on the duration of strategies defined by the Managerial Risk Committee. the contract; Impact on the net result (8,920) (12,222) 8,920 12,222 (in thousands of euro) +0.50% -0.50% 12/31/2017 12/31/2016 12/31/2017 12/31/2016 > > the cost of lease fees now recognized under the item The main financial risk categories to which the Company is The effects on the Company’s equity resulting from the changes in the LIBOR and EURIBOR rates calculated on the hedging other costs will be replaced by the recognition of exposed are shown below. instruments for interest rates which were outstanding at December 31, 2017 are detailed in Note 17, “Derivative financial instruments”. the depreciation of the assets recognized in the previous point. A financial component will also be recognized under the item Financial expenses. 9 9 3 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.Price risk associated with financial assets The company is exposed to price risk, which is limited to the The Company does not hold public debt instruments from The maturities of financial liabilities at December 31, 2017 may be broken down as follows: any European country, and constantly monitors its net credit (in thousands of euro) volatility of financial assets such as listed and unlisted stocks exposure to the banking system. and bonds; these assets are classified as financial assets available for sale. Derivatives hedges are not set up to limit the volatility of these assets. Liquidity risk Liquidity risk represents the risk that the financial resources available are insufficient to meet the financial and commercial obligations pursuant to the contractual terms and conditions. Payables to banks and other lenders Trade payables Other payables 57,666 29,694 75,213 53,314 2,447,334 - 212 - - up to 1 year from 1 to 2 years from 2 to 5 years over 5 years Total 12/31/2017 Financial assets available for sale consist of listed securities Derivative financial instruments 146 3,638 26,077 amounted to euro 179,204 thousand (euro 141,474 thousand The principal instruments used by the Group to manage at December 31, 2016) and those represented by securities liquidity risk are comprised by its annual and three-year indirectly associated with listed shares (Fin. Priv. S.r.l.) financial and cash-pooling plans. These allow complete and amounted to euro 19,908 thousand (euro 19,200 thousand at fair detection and measurement of incoming and outgoing Total 162,719 57,164 2,473,411 December 31, 2016, also inclusive of the investment in Emittenti cash flows. The differences between plans and actual data are The maturities of financial liabilities at December 31, 2016 may be broken down as follows: - - - - - 2,558,315 29,694 75,425 29,861 2,693,295 (in thousands of euro) 4 0 0 Titoli); these financial assets represent 89% of total financial constantly analysed. assets subject to price risk (88% at December 31, 2016); a +5% change in the above listed securities, other things being equal, The Group has implemented a centralised cash pooling system would result in a positive change of euro 8,960 thousand of for the management of collection and payment flows in the Company’s shareholders’ equity (positive for euro 7,073 compliance with various local currency and tax laws. Banking thousand at December 31, 2016), while a -5% change of these relationships are negotiated and managed centrally, in order listed securities, other things being equal, would result in a to ensure coverage of short and medium-term financial needs negative change of euro 8,960 thousand of the Company’s at the lowest possible cost. The procurement of medium and shareholders’ equity (negative for euro 7,073 thousand at long-term resources on the capital market is also streamlined December 31, 2016). through centralised management. Credit risk Credit risk represents the Company’s exposure to contingent losses resulting from default by commercial 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 and financial counterparties. The Company’s exposure for the availability of funds through an adequate amount of commercial obligations is mainly towards Group companies, committed credit facilities and/or recourse to the capital for financial obligations totally towards Group companies. market, while diversifying the products and their maturities up to 1 year from 1 to 2 years from 2 to 5 years over 5 years Total 12/31/2016 Payables to banks and other lenders 296,015 1,916,275 2,508,418 4,720,708 Trade payables Other payables Total 32,425 37,126 - 311 - - 32,425 37,437 365,566 1,916,585 2,508,418 4,790,569 1 0 4 5. INFORMATION ON FAIR VALUE 5.1. Fair value measurement In relation to financial instruments measured at fair value, the following table shows the classification of these instruments on the basis of the hierarchy of levels pursuant to IFRS 13, reflecting the significance of the inputs In order to limit the risk for commercial obligations to third  > level 1 – unadjusted quotations recorded on an active market for assets or liabilities subject to valuation; parties, the Company has procedures in place for assessing At December 31, 2017, the Company had, aside from cash equal to  > level 2 – inputs different from the quoted prices referred to at the preceding level, which are observable on the market either to seize the best available opportunities. used in determining the fair value. The levels are as follows: the potential and financial soundness of customers, for euro 1,749 thousand (euro 1,805 thousand at December 31, 2016), directly (as in the case of prices) or indirectly (because they are derived from prices); monitoring the expected cash flows and for any recovery unused credit facilities equal to euro 100,000 thousand (euro  > level 3 – inputs that are not based on observable market data. actions. With regard to financial counterparties for the 200,000 thousand at December 31, 2016) maturing Q2 2022. management of temporarily excess resources, the Company only uses interlocutors of high credit standing and constantly monitors exposures to individual counterparties. ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.The following table shows assets measured at fair value as at December 31, 2017, divided into the three levels defined above: The following table shows the changes of financial assets that occurred in level 3: (in thousands of euro) (in thousands of euro) Note 12/31/2017 Level 1 Level 2 Level 3 12/31/2017 12/31/2016 FINANCIAL ASSETS Available-for-sale financial assets: Other financial assets > equities and shares > investment funds Derivative hedging instruments Current derivative financial instruments TOTAL ASSETS FINANCIAL LIABILITIES Financial liabilities at fair value through profit or loss Current derivative financial instruments Derivative hedging instruments Non current derivative financial instruments TOTAL LIABILITIES At December 31, 2016, the breakdown was as follows: 4 0 2 12 12 17 17 17 Opening balance Increases Decreases 209,323 179,204 19,909 10,210 Reclassification 15,270 95 - - 15,270 95 - - Transfer from level 2 to level 3 Impairment Fair value adjustments recognized in equity 224,688 179,204 35,274 10,210 Closing balance 7,248 781 - - 2,730 (912) 363 10,210 6,684 2,395 (94) (3) - (2,290) 556 7,248 146 29,716 29,862 - - - 146 29,716 29,862 - - - These financial assets consist mainly of equity investments in Istituto Europeo di Oncologia (European Institute of Oncology) (euro 6,599 thousand), and Emittenti Titoli (euro 2,748 thousand). The item increases refers to the capital increase related to the investment in Alitalia – Compagnia Area Italiana S.p.A. (euro 781 thousand). The item impairment mainly refers to the investments in Alitalia-Compagnia Aerea Italiana S.p.A. (euro 781 thousand) and Movincom Servizi S.r.l. (euro 121 thousand). 3 0 4 Note 12/31/2016 Level 1 Level 2 Level 3 determined considering also in transparency the Fair Value of the shares held in London Stock Exchange by Emittente Titoli. (in thousands of euro) In 2017, there were no transfers from level 1 to level 2 and vice versa, while there was a transfer from level 2 to level 3 following the sale, by Emittenti Titoli, of its investment in the company London Stock Exchange. The Fair Value of Emittente Titoli was in fact FINANCIAL ASSETS Available-for-sale financial assets: Other financial assets > equities and shares > investment funds Derivative hedging instruments Current derivative financial instruments TOTAL ASSETS FINANCIAL LIABILITIES Financial liabilities at fair value through profit or loss Current derivative financial instruments Derivative hedging instruments Non current derivative financial instruments TOTAL LIABILITIES 12 12 17 17 17 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, comprise primarily equity investments classified as financial assets available for sale. 167,926 141,477 19,201 7,248 The fair value of financial instruments not traded on active markets (e.g. derivatives) is measured by means of techniques that 14,636 515 - - 14,636 515 - - 183,077 141,477 34,352 7,248 maximise the use of observable and available market data, using widely applied financial measurement techniques:  > market prices for similar instruments;  > the fair value of cross currency 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. - - - - - - - - - - - - ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.5.2 Categories of financial assets and liabilities The following are the carrying amounts for each class of financial asset and liability identified by IAS 39: 7. ESTIMATES AND ASSUMPTIONS brands of the listed companies of the Tyre sector, and was equal to an average royalty rate of 4.6%. With reference to (in thousands of euro) The preparation of the Financial Statements requires the contribution in terms of royalties from the Prometeon Directors to apply accounting standards and methodologies Tyre Group, the royalty rate used as provided for by the Note 12/31/2017 12/31/2016 which, under certain circumstances, are based on subjective license agreement was equal to 2%; FINANCIAL ASSETS Loans and receivables Other non-current receivables Current trade receivabels Other current receivables Cash Available-for-sale financial assets Other financial assets Derivative hedging instruments Derivative financial instruments Total financial assets FINANCIAL LIABILITIES Financial liabilities at fair value through profit or loss 4 0 4 Derivative financial instruments Financial liabilities at amortized cost Non-current borrowings from banks and other financial institutions Current borrowings from banks and other financial institutions Current trade payables Other non-current payables Other current payables Derivative hedging instruments Derivative financial instruments Total financial liabilities 6. CAPITAL MANAGEMENT POLICY 13 14 13 15 12 17 17 19 19 22 23 23 17 14,820 14,830 52,045 61,692 assessments and estimates that are based on historical  > a discount rate of 9.0%, which included a premium experience and assumptions that are considered reasonable determined on the basis of the risk of the specific asset; and realistic from time to time depending on the circumstances.  > a growth rate of g in the terminal value assumed to be The final results of the items of the financial statements for equal to zero; which said estimates and assumptions were used may differ  > the TAB (Tax Amortisation Benefit) that is, the tax benefit 45,164 651,850 from those in the financial statements that show the effects that could potentially benefit the market participant due 1,749 1,805 224,593 182,562 95 515 338,466 913,254 146 - 2,331,647 4,103,996 16,856 192,055 29,694 32,425 212 311 75,213 37,126 29,716 - 2,483,484 4,365,913 of the occurrence of the event subject of the estimate due to the possibility of fiscally amortising the asset. to the uncertainty that characterizes the assumptions and For the purposes of impairment testing, the recoverable conditions on which the estimates are based. amount of the Pirelli Brand cum-TAB was compared with the carrying amount of the Brand cum-TAB and no losses in value Below is a brief description of the accounting standards that, emerged. in relation to Pirelli & C. S.p.A., involve more than others a higher level of subjectivity by the management in making estimates and for which a change in the conditions underlying the assumptions used could have a significant impact on the Investments in subsidiaries Investments are assessed to establish whether there was a decrease in value, to be financial information. Pirelli Brand (intangible assets with indefinite useful life) The Pirelli Brand is an intangible fixed asset with an indefinite useful life not subject to amortisation, but recognized with a write-down, if there are indications that it will be difficult to recover their net carrying amount through use. To establish the presence of said indications, Directors must make subjective assessments on the basis of information available within the Company and the market, as well as historical experience. Moreover, if it is determined 5 0 4 pursuant to IAS 36, is tested for impairment annually or more that a potential impairment may be generated, the Company frequently, if specific events or circumstances arise that may calculates this loss using appropriate measurement indicate a reduction in value. techniques. The proper identification of elements indicating The impairment test at December 31, 2017 was performed using estimates for calculating the amount of such losses, depend the assistance of an independent third-party professional. on factors that may vary over time, affecting the assessments the existence of a potential impairment loss, and the and estimates made by Directors. The configuration for the recoverable amount for the purpose of the impairment test at December 31, 2017 is the fair value, calculated on the basis of the income approach (the so-called Level 3 of the hierarchy of IFRS 13 – Fair Value measurement) Provisions for risks and charges Provisions are set aside against contingent legal and tax liabilities, representing the and is based on: risk of negative outcome. The value of the provisions recorded  > the consensus forecasts by equity analysts with respect in the financial statements relating to these risks represents The Company’s objective is to maximise the return on net invested capital while maintaining the ability to operate over time, to the forecast revenues for the period 2018-2020 in that the best estimate at the date made by the directors. Such an ensuring adequate returns for its shareholders and benefits for the other stakeholders, with progressive deleverage of the financial they were more prudent than the projections made by estimate entails making assumptions that depend on factors structure in the short/medium medium term. management; that may change over time and which could therefore have a  > an evaluation criterion is obtained by the sum of parts material impact with respect to the current estimates made In order to achieve these objectives, as well as pursuing satisfactory earnings results and generating cash flows, the Company may which also takes into account the contribution of royalties by Directors for the preparation of the Company’s Financial adjust its policy regarding dividends and the configuration of the Company’s capital. from the Prometeon Tyre Group for the use the Pirelli Statements. trademark in relation to the industrial segment;  > the royalty rate applied to the revenues of the Consumer High Value and Consumer Standard evaluation units was deduced from the royalty rates implicit in the valuations Taxes Significant elements of estimation are necessary in defining the forecasts of current taxes for the year and made by an independent entity relative to the main deferred tax assets and liabilities. ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.8. TANGIBLE ASSETS 9. INTANGIBLE ASSETS The items in question and the related changes are detailed as follows: The items in question and the related changes are detailed as follows: (in thousands of euro) (in thousands of euro) Land Buildings Plant and machinery Industrial and Assets commercial Other assets in progress Total equipment and advances Brand Software licenses Other assets Assets in progress and advances Total Net value as of December 31, 2015 21,112 67,486 1,122 24 5,425 - 95,169 At 31 December 2015 - 1,229 4,732 634 6,595 Increases Decreases Depreciation Other - - - (12,091) (33,691) (19) - - 64 475 539 (42) - (45,843) - - (3,974) (219) (7) (725) - (4,925) (1,515) (4) - - - (1,519) At 31 December 2016 9,021 28,306 880 17 4,722 475 43,421 Of which > Historical cost 9,021 54,944 4,686 985 14,612 475 84,723 > Accumulated depreciation - (26,638) (3,806) (968) (9,890) - (41,302) Increases Decreases Reclassification Amortisation At 31 December 2016 Increases Decreases Amortisation 2,270,000 171 1,152 750 2,272,073 - - - (35) - - (35) 56 578 (634) - (343) (2,455) - (2,798) 2,270,000 1,078 4,007 750 2,275,835 - - - 311 1,084 156 1,551 - - (750) (750) (387) (2,127) - (2,514) Net value as of December 31, 2016 9,021 28,306 880 17 4,722 475 43,421 At 31 December 2017 2,270,000 1,002 2,964 156 2,274,122 4 0 6 Increases Decreases Reclassification Depreciation - - - - 332 (112) 475 - - - - - - 118 (37) - 450 - (149) The item Brand refers to the value of the Pirelli Brand (intangible asset with indefinite useful life), for an amount of euro 2,270,000 - (475) - thousand, which originated following the allocation of the merger deficit, generated following the incorporation of the parent (1,705) (219) (5) (458) - (2,387) company Marco Polo International Holding Italy S.p.A. in 2016. The allocation of the deficit was made consistently with the 7 0 4 At 31 December 2017 9,021 27,296 661 12 4,345 - 41,335 consolidated financial statements as a result of the completion of the Purchase Price Allocation. Of which The assessment of the useful life of brands is based on a number of factors including competitors, market share, brand history, > Historical cost 9,021 55,639 4,686 985 14,693 - 85,024 product lifecycle, operational plans and macroeconomic scenario of the countries in which the relating products are sold. Specifically, > Accumulated depreciation - (28,343) (4,025) (973) (10,348) - (43,689) the useful life of the Pirelli Brand has been evaluated as indefinite on the basis of its over one hundred year successful history (born Net value as of December 31, 2017 9,021 27,296 661 12 4,345 - 41,335 in 1872) as well as the intention and ability of the group to continue investing in supporting and upholding the brand. Increases in the year for euro 450 thousand mainly refer to improvements to owned properties. thousand), systems for personnel management (euro 295 thousand) and treasury (euro 85 thousand). The increases in the year mainly include charges for the purchase of software applications (euro 625 thousand), licenses (euro 311 Financial expenses on tangible assets were not capitalized. No impairment was carried out during the 2017 financial year. The total of the future minimum payments due for non-cancellable operating leases amount to euro 112,239 thousand, of which:  > euro 8,281 thousand within one year;  > euro 66,858 thousand between one and five years;  > euro 37,100 thousand over 5 years. Impairment test of the Pirelli Brand (intangible assets with indefinite useful life) The Pirelli Brand at euro 2,270,000 thousand is an intangible fixed asset with an indefinite useful life and as such is not subject to amortisation, but pursuant to IAS 36, is tested for impairment annually or more frequently, if specific events or circumstances arise that may indicate a reduction in value. The impairment test as at December 31, 2017 was carried out with the assistance of an independent third party professional. The configuration of the recoverable amount for impairment testing purposes at December 31, 2017 was calculated on the basis of the income approach (the so-called Level 3 of the hierarchy of IFRS 13 – Fair Value measurement) and is based on:  > the consensus forecasts by equity analysts with respect to the forecast revenues for the period 2018-2020 in that they were more prudent than the projections made by management;  > the evaluation criterion is obtained by the sum of parts which also takes into account the contribution of royalties from the Prometeon Tyre Group for the use the Pirelli trademark in relation to the industrial segment;  > the royalty rate applied to the revenues of the Consumer High Value and Consumer Standard segment was deduced from the royalty rates implicit in the valuations made by an independent entity relative to the main brands of the listed companies of the ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.Tyre sector and was equal to an average royalty rate of 4.6%. With reference to the contribution in terms of royalties from the Below are the changes during the year: Prometeon Tyre Group, the royalty rate used as provided for by the license agreement was equal to 2%;  > a discount rate of 9.0%, which included a premium determined on the basis of the risk of the specific asset;  > a growth rate of g in the terminal value assumed to be equal to zero;  > the TAB (Tax Amortisation Benefit) that is, the tax benefit that could potentially benefit the market participant due to the possibility of fiscally amortising the asset. For the purposes of impairment testing, the recoverable amount of the Pirelli Brand cum-TAB was compared with the carrying amount of the Brand cum-TAB and no losses in value emerged. Opening balance Increases Impairment Decreases A sensitivity analysis was also carried out in relation to the Key Assumptions used in the valuation of the royalty rate (for the Merger deficit Consumer evaluation unit and for the contribution in terms of royalties from the Prometeon Group); the discount rate, and the g growth factor. The fair value remained higher than the carrying amount even assuming the following changes in the sole Key assumption:  > a downwardly change in the royalty rates for the Consumer evaluation units of 50 basis points and the simultaneous zero balance Reclassification from provision for risks and charges Closing balance (in thousands of euro) 12/31/2017 12/31/2016 4,930,701 1,141,926 9,707 200,266 (2,262) (4,114) (364,360) (198,686) - 3,791,309 (5,477) - 4,568,309 4,930,701 for royalties from the license agreement with Prometeon Tyre Group;  > an upwardly change in the discount rate of150 basis points;  > a downwardly change in the g growth rate of 150 basis points. 10. INVESTMENTS IN SUBSIDIARIES The increases refer to euro 8,700 thousand for the capital payment in Pirelli & C. Ambiente S.r.l. and euro 1,000 thousand for the capital payment in HB Servizi S.r.l.. The company checks the recognized values of its investments and the existence of impairment indicators on the basis of as set out in paragraph 3 Accounting Standards – Investments in subsidiaries and associates. At December 31, 2017, impairment indicators were identified on investments in Pirelli & C. Ambiente S.r.l and HB Servizi S.r.l. and therefore it was necessary to perform impairment test At December 31, 2017, this item amounted to euro 4,568,309 thousand (euro 4,930,701 thousand at December 31, 2016) and the for the aforementioned investments. The aforementioned impairment test revealed an impairment loss on the investment in Pirelli 4 0 8 breakdown is as follows: HB Servizi S.r.l. Maristel S.p.A. Pirelli & C. Ambiente S.r.l. Pirelli Group Reinsurance Company S.A. Pirelli Ltda Pirelli Servizi Amministrazione e Tesoreria S.p.A. Pirelli Sistemi Informativi S.r.l. Pirelli Tyre S.p.A. Pirelli UK Ltd. Servizi Aziendali Pirelli S.C.p.A. T.P. Industrial Holding S.p.A. before Pirelli Labs S.p.A. Total (in thousands of euro) & C. Ambiente S.r.l for euro 1,128 thousand and in HB Servizi S.r.l for euro 1,134 thousand. 9 0 4 From the other investments in subsidiaries, no impairment indicators were identified and therefore no impairment tests were 12/31/2017 12/31/2016 necessary to be performed. 230 364 1,315 1,315 2,095 - 6,346 6,346 The decrease refers to the allocation, resolved on March 15, 2017, to the sole shareholder Marco Polo International Holding Italy S.p.A. of all the 32,870,380 shares held in TP Industrial Holding S.p.A., carried out through the distribution of reserves for the amount of euro 364,351 thousand. 9,666 9,666 The reclassification of the provision for risks and charges refers to the accrual made at December 31, 2016 related to the investment in Pirelli & C. Ambiente S.r.l. for the settlement of losses exceeding the book value at that date. The provision was reclassified in 2017 to reduce the value of the investment, which became large following the capital contribution of euro 8,700 thousand previously described. Further details are set out in the Annexes to the explanatory notes. 3,238 3,238 1,655 1,655 4,521,792 4,521,792 21,871 21,871 101 103 - 364,351 4,568,309 4,930,701 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.11. INVESTMENTS IN ASSOCIATED COMPANIES The breakdown is as follows: At December 31, 2017, this item amounted to euro 10,204 thousand (euro 33,078 thousand at December 31, 2016) and the breakdown is as follows: Listed securities Prelios S.p.A. Unlisted securities Consorzio per le Ricerche sui Materiali Avanzati (CORIMAV) Eurostazioni S.p.A. - Roma Fenice S.r.l. Focus Investments S.p.A. International Media Holding S.p.A. Total The breakdown of changes is indicated below: 4 1 0 Opening balance Increases Decreases Impairment Closing balance (in thousands of euro) Financial assets available-for-sale 12/31/2017 12/31/2016 - 13,642 104 6,271 2,477 1,352 - 104 6,271 9,048 4,000 13 10,204 33,078 (in thousands of euro) 12/31/2017 12/31/2016 33,078 134,322 - 4,692 (13,655) (11,192) (9,219) (94,754) 10,204 33,078 Listed securities Mediobanca S.p.A. - Milano RCS Mediagroup S.p.A. - Milano Unlisted securities Fin. Priv S.r.l. Fondo Comune di Investimento Immobiliare Anastasia Istituto Europeo di Oncologia S.r.l. Emittenti Titoli S.p.A. Other companies Total The changes in the year are shown below: Opening balance Increases Decreases Fair value adjustment recognised in equity Impairment Reclassification Closing balance (in thousands of euro) 12/31/2017 12/31/2016 149,027 122,167 30,177 19,307 19,908 15,270 6,599 2,748 864 16,471 14,636 6,231 2,729 1,021 224,593 182,562 (in thousands of euro) 12/31/2017 12/31/2016 1 1 4 182,562 199,062 2,459 (2) 13,061 (10,758) 40,486 (16,510) (912) (2,290) - (3) 224,593 182,562 The decreases mainly refer to the disposal of the Prelios S.p.A. investment on December 28, 2017 to Lavaredo S.p.A., a newly established joint stock company designated by the Burlington fund counterparty in the transaction whose closing took place in Increases for the year refer to the purchase of 1,559,250 shares of the company RCS Mediagroup S.p.A. for euro 1,678 thousand and December 2017. The sale generated a capital gain of euro 2,564 thousand. the subscription of 74,555,289 new shares of the investment in Alitalia-Compagnia Aerea Italiana S.p.A. for euro 781 thousand. The item impairment refers for euro 6,571 thousand to the investment in Fenice S.r.l. regarding which an impairment indicator was The fair value adjustments to equity relate mainly to investments in Mediobanca S.p.A. (positive for euro 26,859 thousand), in identified as the company distributed reserves for euro 8,566 thousand, higher than the portion of the result in the consolidated RCS Mediagroup S.p.A. (positive for euro 9,193 thousand), in Fin. Priv. S.r.l. (positive for euro 3,437 thousand), in Fondo Comune di financial statements. The write-down related to the investment in Focus Investments S.p.A. for euro 2,648 thousand is attributable investimento Anastasia (positive for euro 633 thousand), and in Istituto Europeo di Oncologia (positive for euro 368 thousand). to the adjustment of the book value to the fair value of the same inclusive of the “liquidation preference”. The item impairment mainly refers to the equity investment in Alitalia-Compagnia Aerea Italiana S.p.A. (euro 781 thousand) and Further details are set out in the Annexes to the explanatory notes. Movincom Servizi S.r.l. (euro 121 thousand). 12. OTHER FINANCIAL ASSETS For listed securities, the fair value corresponds to the Stock Exchange listing at December 31, 2017. For unlisted securities and real estate funds, the fair value was estimated according to available information. At December 31, 2017, the item in question amounted to euro 224,593 thousand (euro 182,562 thousand at December 31, 2016) and Further details are set out in the Annexes to the explanatory notes. refers to financial assets available for sale, measured at fair value, with changes in fair value recognized in equity. ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.13. OTHER RECEIVABLES 14. TRADE RECEIVABLES The breakdown of other receivables is as follows: Trade receivables amount to euro 52,045 thousand compared to euro 61,692 thousand of the previous year and the breakdown is as (in thousands of euro) follows: 12/31/2017 12/31/2016 Total Non-current Current Total Non-current Current Other receivables from subsidiaries Financial receivables from subsidiaries 2,040 8,793 - - 2,040 2,010 8,793 633,130 - - 2,010 633,130 Guarantee deposits 712 712 - 709 709 - Other receivables from third parties 18,604 14,108 4,496 19,581 14,121 5,460 Receivables from tax authorities for taxes not related to income Financial accrued interest income Financial prepaid expenses 26,224 3,122 489 - - - 26,224 9,616 3,122 98 489 1,536 - - - 9,616 98 1,536 Receivables from subsidiaries Receivables from associates Receivables from other companies Total receivables - gross amount Provision for bad debt Total receivables Total other receivables 59,984 14,820 45,164 666,680 14,830 651,850 Below is the breakdown of trade receivables based on the currency in which they are expressed: (in thousands of euro) 12/31/2017 12/31/2016 42,159 55,830 3 14,088 56,250 1,085 8,836 65,751 (4,205) (4,059) 52,045 61,692 Financial receivables from subsidiaries mainly refer to the interest-bearing current account, settled at market rates, held with Pirelli International Plc for euro 4,082 thousand (at December 31, 2016 equal to euro 201,405 thousand) and to the receivable from 4 1 2 Pirelli International PLC for the charge-back of guarantee commissions for euro 4,771 thousand. The change compared to the previous year is due to the repayment by the subsidiary Pirelli Tyre S.p.A. of the loan of euro 430,000 thousand, which was disbursed in October 2016. Other non-current receivables from third parties mainly refer to a deposit relating to a long-term contract. Receivables from tax authorities for taxes not related to income for euro 26,224 thousand refer mainly to receivables for VAT, which increased compared to the previous year. EUR USD (Dollar USA) RUB (Ruble Russia) Other currencies Total (in thousands of euro) 12/31/2017 % of total trade receivables 12/31/2016 % of total trade receivables 48,139 2,381 5,699 31 56,250 86% 4% 10% - 59,321 2,474 3,956 - 65,751 90% 4% 6% - 3 1 4 Financial accrued interest income refer to portions of interest accrued but not yet collected on cross currency interest swap through Corporate functions. The aforementioned receivables are due within the financial year and do not show overdue balances derivative contracts related to the unsecured syndicated financing “Facilities” granted to Pirelli & C. S.p.A.. significant amount. Receivables from subsidiaries at December 31, 2017 mainly include the amounts that Pirelli & C. S.p.A. charges for services rendered Prepaid financial expenses relate mainly to the commissions on the revolving and term loan credit line. Receivables from other companies of euro 14,088 thousand (euro 8,836 thousand at December 31, 2016), shown gross of the bad debt The book value of financial receivables and other receivables approximates their fair value. provision of euro 4,205 thousand, are past due for euro 8,725 thousand. Overdue receivables and receivables due have been valued in accordance with the Group policies described in the paragraph relating to credit risk management within the “Financial risk management policy”. The impaired receivables include both significant positions written down separately, and positions with similar characteristics in terms of credit risk, grouped and written down on a collective basis. ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.The change in the provision for bad debts is shown below: Opening balance Increases/decreases Closing balance (in thousands of euro) 12/31/2017 12/31/2016 4,059 3,102 146 957 4,205 4,059 For trade receivables, the carrying amount is considered to approximate the applicable fair value. 15. CASH AND CASH EQUIVALENTS At December 31, 2017, they amount to euro 1,749 thousand, against euro 1,805 thousand at December 31, 2016 and refer to balances of bank accounts in euro repayable on demand. The credit risk associated with cash and cash equivalents is to be considered limited because the counterparties are represented by leading national and international banking institutions. 17. DERIVATIVE FINANCIAL INSTRUMENTS The item includes the fair value of derivative instruments. The breakdown is as follows: 12/31/2017 12/31/2016 Non Current Non Current Current Non Current Non Current Current Assets Liabilities Liabilities Assets Liabilities Liabilities (in thousands of euro) Without adoption of hedge accounting Exchange rate derivative instruments - trade positions 95 - 146 515 In hedge accounting > cash flow hedge: Other derivative instruments Total derivative instruments - 95 29,716 29,716 - 146 - 515 - - - - - - The above derivatives are fully stipulated with the Group’s treasury company, Pirelli International PLC. It is believed that the value of cash and cash equivalents is in line with their fair value. 4 1 4 16. TAX RECEIVABLES Derivative financial instruments not in 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 year. These involve hedges of the Company’s commercial transactions for which hedge accounting was not adopted. The fair value is determined by using the forward exchange rate at the reporting date. 5 1 4 At December 31, 2017, they amount to euro 110,632 thousand (euro 84,621 thousand at December 31, 2016). Derivative financial instruments in hedge accounting The value of other derivatives, recognized as non-current liabilities for euro 29,716 thousand, refers to the fair value measurement of 4 cross currency interest rate swaps with the following The amount mainly includes: characteristics:  > receivables from Group companies participating in the tax consolidation for euro 104,054 thousand (euro 77,840 thousand at December 31, 2016). The increase compared to the previous year substantially depends on the greater contribution of the positive taxable result by the subsidiary Pirelli Tyre S.p.A.;  > receivables from the Inland Revenue for IRES for 2008/2014 for euro 5,347 thousand, unchanged compared to December 31, 2016;  > receivables for IRAP advances paid for euro 925 thousand, unchanged compared to the previous year. Instrument CCIRS CCIRS CCIRS CCIRS forward start Notional (in thousands of USD) 170,422 284,037 681,690 170,422 Start date Deadline Description Jul-17 Jul-17 Jul-17 Jul-19 Jul-19 pay floating EURIBOR / receive floating LIBOR Jun-20 pay floating EURIBOR / receive floating LIBOR Jun-20 pay floating EURIBOR / receive floating LIBOR Jun-22 pay fix EURIBOR / receive floating LIBOR (thousands USD) The objective of these derivatives, for which hedge accounting of the cash flow hedge type was adopted, is to hedge the Company against the risk of fluctuations in cash flows associated with changes in the LIBOR rate and changes in the USD/EUR exchange rate, generated by a liability in USD at variable rate with a notional value of USD 1,136,149 thousand, equivalent to euro 947,344 thousand (see note 19 Borrowings from banks and other financial institutions). The change in the fair value of the period negative for euro 29,716 thousand was suspended in equity for euro 7,117 thousand, while euro 22,599 thousand was recognized in the Income Statement under the item “net expenses on derivatives” (note 34). Other things being equal, a hypothetical increase and decrease of 0.50% of the EURIBOR and LIBOR curves would have respectively a positive net impact of euro 1,541 thousand and a negative net impact of euro 1,596 thousand on the shareholders’ equity of the Company. ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.18. SHAREHOLDERS’ EQUITY  > the grouping of the company’s ordinary shares in 1,000,000,000 with respect to 1,461,509,840 shares Reserve from results carried forward At December 31, 2017, the reserve for results carried forward was zero compared to euro 305,402 thousand at December 31, 2016. The decrease was mainly due to the allocation of all the shares of TP Industrial Holding Equity amounted to euro 4,238,372 thousand (euro 3,206,233 outstanding at August 1, 2017. S.p.A. (euro 188,439 thousand) and for allocation to the legal reserve (euro 116,963 thousand). thousand at December 31, 2016). The statement of changes in equity is shown in the main financial statements. Legal reserve At December 31, 2017, the legal reserve amounted to euro 380,875 thousand, with an increase of 228,762 thousand compared to December 31, 2016, following Equity went from euro 3,206,233 thousand at December 31, the allocation to the legal reserve of the amount of euro 2016 to euro 4,238,372 thousand at December 31, 2017. The 116,963 thousand profits carried forward, approved by the positive change is essentially due to the capital increase, Shareholders’ Meeting of March 6, 2017, and the subsequent equal to euro 1,189,375 thousand, inclusive of share premium, allocation to the legal reserve of the amount of euro 111,799 signed in June 2017 by Marco Polo International Italy S.p.A. thousand by means of withdrawals of euro 65,377 thousand (direct shareholder following the merger with Marco Polo from the reserve for results carried forward and of euro International Holding Italy S.p.A.) which was offset by the 46,421 thousand from the merger reserve, approved by the reduction related to the assignment of all the shares of TP Shareholders’ Meeting of August 1, 2017. Industrial Holding S.p.A. (parent company of the Industrial business). In addition, the change is due to the adjustment to fair value of derivatives designated as cash flow hedge (negative for 5,409 thousand), to the fair value adjustment Surplus reserve At December 31, 2017, the share premium reserve amounted to euro 630,381 thousand and was generated of financial assets available for sale (positive for euro 41,925 following the capital increase. thousand) and to the net result for the year (positive for euro 4 1 6 170,851 thousand): Share capital The share capital at December 31, 2017, fully subscribed and paid-in, amounts to euro 1,904,374,935.66 divided into 1,000,000,000 ordinary shares without nominal value. Concentration reserves At December 31, 2017, concentration reserves amounted to euro 12,467 thousand and unchanged compared to December 31, 2016. Other reserves At December 31, 2017, other reserves amounted to euro 92,535 thousand and unchanged compared In accordance with the provisions of art. 2427, no. 7-bis of the Italian Civil Code, in the following table each item of equity is indicated analytically, with indication of its origin, possibility of use and distributability, as well as of its use in previous years: (in thousands of euro) Amount Possible use Available portion Summary of reserves uses in the last 3 previous years Share capital Surplus reserve Legal reserve Other reserves 1,904,375 - 630,381 A, B, C 630,381 380,875 B 380,875 > Concentration reserve 12,467 A, B, C 12,467 - - - - - - - 92,535 A, B 92,535 23,961 - - 1,022,928 A, B, C 1,022,928 - 4,067,522 2,139,186 473,410 1,665,776 7 1 4 > Other Reserves > IAS Reserves > Merger Reserve Retained earnings Total Non distributable Residual available share A to increase the share capital B to cover losses C to distribute to the shareholders The share capital went from euro 1,345,381 thousand gross to December 31, 2016. 19. BORROWINGS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS of portfolio treasury shares (euro 1,342,281 thousand net of portfolio treasury shares), divided into 207,625,214 shares, at December 31, 2016, to euro 1,904,375 thousand, divided into 1,000,000,000 shares at December 31, 2017. IAS reserves At December 31, 2017, the IAS reserves amounted to euro 23,961 thousand and refer to the reserve for the fair value adjustment of financial assets available for The change in the number of shares was determined by the sale (positive for euro 27,342 thousand), to the actuarial gains/ following transactions: losses reserve (positive for euro 2,028 thousand) and the cash  > the conversion of all outstanding special shares into the flow hedge reserve, net of the tax effect (negative for euro corresponding number of ordinary shares, the annulment 5,409 thousand). of all 351,590 ordinary treasury shares and all 772,792 special treasury shares without reducing the share capital and splitting shares in 1,032,504,160;  > the Capital Increase, fully subscribed by Marco Polo Merger reserve At December 31, 2017, the merger reserve amounted to euro 1,022,928 thousand compared to euro International Italy S.p.A. on June 29, 2017, for euro 1,189,375 1,245,261 thousand at December 31, 2016. The reserve was The breakdown of the item borrowings from banks and other financial institutions is as follows: 12/31/2017 12/31/2016 Total Not currents Currents Total Not currents Currents (in thousands of euro) Borrowings from banks 2,331,086 2,331,086 - 4,267,340 4,103,435 163,905 Other financial payables 12,021 561 11,460 4,378 561 3,817 Accrued liabilities 5,396 - 5,396 24,333 - 24,333 Total 2,348,503 2,331,647 16,856 4,296,051 4,103,996 192,055 thousand, of which euro 558,994 thousand allocated generated following the merger by incorporation of Marco The item borrowings from banks refers to the use of the unsecured financing line (“Facilities”) granted to Pirelli & C. S.p.A. as part to share capital and euro 630,381 thousand to the share Polo International Holding Italy S.p.A. in Pirelli & C. S.p.A. in of the refinancing operation, which also involved Pirelli International Plc, signed on June 27, 2017 (with closing on June 29, 2017). The premium reserve, through the issue of 429,005,680 new 2016 and was used in 2017 to increase the legal reserve. portion of lines granted to Pirelli & C. is equal to euro 2.5 billion used for euro 2.4 billion at December 31, 2017. The refinancing of the ordinary shares, without nominal value; Group was carried out at a total cost of less than 1.85% and with maturity at three and five years. The loan initially underwritten by three underwriters was subsequently subject to review at a syndicate of 18 credit institutions on July 7. It is noted that at December 31, ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.2016, the Company was financed by secured credit lines used for euro 4,267,340 thousand. On June 27, 2017, Marco Polo International At December 31, 2017, there are hedging derivatives for interest rate and exchange rate on payables at variable rate in foreign currency. Italy S.p.A. subscribed a share capital increase for Pirelli & C. S.p.A. for approximately euro 1.2 billion, which allowed the Company to reduce the bank debt by the same amount in the new refinancing transaction. The loan is fully classified as long-term borrowings With reference to the presence of financial covenants, it should be noted that the financing (“Facilities”) granted to Pirelli & C. S.p.A. from banks. and Pirelli International Plc requires compliance with a maximum ratio (“Total Net Leverage”) between net indebtedness and gross operating profit as resulting from the Consolidated Financial Statements of Pirelli & C. S.p.A. Failure to comply with the financial The item other financial payables includes euro 9,000 thousand for the payable to the subsidiary Pirelli International Plc and euro covenant is identified as an event of default which, if not remedied and exercised by a number of lending banks representing at least 2,460 thousand for the payable to shareholders following the squeeze out operation. 66 2/3 percent of the total commitment, will result in early repayment (partial or total) of the loan with simultaneous cancellation The accrued expenses item essentially refers to interest that has accrued on the term loans but has not yet been paid (euro 5,396 thousand). of the related commitment. This parameter was fully satisfied at December 31, 2017. Below are the changes in borrowings from banks: Borrowings from banks at December 31, 2016 Drawdowns of secured financing (Senior Facilities) Reimbursements of secured financing (Senior Facilities) Drawdowns of unsecured financing (Facilities) Reimbursements of unsecured financing (Facilities) 4 1 8 Amortisation of bank/financial expenses Exchange differences Borrowings from banks at December 31, 2017 (in thousands of euro) The refinancing envisages a Negative Pledge clause the terms of which are in line with the market standards for this type of 4,267,340 249,108 (4,509,537) 2,879,641 (499,450) 57,265 (113,281) 2,331,086 credit facility. The other outstanding financial payables do not contain financial covenants. It is noted that on January 22, 2018, under the EMTN program approved at the end of 2017 and entered into on January 10, 2018, Pirelli placed a bond at international institutional investors for a nominal amount of euro 600 million with a five-year term at fixed rate. Net financial position (alternative performance indicator not required by IFRS accounting standards) The table below shows the breakdown of the net financial position and net financial debt at December 31, 2017 and December 31, 2016, determined in accordance with the provisions of Consob communication DEM/6064293 of July 28, 2006 and in compliance with the ESMA/2013/319 Recommendations. 9 1 4 The carrying amount of current payables is considered to approximate their fair value. The table below compares the fair value of non-current financial payables with their carrying amount: (in thousands of euro) 12/31/2017 12/31/2016 Carrying amount Fair value Carrying amount Fair value Current borrowings from banks and other financial institutions Non-current borrowings from banks and other financial institutions Non-current derivative financial instruments (liabilities) Borrowings from banks Other financial payables 2,331,086 2,364,230 4,103,996 4,103,996 561 561 561 561 Total gross debt Cash and cash equivalents Total borrowings from banks and other financial institutions - non current 2,331,647 2,364,791 4,104,557 4,104,557 Current financial receivables and other assets Note 12/31/2017 related parties 12/31/2016 related parties (note 37) (note 37) of which of which (in thousands of euro) 19 19 17 15 13 13 16,856 9,001 192,055 2,331,647 4,103,996 29,716 29,716 2,378,219 (1,749) 4,296,051 (1,805) 772 561 (12,404) (11,915) (634,763) (633,227) 2,364,066 (712) 2,363,354 3,659,482 (709) 3,658,774 Net financial debt * Non-current financial receivables and other assets Total net financial (liquidity)/debt position * 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" The breakdown of borrowings from banks and other financial institutions by currency of origin of the payable at December 31, 2017 and December 31, 2016 is as follows: EUR USD (Dollar USA) Total (in thousands of euro) 12/31/2017 12/31/2016 1,403,382 3,573,011 945,121 722,479 2,348,503 4,295,490 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.20. PROVISIONS FOR RISKS AND CHARGES The following is a detail of changes of the item in question: Employees’ leaving indemnities (TFR) The changes in the year 2017 for the employees’ leaving indemnities (TFR) are the following: 12/31/2017 12/31/2016 Opening balance Movements through income statement (in thousands of euro) Total Non-current Current Total Non-current Current Actuarial (gains)/losses recognized in equity (in thousands of euro) 12/31/2017 12/31/2016 1,248 1,136 1,548 1,201 17 55 Opening balance 51,427 45,950 5,477 14,746 14,346 400 Indemnities, advance payments, relocations, payment to funds (1,016) (1,556) Increases Reversals Uses 3,656 3,656 (530) (530) - - 14,873 9,396 5,477 (8,405) (8,405) - (8,875) (3,398) (5,477) (3,287) (2,887) (400) Merger deficit - - Total provision for liabilities and charges 45,678 45,678 - - 33,500 33,500 - 51,427 45,950 5,477 Total employees' leaving indemnities (TFR) 1,385 1,248 The amounts recognized in the income statement are included in the item “Personnel Costs” (note 29). Net actuarial gains accrued in 2017, recognized directly in other comprehensive income, amount to euro 17 thousand and are essentially related to the change in the economic parameters of reference (discount rate and inflation rate). 4 2 0 The provisions for risks and charges refer for euro 33,500 thousand to contingent liabilities (whose outlay is not considered probable) In accordance with national legislation, the amount due to each employee accrues based on the service provided and is paid when identified in the Purchase Price Allocation referable to the decision taken by the European Commission at the conclusion of the the employee leaves the company. The treatment due to the termination of the employment relationship is calculated based on its antitrust investigation initiated with respect to the business of energy cables, which provides for a fine for Prysmian of about euro duration and the taxable remuneration of each employee. The liability, annually revalued on the basis of the official cost of living and 104 million for a portion of which, equal to euro 67 million, Pirelli & C. S.p.A., although not involved in the alleged cartel, is called to statutory interest rate, is not associated with any accrual condition or period, nor with any financial funding obligation; therefore, respond jointly with Prysmian exclusively in application of the so-called “parental liability” principle, because, during part of the there is no activity at the service of the fund. period of the alleged infringement, Prysmian was controlled by Pirelli. The item also includes provisions made for legal and tax disputes (euro 3,471 thousand), labour disputes (euro 3,421 thousand) and other risks, and expenses, mainly expenses for reclamation The discipline was supplemented by Legislative Decree no. 252/2005 and by Law no. 296/2006 (Finanziaria 2007) which, for companies of areas (euro 5,286 thousand). with at least 50 employees, has established that the portions accrued since 2007 be allocated, on the employees’ option, either to the INPS Treasury Fund or to supplementary pension schemes, assuming the nature of “Defined contribution plan”. In any case, for all Increases in the year relate mainly to the provision to adjust the provision to the actual requirements for legal and tax proceedings. companies, the revaluations of the amounts outstanding at the option dates are still accounted for under staff severance indemnities 1 2 4 The releases mainly refer to the release of tax provisions. The reclassification of the provision for risks and charges refers to the accrual made at December 31, 2016 relating to the investment in Pirelli & C. Ambiente S.r.l. for the settlement of losses exceeding the carrying amount of the same at that date. The provision was reclassified in 2017 to reduce the value of the investment, which became large following the capital contribution of euro 8,700 thousand, as described in note 10. 21. PERSONNEL PROVISIONS Personnel provisions amount to euro 2,072 thousand (euro 3,965 thousand at December 31, 2016). The item includes the employees’ leaving indemnities (TFR), which amounts to euro 1,385 thousand (euro 1,248 thousand at December 31, 2016) and other employee benefits for euro 687 thousand (euro 2,717 thousand at December 31, 2016). The decrease compared to the previous year is attributable to the payable relating to the 2016-2018 Long-Term Incentive Plan for the Management of the Pirelli Group, which was classified under other payables, following the early closing of the Plan approved by the Board of Directors on July 28, 2017. Discount rate Inflation rate as well as, for companies with less than 50 employees, also the portions accrued and not allocated to supplementary pensions. The principal actuarial assumptions used at December 31, 2017 are as follows: Discount rate Inflation rate The principal actuarial assumptions used at December 31, 2016 were as follows: 2017 1.6% 1.5% 2016 1.5% 1.0% Hired employees at December 31, 2017 amount to 141 units (134 units at December 31, 2016). In other conditions being equal, a hypothetical change of 0.25% in the discount rate would result in a decrease in liabilities equal to 1.78%, in the case of an increase (2.45% at December 31, 2016), and an increase in liabilities of 1.84%, in the case of a decrease (2.51% at December 31, 2016). ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.22. TRADE PAYABLES 24. PROVISION FOR DEFERRED TAX LIABILITIES The breakdown of trade payables is as follows: The provision for deferred tax liabilities amounted to euro 554,828 thousand at December 31, 2017 (euro 633,330 thousand at (in thousands of euro) December 31, 2016). 12/31/2017 12/31/2016 The breakdown of deferred tax provisions gross of the offsets made is as follows: Payables to subsidiaries Payables to associates Payables to other companies Total trade payables 4,755 64 605 975 24,875 30,845 29,694 32,425 The carrying amount of trade payables is considered to approximate their fair value. 23. OTHER PAYABLES The breakdown of other payables is as follows: 4 2 2 12/31/2017 12/31/2016 Total Non-current Current Total Non-current Current (in thousands of euro) Payables to subsidiaries 27,491 Payables to social security and welfare institutions 3,067 Payables to employees 8,303 - - - 27,491 11,196 3,067 2,480 8,303 10,032 - - - 11,196 2,480 10,032 Other payables 35,377 211 35,166 9,798 311 9,487 Accrued liabilities Deferred income 1,177 8 - - 1,177 250 8 3,681 - - 250 3,681 Total other payable 75,423 211 75,212 37,437 311 37,126 Payables to subsidiaries mainly refer to receivables related to VAT consolidation. Payables to pension and social security institutions are mainly constituted by contributions to be paid to the INPS [National Social Welfare Institute] and INAIL [National Institute for Insurance against Industrial Accidents]. Payables towards employees refer to contributions for fees to be paid to employees. The item mainly includes the payable related to Deferred tax assets Provision for risk and charges Property, plant and equipment Employees provision Provision for bad debt Tax losses carried forward ACE Benefit Interests Derivatives Total deferred tax assets Provision for deferred tax liabilities Brand Exchange differences not realised Deferred tax assets > of which within 12 months > of which over 12 months Provision for deferred tax liabilities > of which within 12 months > of which over 12 months Total (in thousands of euro) 12/31/2017 12/31/2016 85,983 52,964 33,019 - - - (640,811) (633,330) - - (640,811) (633,330) (554,828) (633,330) The tax effect of temporary differences and of tax losses carried forward which make up the item is shown in the following table: (in thousands of euro) 12/31/2017 3 2 4 the 2016-2018 Long-Term Incentive Plan, with respect to the early closing thereof approved by the Board of Directors of Pirelli & C. Total provision for deferred tax liabilities S.p.A. on July 28, 2017, which will be paid in 2018. Total The item Other payables includes payables for fees to be paid to directors and Statutory Auditors, for withholding taxes on income from self-employed and employed work and payables to advisors for commissions related to the IPO. For other current payables it is considered that the carrying value approximates their fair value. 25. TAX PAYABLES These amounted to euro 18,636 thousand (euro 20,043 thousand at December 31, 2016) and mainly include payables for withholding taxes incurred abroad (WHT), transferred from subsidiaries that adhere to the tax consolidation by the Company. 2,103 422 189 1,009 35,421 30,913 14,218 1,708 85,983 (633,330) (7,481) (640,811) (554,828) ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.INCOME STATEMENT 28. RAW MATERIALS AND CONSUMABLES USED 26. REVENUES FROM SALES AND SERVICES Revenues from sales and services amount to euro 42,084 thousand for 2017 compared to euro 55,991 thousand in 2016 and the breakdown is as follows: various materials. 29. PERSONNEL COSTS They amount to euro 183 thousand in 2017 (euro 209 thousand in 2016) and include purchases of advertising material, fuels and (in thousands of euro) 2017 2016 40,070 2,014 42,084 55,270 721 55,991 Sales of services to subsidiaries Sales of services to other companies Total revenues from sales and services Revenues from subsidiaries refer to services provided through Corporate functions. 27. OTHER INCOME Personnel costs amount to euro 26,710 thousand (euro 26,827 thousand in 2016) and the breakdown is as follows: Wages and salaries Social security and welfare contributions Employee leaving indemnities (TFR) Retirement and similar obbligations Other costs Total (in thousands of euro) 2017 2016 19,969 5,129 1,027 232 353 20,450 4,799 950 280 348 26,710 26,827 4 2 4 Other income amounted to euro 105,778 thousand (euro 149,849 thousand in 2016) and the breakdown is as follows: (in thousands of euro) The average staff headcount is the following: Other income from subsidiaries Other revenues from third parties Other income from other companies 2017 2016 98,903 110,524 6,875 39,325 105,778 149,849  > Executives 37  > Employees 102  > Workers 2 Personnel costs in 2017 include non-recurring events for a total of euro 1,691 thousand for retention plan. 30. DEPRECIATION, AMORTIZATION AND WRITE-DOWNS 5 2 4 Other revenues from subsidiaries include royalties paid by the Group’s companies for the use of Pirelli Brand (euro 71,897 thousand The breakdown of the item is as follows: in 2017 compared to euro 79,879 thousand in 2016), recovery of expenses and other revenues (euro 23,019 thousand in 2017 compared to euro 23,045 thousand in 2016), rents and recoveries of management fees on rents (euro 5,731 thousand in 2017 compared to euro 10,275 thousand in 2016). Revenues from other companies mainly include royalties paid by other companies for the use of the Pirelli brand (euro 2,221 thousand in 2017 compared to euro 2,882 thousand in 2016). Amortisation - intangible assets Depreciation - property, plant and equipment Impairment of tangible assets In 2016, other revenues from other companies also included the capital gain deriving from the sale of the Research and Development Total depreciation, amortisation and impairments building located in Milan Bicocca for euro 27,199 thousand and of the building located in San Donato for euro 2,199 thousand. (in thousands of euro) 2017 2016 2,514 2,386 - 4,900 2,798 4,925 1,518 9,241 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.31. OTHER COSTS The breakdown of other costs is as follows: Services rendered by subsidiaries Advertising Consultancy and collaboration services Accruals to provisions Legal and notarial expenses Travel expenses Remuneration of Directors and supervisory bodies Membership fees and contributions Rental and lease instalments IT expenses Energy, gas and water expenses Security service Insurance premiums 4 2 6 Patents and trademarks expenses Cleaning and property ordinary maintenance expenses Property maintenance Bank charges for IPO Other Total other costs 32. NET INCOME (LOSS) FROM EQUITY INVESTMENTS (in thousands of euro) 32.1. Gains on equity investments They amount to euro 2,752 thousand in 2017 (euro 464 thousand in 2016) and the breakdown is as follows: 2017 2016 16,032 33,249 11,863 3,931 4,434 6,904 28,181 11,377 7,954 2,996 10,653 10,746 Capital gain on disposal of investment in Prelios S.p.A. Other gains on equity investments Total (in thousands of euro) 2017 2016 2,564 188 2,752 - 464 464 2,515 1,484 10,662 2,946 1,483 2,863 3,796 719 1,381 901 44,274 13,874 2,719 1,532 8,187 2,457 1,717 2,477 3,428 640 1,618 1,009 - For further details, reference shall be made to note 11 – Investments in associated companies. 32.2. Losses from investments They amount to euro 13,833 thousand (euro 107,159 thousand in 2016) and the breakdown is as follows: Impairment losses on equity investments in subsidiaries: > Pirelli & C. Ambiente S.r.l. > Hb Servizi S.r.l. (in thousands of euro) 2017 2016 7 2 4 1,128 1,134 8,354 1,236 12,401 Impairment losses on equity investments in associates: 167,060 106,343 > Prelios S.p.A. - 28,278 Other costs include non-recurring costs for an amount of euro 62,390 thousand and refer mainly to costs related to the IPO. > Focus Investments S.p.A. > Fenice S.r.l. > Eurostazioni S.p.A. > International Media Holding S.p.A. Impairment losses on other financial assets: > Alitalia S.p.A.- Compagnia Aerea Italiana S.p.A. > Movincom Servizi S.p.A. > GWM Renewable Energy II S.p.A. > Emittente Titoli S.p.A. > Others Total 2,648 6,570 - - 781 120 - 1,441 11 - 19,131 46,666 679 1,881 16 519 - 399 13,833 107,159 For further details, reference shall be made to the notes related to investments in subsidiaries (note 10), associates (note 11) and other financial assets (note 12). ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. From subsidiaries: > Pirelli Tyre S.p.A. - Italy > Pirelli Group Reinsurance Company SA - Switzerland > Pirelli Sistemi Informativi S.r.l. - Italy From associates: > Eurostazioni S.p.A. - Itay > Fenice Srl - Italy > International Media Holding S.p.A.- Italy From other financial assets: > Mediobanca S.p.A. - Italy > ECA Ltd - United the Kingdom > Fin. Priv. S.r.l. - Italy > Emittenti Titoli S.p.A. - Italy > Euroqube S.A. (in liquidation) - Belgium 33. FINANCIAL INCOME The breakdown is as follows: Interests Other financial income Net gains on derivative financial instruments Net gains on exchange rates Total financial income 32.3 Dividends They amount to euro 215,497 thousand in 2017 compared to euro 279,143 thousand in 2016 and the breakdown is as follows: (in thousands of euro) 2017 2016 34. FINANCIAL COSTS The breakdown is as follows: 200,000 169,000 - 300 3,209 - Interest Commissions Net losses on exchange rates Net interest costs on employee benefit obligations Net losses on derivative financial instruments Total financial expenses - 100,353 8,556 15 - - 5,829 4,254 10 757 30 - 11 554 1,727 35 Interests include euro 112,036 thousand for the unsecured financing line (“Facilities”) granted to Pirelli & C. S.p.A. and entered into on June 27, 2017 and euro 23,223 thousand for the secured financing line (“Senior Facilities”) granted to Pirelli & C. S.p.A. repaid early on June 29, 2017, of which euro 41,967 thousand related to the subsequent reversal to the Income Statement of the portion of costs not amortized at the closing date. Interest on the financing is shown net of interest income accrued on hedging instruments on interest rates and exchange rates equal to euro 7,720 thousand. (in thousands of euro) 2017 2016 136,839 1,147 - 24 102,108 240,118 237,367 14,798 34,669 36 - 286,870 Total 215,497 279,143 4 2 8 Net expenses on derivatives refer to forward purchases/sales of foreign currencies to hedge financial payables in currency of the Company, in accordance with the Group foreign exchange risk management policy. For transactions outstanding at the end of the 9 2 4 The dividends collected by Fenice S.r.l refer to the reduction of the company’s capital, implemented by distribution to shareholders period, the fair value is determined using the forward exchange rate at the reporting date. The fair value measurement includes two of the amount collected by Fenice S.r.l. as fee for the sale of the investment held in Prelios S.p.A. to the Burlington fund, in accordance elements: the interest component linked to the interest rate spread between the currencies subject to the individual hedges, a net with the preferential allocation criteria as provided for by the Articles of Association. revenue of euro 8,793 thousand, and the exchange rate component, a net cost of euro 110,218 thousand. Comparing net foreign exchange gains, equal to euro 110,315 thousand, with the exchange rate component of net expenses on derivatives, the impact is almost nil. (in thousands of euro) (“Senior Facilities”) as described under the item interest. Financial expenses include non-recurring events for euro 41,967 thousand relating to the early closing of the secured financing 2017 2016 1,686 4,744 - 110,315 116,745 10,703 227 39,009 - 49,939 35. TAXES The breakdown of taxes is as follows: Current taxes Deferred tax assets/(liabilities) Total income taxes (in thousands of euro) 2017 2016 64,005 76,794 69,741 - 140,799 69,741 Interests mainly refer to interest accrued on financial receivables from group companies. The item other financial income mainly includes guarantee fees charged to other Group companies. Net exchange rate gains of euro 110,315 thousand refer to the adjustment to the exchange rate at the end of the period of the items The positive balance of current taxes for the year 2017 is mainly due to the benefits deriving from the tax consolidation (euro 72,140 expressed in the currency other than the functional one still in effect at the closing date of the Financial Statements and the net thousand), offset by a negative effect of foreign withholding taxes of previous years (euro 4,120 thousand) and taxes related to profits on items closed during the year. previous years (euro 3,992 thousand). ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.Deferred tax assets benefit from the recognition of deferred tax assets on previous tax losses, exceedances of interest expenses not deducted and ACE benefit for euro 80,552 thousand, deferred tax assets on temporary differences for a total of euro 3,723 thousand, 36. NON-RECURRING EXPENSES AND INCOME offset by deferred tax liabilities on unrealized exchange rate difference gains for euro 7,481 thousand. Pursuant to Consob Communication no. DEM/6064293 of July 28, 2006, information is provided below regarding the economic impacts of non-recurring events and transactions of the Company equal to net expenses of euro 9,940 thousand in 2017 and net The item includes non-recurring income for € 96,108 thousand, which includes € 80,552 thousand for the recognition of deferred tax income of euro 15,194 thousand in 2016: assets previously described and € 15,556 thousand for the tax impact of non-recurring charges for the year (note 36). The table below shows the reconciliation of the effective tax rate with the theoretical rate of the Parent Company: (in thousands of euro) 2017 2016 (in thousands of euro) Other income: > Gains on property sales - 29,398 A) Profit/(loss) before taxes B) Theoretical taxes Main causes that give rise to changes between theoretical and effective taxes: Income not subject to taxation Non-deductible costs Uses losses previous years not booked 2017 2016 30,052 (1,264) 7,212 (348) (57,760) (88,766) 20,088 33,872 (37,648) (20,885) Deferred tax assets on previous tax losses and other temporary differences (80,552) - Taxes relating to previous years 8,112 (9,268) Deferred tax assets not recognized on temporary differences of the year 4 3 0 Release of provisions Other C) Effective taxes Theoretical tax rate (B/A) Effective tax rate (C/A) - - (251) 26,127 (7,399) (3,074) (140,799) (69,741) 24% 27.5% -468.5% 5,517.5% Personnel costs: > Retention Plan Other costs: > IPO costs > Other Impact on operating result Financial expenses: > Refinancing impact June 2017 transaction costs Impact on result before taxes Taxes: > Recognition of deferred tax assets on previous losses and other temporary differences > Tax impact on operating result adjustments and financial expenses Impact on net result 37. RELATED PARTY TRANSACTIONS (1,691) (62,390) - - - (7,250) (64,081) 22,148 (41,967) (106,048) 80,552 15,556 (9,940) - 22,148 - (6,954) 15,194 1 3 4 Consolidated tax return It is noted that starting from the 2004 financial year, the Company exercised the option for consolidated taxation as consolidating company, pursuant to article 117 et seq of the t.u.i.r. (Italian Income Tax Code), with Transactions between Pirelli & C. S.p.A. and the subsidiaries mainly concern:  > services (technical, organizational, general) provided by the headquarters to subsidiaries; regulation of relationships arising from the consolidation through specific “Regulations”, which provide for a common procedure for  > royalties for the use of patents for Group companies benefiting from them. the application of laws and regulations. All the transactions listed above are part of the ordinary management of relations between the Parent Company and its subsidiaries. These regulations were updated in subsequent years as a result of changes concerning the companies involved in the agreement Transactions with related parties also included the fees paid to Directors and Key Managers. and the shareholding structure relating thereto, as well as in view of the corrective and supplementary actions of the reference legislation. The aforementioned changes concerned in particular the remuneration of tax losses used by the companies participating in the consolidation. The adoption of the consolidation makes it possible to compensate, with regard to the parent company Pirelli & C. S.p.A., the taxable income or loss of the same parent company with those of its resident subsidiaries which have exercised the option, given that the tax losses accrued during periods prior to the introduction of Group taxation can be used by those companies which are eligible. ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.The following table summarises the items from the Statement of Financial Position and the Income Statement, which include the related party transactions and their relative impact. Balance sheet transactions with related parties The tables below shows the main balance sheet transactions with related parties for the years ended December 31, 2017 and December 31, 2016. (in thousands of euro) (in thousands of euro) 12/31/2017 of which related parties % share 12/31/2016 of which related parties % share Subsidiaries Associates Other related parties Total 31 December 2017 BALANCE SHEET Current assets Trade receivables Other receivables Tax receivables 52,045 43,722 84.0% 61,692 56,915 92.3% 45,164 13,973 30.9% 651,850 635,262 97.5% 110,632 104,054 94.1% 84,621 77,840 92.0% Derivative financial instruments 95 95 100.0% 515 515 100.0% Non-current liabilities Payables to banks and other financial lenders 2,331,647 - 0.0% 4,103,996 561 Derivative financial instruments 29,716 29,716 100.0% - - Current liabilities Payables to banks and other financial lenders 16,856 9,412 55.8% 192,055 6,453 0.0% 0.0% 3.4% 4.9% Trade payables Other payables Tax payables 4 3 2 29,694 4,820 16.2% 32,425 1,582 75,213 27,491 36.6% 37,126 14,876 40.1% 18,637 18,408 98.8% 20,043 19,814 98.9% Derivative financial instruments 146 146 100.0% - - 0.0% 2017 of which related parties % share 2016 of which related parties % share (in thousands of euro) INCOME STATEMENT Revenues from sales and services 42,084 41,349 98.3% 55,991 55,270 98.7% Other income 105,778 99,323 93.9% 149,849 110,524 73.8% Personnel expenses (26,710) (4,780) 17.9% (26,827) (4,482) 16.7% Other costs (167,060) (18,618) 11.1% (106,343) (9,246) Gain on equity investments 2,753 2,564 93.1% 464 - 8.7% 0.0% Trade receivables Other current receivables Tax receivables Derivative financial instruments (current assets) Payables to banks and other lenders (current liabilities) Trade payables Other payables Tax payables Derivative financial instruments (current liabilities) 42,159 13,973 104,054 95 9,412 4,755 26,814 8,513 146 Derivative financial instruments (non-current liabilities) 29,716 3 - - - - 64 - - - - 1,560 - - - - - 677 9,895 - - 43,722 13,973 104,054 95 9,412 4,820 27,491 18,408 146 29,716 (in thousands of euro) Trade receivables Other receivables (current) Tax receivables Derivative financial instruments (current assets) Payables to banks and other lenders (non-current) Payables to banks and other lenders (current) Trade payables Other payables Tax payables Subsidiaries Associates Other related parties Total 31 December 2016 55,822 633,533 77,840 515 - 5,681 754 14,876 19,814 1,093 1,729 - - 561 772 826 - - - - - - - - 2 - - 56,915 635,262 77,840 515 561 6,453 1,582 14,876 19,814 3 3 4 Trade receivables amounted to euro 43,722 thousand (euro 56,915 thousand at December 31, 2016) and mainly refer to receivables for services/provisions provided to Group companies (euro 34,596 thousand from Pirelli Tyre S.p.A., euro 5,625 thousand from Losses on equity investments (13,833) (11,480) 83.0% (107,159) (104,344) 97.4% Limited Liability Company Pirelli Tyre Russia, euro 532 thousand from Pirelli Sistemi Informativi S.r.l., euro 481 thousand from Pirelli Dividends Financial income 215,496 208,871 96.9% 279,143 272,563 97.6% International Plc, euro 400 thousand from Pirelli Tyre Trading (Shanghai Co. Ltd.). The item also includes, for euro 1,560 thousand, 116,745 10,681 9.1% 49,939 49,714 99.5% trade receivables due from Prometeon group companies. Financial expenses (240,118) (103,275) 43.0% (286,870) (6,878) 2.4% Other current receivables amounted to euro 13,973 thousand (euro 635,262 thousand at December 31, 2016) and mainly refer for euro 4,082 thousand to the intra-group current account with Pirelli International Plc; euro 4,711 thousand in guarantee fees charged to Pirelli International Plc, for euro 3,122 thousand to the interest accrual accrued on CCIRS stipulated with Pirelli International Plc; for euro 2,040 thousand to VAT receivables transferred to the consolidation (euro 1,431 thousand from Pirelli Industrie Pneumatici S.r.l., euro 317 thousand from Pirelli Sistemi Informativi S.r.l., euro 226 thousand from Pirelli Servizi Amministrazione e Tesoreria S.p.A.). Tax receivables amounted to euro 104,054 thousand (euro 77,840 thousand at December 31, 2016) and refer to receivables from Group companies that adhere to tax consolidation (mainly euro 98,716 thousand from Pirelli Tyre S.p.A., euro 2,828 thousand from Pirelli Sistemi Informativi S.r.l., euro 2,420 thousand from Pirelli Industrie Pneumatici S.r.l.). ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.Derivative financial instruments (current assets) for euro 95 thousand (euro 515 thousand at December 31, 2016) refer to hedging (in thousands of euro) transactions with Pirelli International Plc. Subsidiaries Associates Other related parties Total 2016 Borrowings from banks and other financial institutions (current) amounted to euro 9,412 thousand (euro 6,453 thousand at December 31, 2016) and refer to the financing and related accruals with Pirelli International Plc. Revenues from sales and services 55,270 - Trade payables amounted to euro 4,820 thousand (euro 1,582 thousand at December 31, 2016) and mainly refer to payables for the provision of services. The main ones are: euro 2,500 thousand to HB Servizi S.r.l., euro 716 thousand to Pirelli Sistemi Informativi S.r.l., euro 646 thousand to Pirelli Tyre S.p.A., euro 619 thousand to TP Trading (Beijing) Co. Ltd., euro 313 thousand to Pirelli Amministrazione e Tesoreria S.p.A.. Other income Personnel expenses Other costs Losses from investments (9,590) (94,754) Result from investments - Dividends 172,209 100,353 Other payables amounted to euro 27,491 thousand (euro 14,876 thousand at December 31, 2016) and mainly refer to payables with Group companies that adhere to the VAT consolidation. The main ones are: euro 24,603 thousand to Pirelli Tyre S.p.A., euro 210 Financial income Financial expenses 49,709 (6,878) 5 - thousand to Driver Servizi Retail S.r.l.. 109,223 1,301 - - 55,270 110,524 - - (4,482) (4,482) (5,954) (950) (2,342) (9,246) - - - - (104,344) 272,563 49,714 (6,878) Tax payables amounted to euro 18,408 thousand (euro 19,814 thousand at December 31, 2016) and refer for euro 8,338 thousand to Revenues from sales and services amounted to euro 41,349 thousand in 2017 (euro 55,270 thousand in 2016) and mainly refer to payables to subsidiaries that adhere to the tax consolidation and for euro 9,895 thousand) to the payable to Prometeon Tyre Group service contracts. The main relations with subsidiaries are: euro 38,600 thousand - Pirelli Tyre S.p.A., euro 451 thousand - Pirelli & C. S.r.l. for adhesion to the tax consolidation. Ambiente S.r.l., euro 402 thousand - Pirelli Sistemi Informativi S.r.l., euro 298 thousand - HB Servizi S.r.l.. The amount of euro 146 thousand (nil at December 31, 2016) of derivative financial instruments – current liabilities refers to Relations with other related companies refer for euro 1,279 thousand to the service/provisions contract with Prometeon Tyre Group S.r.l.. hedging transactions with Pirelli International Plc. The amount of euro 29,716 thousand of derivative financial instruments (non-current liabilities) refers to the fair value of other Pirelli Tyre S.p.A., euro 2,053 thousand with Limited Liability Company Pirelli Tyre Russia); other recoveries (euro 19,964 thousand Other income for euro 99,323 thousand in 2017 (euro 110,524 thousand in 2016) mainly refers to: royalties (euro 69,826 thousand with 5 3 4 4 3 4 derivatives outstanding with Pirelli International Plc. Profit and loss transactions with related parties The tables below show the main financial transactions with related parties for the years 2017 and 2016. (in thousands of euro) Revenues from sales and services Other income Personnel expenses Other costs Subsidiaries Associates Other related parties Total 2017 40,070 98,903 - 384 1,279 41,349 36 99,323 from Pirelli Tyre S.p.A., euro 1,007 thousand from Pirelli International Plc, euro 4 thousand from Pirelli Tyre Trading (Shanghai) Co.Ltd.); lease contracts (euro 4,889 thousand with Pirelli Tyre S.p.A., euro 255 thousand with Pirelli Servizi Amministrazione e Tesoreria S.p.A.). The amount shown in associates for euro 384 thousand refers to maintenance costs on rents with Prelios S.p.A.. Other costs for euro 16,032 thousand in 2017 (euro 7,596 thousand in 2016) mainly refer to charges for services and miscellaneous costs (euro 9,309 thousand Pirelli Sistemi Informativi S.r.l., euro 2,524 thousand HB Servizi S.r.l., euro 1,025 thousand Pirelli Servizi Amministrazione e Tesoreria S.p.A., euro 1,263 thousand TP Trading (Beijing) Co. Ltd, euro 822 thousand Pirelli Tyre S.p.A., euro 371 thousand Servizi Aziendali Pirelli S.C.p.a.). - - (4,780) (4,780) In the item associates, the amount shown refers to relations with the Consortium for Research on Advanced Materials – Corimav. (15,773) (259) (2,586) (18,618) The gain on equity investments for euro 2,564 thousand in 2017 mainly refers to the capital gain realized on the disposal of Prelios S.p.A.. Gains on equity investments - 2,564 Losses from investments (2,262) (9,218) Dividends Financial income Financial expenses 200,300 8,571 10,681 (103,275) - - - - - - - 2,564 (11,480) 208,871 10,681 (103,275) Losses from investments for euro 11,480 thousand in 2017 (euro 104,345 thousand in 2017) mainly refer to the write-downs of investments in Pirelli & C. Ambiente S.r.l., HB Servizi S.r.l., Fenice and Focus. For further details, reference is made to note 32. Dividends for euro 208,871 thousand in 2017 (euro 272,563 thousand in 2016) refer to dividends received in 2017 (euro 200,000 thousand from Pirelli Tyre S.p.A. and euro 300 thousand from Pirelli Sistemi Informativi S.r.l.). The amount shown in the item associates mainly refers to the distribution of reserves made by Fenice S.r.l. (euro 8,556 thousand). Financial income for euro 10,681 thousand in 2017 (euro 49,714 thousand in 2016) refers to euro 4,711 thousand for the charge-back of fees to Pirelli International Plc, euro 1,878 thousand to interest income on receivables from subsidiaries and for the remaining amount to net exchange rate gains. ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. Financial expenses amounted to euro 103,275 thousand (euro 6,878 thousand at December 31, 2016) and mainly refer to net expenses on derivatives for euro 102,108 thousand and for euro 1,167 thousand to interest accrued on existing relationships with Pirelli International Plc. 39. COMMITMENTS AND RISKS 40. INFORMATION PURSUANT TO ART. 149 – DUODECIES OF THE CONSOB ISSUERS’ REGULATION Guarantees On November 18, 2014, a bond for a total of euro 600 million was issued by Pirelli International Plc at a price Pursuant to Art. 149 – duodecies of the Consob Issuers’ Regulation, the following table shows the fees pertaining to 2017 for the auditing activities and other services rendered by the Auditing Company PricewaterhouseCoopers S.p.A. and by the companies of equal to 99.498% of the nominal value and originally placed the PricewaterhouseCoopers network: Benefits for key managers At December 31, 2017, remuneration payable to key managers amounted to euro with institutional investors, interest-bearing at a fixed rate of 1.75% on a annual basis and maturing on November 18, 2019. It is specified that the aforementioned bond was originally 7,367 thousand. The portion relating to employee benefits was guaranteed, on the basis of an independent first demand recognized in the Income Statement item “personnel costs” guarantee, by Pirelli Tyre S.p.A., to which Pirelli & C. S.p.A. was for euro 4,780 thousand and for euro 2,587 thousand in the subsequently added on July 26, 2016 as additional guarantor. Income Statement item “other costs”. 38. REMUNERATION FOR DIRECTORS AND STATUTORY AUDITORS On June 27, 2017, Pirelli International Plc and Pirelli & C. S.p.A. (simultaneously as financed party and guarantor of the other party and also the “Beneficiaries”) together with Pirelli Tyre, Pirelli Deutschland GmbH, S.C. Pirelli Tyres România S.r.l. and Pirelli Pneus Ltda (the “Original Guarantors” and, together The fees due to Directors of Pirelli & C. S.p.A. amounted to euro with the Beneficiaries, the “Obliged Parties”), on the one 2,133 thousand in 2017 and euro 1,373 thousand in 2016. The fees hand, J.P. Morgan Europe Limited, as Agent (the “Agent”) due to the Statutory Auditors for the function performed at and a series of financing banks including J.P.Morgan Limited, Pirelli & C. S.p.A. amounted to euro 296 thousand in 2017 (euro Banca IMI S.p.A., and The Bank of Tokyo-Mitsubishi UFI, Ltd. Company that provided the service Company that received the service Partial fees Total fees (in thousands of euro) Independent auditing services (1) PricewaterhouseCoopers S.p.A. Pirelli & C. S.p.A. 1,920 Independent certification services (2) PricewaterhouseCoopers S.p.A. Pirelli & C. S.p.A. 1,973 Services other than auditing (3) PricewaterhouseCoopers S.p.A. Pirelli & C. S.p.A. 405 45% 46% 9% (1) the item "Independent auditing services" includes 1.850 thousands of euro paid for the audit of the Interim carve out consolidated financial statements of the Pirelli of the Consumer Business included in the Registration Document released for the IPO of Pirelli & C. S.p.A. in the Milan Stock Exchange, successfully completed on October 4, 2017. (2) the item "Independent certification services" includes amounts paid for certification services for the IPO of Pirelli & C. S.p.A. in the Milan Stock Exchange, successfully completed on October 4, 2017 (1.973 thousands of euro). (3) the item "Services other than auditing" include amounts paid for services other than auditing awarded before October 4, 2017, date of completion of the IPO of Pirelli & C. S.p.A. In the Milan Stock Exchange. Total 4,298 100% 4 3 6 280 thousand in 2016). on the other, have signed a financing contract, regulated by English law, for a maximum amount of euro 4.2 billion. Of the aforementioned banking line, the portion of lines granted in favour of Pirelli & C. S.p.A. at December 31, 2017 equal to euro 2.5 billion, of which euro 2.4 billion used; the lines granted in 41. SIGNIFICANT EVENTS SUBSEQUENT TO THE YEAR-END 7 3 4 favour of Pirelli International Plc instead amounted to euro 1.6 On January 10, 2018, Pirelli initiated the sale of the ordinary shares held in Mediobanca S.p.A. reserved to “qualified investors” in Italy billion used for euro 1 billion. Pirelli & C. S.p.A. has undertaken a and institutional investors abroad, pursuant to Regulation S of the United States Securities Act of 1933 as subsequently amended, solid commitment with the Original Guarantors to guarantee and in the United States of America limited to “Qualified Institutional Buyers” pursuant to the Rule 144 A of the United States the reimbursement of all uses made by Pirelli International Securities Act of 1933, through an accelerated bookbuilding procedure. On January 11, 2018, Pirelli announced that it had successfully Plc under and for the entire duration of the new unsecured completed the sale - through the aforementioned procedure - of 15,753,367 ordinary shares held in Mediobanca - corresponding financing, which is not backed by real guarantees. to approximately 1.8% of the share capital with voting rights and representing the entire investment held directly by Pirelli in Mediobanca. Total net proceeds for Pirelli deriving from the transaction amounted to approximately euro 152.8 million. On January 22, 2018, under the EMTN program approved at the end of 2017 and entered into on January 10, 2018, Pirelli placed a bond at international institutional investors for a nominal amount of euro 600 million with a five-year term at fixed rate. The issue, with a yield of 110 basis points on the reference rate, allows the debt to be optimized by extending the maturities and reducing the cost. As evidence of investor confidence towards Pirelli, the loan saw collection of orders at closing for euro 2.4 billion from around 280 international investors. The effective yield at maturity is 1.479% and the securities are admitted to listing on the Luxembourg Stock Exchange. On February 26, 2018 the Board of Directors of Pirelli, in line with that which was announced during the IPO, approved the adoption of a new 3-year 2018-2020 monetary incentive plan (LTI Plan) – destined to all management (about 290 people) – correlated to the targets for the period 2018/2020 contained in the 2017/2020 industrial plan. The LTI (Long Term Incentive) Plan was approved – also in accordance with article 2389 of the civil code – at the proposal of the Remuneration Committee and with the favourable opinion of the Board of Statutory Auditors, in relation to the subjects for whom this opinion is requested. In the part linked to Total Shareholder Return, the LTI Plan will be submitted for approval at the Shareholders’ meeting called to approve results for the 12 months ended on 31 December 2017. The LTI Plan, in line with the mechanisms of variable retribution adopted at the international level, is also based on the performance of Pirelli shares (Total Shareholder Return) allowing in this way the alignment of management and shareholder ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. interests. The LTI Plan – as in the past totally self-financed, Manufacturing, Francesco Sala; the Executive Vice President in so far as the relative charges are included in the economic Business Unit Prestige & Motorsport & COO Region Europe, Andrea ANNEXES TO THE EXPLANATORY NOTES figures of the industrial plan – includes an on/off condition, Casaluci and the Executive Vice President Pirelli Digital, Luigi MOVEMENTS OF INVESTMENTS IN SUBSIDIARIES FROM 12/31/2016 TO 12/31/2017 (CONTINUED) represented by the company’s deleveraging (Net Financial Staccoli. The LTI plan also applies to senior managers and Position/Ebitda Adjusted ratio below 2 times on 31 December Executives of the Group (including board member Giovanni 2020) and the following targets: Tronchetti Provera) and can be also extended to those who, > Group Return on Sales (ROS), with a weight at target of 30% during the course of the 3-year period, assume, either through of the LTI premium; internal career growth or new hiring, an Executive position. > Group “absolute” Total Shareholder Return, with a weight at target of 40% of the LTI premium; The LTI Plan is also aimed at retention. In the event that > Group “relative” Total Shareholder Return compared with a the employee relationship ends before the end of the 3-year selected panel of peers, with a weight at target of 20% of period, with the exception of natural circumstances, the the LTI premium; recipient’s ceases to participate in the LTI Plan and as a INVESTMENTS IN SUBSIDIARIES ITALY Unlisted: Pirelli Servizi 12/31/2016 CHANGES 12/31/2017 Carrying Number amount (in % of shares thousands holding of which direct Number of shares of euro) (in thousands of euro) Carrying Number amount in % of which of shares thousands holding direct of euro  > Position of Pirelli on the Dow Jones Sustainability World Index consequence the LTI premium will not be provided, not even Amministrazioni e 2,047,000 3,237 100 100 ATX Auto Components sector, with a weight at target of pro-quota. In the case of Board Members holding particular 10% of the LTI premium. roles to whom specific attributions are delegated (it is the case The LTI Plan terminates on 31 December 2020 and sets in the of the Executive Vice Chairman and Chief Executive Officer second quarter of 2021 the date of the eventual payment of Mr. Marco Tronchetti Provera) who cease in the role because the medium/long term incentive matured, on condition that, their mandate has been completed and are not subsequently on 31 December 2020, the relationship as an employee of the nominated, not even as board members, pro-quota payment participant has not ended. of the LTI premium is foreseen. TP Industrial Holding S.p.A. Pirelli Sistemi Informativi S.r.l. Pirelli & C. Ambiente S.r.l. Tesoreria S.p.A. Maristel S.p.A. 1,020,000 1,315 100 100 - - - 2,047,000 3,237 100 100 - 1,020,000 1,315 100 100 203,666,000 364,351 100 100 (203,666,000) (364,351) - - - - 1 share 1,655 100 100 1 share - 100 100 - - - - 1 share 1,655 100 100 2,096 1 share 2,096 100 100 - 558,154,000 4,521,792 100 100 For further information on the operation of the LTI Plan, please Pirelli Tyre S.p.A. 558,154,000 4,521,792 100 100 4 3 8 The participants in the LTI plan include, among others, the refer to the Remuneration Report which will be submitted (for Executive Vice Chairman and Chief Executive Officer of Pirelli & C. the part relating to the Pirelli Remuneration Policy for 2017) Servizi Aziendali Pirelli S.C.p.A. 95,940 103 100 92.3 (962) (3) 94,978 101 100 91.3 9 3 4 S.p.A., Marco Tronchetti Provera, the Executive Vice President to the advisory vote of the Shareholders’ Meeting called to and Chief Financial Officer, Francesco Tanzi; the Executive Vice approve the Annual Financial Report at December 31, 2017, as President and Chief Planning and Controlling Officer, Maurizio well as the illustrative report and the informative document Sala; the Executive Vice President and Strategic Advisor Technology, related to the LTI Plan that will be made available to the public, Maurizio Boiocchi; the Executive Vice President and Chief within the terms and according to the procedures envisaged Commercial Officer Roberto Righi; the Senior Vice President by the regulations, also regulatory, in force. HB Servizi S.r.l. 1 share 364 100 100 - (134) 1 share 230 100 100 Total investments in Italian subsidiaries 4,892,819 (362,392) 4,530,427 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. MOVEMENTS OF INVESTMENTS IN SUBSIDIARIES FROM 12/31/2016 TO 12/31/2017 MOVEMENTS OF INVESTMENTS IN ASSOCIATES FROM 12/31/2016 TO 12/31/2017 12/31/2016 CHANGES 12/31/2017 12/31/2016 CHANGES 12/31/2017 Carrying Number amount (in % of shares thousands holding of which direct Number of shares of euro) (in thousands of euro) Carrying Number amount (in % of which of shares thousands holding direct of euro) Carrying Number amount (in % of shares thousands holding of which direct Number of shares of euro) (in thousands of euro) Carrying Number amount (in % of which of shares thousands holding direct of euro) FOREIGN COMPANIES Brazil Pirelli Ltda 14,000,000 9,666 100 100 Pirelli Latam Participações Ltda. Pirelli Pneus Ltda Pirelli Comercial de Pneus Brasil Ltda. UK 1 1 1 - - - - - - - - - - - (1) (1) - 14,000,000 9,666 100 100 - - - 1 - - - - - - - - - - - Pirelli UK Ltd. 163,991,278 21,871 100 100 - - 163,991,278 21,871 100 100 INVESTMENTS IN ASSOCIATES ITALY Listed Prelios S.p.A. 148,127,621 13,643 12.9 12.9 (148,127,621) (13,643) - Total listed Italian companies Unlisted 13,643 (13,643) - - - - Fenice S.r.l. 1 share 9,048 69.9 69.9 - (6,571) 1 share 2,478 69.9 69.9 Consorzio per le Ricerche sui Materiali Avanzati (CORIMAV) 1 share 104 100 100 Eurostazioni S.p.A. 523,328 6,271 32.7 32.7 - - - 1 share 104 100 100 - 52,333,333 6,271 32.7 32.7 Switzerland Pirelli Group Reinsurance Company S.A. Total investments in foreign subsidiaries Total investments in subsidiaries 4 4 0 800,000 6,346 100 100 - - 800,000 6,346 100 100 International Media Holding S.p.A. 12,500 13 28 28 (12,500) (13) - - - - 37,883 4,930,701 - 37,883 (362,392) 4,568,309 Focus Investments S.p.A. 111,111 4,000 8.3 8.3 - (2,648) 111,111 1,352 8.3 8.3 Total unlisted companies Total investments in associates - Italy Total investments in associates - foreign entities Total investments in associates 19,435 33,078 (9,231) 10,204 (22,874) 10,204 - - 33,078 (22,874) 10,204 1 4 4 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. MOVEMENTS OF OTHER FINANCIAL ASSETS FROM 12/31/2016 TO 12/31/2017 (CONTINUED) MOVEMENTS OF OTHER FINANCIAL ASSETS FROM 12/31/2016 TO 12/31/2017 (CONTINUED) 12/31/2016 CHANGES 12/31/2017 12/31/2016 CHANGES 12/31/2017 Carrying Number amount (in % of shares thousands holding of which direct Number of shares of euro) (in thousands of euro) Carrying Number amount (in % of which of shares thousands holding direct of euro) Carrying Number amount (in % of shares thousands holding of which direct Number of shares of euro) (in thousands of euro) Carrying Number amount (in % of which of shares thousands holding direct of euro) INVESTMENTS IN OTHER COMPANIES ITALIAN LISTED COMPANIES Mediobanca S.p.A. 15,753,367 122,167 RCS Mediagroup S.p.A. 23,135,668 19,307 1.8 4.4 1.8 - 26,860 15,753,367 149,027 4.4 1,559,250 10,871 24,694,918 30,177 1.8 4.7 1.8 4.7 Intek Group S.p.A. (Ex Fin Breda S.p.A. 11,825 2 0.0 0.0 (11,825) (2) - - - - in liquidation) Total other Italian listed companies Total other foreign listed companies Total other listed companies 141,477 - 141,477 37,728 179,204 - - 37,728 179,204 4 4 2 ITALIAN UNLISTED COMPANIES Aree Urbane S.r.l. (in liquidation) C.I.R.A. - Centro Italiano di Ricerche Aerospaziali S.c.p.A. Alitalia Compagnia Aerea Italiana S.p.A. CEFRIEL - Società Consortile a Responsabilità limitata Consorzio DIXIT (in liquidation) MIP Politecnico di Milano - Graduate School of Business società consortile per azioni già Consorzio per L'Innovazione nella Gestione di Azienda -Mip- (Master Imprese Politecnico) Consorzio Milano Ricerche Societa' Generale per la Progettazione Consulenze e Partecipazioni (ex Italconsult) S.p.A. 1 share - 0.3 0.3 30 - 0.1 0.1 - - - 1 share - - - - 30 - 0.1 0.1 1,087,543,374 - 1.7 1.5 74,555,289 - 1,162,098,663 - 1.7 1.7 1 share - 5.2 5.2 1 share - 14.3 14.3 - - - 1 share - 4.9 4.9 - 1 share - 14.3 14.3 12,000 - 3.4 3.4 - - 12,000 - 3.1 3.1 1 share - 7.1 7.1 - - 1 share - 9.0 9.0 3 4 4 1,100 - 3.7 3.7 Emittenti Titoli S.p.A. 229,000 2,729 2.8 2.8 F.C. Internazionale Milano S.p.A. 55,805,625 - 0.5 0.5 Fin. Priv. S.r.l. 1 share 16,472 14.3 14.3 Istituto Europeo di Oncologia S.r.l. Nomisma - Società di Studi Economici S.p.A. Redaelli Sidas S.p.A. (in liquidation) Consorzio Movincom S.c.r.l. 1 share 6,231 6.1 6.1 959,429 236 3.3 3.3 750,000 - 4.6 4.6 1 6 5.9 5.9 Movincom Servizi S.p.A. 135,102 120 Tiglio I S.r.l. 1 share 98 Genextra S.p.A. 592,450 513 4.4 0.6 0.6 4.4 0.6 0.6 - - - - - - - - - - - - 1,100 - 3.7 3.7 19 229,000 2,748 2.8 2.8 - 55,805,625 - 0.4 0.4 3,437 1 share 19,909 14.3 14.3 368 1 share 6,599 6.1 6.1 9 959,429 245 3.3 3.3 - 750,000 - 4.6 4.6 1 (120) 135,102 6 - (11) 1 share 87 (32) 592,450 481 5.9 5.9 4.4 0.6 0.6 4.4 0.6 0.6 Total other Italian unlisted companies 26,404 3,670 30,075 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. FOREIGN COMPANIES Libia Libyan-Italian Joint Company - ordinary shares B Belgium Euroqube S.A. (in liquidation) U.S.A. Gws Photonics Inc - Wilmington - private shares B Gws Photonics Inc - Wilmington - private shares C UK 4 4 4 Total other foreign companies OTHER PORTFOLIO SECURITIES Fondo Comune di Investimento Immobiliare - Anastasia TOTAL OTHER PORTFOLIO SECURITIES TOTAL OTHER FINANCIAL ASSETS MOVEMENTS OF OTHER FINANCIAL ASSETS FROM 12/31/2016 TO 12/31/2017 LIST OF INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES (PURSUANT TO ART. 2427 OF THE CIVIL CODE) 12/31/2016 CHANGES 12/31/2017 Carrying Number amount (in % of shares thousands holding of which direct Number of shares of euro) (in thousands of euro) Carrying Number amount (in % of which of shares thousands holding direct of euro) INVESTMENTS IN SUBSIDIARIES - ITALY Legal address Carrying amount Share % Share capital Attributable equity Attributable net income (in thousands of euro) 300 32 1.0 1.0 - - 300 32 1.0 1.0 67,570 13 17.8 17.8 - - 67,570 13 17.8 17.8 1,724,138 - 194,248 - - - - - - - - 1,724,138 - - 194,248 - - - - - Pirelli Servizi Amministrazione e Tesoreria S.p.A. Maristel S.p.A. Pirelli Ambiente S.r.l. Pirelli Sistemi Informativi S.r.l. Milan 3,237 Milan Milan Milan 1,315 2,096 1,655 Pirelli Tyre S.p.A. Milan 4,521,792 Servizi Aziendali Pirelli S.c.p.a. HB Servizi S.r.l. Milan Milan 101 230 Total investments in subsidiaries - Italy 4,530,426 INVESTMENTS IN FOREIGN SUBSIDIARIES Switzerland 100% 100% 100% 100% 100% 91.3% 100% 2,047 3,675 563 1,020 2,039 (70) 10 2,083 (1,141) 1,010 8,031 5,802 558,154 1,444,381 329,438 104 10 285 7 94 (1,270) Eca International 100 - 2.8 2.8 - 45 - - 100 - 2.8 2.8 45 Brasil Pirelli Ltda UK Sao Paulo 9,666 100% 3,527 1,054 (783) 5 4 4 Pirelli UK Ltd. London 21,871 100% 184,835 20,863 (660) Pirelli Group Reinsurance Company S.A. Lugano 6,346 100% 6,836 19,816 5,468 53 shares 14,636 - - - 633 53 shares 15,270 - - Total investments in subsidiaries Total investments in foreign subsidiaries 37,883 4,568,309 14,636 182,562 633 15,270 42,031 224,593 INVESTMENTS IN ASSOCIATES - ITALY Consortium for the reasearch into advanced material (CORIMAV) Milan 104 100% 104 104 - Eurostazioni S.p.A. ** Rome 6,271 32.7% 16,000 6,266 (16) Fenice S.r.l. Focus Investments S.r.l. Milan Milan 2,477 69.9%* 1,352 8.3%* * * * * Total investments in associates - Italy Total investments in associates * Data not yet available. ** Balance sheet at July 31, 2017. 10,204 10,204 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. REPORT OF TO THE SHAREHOLDERS’ MEETING BOARD OF THE STATUTORY AUDITORS The Management Report on Operations summarises the principal risks and uncertainties and outlines the business outlook. 4 4 6 To the Shareholders, The Board of Statutory Auditors is required to report to the Shareholders’ Meeting, called to approve the Financial Statements, on the supervisory activities performed during the financial year and on any omissions or misconduct which it might have identified, pursuant to Article 153 of Legislative Decree No. 58/1998 (“TUF”). The Board of Statutory Auditors may also make proposals regarding the financial statements and their approval and other matters under its responsibility. The Board of Statutory Auditors performed its supervisory activities during the financial year in accordance with the requirements envisaged by law and taking into account the code of conduct recommended by the Italian Accounting Profession (Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili), Consob’s regulations governing corporate controls and the activities of the Board of Statutory Auditors, as well as recommendations of the Self-Governance Code of listed companies, which Pirelli & C. S.p.A (hereafter “Pirelli” or the “Company” ) has adopted. The Board of Statutory Auditors and its members performed their supervisory roles, as well as by participating to the Board of Directors meetings and to the internal Board Committees meetings, also via a continuous exchange of information with relevant corporate administrative, audit and compliance functions and with members of the Board of Statutory Auditors of key subsidiaries and of firms entrusted with statutory audit services. * * * The 2017 financial year was marked by significative corporate events. Two years after the company’s delisting, following the take over bid by China National Chemical Corporation for the acquisition of Camfin S.p.A shareholding, Pirelli was listed again on October 4, 2017. Trading on the Stock Exchange followed a reorganisation process which led to the stripping off of the Industrial segment and to a stronger focus on the Consumer business. The company incorporated new functions and set up new business lines (Consumer Marketing, Digital, data Science, Cyber and Velo). Following the reorganisation process, the Company presents itself as a “pure consumer tyre player”. The Board of Statutory Auditors acknowledges that Pirelli, during the period when the Company was not listed on regulated markets, maintained its risk control and management functions as well as the organisational governance and compliance structure, which are typical of a listed company, thus facilitating the supervisory function of the Board of Statutory Auditors. * * * It is important to note that the financial statements of Pirelli were prepared in accordance with the IAS/IFRS International accounting standards issued by the International Accounting Standards Board (IASB) and endorsed by the European Union, in force at December 31, 2017, and also in compliance with the provisions issued in implementation of Article 9 of Legislative Decree No. 38/2005. The Company’s Financial Statements consist of the Statement of Financial Position, the Income Statement, the Statement of Other Comprehensive Income, the Statement of Changes in Equity, the Statement of Cash Flow and the Explanatory Notes. The Financial Statements are accompanied by the Management Report on Operations, and include the Report on Corporate Governance and the Structure of Share Ownership – prepared pursuant to Article 123-bis of the TUF – as well as the Supply Chain Sustainable Management System Report (non financial consolidated statement pursuant to articles 3 and 4 of Legislative Decree 254, December 30, 2016). Pirelli’s 2017 Separate Financial Statements and Consolidated Financial Statements include statements of compliance by the CEO and by Officer responsible for drafting the Company’s accounting documents, as required by prevailing legislation. As a result of the assignment of the shares of TP Industrial Holding S.p.A (company owned by the same entity owning Pirelli) to the controlling shareholder, the Financial Statements qualify the Industrial business as “discontinued operation” and results are reclassified to the Income Statement as a single item “net income (loss) related to discontinued operations”. 2017 Financial Statements: Revenues Operating Income (EBIT) 7 4 4 euro 5,352.3 mill euro 673.6 mill adjusted EBIT margin before start-up costs euro 926.6 mill Consolidated net income (including divested assets) euros 175.7 mill At December 31, 2017 the item income (loss) from equity investments was negative to the amount of euro 6.9 million and mainly refers: - - to the negative pro-rata share of the results for the 2017 financial year for the Indonesian Joint Venture PT Evoluzione Tyres to the negative pro-rata share of the results for the fourth quarter of 2016 and the first nine months of Prelios S.p.A (negative to the amount of euro 3.1 million) - partially offset by the positive pro-rata result of Fenice S.r.l (positive at euro 5.0 million) which indirectly includes proceeds deriving from the disposal of the investment in Prelios S.p.A by Fenice S.r.l. ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. - - - to the euro 7,6 million impairments of the investment in Pirelli de Venezuela C.A (negative to the amount of euro 7.6 million), whose residual value at December 31, 2017 was equal to euro 2.6 million; to the capital gain deriving from the disposal at December 28, 2017 of the total investment in Prelios S.p.A. (a capital gain net of the cost of the sale of euro 5.8 million); to dividends received from Mediobanca S.p.A. (euro 5.8 million) and Fin. Priv. S.r.l. (euro 0.8 million). The consolidated net financial (liquidity)/debt position was negative to the amount of euro 3,218.5 million (euro 4,912.8 million at December 31, 2016). Pirelli closed the 2017 financial year with positive net income to the amount of euro 171 million (euro 68 million in 2016) APPOINTMENT OF THE BOARD OF STATUTORY AUDITORS 4 4 8 The Board of Statutory Auditors in office at the date of the Report was appointed by the Shareholders’ Meeting held on May 14, 2015 and integrated during the mandate, following changes to its composition and the expansion of the total number of Statutory Auditors (currently five Effective Statutory Auditors and three Substitute Auditors). The Annual Report on Corporate Governance and Structure of Share Ownership included in the Financial Statements gives details concerning the changes in the Board of Statutory Auditor composition, from its appointment to the date of the report. As of today, following the Shareholders’ Meeting decisions taken in 2017 (August 1, 2017 and September 5, 2017) the Board of Statutory Auditors consists of five Standing Statutory Auditors: Mr Francesco Fallara (Chairman), Mr Fabio Artoni, Ms Antonella Carù, Mr. Luca Nicodemi and Mr. Alberto Villani and two Alternate Auditors: Mr. Fabio Facchini and Ms Giovanna Maria Carla Oddo (one Alternate Auditor remains to be appointed considering that the entire Board of Statutory Auditors will expire at the Shareholders’ Meeting convened for the approval of the financial statements at 31 December 2017. SIGNIFICATIVE EVENTS OF 2017 The Management Report on Operations gives a detailed account of the most significant events of 2017. Specific attention is given to the following transactions: - on January 13, 2017, the disposal to Cinda of 38% of the capital of Pirelli Industrial S.r.l. was finalised as part of the wider reorganisation and integration project of the Industrial business. (today known as the Prometeon Tyre Group S.r.l.) pursuant to the agreement signed on December 28, 2016 between Pirelli Tyre S.p.A. and Cinda. The sale took place at a value of approximately 266 million euro; - during the month of March 2017, for the purpose of ensuring autonomous growth paths and independent development strategies, the two business areas - Consumer and Industrial - were definitively separated as a result of the assignment to the sole shareholder Marco Polo International Holding Italy S.p.A., of all TP Industrial Holding S.p.A. shares previously held by Pirelli & C. S.p.A.. TP Industrial Holding S.p.A., the company which holds 52% of the share capital of Pirelli Industrial S.r.l. (today called Prometeon Tyre Group S.r.l.), is the company that owns Pirelli’s Industrial assets; - On April 27, 2017 the Board of Directors of the Company decided to accelerate the listing process in order to take advantage of the market opportunities of the fourth quarter of 2017. This decision was made in the light of the positive results which had been achieved by the Company, the implemented focus on the Consumer business. In context of the listing, the CNRC confirmed its willingness to lower its share in Pirelli to below 50% of the capital, this without prejudicing the requisite conditions for the continued consolidation of Pirelli; - At the end of June 2017, Marco Polo International Italy S.p.A. - a direct shareholder of Pirelli following the incorporation by merger of Marco Polo International Holding Italy S.p.A. – underwrote capital increase, which including the premium amounted to approximately euro 1.2 billion. It is also to be noted is that on June 27, 2017 (with a closing date of June 29), Pirelli & C. S.p.A. and Pirelli International Plc underwrote a new unsecured refinancing contract for a total amount of euro 4.2 billion with a pool of leading international banks, whose first drawdowns were used, together with the proceeds from the aforementioned capital increase, to repay in full, on June 29, 2017, the financing underwritten in 2016 for the amount of euro 6.4 billion, and thus cancelling all collateral securities issued under this new financing. The refinancing operation was completed with improved conditions compared to the previous financing completed in 2016, particularly through the reduction of the all-in cost but also thanks to the lengthening of its average life, thus contributing to the improvement of Pirelli’s financial profile; - At the end of July 2017, Burlington Loan Management DAC, an Irish investment vehicle managed by Davidson Kempner Capital Management LP, signed a purchase contract with Pirelli, Intesa Sanpaolo S.p.A., UniCredit S.p.A. and Fenice S.r.l. for the acquisition of 44.86% of the capital of Prelios S.p.A. amounting to 611,910,548 shares in total. The trade was set at euro 0.116 per share, which equalled a total of approximately euro 70.9 million, of which approximately euro 17.2 million was due to Pirelli, approximately euro 24.5 million euro to Fenice S.r.l, the vehicle invested in by Pirelli, and the remainder - in proportion to the investment held – due to Intesa Sanpaolo and Unicredit. The closing of the operation - with simultaneous collection - was finalised on December 28, 2017. - On August 1, 2017 the Shareholders’ Meeting of Pirelli approved a number of resolutions aimed at implementing the previously announced process of listing the Company shares on the stock exchange. Amongst other things, the adoption of a new text for the Articles of Association was approved (effective as of the listing date) which expressly provides for, amongst other things, a “corporate governance based on best international practice”. - Also on August 1, 2017 (effective as of August 31, 2017), the Shareholders Meeting renewed the Board of Directors, pursuant to the new Shareholders’ Agreement signed on July 28, 2017 by the China National Chemical Corporation, the China National Tire & Rubber Corporation, 9 4 4 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. 4 5 0 Ltd., the Silk Road Fund Co.,Ltd., the CNRC International Limited (HK), the CNRC International Holding (HK) Limited, Fourteen Sundew S.à r.l., Camfin S.p.A., Long-Term Investments Luxembourg S.A. and Marco Tronchetti Provera & C. S.p.A.. The Board of Directors appointed by the aforementioned Shareholders’ meeting are still effective and their mandate will expire with the Shareholders’ meeting called to approve the financial statement at 31 December 2019. The same aforesaid Shareholders’ Meeting also (i) appointed Antonella Carù as the new Statutory Auditor of the Company, replacing Fabrizio Acerbis, (ii) conferred the role for the statutory audit of accounts for the nine-year period from 2017 to 2025 to the independent auditing firm PricewaterhouseCoopers S.p.A. (the new role become effective starting from October 4, 2017); - On August 31, 2017 Pirelli’s Board of Directors deliberated on the governance structure of the Company, and approved, in particular, the constitution of the Board Committees and the establishment of procedures in view of the listing of the Company on the stock exchange.n addition, the Board of Directors appointed Marco Tronchetti Provera as Executive Vice Chairman and Chief Executive Officer, conferring to him the same powers of management of the Company, consistent with those of the previous mandate and with the Shareholders’ Agreements signed on 28 July 2017; - On September 1, 2017, as part of the preparatory process for re-listing the Company, Pirelli’s announced its new strategy of focusing on the High Value segment (Prestige, New Premium, Specialties and Super Specialties, and Premium Moto), as well as released the forecast data for the new 2017-2020 Industrial Plan, plus carve-out consolidated Interim Financial Statements at June 30, 2017, and a carve-out consolidated Financial Statements for 2016, 2015 and 2014; - On September 5, 2017, the Shareholders’ Meeting appointed Luca Nicodemi and Alberto Villani as Statutory Auditors for the Company, replacing Giovanni Bandera and David Reali, who had resigned from the role for professional reasons; - On September 12, 2017, Pirelli, consistent with focusing its activities on its core business, notified the Chairman of the Agreement to invest in the capital of Mediobanca S.p.A., the decision to exercise the right of cancellation from the agreement for all shares held and conferred to the Agreement itself, approximately 1.8% of Mediobanca’s share capital; - On September 15, 2017, in context of the listing process, CONSOB approved the registration document, the disclosure notes for the financial instruments and the related summary note for the offer of sale and admission to the listing on the Mercato Telematico Azionario (screen-based stock exchange), organised and managed by Borsa Italiana S.p.A., of the Pirelli shares offered by Marco Polo International Italy S.p.A.. The offer of sale was carried out from September 18, 2017 to September 28, 2017; - On October 4, 2017 Pirelli & C. S.p.A. shares were launched on the Milan Stock Exchange on the Mercato Telematico Azionario (MTA or screen-based stock exchange) which is organised and managed by Borsa Italiana S.p.A. With the start of trading all management and coordination activities by Marco Polo International Italy S.p.A. ceased. As part of the Global Sales Offer, 350 million ordinary shares, were offered at a price of euro 6.5 per share for a capitalisation of euro 6.5 billion. The Greenshoe Option, granted as part of the transaction by Marco Polo International Italy S.p.A. to the placement consortium for 50 million shares, was partially exercised on November 2, 2017 for a total of 18,904,836 shares. With the inclusion of the Greenshoe Option, the Offer of Sale therefore concerned 368,904,836 ordinary Pirelli shares and, consequently, the total proceeds deriving from the Sales Offer which were exclusively due to Marco Polo International Italy S.p.A. amounted to approximately euro 2.4 billion. As a result of the partial exercise of the Greenshoe Option, Marco Polo International Italy S.p.A. holds 631,095,164 ordinary Pirelli shares which correspond to approximately 63.11% of the share capital; - On December 21, 2017 the Board of Directors of Pirelli approved an EMTN (Euro Medium Term Note) for the issuance of senior unsecured non-convertible bonds for an amount equal to a maximum of euro 2.0 billion. The adoption of the EMTN program responds the objective of the constant optimisation of the Pirelli financial structure, and allows for the favourable and timely seizure of windows of opportunity available on the bond market. As part of this program, the Board of Directors authorised the issue, to be executed by January 31, 2019, of one or more bonds, to be placed with institutional investors, for a total maximum amount of up to euro 1.0 billion. UNUSUAL OR EXCEPTIONAL TRANSACTIONS The most significant transactions in the 2017 financial year are reported in detail in the Management Report on Operations. No unusual or exceptional transactions were executed, according to the definition provided for in Consob communication DEM/6064293 dating July 28, 2006. 1 5 4 INTRACOMPANY OR TRANSACTIONS WITH RELATED PARTIES On August 31, 2017, pursuant to Article 2391-bis of the Italian Civil Code and Consob Resolution No. 17221 dated March 12, 2010 containing the “Regulations on Related Party Transactions,” subsequently amended by Consob Resolution No. 17389 dated June 23, 23 2010, the Board of Directors of Pirelli unanimously approved the “Procedure regulating Related Party Transactions” effective from October 4, 2017, when listing of the Company’s ordinary shares started on the Mercato Telematico Azionario which is organised and managed by Borsa Italiana S.p.A. In line with what described on the listing prospectus, on November 6, 2017, the Board of Directors of Pirelli, subject to the favourable opinion of the relevant Committee, comprised exclusively of Independent Directors (and entrusted with this duty under Article 4 of the cited Regulation in a specific resolution passed by the Board of Directors) unanimously confirmed the text of the “Procedure governing Related Party Transactions” which had been approved before the listing. It is important to note that the Procedure adopted by the Company, pursuant to Article 4, paragraph 6 of the cited Regulation, (i) is consistent with the principles set out in the Regulation itself, (ii) is published on the Company website (www.pirelli.com). Related party transactions with Pirelli Group companies and with third parties were executed in the 2017 financial year. ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. 4 5 2 The intercompany transactions which we examined were ordinary transactions, essentially consisting of the mutual exchange of administrative, financial and organisational services. These transactions were settled on an arm’s length basis at conditions determined according to standard benchmarks which reflect actual use of the services and were performed in the Company’s interests, since aimed at streamlining the use of the Group’s resources. The non-intercompany related party transactions which we examined also involved ordinary transactions (since included in the ordinary operating activities or related financial transactions) and/or concluded at conditions equivalent to an arm’s length basis or standard conditions, and were performed in the Company’s interests. The Company reported these transactions to us periodically. We attended the meetings of the Committee for Transactions with Related Parties during which we expressed a favourable opinion on some related party transactions of “minor importance”, the Committee having assessed the Company’s interests in carrying out the transaction, as well as the advantage and substantial fairness of the respective terms and conditions. We supervised compliance with the Procedure for Transactions with Related Parties adopted by the Company and the appropriateness of procedures implemented by the Board of Directors and by the relevant Committee for Transactions with Related Parties and we have no observations to make in this regard. Transactions with Related Parties are indicated in the Explanatory Notes to the Company’s financial statements and to the consolidated financial statements, which also report the consequent economic effects. Given the size of the transaction and pursuant to what stated in the registration documents submitted for Pirelli’s admission to listing, a specific section of the Financial Statements is devoted to activities with Prometeon Group, as part of the wider reorganisation which led to the stripping off of the Industrial segment. IMPAIRMENT TEST PROCEDURE It is important to note that, as suggested in the joint document issued by the Bank of Italy, Consob and ISVAP dated March 3, 2010, the Board of Directors confirmed that the impairment test complied with the provisions of IAS 36, after being approved by the Audit, Risks, Sustainability and Corporate Governace Committee and by the Statutory Auditors; this confirmation was given independently and prior to the date of the Board of Directors’ meeting held on February 26, 2018 to approve the financial statements. In particular, the Company conducted the impairment test procedures on the goodwill allocated to the Consumer cash generating units and on the brand Pirelli. The Explanatory Notes to the Financial Statements contain the information and results of the assessment process, carried out also with the assistance of a highly qualified expert. The Board of Statutory Auditors is of the opinion that the procedure adopted by the Company is adequate. SUPERVISORY ACTIVITY, PURSUANT TO LEGISLATIVE DECREE 39/2010 “STATUTORY INDEPENDENT AUDITOR” The Board of Statutory Auditors, in collaboration with Audit, Risks, Sustainability and Corporate Governance Committee and pursuant to changes to the regulations introduced by Legislative Decree 135/2016, supervised: - - - - - the financial reporting process; the effectiveness of the internal control, internal audit and risk management systems; the statutory audits of the annual and consolidated accounts; the independence of the independent auditor, in particular with regard to the provision of non- auditing services; the results of the statutory audit with specific reference to the additional report, pursuant to article 11 of EU regulation 537/2014 * * * SUPERVISORY ACTIVITY OF THE FINANCIAL REPORTING PROCESS The Board of Statutory Auditors, having verified the existence of adequate rules and processes governing the process to prepare and report financial information, gives its favorable opinion on the adequacy of the process to prepare the financial information and deems that there are no objections to report to the Shareholders’ Meeting in this regard. Following its listing and pursuant to relevant regulations, the Company has informed the public that, in line with procedures adopted to date and with a view to guaranteeing continuity in the information disclosed to the public, will continue, on a voluntary basis, to disclose additional financial information on a periodic basis, in line with article 82-ter of Consob Regulation 1197/99 (see interim operating reports). The Company did not avail itself of the right to omit information concerning upcoming developments and transactions which are the object of negotiations, as provided for in Article 3, paragraph 8 of Legislative Decree 254/2016. SUPERVISORY ACTIVITY OF THE NON-FINANCIAL REPORTING PROCESS The Board of Statutory Auditors, having verified the adherence to provisions laid down by Legislative Decree 254/2016 relating to non financial reporting documents (“DNF”), and having monitored the existence of adequate rules and processes governing the preparation and dissemination of non- financial information, gives its favorable opinion on the adequacy of the process to prepare non- financial information documents and deems that there are no objections to report to the Shareholders’ Meeting in this regard. 3 5 4 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. 4 5 4 SUPERVISING THE EFFECTIVENESS OF INTERNAL CONTROL, INTERNAL AUDIT AND RISK MANAGEMENT SYSTEMS AND OF THE STATUTORY AUDITS OF ANNUAL AND CONSOLIDATED ACCOUNTS The Board of Statutory Auditors, in collaboration Audit, Risks, Sustainability and Corporate Governance Committee, met with the Internal Audit Director once every quarter. At those meetings, the Board of Statutory Auditors received information about the results of the audits designed to determine the adequacy and operations of the Internal Control System, compliance with the laws, business procedures and processes, as well as implementation of the related improvement plans. The Board also received the Audit Plan for the financial year, its final results as well as the risk analysis. Once every six months, the Board also received reports from the Audit, Risks, Sustainability and Corporate Governance Committee and from the Supervisory Body on the activities performed. The Board of Statutory Auditors has also acknowledged the report from the Responsible Officer. When the draft financial statements were approved, the Responsible Officer confirmed the adequacy and appropriateness of the powers and resources conferred on him by the Board of Directors, and also confirmed that he had been given direct access to all the information necessary to produce accounting data, without needing to obtain any authorisation. The Board of Statutory Auditors also acknowledged that the Responsible Officer had reported having participated in the internal information flows for accounting purposes and having approved all corporate procedures which impacted the Company’s economic, equity and financial position. Accordingly, the Board of Statutory Auditors expresses a positive opinion on the adequacy of the internal control system and risk governance system, as a whole, and has no objections to report to the Shareholders’ Meeting in this regard. The Board of Statutory Auditors met with the independent auditor at least once every quarter. No critical issues arose at those meetings with regard to audits or significant shortcomings in the internal control system related to the financial reporting process, also with regard to the provisions set out in Article 19, paragraph 3 of Legislative Decree 39/2010. On March 8, 2018 pursuant to Article 14 of Legislative Decree 39/2010 and of Article 10 of EU Regulation 537/2014, PricewaterhouseCoopers S.p.A published its reports on the Financial Statements and Consolidated Financial Statements as of December 31, 2017. On the same date independent auditor published its Additional Report for the Internal Control and Internal Audit Committee pursuant to Article 11 of the UE Regulation number 537/2014. On March 8, 2018, pursuant to article 3, paragraph 10 D of Legislative Decree 254/2016, PWC also published its Report on the Consolidated non-Financial Statements. The Report was drafted in compliance with the latest provisions laid down in the Legislative Decree 39/2010 as modified by Legislative Decree 135/2016. submitted by the Board of Statutory Auditors during the meeting held on April 27, 2017, in accordance with the provisions applicable to non-listed companies. Subsequently and following the start of the re-listing procedure, during the meeting held on August 1, 2017, the firm was entrusted with the task of providing auditing services for a nine-year period (2017-2025), in compliance with the provisions applicable to listed companies (the appointment being effective as of October 4, 2017, date upon which Pirelli was admitted to trading on the Stock Exchange). The Board of Statutory Auditors supervised the independence of the Independent Auditor and in particular, the Board received periodic information on the non-auditing assignments to be attributed (or actually attributed based on specific regulatory provisions) to the Independent Auditor. A detailed procedure was issued at Group level with reference to the independence of the independent auditor that, in compliance to provisions laid down in Legislative Decree 39/2010 (as modified by Legislative Decree 135/2016) prohibits all Pirelli Group companies from assigning work, different from auditing services, to member companies of the same network as the Independent Auditor appointed by the Group without obtaining prior and express authorisation from the Board of Statutory Auditors. The Board of Statutory Auditors with the support of the Chief Financial Officer and of the Secretary of the Board of Directors is responsible for verifying that the assignment to be given is not included in the activities prohibited by Article 5 of EU Regulation number 537/2014 and that, in any event, given its characteristics, does not impact the independence of the independent auditor. During the 2017 financial year PricewaterhouseCoopers S.p.A. performed the activities summarised below on behalf of the Group: ESTERNAL AUDITORS FEES 2017 (thousand Euro) from to partial fees total fees Independent Audit fees (1) PricewaterhouseCoopers S.p.A. Pirelli & C. S.p.A. PricewaterhouseCoopers S.p.A. Subsidiaries Network PricewaterhouseCoopers Subsidiaries Independent Certification services (2) PricewaterhouseCoopers S.p.A. Pirelli & C. S.p.A. PricewaterhouseCoopers S.p.A. Subsidiaries Network PricewaterhouseCoopers Subsidiaries Non Audit fees(3) PricewaterhouseCoopers S.p.A. Pirelli & C. S.p.A. PricewaterhouseCoopers S.p.A. Subsidiaries Network PricewaterhouseCoopers Subsidiaries 1.920 708 1.351 1.973 63 43 405 297 759 3.979 53% 2.079 28% 1.461 7.519 19% 100% (1) Are included 1.850 migliaia Euro oaid for the audit of Interim carve out consolidated financial statements of Pirelli consumer business included into the Registration Document released for the Iisting of Pirelli & C. S.p.A. in the Milan Stock Exchange Market, successfully completed on October 4, 2017 (2) The item independent certification services incudes the fee paid for the certification and auditing services referring to the project of the listing of the company, successfully completed on October 4, 2017 (1973 thousand Euro) (3) In the item non audit fees are included the fees paid for services other than the audit ones, in particular for mandates signed before October 4, 2017 (listing date) - 1,444 thousands euro 5 5 4 SUPERVISING THE INDEPENDENCE OF THE INDEPENDENT AUDITOR, IN PARTICULAR WITH REGARD TO THE PROVISION OF NON-AUDITING SERVICES PricewaterhouseCoopers S.p.A. is the firm entrusted with the task of providing auditing services. The company was appointed by the Shareholders’ meeting, on the basis of a reasoned proposal The Board of Statutory Auditors considers that the above-mentioned fees are proportionate with the quantity, complexity and characteristics of the work performed and also believes that the assignments (and related fees) for non-auditing services do not compromise the Independent Auditor’s independence. The Board of Statutory Auditors has taken note that, as stated in the above ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. table which is also included in the Explanatory Notes, almost all non-auditing assignments were entrusted to the independent auditor before Pirelli’s admission to listing. The Board was also informed that some of those assignments relate to the final implementation of assignments entrusted before PricewaterhouseCoopers S.p.A was chosen the independent audit firm. On this last point, it is important to note that the Board of Directors shares this opinion, following assessment by the Audit, Risks, Sustainability and Corporate Governance Committee. ORGANISATIONAL STRUCTURE The Board of Statutory Auditors has found that the Company’s organisational structure adequately satisfies its requirements and guarantees compliance with the principles of fair management. The Report on Corporate Governance and the Structure of Share Ownership describes powers given to the Chairman and to the CEO Mr Marco Tronchetti Provera. It is to be noted that, following listing of the Company’s ordinary shares on the Mercato Telematico Azionario which is organised and managed by Borsa Italiana S.p.A., all management and coordination activities by Marco Polo International Italy S.p.A. ceased. 4 5 6 Notably, in its meeting on August 31, 2017, the Board of Directors took notice of the fact that Marco Polo ended its management and coordination activities on the initial date of trading, without prejudice to the right of CNRC to consolidate Pirelli. More specifically, the Board of Directors of Pirelli took note that, based on factual circumstances, starting from its initial date of trading, Pirelli is no longer subject to any of the management and coordination activities performed by Marco Polo or by any other company or body (including CRNC and CehmChina) and that therefore, by way of example and not limited to: (i) Pirelli has full autonomy with reference to relations to be maintained with customers and suppliers, with no outside interference in this respect. (ii) Pirelli is to autonomously prepare strategic, business, financial and/or budget plans for the Company and for the Group; (iii) Pirelli is not subject to Group’s regulations (iv) There is no organisational and functional link between Pirelli, on one hand, and Marco Polo, CNRC and/or ChemChina on the other. (v) There are non decisions, resolutions or communications by Marco Polo, CNRC and/or ChemChina that might lead to the assumption that decisions taken by Pirelli are the result of an imperative and compulsory will expressed by Marco Polo, CNRC and/or ChemChina; (vi) Marco Polo, CNRC and/or ChemChina will not centrally manage neither Treasury activities nor any other financial assistance and coordination functions; (vii) Marco Polo, CNRC and/or ChemChina will not issue dispositions or instructions - and will not coordinate any initiative, having any effect on Pirelli’s decisions concerning financial and credit matters. (viii) Marco Polo, CNRC and/or ChemChina will not issue any guidelines concerning the execution of extraordinary transactions by Pirelli, such as for example, listing of financial instruments, acquisitions, disposals, transfer of assets, mergers and demergers, etc; (ix) Marco Polo, CNRC and/or ChemChina will not adopt decisions affecting Pirelli’s operating strategies, nor will they provide Group’s strategic guidelines. It is worth mentioning that Pirelli exercises management and coordination activities over a number of subsidiaries, having disclosed information as envisaged under Article 2497-bis of the Italian Civil Code. REMUNERATION OF DIRECTORS AND EXECUTIVES WITH STRATEGIC RESPONSIBILITIES During the financial year, the Board of Statutory Auditors expressed the opinions requested by law on the remuneration of Directors holding special offices, expressing the opinions envisaged under Article 2389 of the Italian Civil Code. In particular, the Board of Statutory Auditors found that the existing remuneration system foresees the compensation broken down into a fixed component and an additional (variable) component linked to the financial results achieved by the Group also in the long-term and related to the attainment of specific objectives set by the Board of Directors, as proposed by the Remuneration Committee. The remuneration system also envisages a four-year retention plan aimed at a selected group of managers; the Chairman and the CEO are not to benefit from such retention scheme. The Board of Directors, based on a proposal by the Remuneration Committee and subject to the favourable opinion of the Board of Statutory Auditors, resolved in favour of the early termination of the 2016-2018 LTI plan and decided to approve a “new” three-year 2018-2020 incentive plan linked to achieving the targets set out in the 2017-2020 industrial business plan. As in the past, this three-year incentive plan is extended to all the Pirelli management and will be submitted for approval to the Shareholders’ Meeting that will be held on May 15, 2018, in the part that foresees that a portion of the incentive is determined on the basis of a Total Shareholder Return target. Furthermore, the LTI Plan envisages a rolling deferment mechanism of part of the accrued MBO and an increase of the accrued MBO on achieving given targets the following year. With reference to the extraordinary incentive Plan (Special Award) adopted within the framework of the IPO process and aimed at a selected group of executives and senior managers, including the Chairman and the CEO, the Board of Statutory Auditors acknowledges that the Company has duly 7 5 4 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. 4 5 8 verified and communicated to the market that the Equity Value target, whose attainment was prejudicial to the awarding of the incentive plan, was not achieved. ADDITIONAL ACTIVITIES BY THE BOARD OF STATUTORY AUDITORS AND DISCLOSURES REQUIRED BY CONSOB While performing its functions as prescribed by Article 149 of the TUF, the Board of Statutory Auditors supervised: - compliance with the law and the articles of incorporation; - application of the principles of fair management; - - - the adequacy of the Company’s organisational structure, for those aspects under its responsibility, governing internal audit and the administrative and accounting systems, and the reliability of the administrative and accounting system in adequately recording operating results; the procedures for the effective implementation of the corporate governance rules envisaged by codes of conduct which the company has publicly declared to comply with. In this regard it is important to note that, pursuant to Article 123-bis of the TUF, the Company has prepared the annual Report on Corporate Governance and the Structure of Share Ownership for the 2017 financial year providing information about (i) the corporate governance practices effectively applied by the Company beyond the obligations foreseen in legislative or regulatory rules, (ii) the principal characteristics of the existing risk management and internal control systems in relation to the financial reporting process, also referred to consolidated information, (iii) the operating mechanisms of the Shareholders’ Meeting, its principal powers, shareholders rights and the procedures to exercise such rights, (iv) the composition and functioning of management and supervisory bodies and their committees, as well as the other information envisaged in Article 123-bis of the TUF; the adequacy of the instructions issued to subsidiaries, pursuant to Article 114, paragraph 2 of Legislative Decree No. 58/1998, having confirmed that the Company is capable of promptly and regularly satisfying its statutory reporting obligations, as provided by the cited Article 114, paragraph 2 of Legislative Decree No. 58/1998. This is also achieved by collecting information from the managers of organisational functions and periodic meetings with the independent auditor, for the mutual exchange of important data and information. We have no specific observations to make in this regard. Moreover, it is to be noted that the Management Report on Operations includes a paragraph which describes the principal characteristics of the existing risk management and internal control systems in relation to the financial reporting process, also referred to the consolidated information. The Board of Statutory Auditors acknowledges: - that the Management Report on Operations complies with the applicable laws and regulations and is consistent with the resolutions passed by the administrative body and with the results reported in the financial statements and includes adequate information concerning the financial year’s activities and intercompany transactions. The section containing disclosures concerning related party transactions has been included in the Explanatory Notes to the financial statements, in compliance with the IFRSs; - - - that the Explanatory Note is compliant with existing regulations in providing indication of criteria used for the assessment of items in the Financial Statements and for value adjustments; that the Company’s financial statements and the consolidated financial statements were prepared in accordance with the structure and formats imposed by applicable laws and regulations. The financial statements specifically indicate the effects of related party transactions in the equity and financial position and in the income statement, pursuant to Consob Resolution No. 15519/2006; that the Boards of Directors of the main subsidiaries include Directors and/or managers of the Parent Company that guarantee a coordinated management and an adequate flow of information, also supported by adequate accounting information. Furthermore, it is important to note that the Board of Statutory Auditors: - - received information from the Directors at least once every quarter concerning the Company’s activity and the transactions having the greatest impact on its strategy, earnings, financial position and equity, and that it has received this information in compliance with the specific procedure approved by the Board of Directors in its meeting of 31 August, 2017. The Board of Statutory Auditors can give a reasonable assurance that the resolved and executed transactions comply with the law and the Company Byylaws, and are not manifestly imprudent, reckless or in conflict of interest, or in violation of the resolutions passed by the Shareholders’ Meeting, or capable of compromising the integrity of corporate assets; received from the Supervisory Body, established pursuant to Legislative Decree No. 231 dated June 8, 2001, of which the Statutory Auditor Ms. Antonella Carù is a member, information about the results of its own control activity, which did not reveal anomalies or misconduct; - held periodic meetings with representatives of the independent auditor in order to exchange important data and information for the performance of its duties, as prescribed by Article 150, paragraph 3 of the TUF. In this regard, no important data and information were identified which would require a mention in this report; - obtained information from the corresponding bodies of the main subsidiaries with regard to their management and control systems and their general operating performance (pursuant to paragraphs 1 and 2 of Article 151 of Legislative Decree No. 58/1998); 9 5 4 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. 4 6 0 - during the 2017 financial year, issued opinions pursuant to Article 2386 and opinions pursuant to Article 2389 of the Italian Civil Code: (i) opinion regarding the adoption of the Procedure for Transactions with Related Parties, as previously described in detail; (ii) reasoned proposal for the appointment of the independent auditor during the Shareholders’ Meeting held on April 27, 2017 and later during the Shareholders’ Meeting on August 1, 2017 with a view to change the appointment of the independent auditor following admission of the Company’s ordinary shares to listing on the Mercato Telematico organised and Managed by Borsa Italiana S.p.A. (iii) opinion, in compliance with instructions accompanying the Rules of the Markets organised and managed by Borsa Italiana S.p.A., concerning the approval of a memorandum related to the internal audit system required for the purpose of the Company’s listing Lastly, the Board of Statutory Auditors did not express any opinion concerning the confirmation of Mr Francesco Tanzi as the Manger responsible for preparing corporate financial reports. During the 2017 financial year the Board of Statutory Auditors did not receive any complaints. The Board of Statutory Auditors reports that, following the company’s listing, it received a complaint pursuant to article 2408 of the Italian Civil Code, from a shareholder invoking that Board Member Ms Laura Cioli was not compliant with the independence prerequisite. The Board of Statutory Auditors examined the complaint, performed investigations and analysis deemed necessary and acquired evidence from the Company’s relevant bodies. Based on the investigative work performed, the Board considered there was no need to pursue the complaint, deeming it as unfounded. With regard to PricewaterhouseCoopers S.p.A., the Board of Statutory Auditors notes that: - - the independent auditor, pursuant to article 14 of Legislative Decree 39/2010 and article 10 of UE Regulation 537/2014, on March 8, 2018 issued a report containing its unqualified opinion stating that the statutory financial statements and the consolidated financial statements provide a truthful and accurate representation of the equity and financial position of Pirelli and of the Group as of December 31, 2017 and of the economic results and cash flow for the financial year closing at the same date, in compliance with applicable accounting standards, and gave evidence of key aspects of the auditing exercise; the independent auditor issued its unqualified opinion stating that the Report on Operations accompanying the Financial Statements and the Consolidated Financial Statements as of December 31, 2017, as well as specific information contained in the Report on Corporate Governance and the Structure of Share Ownership, as laid down in article 123-bis, paragraph 4 TUF have been drafted pursuant to current legislation; - - the independent auditor stated that, as regards possible material errors in the Report on Operations, based on the knowledge and understanding of the company and its market acquired in the course of the auditing activities, no objections were raised; the independent auditor confirmed the Company’s statement regarding the fact that no other assignments have been given to persons or entities related to each other by on-going relationships with the independent auditor; - on March 8, 2018 the independent auditor provided the Board of Statutory Auditors with the Additional Report, pursuant to article 11 of the EU regulation 537/2014, resulting in no significant shortcoming concerning the internal audit system for financial reporting that needed to be brought to the attention of persons responsible for “governance” activities; - on March 8, 2018 the independent auditor, pursuant to article 3, paragraph 10 of Legislative Decree 254/2016, issued the Report on the consolidated non-financial statements, concluding that all elements confirmed that the non-financial statements relating to the financial year closing at December 31, 2018 had been drafted, in all its significant parts, in compliance with the requirements laid down by Legislative Decree 254/2016 and by the GRI Standards; - pursuant to article 6 of the UE regulations 537/2014 the independent auditor provided the Board of Statutory Auditors with a statement, accompanying the Additional Report, that does not give evidence of any circumstance that could jeopardising the audit firm’s independence (for more details concerning assignments different from auditing services, refer to paragraph “supervisory activity on the independence of the independent auditor, in particular with regard to the provision of non-auditing services” of this report). Lastly, the Board of Statutory Auditors took note of the Transparency Report drafted by the independent auditor and published on its web site, pursuant to article 18 of Legislative Decree 39/2010. Furthermore, with regard to the corporate bodies, the Board of Statutory Auditors reports that: - the current Board of Directors - appointed on August 1, 2017, with effect from August 31, 2017 and falling from office with the Shareholders’ Meeting called to approve the financial statements for the financial year closed at December 31, 2019 - comprises 14 Directors at the date of the Report, including 13 Non-executive Directors and, of these, 7 Directors who satisfy the independence requirements envisaged in the Self-Regulatory Code and in the TUF. In compliance with the registration document drafted upon request for admission to listing, the Board of Directors will be integrated by one further Independent Director to be nominated by the minorities at the first Shareholders’ meeting following the start of trading (coinciding with the Shareholders’ meeting for the approval of the financial statements) with the majorities required by the law without applying the list vote. - during the 2017 financial year, the Board of Directors held 13 meetings (11 meetings before admission to listing); 1 6 4 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A.4 6 2 - the Audit, Risks, Sustainability and Corporate Governace Committee comprises three independent Directors and held 2 meetings during the 2017 financial year (1 meeting after admission to listing); - at the time of this Report, the Remuneration Committee is composed of three non-Executive Directors, most of them independent (the Chairman is an independent Director) and held 4 meetings during 2017 (1 meeting after admission to listing); - - - the Committee for Transactions with Related Parties, at the time of this Report, is composed of three independent Directors and during the 2017 financial year held 2 meetings (following the Company’s admission to listing); the Appointments and Succession Committee, at the time of this Report, is composed of four Directors, the majority of whom are non-executive Directors and, during the 2017 financial year, the Committee held no meeting; the Strategies Committee, at the time of this Report, is composed of seven, mostly non- executive, Directors (of whom two are Independent Directors) and, during the 2017 financial year, the Committee held no meeting. The Board of Statutory Auditors has always attended the meetings of the Board of Directors and the Board of Directors’ Committees. The Report on Corporate Governance and the Structure of Share Ownership provides information on the percentage attendance by individual members of the Board of Statutory Auditors at the meetings of the Board of Directors and its Committees, as from the first date of trading of Pirelli’s shares on the Mercato Telematico Azionario organised and managed by Borsa Italiana S.p.A. The Board of Statutory Auditors took part in the above meetings in its role as the Internal Control and Audit Committee, pursuant to Article 19 of Legislative Decree No. 39/2010. The Board of Statutory Auditors attended the Shareholders’ Meetings (both ordinary and extraordinary meetings) held in 2017 on the following dates: March 6, March 15, April 27, June 19, August 1 and September 5. The Board of Statutory Auditors also attended the Special Meeting held on June 19, 2017 which approved the conversion of all special shares into ordinary shares. Lastly, the Board of Statutory Auditors acknowledges that: - it supervised the fulfillment of obligations related to the “Market Abuse” and “Investor Protection” regulations with regard to corporate disclosures and internal dealing, and particularly with regard to the treatment of privileged information and the procedure for issuance of press releases and public disclosures; - as recommended by the Self-Regulatory Code of the Italian Stock Exchange (Borsa Italiana) it verified, upon its appointment and later during the meeting held on February 26, 2018, that its own members satisfy the same requirements for independence, where applicable, as the foregoing Code requires for Directors; - it found that the criteria and procedures for ascertaining the requirements for independence adopted by the Board of Directors were applied correctly for the annual assessment of the independence of its members, and it has no observations to make in this regard; - it confirmed that the Directors’ Report enclosed with the Company’s Financial Statements describes the principal risks and uncertainties to which the Company is exposed; - with reference to the provisions of Article 15 of the Consob Regulations 20249 of December 28, 2017 concerning market regulations, it has verified that the corporate organisation and the procedures adopted enable Pirelli to ascertain that the companies controlled and incorporated by it and regulated by the law of non-European Union States subject to compliance with Consob regulations, have in place an adequate administrative and accounting system that is able to regularly provide the Company’s management and the independent auditor with the economic, equity and financial information necessary to prepare the consolidated financial statements. We note that at December 31, 2017, the non-EU companies which were directly or indirectly controlled by Pirelli and of material interest pursuant to Article 15 of the Market Regulations were as follows: Limited Liability Company Pirelli Tyre Russia (Russia); Pirelli Pneus Ltda - (Brazil); Pirelli Commercial de Pneus Brasil Ltda (Brazil); Pirelli Tire LLC (USA); Pirelli Tyre Co. Ltd. (China); Pirelli Otomobil Lastikleri A.S. (Turkey); Pirelli Neumaticos S.A.I.C. (Argentina); Pirelli Neumaticos S.A. de C.V. (Mexico); Pirelli Asia Pte Ltd (Singapore). During the course of the supervisory and audit activities and on the basis of the information obtained from the independent auditor, no omissions, misconduct, irregularities or material facts were found which are worthy of being reported or mentioned in this report. The activities described above, conducted both on a collegial and an individual basis, are documented in the minutes of the 12 Board of Statutory Auditors’ meetings held during 2017. 3 6 4 PROPOSALS TO THE SHAREHOLDERS’ MEETING FINANCIAL STATEMENTS AT DECEMBER 31, 2017 The Board of Statutory Auditors expresses its favourable opinion on the approval of the Financial Statements at December 31, 2017 and has no objections to raise with regard to the motions submitted by the Board of Directors concerning the allocation of the profit. GROUP REMUNERATION POLICY AND THREE-YEAR INCENTIVE PLAN 2018-2020 We inform you that the Board of Statutory Auditors has expressed a favourable opinion on the Remuneration Policy for 2018 submitted for consultation to the Shareholders’ Meeting convened on May 15, 2018, and on the adoption of the new 2018-2020 LTI plan, submitted for approval to the Shareholders’ Meeting pursuant to Article 114-bis of Legislative Decree 58/1998 (“TUF”), as it envisages, among other things, that part of the incentive will be calculated based on a Total Shareholder Return target. ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. APPOINTMENT OF THE BOARD OF STATUTORY AUDITORS The Board of Statutory Auditors will fall from office after having completed its mandate. We wish to thank you for placing your trust in us and we remind you that Shareholders will be asked to appoint a new Board of Statutory Auditors for the next triennium using the list vote mechanism. OTHER ISSUES SUBMITTED FOR APPROVAL BY THE SHAREHOLDERS’ MEETING The Board of Statutory Auditors has no comments to make on the other matters submitted for your approval (appointment of one Director and authorisation for signing a D&O liability insurance policy). **** Pursuant to Article 144-quinquiesdecies of the Issuer Regulations, duly approved by Consob with Resolution No. 11971/99, as subsequently amended and supplemented, the list of positions held by members of the Board of Statutory Auditors in the companies listed in Book V, Title V, Chapters V, VI and VII of the Italian Civil Code is published by Consob on its website (www.consob.it). 4 6 4 It is important to observe that Article 144-quaterdecies (Consob reporting obligations) establishes that members of the supervisory body of just one issuer are not subject to the reporting obligations envisaged in this Article, and therefore, in this case, they do not appear in the lists published by Consob. In its Report on Corporate Governance and the Structure of Share Ownership, the Company lists the main positions held by the members of the Board of Statutory Auditors. The Board of Statutory Auditors here acknowledges that all its members were in full compliance of the regulatory provisions laid down by Consob governing the “maximum number of positions to be held”. Milan, March 12, 2018 Mr. Francesco Fallacara Mr. Fabio Antoni Ms. Antonella Carù Mr. Luca Nicodemi Mr. Alberto Villani 5 6 4 ANNUAL REPORT 2017ANNUAL REPORT 2017 Separate Financial Statements of Pirelli & C. S.p.A.Separate Financial Statements of Pirelli & C. S.p.A. PROPOSAL FOR THE APPROVAL OF THE FINANCIAL STATEMENTS AND FOR THE ALLOCATION OF THE RESULT OF THE FINANCIAL YEAR APPOINTMENT OF A DIRECTOR SUBJECT TO AN INCREASE TO 15 IN THE NUMBER OF MEMBERS OF THE BOARD OF DIRECTORS. the voting list procedure, is resolved by the Meeting with the The Board invites shareholders who wish to submit proposals majorities required by law. for the candidacy for the office of member of the Board of As indicated in the Registration Document, drawn up upon of law and the Articles of Association, also that which is the admission of the company’s ordinary shares to trading recommended on the matter by the Self-Regulatory Code. Directors to take into account, in addition to the provisions Dear Shareholders, Dear Shareholders, on the Mercato Telematico Azionario (screen-based stock exchange) Organised and managed by Borsa Italiana S.p.A., In particular, the Board hopes that any candidacy may be The financial year at December 31, 2017 closed with a result of the ordinary shareholders’ meeting held on 1 August 2017 Marco Polo is committed to ensuring that minorities can made available to the public - also through the Company - Euro 170,850,918.00. gave rise to the renewal of the Board of Directors of Pirelli & C. elect their representative on the Board during the first accompanied by suitable documentation, as indicated in the S.p.A. (“Pirelli” or the “Company”),determining as fourteen shareholders’ meeting to be held after the date of the start appropriate section of the Pirelli website dedicated to the The Board of Directors, having taken into account that, the number of members of the Board and setting the duration of negotiations, following the determination of 15 as the new Shareholders’ Meeting, at least 25 days before the date of the following the shareholders’ meeting resolutions taken during of the related mandate as three financial years, thus expiring number of Directors. 2017, the legal reserve was completed and reached the limit as at the meeting called to approve the financial statements of Shareholders’ Meeting and therefore by 20 April 2018, and this in order to allow those entitled to vote in the Meeting to know provided for by Art. 2430 of the Italian Civil Code, proposes to the Company as at 31 December 201941. This commitment also concerns the shareholders of Marco Polo in advance the personal and professional characteristics of carry forward the total result of the financial year. who are the recipients of shares held by the latter in case the the candidate(s), notwithstanding the right to file candidates In this regard, it is recalled that: demerger of the company contemplated in the Shareholders’ during the Shareholders’ meeting. If you agree with our proposal, we invite you to approve the  > The aforementioned appointment of the new Board of Agreement is completed before the Meeting.The appointed following: Directors - which took effect from 31 August 2017 - was Director will expire together with those currently in office, Finally, the Board invites shareholders to also take into RESOLUTIONS International Italy S.p.A (“Marco Polo”, at the time the called to approve the financial statements for the year ended the execution of the position of Director of Pirelli as well as approved at the meeting by the shareholder Marco Polo and therefore on the date of the shareholders’ meeting account the proficiency and skills profiles necessary for Company’s sole shareholder) before the stock market 31 December 2019 and will be paid a remuneration for the the guidance regarding the maximum number of positions The Shareholders’ Meeting, listing of the Pirelli shares finalised on 4 October 2017 (the position in line with that determined for the other members deemed compatible with the effective execution of the 4 6 8  > having examined the Annual Financial Report as at “Listing”); of the Board of Directors. office of Director of the Company published on the Pirelli December 31, 2017;  > as reported in the documentation published in the Listing website www.pirelli.com – Governance section45. At this 9 6 4  > having acknowledged the Statutory Auditors Report; process42 the current composition of the Board of In particular, it should be noted that each member of the regard, the Board of Directors suggests to the Shareholders  > having acknowledged the Independent Auditors’ Report. Directors reflects the shareholders’ agreement existing Board of Directors is entitled to a gross annual fee for the who shall file candidates, taking in account that the newly RESOLVES Agreement”), pursuant to which the Board of Directors remuneration set by the Board of Directors in the case of Sustainability and Corporate Governance Committee and of Pirelli is envisaged as being initially composed of 14 participation in advisory committees. of the Remuneration Committee and also considering the between Marco Polo shareholders43 (the “Shareholders’ office of 60 thousand Euro, in addition to any supplementary appointed Director will be a member of the Audit, Risks, a. to approve the Company’s Financial Statements for the members, 7 of which are independent, and that it comprises professional skills of the directors currently appointed (skills financial year closed at December 31, 2017, as presented by a further independent director, to be appointed at the Finally, it should be noted that the new Director, as decided that grant the Board of directors with an adeguate and the Board of Directors in their entirety, and the individual first meeting of Pirelli subsequent to the Listing by the by the Board of Directors at the meeting held on 31 August balanced composition), to choose the candidate having the entries and proposed allocations therein, which report a shareholders that are not Marco Polo (the “Minorities.”); 2017, will also be appointed as member of the Control, Risks, knowledge and the experience, also academic, accrued on the result of Euro 170,850,918.00;  > during the aforementioned meeting of 1 August 2017, Marco Sustainability and Corporate Governance Committee and of the same topic of the focus of the abovementioned committees. b. to carry forward the result equal to Euro 170,850,918.00. Polo undertook to ensure that Minorities can elect their Compensation Committee. representative on the Board during the first shareholders’ meeting to be held after the Listing, following the determination of the new number of Directors as 15 (“Meeting”). Proposal of the board of directors In view of the foregoing, the Board of Directors proposes to approve the increase from fourteen to fifteen of the number of members It should be noted that, for the purposes of adopting the of the Board and the appointment of a new Director meeting required shareholders’ meeting resolutions, the statutory the independence requirements provided for by Legislative procedure of the voting list does not apply, as it is not a case of Decree 58/1998 and by the Self-Regulatory Code of the listed the full renewal of the Board of Directors. Therefore, pursuant companies to which Pirelli has adhered44. to Article 10 of the Articles of Association, the appointment of Directors who, for any reason, are not appointed pursuant to *** 41 The Company’s Articles of Association (article 10.1) provide the following: “The company is managed by a Board of Directors composed of up to fifteen members who remain in office for three financial years and may be re-elected. 42 Cf. Registration Document accessed at the following Company web address: https://corporate.pirelli.com/corporate/it-it/investitori/pirelli-in- borsa/ipo-documentation 43 Accessed at the following Company web address: https://corporate.pirelli.com/corporate/it-it/governance/patti 44 Accessed at the following web address: http://www.borsaitaliana.it/comitato-corporate-governance/codice/2015clean.pdf 45 It is to be noted that as of the date of this report, the Board of Directors of Pirelli & C. S.p.A. is made up of fourteen Directors, seven of whom are in possession of the requisites of independence, both pursuant to Legislative Decree 58/1998 and pursuant to the Self-Regulatory Code of the listed companies. It should also be noted that the current composition of the Board ensures compliance with legal and statutory provisions on gender balance. ANNUAL REPORT 2017ANNUAL REPORT 2017 ResolutionsResolutionsBOARD OF STATUTORY AUDITORS: > APPOINTMENT OF STANDING AND ALTERNATE MEMBERS; > APPOINTMENT OF THE CHAIRMAN; > DETERMINATION OF MEMBERS’ SALARIES. least 1% of the share capital with voting rights in the ordinary together with each list, the acceptances of the candidature by of votes, a new ballot will be held between these lists by Shareholders’ Meeting (minimum threshold established by the individual candidates must be filed in conjunction with the all the persons entitled to vote who are present at the the Articles of Association, identical to that established by declarations by means of which they attest, under their own meeting. The candidates on the list that obtains a simple Consob with Resolution no. 20273 of 24 January 2018) have responsibility, the non-existence of causes of ineligibility and majority of the votes are elected. the right to submit the lists. incompatibility, as well as the existence of the requirements In the event of the submission of several lists, the The lists of candidates - signed by the shareholders submitting provisions, and by the Articles of Association to assume the assigned to the standing member indicated as the first prescribed by the applicable provisions, including regulatory Chairmanship of the Board of Statutory Auditors shall be Dear Shareholders, them, indicating their identity and the percentage of their office. The declarations must be accompanied by a curriculum candidate on the list which is the second by number of votes. equity investment in the ordinary share capital of the vitae for each candidate containing exhaustive information with the approval of the annual financial report as at 31 Company - must be filed at the Company’s registered office regarding their personal and professional characteristics In the event that no lists of candidates are submitted, the December 2017, the Board of Statutory Auditors of Pirelli at least twenty-five days before the date set for the Meeting. with information - also attached - of the administrative and Shareholders’ Meeting will appoint the Board of Statutory & C. S.p.A., appointed by the Shareholders’ Meeting on 14 supervisory positions held in other companies. Auditors with the majorities required by law, without May 2015 for the 2015/2017 three-year period, is nearing the The shareholders can also submit the lists of candidates by prejudice, in any case, to compliance with the regulation on completion of its full term. sending them and the supporting documentation to the It should be noted that - pursuant to the Self-Regulatory Code gender balance. following certified e-mail box: assemblea@pec.pirelli.it. of the Listed Companies (“Code”)46, to which the Company has Currently, also following the meeting resolutions of 1 August adhered - the Statutory Auditors must be chosen from among In this regard, it is recalled that law no. 120 of 12 July 2011 and 5 September 2017, the members of the Board of Statutory If only one list has been submitted within the aforementioned persons who can be qualified as independent also on the basis introduced the gender quotas for the composition of the Auditors are as follows: deadline, or only lists submitted by shareholders that are of the criteria set by the aforementioned Code with reference administrative and supervisory bodies of listed companies,  > Francesco Fallacara (Chairman of the Board of Statutory connected to one another, pursuant to the regulations, to the Directors and, therefore, those who are entitled and establishing that these companies must guarantee, for at least 4 7 0 Auditors);  > Fabio Artoni (Standing Auditor);  > Antonella Carù (Standing Auditor);  > Luca Nicodemi (Standing Auditor);  > Alberto Villani (Standing Auditor);  > Fabio Facchini (Alternate Auditor);  > Giovanna Maria Carla Oddo (Alternate Auditor). including regulatory provisions, further lists may be intend to submit the lists are invited to take this into account three consecutive terms, compliance with a criterion of division submitted up to the third day following the list submission when identifying candidates to be proposed. between genders in the composition of the corporate bodies. deadline (twenty-five days before the Meeting). In this case, the thresholds required for their submission are reduced by Each shareholder may submit or participate in the submission In fact, at least one third of the Directors and standing Auditors half, equal, therefore, to 0.5% of the share capital with voting of only one list and each candidate may appear on only one elected must belong to the less represented gender.The rights in the ordinary Shareholders’ Meeting. list, under penalty of ineligibility. Legislator has, however, granted that at the time of the first 1 7 4 application of the aforementioned law, the share of the less The Company’s Bylaws, which sets the number of Substitute The ownership of the overall equity investment is certified, Lists submitted without observing the provisions contained represented gender within the newly-appointed body is at least Auditors to three, entered in force at the date of Company’s pursuant to the current regulatory provisions, even after the in Article 16 of the Articles of Association will be considered one fifth of the Directors and of the standing Auditors elected. shares’ listing on the Stock Exchange. As a result, one position filing of the lists, provided this occurs at least 21 days prior to as not submitted. as Substitute Auditor is vacant. Taking into account that one the date of the Meeting. Therefore, in order to ensure a balance between the genders, of the items in the Agenda of the Shareholders’ Meeting, If only one list is submitted, the Shareholders’ Meeting Art. 16 of the Articles of Association establishes that the called to approve the Financial Report, concerns the renewal The lists of candidates must be divided into two distinct votes on it and, if the list obtains the relative majority, the lists which, considering both sections, have a number of of the whole Board of Auditors, there has been no need for an sections: the first section must contain the list of candidates candidates listed in the respective sections of the list are candidates equal to or higher than three, must include immediate Board integration. (marked by a progressive number) for the office of standing elected as standing Auditors; in this case, the chairmanship of candidates of a different gender both in the section of the list Auditor, while the second section must contain the list of the Board of Statutory Auditors lies with the person indicated relating to standing Auditors, as well as in that relating to The Shareholders’ Meeting is therefore called, pursuant to candidates (marked with a progressive number) for the office in first place in the aforementioned list. alternate Auditors. Furthermore, the Articles of Association the applicable provisions of law and regulations and of Art. of alternate Auditor. The first of the candidates of each section provide that if the application of the voting list process 16 of the Articles of Association (available in full at the end of must be identified among those registered in the Register of In the event that two or more lists are submitted, the election does not ensure, considering the standing Auditors and this report) to: Statutory Auditors who have carried out statutory audits for of the members of the Board of Statutory Auditors will be as the alternate Auditors separately, the minimum number of  > appoint five standing Auditors and three alternate Auditors; a period of no less than three years. In compliance with the follows: Auditors belonging to the less represented gender envisaged  > appoint the Chairman of the Board of Statutory Auditors, provisions of the Articles of Association and the pro tempore  > from the list that obtained the highest number of votes (the by the law and/or pro tempore regulation in force, the where it is not possible to identify him/her following the legislation in force on gender balance, those lists which, when so-called majority list) are taken, in the order in which they candidate belonging to the most represented and elected application of the voting list process; considering both sections, have a number of candidates equal are listed, four standing members and two alternate; gender, indicated with the highest progressive number of  > determine the salaries of the members of the Board of to or higher than three, must include candidates of a different  > from the list that received the second highest number of each section in the list that has reported the highest number Statutory Auditors. gender both in the section of the list relating to standing votes during the Meeting (the so-called minority list) are of votes, will be replaced by the candidate belonging to The appointment of the standing and alternate Auditors standing member and the other alternate member. In the same section of the same list according to the progressive will take place by means of the application of the voting list Furthermore, each list must be accompanied by the event that more than one list obtains the same number submission order. Auditors, as well as in that relating to alternate Auditors. taken, in the order in which they are listed, the remaining the less represented and unelected gender, taken from the process. In this regard, it should be noted that shareholders documentation required by Art. 16 of the Articles of Association who, alone or together with other shareholders, represent at and the applicable provisions of law and regulations. In particular, 46 Can be accessed at the following web address: http://www.borsaitaliana.it/comitato-corporate-governance/codice/2015clean.pdf. ANNUAL REPORT 2017ANNUAL REPORT 2017 ResolutionsResolutionsOutgoing Auditors are re-eligible. aforementioned legislative decree can be attributed to the 16.4 Each slate shall contain a number of candidates which does not to gender balance, slates that - taking account of both sections - Board of Statutory Auditors. exceed the number of members to be appointed. present a number of candidates equal to or exceeding three, must In view of the above, the Board of Directors invites those include candidates of each gender both in the section for standing shareholders who intend to submit lists for the election of Finally, it is recalled that the standing Auditors participate in 16.5 Shareholders who, alone or together with other shareholders, statutory auditors and in the section for alternates. members of the Board of Statutory Auditors to comply with the meetings of the Board of Directors and its members (in represent at least 1 percent of the shares with voting rights in the the aforementioned provisions, recommending in this regard whole or in part) are invited to participate in the Committees ordinary shareholders’ meeting or the minor percentage, according to 16.11 Each person entitled to vote may vote for only one slate. that the first two candidates of each section of the list are of established within the Board. the regulations issued by Commissione Nazionale per le Società e la different genders. Borsa for the submission of slates for the appointment of the Board of 16.12 The Board of Statutory Auditors shall be elected as specified In view of the aforementioned, the Board of Directors, Directors shall be entitled to submit slates. below: The Company will make available to the public the lists of pursuant to and in compliance with the Company Articles a. four effective members and two alternate members shall be candidates submitted, accompanied by the information of Association and the regulations applicable to the matter, 16.6 Each shareholder may present or take part in the presentation of chosen from the slate which obtains the highest number of votes required by the applicable regulations, at its registered invites you to submit lists of candidates for the appointment only one slate. (known as the majority slate), in the consecutive order in which office, the authorised storage process and by publication of the members of the Board of Statutory Auditors and they are listed thereon; on the website www.pirelli.com, in the appropriate section proposals concerning the determination of the relative 16.7 The slates of candidates, which must be undersigned by the parties b. the remaining standing member and the other alternate member dedicated to the Meeting. salaries and to resolve on: submitting them, shall be filed in the Company’s registered office shall be chosen from the slate which obtains the highest number  > the appointment of the members of the Board of Statutory at least twenty five days prior to the date set for the shareholders’ of votes cast by the shareholders after the first slate (known as Finally, we invite shareholders who intend to submit lists Auditors (five standing Auditors and three alternate meeting that is required to decide upon the appointment of the the minority slate), in the consecutive order in which they are for the appointment of members of the Board of Statutory Auditors) for the financial years 2018, 2019 and 2020, by members of the Board of Statutory Auditors, except for those cases listed thereon; if several slates obtain the same number of votes, Auditors to view the specific documentation published on voting the lists of candidates submitted; in which the law and/or the regulation provide an extension of the a new vote between said slates will be cast by all those entitled the Company’s website www.pirelli.com and, in particular,  > the appointment of the Chairman of the Board of Statutory deadline They are made available to the public at the registered to vote attending the meeting, and the candidates on the slate the recommendations contained in Consob communication Auditors, unless it is possible to proceed with his/her office, on the Company website and in the other ways specified by which obtains the simple majority of the votes will be elected. no. DEM/9017893 of 26 February 2009 and the current Consob identification in accordance with the provisions of the Commissione Nazionale per la Società e la Borsa regulations at least 4 7 2 provisions regarding the limits on the aggregation of offices Articles of Association; 21 days before the date of the general meeting. 16.13 The chair of the Board of Statutory Auditors shall pertain to the of the members of the supervisory bodies of listed companies.  > the determination of the salary due to the members of the standing member listed as the first candidate on the minority slate. 3 7 4 Board of Statutory Auditors. Without limitation to any further documentation required by In addition to the appointment of the Board of Statutory applicable rules, including any regulatory provisions, a personal and 16.14 If, considering the standing statutory auditor and the alternates Auditors, it is also necessary to decide on the allocation of *** professional curriculum including also the offices held in management statutory auditors separately, the application of the slate voting the gross annual salary due to the members of the Board and supervisory bodies of other companies, of the individuals standing procedure fails to secure the minimum number of statutory auditors of of Statutory Auditors, currently set at 75,000 euro for the Board of statutory auditors Article 16 for election must accompany the slates together with the statements the less represented gender as required by law and/or regulation in force Chairman of the Board of Statutory Auditors and 50,000 euro in which the individual candidates agree to: at the time, the appointed candidate of the more represented gender for each of the standing Auditors (the member of the Board 16.1 The Board of Statutory Auditors shall be composed of five > their nomination indicated with the higher progressive number in each section of the of Statutory Auditors called to be part of the Supervisory effective and three alternate auditors, who must be in possession  > declare, under their own liability, that there are no grounds for slate that attracts most votes shall be substituted by the non-appointed Body of the Company is now allocated an additional salary of of the requisites established under applicable laws and regulations; their ineligibility or incompatibility, and that they meet the candidate of the less represented gender drawn from the same section 40,000 euro). to this end, it shall be borne in mind that the fields and sectors of requisites prescribed by law, by these By-laws and by regulation of the same slate on the basis of their progressive order of presentation. business closely connected with those of the Company are those for the position. In determining the salary to be attributed to the members stated in the Company’s purpose, with particular reference to Any changes that occur up to the date of the Shareholders’ meeting 16.15 The position of a standing auditor which falls vacant due to of the Board of Statutory Auditors, we invite you, as already companies or corporations operating in the financial, industrial, must be promptly notified to the Company. his/her death, forfeiture or resignation shall be filled by the first happened on the occasion of the previous renewal of the banking, insurance and real estate sectors and in the services field alternate auditor chosen from the same slate as the former. If filling supervisory body, to consider - in addition to what is envisaged by in general. 16.8 Any slates submitted without complying with the foregoing the position in this way fails produce a composition of the Board the current regulatory provisions regarding the responsibilities of the provisions shall be disregarded. of Statutory Auditors that complies with the rules in force even on Board of Statutory Auditors - also the additional tasks assigned 16.2 The ordinary shareholders’ meeting shall elect the Board of gender balance, the position will be filled by the second alternate to this body by Legislative Decree of January 27 2010 no. 39 Statutory Auditors and determine its remuneration. The minority 16.9 Each candidate may appear on only one slate, on penalty of auditor drawn from the same slate. If, subsequently, there is a need containing the “Implementation of Directive 2006/43/EC on shareholders shall be entitled to appoint one effective auditor and losing the right to be elected. to substitute another statutory auditor from the same slate that statutory audits of annual and consolidated accounts and of one alternate auditor. obtained most votes, the other alternate auditor drawn from the same the fact that pursuant to art. 6, paragraph 4-bis, of Legislative 16.10 The slates shall be divided into two sections: one for candidates slate shall fill the position, whatever the outcome. In the event of the Decree of 8 June 2011 no. 231 containing the “Provisions on 16.3 The Board of Statutory Auditors shall be appointed in compliance for the position of standing Auditor and one for candidates for the replacement of the Chairman of the Board of Statutory Auditors, the administrative liability of legal persons, companies and with applicable laws and regulations and with the exception of the position of alternate Auditor. The first candidate listed in each section the chair shall pertain to the statutory auditor of the same slate as associations, including those without legal personality, provisions of paragraph 17 of this article 16, on the basis of slates must be selected from among the persons enrolled in the Register of the outgoing Chairman, following the order contained in the slate, pursuant to Article 11 of the Law of 29 September 2000, no. presented by the shareholders in which candidates are listed by Auditors who have worked on statutory audits for a period of no less subject in all cases to observance of the requirements in law and/or 300” the functions of Supervisory Body envisaged by the consecutive number. than three years. In compliance with the current provisions relating in the Company By-laws for holding that office and to compliance ANNUAL REPORT 2017ANNUAL REPORT 2017 ResolutionsResolutionswith gender balance as provided by law and/or regulation currently in force; if it proves impossible to effect substitutions and replacements under the foregoing procedures, a shareholders’ meeting shall be CONSULTATION ON THE POLICY OF PIRELLI GROUP ON REMUNERATION following years in consideration of the services com) mechanism in accordance with legal requirements provided during the reference year, possibly stating and at the Borsa Italiana SpA (Milan, Piazza degli Affari n.6) an estimation for the items which cannot be alongside the current Report. called to complete the Board of Statutory Auditors which shall adopt Dear Shareholders, objectively measured during the reference year. resolutions by relative majority vote. As established by the Italian Consolidated Law on Finance, we *** 16.16 When the shareholders’ meeting is required, pursuant to the Consolidated Law on Finance (“TUF”) we called this meeting of the Remuneration Report under the first section. Pursuant to art.123-ter, paragraphs 3 and 6 of the Italian hereby ask you to express your consultation vote on the part provisions of the foregoing paragraph or to the law, to appoint the also with the purpose of submitting to your consultation vote standing and/or alternate members needed to complete the Board of the first section of the Remuneration Report which states the Statutory Auditors, it shall proceed as follows: if auditors elected from Remuneration Policy of the members of the governing bodies the majority slate have to be replaced, the appointment shall be made and of the Executives with strategic responsibilities to which by relative majority vote without slate constraints, without prejudice, Pirelli refers for defining the remuneration of Senior Managers whatever the circumstances, to compliance with the gender balance and Executives. as provided by law and/or regulation in force at the time; if, however, THREE-YEAR MONETARY INCENTIVE PLAN (2018-2020) FOR PIRELLI’S GROUP MANAGEMENT. RELATED AND CONSEQUENT RESOLUTIONS auditors elected from the minority slate have to be replaced, the The Policy is submitted to the Pirelli Shareholders’ Meeting for Dear Shareholders, shareholders’ meeting shall replace them by relative majority vote, the first time after the admission to listing of the Company Rationale for plan adoption47 In line with national and international best practices, the Remuneration Policy for the year 2018 adopted by Pirelli (the “2018 Policy”)48 is based upon Pirelli’s goal of attracting, motivating and retaining those resources possessing the professional skills required to successfully pursue the Group’s objectives. The 2018 Policy and the 2018-2020 LTI Plan (which forms an integral part of it) are defined in such a way as to align the selecting them where possible from amongst the candidates listed on which was granted on 04 October 2017 (“Listing”). During the meeting held on February 26, 2018, the Board of interests of Management with those of Shareholders, pursuing the slate on which the auditor to be replaced appeared and in any Directors approved the adoption of a new 2018-2020 three- the primary objective of creating sustainable medium to long event in accordance with the principle of necessary representation of The Policy which is to be voted by you was prepared on year monetary incentive plan for the Management of the term value, through the creation of an effective and proven minorities to which this By-Laws ensure the right to take part to the the base of the past application experiences and takes in Pirelli Group (“LTI Plan”). The Plan is linked to the objectives correlation between remuneration on the one hand, and appointment of the Board of Statutory Auditors, without prejudice, due consideration the statutory requirements adopted by of the 2018/2020 period included in the 2017/2020 Business individual and Pirelli’s performances on the other. whatever the circumstances, to compliance with the gender balance CONSOB, and the adoption, occurred in 2018 of a new Long Plan. The guidelines of the LTI Plan were previously approved 4 7 4 as provided by law and/or regulation in force at the time. The Term Incentive Cash Plan for 2018-2020 (“LTI Plan”) and of by the Board of Directors in the meeting held on July 28, The 2018 Policy was drawn up based on past experience, in principle of necessary representation of minorities shall be considered a Retention Plan intended to provide support for the new 2017, as announced to the Market within the framework of order to allow for a full understanding of the link between 5 7 4 complied with in the event of the appointment of Statutory Auditors Industrial Plan, which was disclosed to the market at the time the Initial Public Offering (“IPO”) transaction concluded with the Management’s remuneration structure and the creation nominated before in the minority slate or in slates different other than of Pirelli’s Listing. the listing of Pirelli & C. shares on the Stock Exchange. The of value in the medium to long term horizon. The 2018 Policy the one which obtained the highest number of votes in the context of new LTI Plan was also approved pursuant to Art. 2389 of the also takes into account the regulatory provisions adopted by the appointment of the Board of Statutory Auditors. As established under art. 123-Ter of the TUF, the Remuneration Italian Civil Code, following proposal by the Remuneration Consob with resolution no. 18049 of December 23, 2011. Report which we are hereby submitting to you is organized in Committee and with the favourable opinion expressed by 16.17 In case only one slate has been presented, the shareholders’ two separate sections: the Board of Statutory Auditors on the subjects for whom the The LTI Plan was adopted in support of the new 2018/2020 meeting shall vote on it; if the slate obtains the relative majority of I. The first section presents: above-mentioned opinion is requested. The LTI Plan is subject Business Plan with consequent early closure of the 2016-2018 the share capital, the candidates listed in the respective section shall a. The Remuneration Policy of Directors and to the approval of the Shareholders’ Meeting pursuant LTI Plan, with pro-rata payment of the three-year incentive be appointed to the office of standing auditors and alternate auditors; Executives with strategic responsibilities and to to art. 114-bis of Legislative Decree 58/1998 (“TUF,” the envisaged therein. the candidate listed at the first place in the slate shall be appointed as which Pirelli refers for defining the remuneration of Consolidated Financial Act), as it sets out, inter alia, that part Chairman of the Board of Statutory Auditors. Senior Managers and Executives; of the incentive is to be determined on the basis of the Total 16.18 When appointing auditors who, for whatsoever reason, were not implementing the Policy thereof. Pirelli’s performance and with respect to an index composed b. The procedures employed for adopting and Shareholder Return objectives calculated with respect to Recipients of the plan49 The LTI Plan is addressed to Pirelli’s Management (consisting of Executive Directors of appointed under the procedures established herein, the shareholders’ II. The second section, which concerns namely the by a selected panel of “peers” belonging to the Tyre sector. Pirelli & C. and by the Group’s executives) and may also be meeting shall vote on the basis of the majorities required by law, members of the governing and supervisory bodies, and extended to those who, over the three-year period, become without prejudice, whatever the circumstances, to compliance with the also, in aggregate form, the Executives with strategic Below, please find the highlights of the LTI Plan. For a more part of the Group’s Management or take on an Executive role. gender balance as provided by law and/or regulation in force at the time. responsibilities presents: detailed description we invite you to refer to the Disclosure In such cases, inclusion in the Plan is subject to the condition a. the items which form the remuneration, including Document drafted pursuant to art. 84-bis, first paragraph, of participating in the LTI Plan for at least a full year and 16.19 Outgoing members of the Board of Statutory Auditors may be the sums due in case of termination of the office or of Consob resolution no. 11971 of May 14, 1999 (the “Issuers the incentive percentages are calculated on the basis of the re-elected to office. of the labour contract; Regulations”), available to the public at the registered office number of months of actual participation in the Plan. 16.20 Meetings of the Board of Statutory Auditors may, if the affiliates at any title and in any form during year 2017, Alberto Pirelli 25- and on Pirelli’s website (www.pirelli.com) as In particular, the LTI Plan includes, amongst others, the Chairman or whoever acts in his/her stead verifies the necessity, be highlighting any component of said remuneration well as on the authorized eMarket storage (eMarket Storage. Executive Vice Chairman and Chief Executive Officer of b. the salaries paid by the Company, its subsidiaries or of Pirelli & C. S.p.A. (“Pirelli”) - located in Milan, viale Piero and attended by means of telecommunications systems that permit all which may be allocated to services provided during attendees to participate in the discussion and obtain information on years preceeding the reference one and highlighting, an equal basis. furthermore, the salaries due during one or more 47 Information pursuant to art. 114-bis, par. 1, a) of the legislative decree 58/1998. 48 The 2018 Policy is made available to the public along with this Report. 49 Information pursuant to art. 114-bis, par. 1, b) and b-bis of the legislative decree 58/1998. ANNUAL REPORT 2017ANNUAL REPORT 2017 ResolutionsResolutionsPirelli & C. Marco Tronchetti Provera, and the Managers  > a medium-long term variable component: consisting of achievement of the minimum value of at least one of the having strategic responsibilities50 Maurizio Boiocchi (EVP the incentive of the LTI Plan, aimed at rewarding the above-mentioned economic / financial objectives. and Strategic Advisor Technology), Andrea Casaluci (EVP Group’s performance for the 2018-2020 period, and the For all of the three objectives (TSR, ROS and Sustainability) a Special fund to incentivize workers’ participation in companies52 The Plan receives no support from the Special Fund to incentivize workers’ participation in Business Unit Prestige & Motorsport & COO Region Europe), aforementioned component of MBO deferral and increase minimum value (access threshold) has been set corresponding companies, pursuant to Art. 4, Par. 112 of Law n. 350 dated Roberto Righi (EVP and Chief Commercial Officer), Francesco reward mechanism. to a payout equal to 75% of the respective portion – with December 24, 2003. Sala (Senior Vice President Manufacturing), Maurizio Sala As with the MBO incentive, also the LTI incentive is established reference to each objective - of the incentive achievable at (EVP and Chief Planning and Controlling Officer), Luigi as a percentage of the fixed component increasing on the target performance. **** Staccoli (EVP Pirelli Digital) and Francesco Tanzi (EVP and basis of the position held and of the reference benchmarks Chief Financial Officer). The LTI plan is also addressed to for each role. If target objectives are reached, this percentage In the event of failing to achieve the minimum established The LTI Plan is to be considered “of particular relevance” as it senior managers and to the Group’s executives (including may vary from a minimum of 50% for Executives up to a value (access threshold) for any objective, the beneficiary is addressed, amongst others, to the Executive Vice Chairman Director Giovanni Tronchetti Provera, exclusively as a Group’s maximum of 250% for Directors holding special offices who does not accrue any right to payment of the relevant portion and Chief Executive Officer of Pirelli & C. and to subjects executive) and may also be extended to those who, over the are assigned specific duties. A limit has been set to the of the incentive. three-year period, for internal career growth or as newly maximum LTI incentive that is equal to twice the incentive having strategic responsibilities as they have regular access to classified information and hold the power to adopt decisions hired, take on Executive positions. that can be attained at target. In relation to the TSR and ROS targets, the final calculation that may affect the Group’s evolution and future prospects. Performance objectives and calculation of award51 Pirelli’s Management remuneration structure is composed by three elements:  > a fixed component; as a percentage of the gross annual fixed component / Gross Annual Salary (GAS) received by the beneficiary on the date at which participation of the subject to the Plan  > an annual variable component (MBO): this is a percentage was established. The 2018-2020 LTI Plan envisages an access Award pay-out period If objectives are met, pay-out (“Pay-Out Date”) of the medium to long term incentive (so- or stocks, but exclusively a cash incentive partially related to the performance of Pirelli’s ordinary share, the Disclosure Document, drafted in compliance with the current legislation, does not contain the information required for mechanisms The LTI Plan, which is monetary and does not provide for the of the incentive for intermediate results between the access assignment of shares or options on shares, is subject to the threshold and the target or between the target and the Taking into account that the LTI Plan is monetary and does achievement of the three-year objectives and is determined maximum, is carried out using linear interpolation. not provide for the allocation of shares or options on shares of the fixed component increasing in relation to the threshold consisting in a Deleveraging (calculated as the called LTI award) to participants of the LTI Plan will be carried regarding the assignment of shares or options on shares. 4 7 6 position held by the beneficiary and taking into account NFP / EBITDA adjusted ratio) lower than 2 as calculated at out in the first half of 2021, provided that for the participants, the different roles’ reference benchmarks. If target December 31, 2020. as of 31 December 2020, the employment relationship has not **** 7 7 4 objectives are achieved, this percentage may vary from a ceased. minimum of 20% for Executives (executives of the Italian Furthermore, the following four types of objectives have Dear Shareholders, Pirelli Company or employees of the Group’s foreign been established, the first three of which are independent In the event of termination of the employment relationship, Companies, with a position or role that is equivalent to from each other, with relative weightings: which may have occurred for any reason before the end of the On the basis of the above, we ask you to: that of an Italian executive) up to a maximum of 125%  > Return on Sales target (calculated as the ratio between three-year period, the recipient ceases to participate in the 1. approve - pursuant to art. 114-bis of Legislative Decree for Directors holding special offices who are assigned the three-year cumulative Group Adjusted EBIT and the LTI Plan and, consequently, the LTI Bonus will not be paid, not n. 58 dated February 24, 1998, as subsequently amended specific duties, and is aimed to reward, depending on the cumulative net sales for the three-year period) with a even pro-rata. For Directors holding special offices who are and integrated - the adoption of a 2018-2020 three- position held, the annual performance of the Group, of the weighting equal to 30% of the total LTI award; assigned specific duties (as is the case for the Executive Vice year monetary incentive plan (so-called LTI Plan) for the Company and / or of the function to which they belong. A  > Absolute Group Total Shareholder Return (“TSR”) Chairman and Chief Executive Officer Mr. Marco Tronchetti Management of the Pirelli Group in the part in which it cap to the maximum attainable MBO award is set which target with a weighting on the total LTI award equal Provera) who cease to hold office because their term has is also based on the performance of Pirelli’s share, in the amounts to twice the incentive payable at target level. to 40%. In the document made available at the expired and are not subsequently appointed as directors the terms illustrated in this Report and, as better described, For the sake of continuity of results over time, payment Shareholders’ Meeting, more detailed information on the pro-rata payment of the LTI bonus will be provided for. in the Disclosure Document relating to the LTI Plan of 25% of the potentially accrued MBO is deferred to the implementation of the TSR target and on the peer group following year, its payment being subject to the accrual composition is available; of the MBO award in such following year (and therefore  > Relative TSR target, with a weighting of 20%, relative to a potentially at “risk” of disbursement), in addition to a panel of selected peers. In the document made available Duration of the plan and changes The Plan, referred to the financial years 2018-2020, ends on the Pay-Out Date. (prepared pursuant to article 84-bis, 1st Paragraph, of the Issuers’ Regulation). In fact, the LTI Plan envisages, inter alia, that a portion of the LTI Award will be determined on the basis of the Total Shareholder Return objective possible “reward” mechanism of increase of the total MBO at the Shareholders’ Meeting, more detailed information In compliance with existing procedures in order to proceed calculated according to Pirelli’s performance and to an award, in accordance with the degree of achievement on the implementation of the TSR target is available; with a review of the LTI Plan, reference should be made to the index composed of selected “peers” in the Tyre sector; of the MBO objectives in the following year (for the  > the remaining 10% is calculated on the basis of a Disclosure Document. 2. confer to the Board of Directors – and, on its behalf, to valuation of the Annual Total Direct Compensation, this Sustainability indicator in relation to the positioning deferral and “bonus” component is classified as a medium- of Pirelli in the Dow Jones Sustainability Index AX Auto long term variable component). Components sector. This objective is subject to the the Executive Vice Chairman and Chief Executive Officer - all powers necessary to proceed to the full and complete implementation of the LTI Plan. 50 It should be noted that Mr. Gustavo Bracco, Executive with strategic responsibilities, is not among the LTI Plan recipients. 51 Information pursuant to art. 114-bis, par. 1, c) of the legislative decree 58/1998. 52 Information pursuant to art. 114-bis, par. 1, d) of the legislative decree 58/1998. ANNUAL REPORT 2017ANNUAL REPORT 2017 ResolutionsResolutions“DIRECTORS AND OFFICERS LIABILITY INSURANCE” POLICY. RELATED AND CONSEQUENT RESOLUTIONS Dear Shareholders, benchmarking activities were carried out with companies with comparable characteristics to Pirelli. Set out below are the main terms and conditions of the new D&O policy, which in addition to taking into account best market practices and Pirelli’s positioning in relation to major The use of insurance coverage to cover the civil liability of companies that have adopted similar cover, also takes into members of corporate bodies and executives, is a widespread account the characteristics and international vocation of the international practice nowadays in the most advanced Group. financial markets, so as to provide protection for members of  > Term: 12 months; management and control bodies, enabling them to carry out  > Annual award: EUR 2-2.5 million; their assigned tasks calmly and in the interests of the Company,  > Upper limit: EUR 250 million. limiting risks associated with exercising their duties. Deductibles related to associated risks and automatic coverage mechanisms are foreseen for new subjects taking Such policies - commonly defined as “Directors’ and Officers’ on positions within the group or for newly acquired entities. Liability Insurance” or more simply “D&O” - actually allow No coverage is provided for if the insured party’s conduct is members of corporate bodies (and Group executives as based, originates or results from a) the acquisition of profit well as Statutory Auditors) to be indemnified from the cost or advantage to which the Insured was not entitled b) any of compensating for financial damages deriving from civil criminal, dishonest or fraudulent act. liability, as well as for legal expenses related to any liability actions brought by third parties damaged by acts carried *** out by members of the above-mentioned corporate bodies in 4 7 8 exercising their duties, obviously with the exception of cases For all of the above, we invite you to authorise the Board of of intentional breach by the aforementioned subjects of the Directors to renew the D&O insurance policy, in accordance obligations inherent to exercising their duties and therefore with the terms and conditions illustrated above, and to protect the assets of the members of corporate bodies and therefore, to approve the following. companies that make up the Pirelli Group. The Company, which has adopted these practices for years, considers it appropriate to propose to its Shareholders, Resolution “The Ordinary Shareholders’ Meeting, having noted the proposal of the Directors; at the first Shareholders’ Meeting after the new listing of RESOLVES the Company, to renew the D&O to cover the civil liability a. to authorise the Board of Directors to renew the Directors of members of corporate bodies and management against & Officers Liability insurance policy, according to the terms the risk that they, when exercising their duties, may and conditions illustrated above; unintentionally cause financial damage to third parties or b. to confer on the Board of Directors - up to the expiry anyone who has an interest in the Company. of their relevant mandate -, and for their part, on the Following renewal in October 2017, the D&O policy currently the necessary powers to renew the D&O policy, and in in force provides for the following main features: any case, to also implement the aforesaid resolution by  > Term: 12 months;  > Upper limit: EUR 250 million means of proxies; c. to entrust the Board of Directors with the task of renewing There are a limited number of exclusions in the policy. the Directors & Officers Liability insurance policy in Executive Vice Chairman and Chief Executive Officer, all accordance with the standard terms and conditions of In order to assess Pirelli’s position with respect to major the insurance market”. companies that have already adopted similar cover, 9 7 4 ANNUAL REPORT 2017ANNUAL REPORT 2017 ResolutionsResolutions4 8 2 3 8 4 ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertificationsPirelli & C SpA Independent auditor’s report in accordance with article 14 of Legislative Decree 39 of 27 January 2010 and article 10 of Regulation (EU) 537/2014 Consolidated financial statements as of 31 December 2017 4 8 4 Independent auditor’s report in accordance with article 14 of Legislative Decree 39 of 27 January 2010 and article 10 of Regulation (EU) 537/2014 To the shareholders of Pirelli & C SpA Report on the Audit of the Consolidated Financial Statements Opinion We have audited the consolidated financial statements of Pirelli & C SpA and its subsidiaries (Pirelli group), which comprise the statement of financial position as of 31 December 2017, the income statement, the statement of comprehensive income, the statement of changes in equity and the statement of cash flows for the year then ended, and the notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Pirelli group as of 31 December 2017, and of the result of its operations and cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union, and with the regulations issued to implement article 9 of Legislative Decree 38/05. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISA Italia). Our responsibilities under those standards are further described in section Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements of this report. We are independent of Pirelli & C SpA (the Company) based on ethic and independence regulations and standards applicable to audits of financial statements under Italian law. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 5 8 4 ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertificationsKey Audit Matters How our audit addressed the key audit matter 4 8 6 Recoverability of brands with indefinite useful life and goodwill Note 10 “Intangible assets”. As of 31 December 2017 the indefinite-lived intangible assets Pirelli brand and goodwill amount to € 2,270 million and € 1,877 million, respectively. Recoverability of the carrying amount of Pirelli brand and goodwill were tested for impairment at the year-end, in accordance with IAS36 – Impairment of Assets. The recoverable amount of Pirelli Brand is measured using its fair value, based on an income approach. This requires the use of estimates for revenue projections, implied royalty rates and discount rate. The recoverable amount of goodwill, entirely allocated to the Consumer segment, is measured using its fair value, based on the market price of the Company shares. The recoverable amount of Pirelli Brand is compared with its carrying amount. The recoverable amount of the Consumer segment is compared with the carrying amount of segment assets and liabilities, including brand and goodwill. • • • • We have performed an understanding and evaluation of the internal controls in place over the impairment testing of brand and goodwill. We have performed, with the support of PwC experts, the following audit procedures: • assessment over the adequacy of the impairment testing process in accordance with the requirement of the accounting standard; assessment of the allocation of goodwill to the group of cash generating units – CGU; assessment of the key assumptions used when determining the fair value, with focus to revenue projections , implied royalty rates and discount rate, including benchmarking e sensitivity analysis; testing of the accuracy of the amounts of assets and liabilities directly attributable to the Consumer segment; testing the mathematical accuracy of the calculation model used. Considering the magnitude of the carrying amounts and the subjective judgment in some of the assumptions used for the calculation of the fair values, recoverability of the carrying amounts of Pirelli brand and goodwill represented a key matter in the audit of the consolidated financial statements. We have assessed variances between projections used in previous years and actual results to evaluate the reliability and coherence with the market trend. We have assessed the accuracy and completeness of the disclosure presented in the notes to the consolidated financial statements. Key Audit Matters Revenue recognition Note 3 “ Adopted Accounting Standards” Considering the magnitude and the high volume of sales transactions carried out through a global distribution network, different sales channels and logistic platforms, the revenue recognition represented a key matter in the audit of the consolidated accounts. Measurement of pension plans Note 22 “Employee benefit obligations”. As of 31 December 2017 the net pension obligation amounts to € 183 million, representing the net balance of a gross pension obligation of € 1,397 million and the plan assets of € 1,214 million. The measurement of the net pension obligation at the balance sheet date has been performed in accordance with IAS19 - Employee Benefits, with the assistance of external actuaries. The measurement of the pension obligation requires the use of estimates based on actuarial assumptions. Considering the magnitude of the amounts and the subjective judgment in the actuarial assumptions used, the measurement of the pension obligation represented a key matter in the audit of the consolidated financial statements. How our audit addressed the key audit matter We have carried out our procedures to verifying existence, completeness, accuracy and proper period of sales transactions. For the main revenue streams we have performed an understanding and an evaluation of the internal controls over the revenue recognition, and a validation of relevant controls. We have tested samples of sales transactions obtaining appropriate supporting evidence, with specific attention to key contractual terms. We have tested samples of sales returns transactions, credit notes and year-end accruals. We have tested with the support of PwC actuarial experts the actuarial valuations carried out by the external experts engaged by the group, with specific reference to the reasonableness of the main actuarial assumptions used. We have tested the accuracy and completeness of the census data of the plan participants for the calculation of the pension obligation. We have tested the fair value of the plan assets, also considering third party confirmations. We have assessed the accuracy and completeness of the disclosure presented in the notes to the consolidated financial statements. 7 8 4 3 of 8 4 of 8 ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertifications4 8 8 Other matters The consolidated financial statements of Pirelli group for the year ended 31 December 2016 were audited by another auditor which, on 4 April 2017, issued an unqualified audit report. As explained in the notes, in accordance with IFRS5 – Non Current Assets Held for Sale and Discontinued Operations, comparative information has been restated as a result of the distribution of the Industrial business to the Company shareholder Marco Polo International Holding Italy SpA. The distribution was executed through the assignment of all the shares of TP Industrial Holding SpA, the group subsidiary owning the Industrial business. Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union, and with the regulations issued to implement article 9 of Legislative Decree 38/05 and, in the terms prescribed by law, for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Management is responsible for assessing the group ability to continue as a going concern and, in preparing the consolidated financial statements, for the appropriate application of the going concern basis of accounting, and for disclosing matters related to going concern. In preparing the consolidated financial statements, management uses the going concern basis of accounting unless management intends either to liquidate Pirelli & C SpA or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing, in the terms prescribed by law, the group financial reporting process. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with International Standards on Auditing (ISA Italia) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements. As part of an audit conducted in accordance with International Standards on Auditing (ISA Italia), we exercise professional judgment and maintain professional scepticism throughout the audit. Furthermore: • • • • • • we identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error; we design and perform audit procedures responsive to those risks; we obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; we obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group internal control; we evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management; we conclude on the appropriateness of management use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the group to cease to continue as a going concern; we evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation; we obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion on the consolidated financial statements. We communicate with those charged with governance, identified at an appropriate level as required by ISA Italia regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we complied with the regulations and standards on ethics and independence applicable under Italian law and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence and, where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that are of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our report. 9 8 4 5 of 8 6 of 8 ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertifications4 9 0 Additional Disclosures required by Article 10 of Regulation (EU) 537/2014 We were appointed by the shareholders of Pirelli & C SpA at the general meeting held on 1 August 2017 to perform the audit of the Company consolidated and separate financial statements for the years ending 31 December 2017 through 31 December 2025. We declare that we did not provide any prohibited non-audit services referred to in article 5, paragraph 1, of Regulation (EU) 537/2014 and that we remained independent of the Company in conducting the audit. We confirm that the opinion on the consolidated financial statements expressed in this report is consistent with the additional report to those charged with governance, in their capacity as audit committee, prepared pursuant to article 11 of the aforementioned Regulation. Report on Compliance with other Laws and Regulations Opinion in accordance with Article 14, paragraph 2, letter e), of Legislative Decree 39/10 and Article 123-bis, paragraph 4, of Legislative Decree 58/98 Management of Pirelli & C SpA is responsible for preparing a report on operations and a report on the corporate governance and ownership structure of the Pirelli group as of 31 December 2017, including their consistency with the relevant consolidated financial statements and their compliance with the law. We have performed the procedures required under auditing standard (SA Italia) 720B to express an opinion on the consistency of the report on operations and of the specific information included in the report on corporate governance and ownership structure referred to in article 123-bis, paragraph 4, of Legislative Decree 58/98, with the consolidated financial statements of the Pirelli group as of 31 December 2017 and on their compliance with the law, as well as to issue a statement on material misstatements, if any. In our opinion, the report on operations and the specific information included in the report on corporate governance and ownership structure mentioned above are consistent with the consolidated financial statements of the Pirelli group as of 31 December 2017 and are prepared in compliance with the law. With reference to the statement referred to in article 14, paragraph 2, letter e), of Legislative Decree 39/10, issued on the basis of our knowledge and understanding of the group obtained in the course of the audit, we have nothing to report. Statement in accordance with article 4 of Consob Regulation implementing Legislative Decree 254 of 30 December 2016 Management of Pirelli & C SpA is responsible for the preparation of the non-financial disclosure pursuant to Legislative Decree 254 of 30 December 2016. We have verified that the non-financial disclosure was approved by the board of directors. Pursuant to article 3, paragraph 10, of Legislative Decree 254 of 30 December 2016, the non-financial disclosure is subject to separate audit reporting by our firm. Milan, 8 March 2018 PricewaterhouseCoopers SpA Signed by Paolo Caccini (Partner) This report has been translated into English from the Italian original solely for the convenience of international readers 1 9 4 7 of 8 8 of 8 ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertifications4 9 2 3 9 4 ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertificationsPirelli & C SpA Independent auditor’s report in accordance with article 14 of Legislative Decree 39 of 27 January 2010 and article 10 of Regulation (EU) 537/2014 Separate financial statements as of 31 December 2017 4 9 4 Independent auditor’s report in accordance with article 14 of Legislative Decree 39 of 27 January 2010 and article 10 of Regulation (EU) 537/2014 To the shareholders of Pirelli & C SpA Report on the Audit of the Separate Financial Statements Opinion We have audited the separate financial statements of Pirelli & C SpA (the “Company”), which comprise the statement of financial position as of 31 December 2017, the income statement, the statement of comprehensive income, the statement of changes in equity and the statement of cash flows for the year then ended, and the notes to the separate financial statements, including a summary of significant accounting policies. In our opinion, the separate financial statements give a true and fair view of the financial position of the Company as of 31 December 2017, and of the result of its operations and cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union, and with the regulations issued to implement article 9 of Legislative Decree 38/05. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISA Italia). Our responsibilities under those standards are further described in section Auditor’s Responsibilities for the Audit of the Separate Financial Statements of this report. We are independent of the Company based on ethic and independence regulations and standards applicable to audits of financial statements under Italian law. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the separate financial statements of the current period. These matters were addressed in the context of our audit of the separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 5 9 4 ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertificationsKey Audit Matters How our audit addressed the key audit matter Recoverability of brands with indefinite useful life Note 9 “Intangible assets”. As of 31 December 2017 the indefinite-lived intangible asset Pirelli brand amounts to € 2,270 million. Recoverability of the carrying amount of Pirelli brand was tested for impairment at the year-end, in accordance with IAS36 – Impairment of Assets. The recoverable amount of Pirelli Brand is measured using its fair value, based on an income approach. This requires the use of estimates for revenue projections, implied royalty rates and discount rate. The recoverable amount of Pirelli Brand is compared with its carrying amount. 4 9 6 We have performed an understanding and evaluation of the internal controls in place over the impairment testing of the brand. We have performed, with the support of PwC experts, the following audit procedures: • assessment over the adequacy of the impairment testing process in accordance with the requirement of the accounting standard; assessment of the key assumptions used when determining the fair value, with focus to revenue projections , implied royalty rates and discount rate, including benchmarking e sensitivity analysis; testing the mathematical accuracy of the calculation model used. • • Considering the magnitude of the carrying amount and the subjective judgment in some of the assumptions used for the calculation of the fair value, recoverability of the carrying amount of Pirelli brand represented a key matter in the audit of the separate financial statements. We have assessed variances between projections used in previous years and actual results to evaluate the reliability and coherence with the market trend. We have assessed the accuracy and completeness of the disclosure presented in the notes to the separate financial statements. Other matters The separate financial statements of Pirelli & C SpA for the year ended 31 December 2016 were audited by another auditor which, on 4 April 2017, issued an unqualified audit report. Responsibilities of Management and Those Charged with Governance for the Separate Financial Statements Management is responsible for the preparation of separate financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union, and with the regulations issued to implement article 9 of Legislative Decree 38/05 and, in the • • • terms prescribed by law, for such internal control as management determines is necessary to enable the preparation of separate financial statements that are free from material misstatement, whether due to fraud or error. Management is responsible for assessing the Company ability to continue as a going concern and, in preparing the separate financial statements, for the appropriate application of the going concern basis of accounting, and for disclosing matters related to going concern. In preparing the separate financial statements, management uses the going concern basis of accounting unless management intends either to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing, in the terms prescribed by law, the Company financial reporting process. Auditor’s Responsibilities for the Audit of the Separate Financial Statements Our objectives are to obtain reasonable assurance about whether the separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with International Standards on Auditing (ISA Italia) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the separate financial statements. 7 9 4 As part of an audit conducted in accordance with International Standards on Auditing (ISA Italia), we exercise professional judgment and maintain professional scepticism throughout the audit. Furthermore: • we identify and assess the risks of material misstatement of the separate financial statements, whether due to fraud or error; we design and perform audit procedures responsive to those risks; we obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; we obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company internal control; we evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management; we conclude on the appropriateness of management use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are 3 of 6 4 of 6 ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertifications4 9 8 • based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern; we evaluate the overall presentation, structure and content of the separate financial statements, including the disclosures, and whether the separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance, identified at an appropriate level as required by ISA Italia regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we complied with the regulations and standards on ethics and independence applicable under Italian law and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence and, where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that are of most significance in the audit of the separate financial statements of the current period and are therefore the key audit matters. We describe these matters in our report. Additional Disclosures required by Article 10 of Regulation (EU) 537/2014 We were appointed by the shareholders of Pirelli & C SpA at the general meeting held on 1 August 2017 to perform the audit of the Company consolidated and separate financial statements for the years ending 31 December 2017 through 31 December 2025. We declare that we did not provide any prohibited non-audit services referred to in article 5, paragraph 1, of Regulation (EU) 537/2014 and that we remained independent of the Company in conducting the audit. We confirm that the opinion on the separate financial statements expressed in this report is consistent with the additional report to those charged with governance, in their capacity as audit committee, prepared pursuant to article 11 of the aforementioned Regulation. Report on Compliance with other Laws and Regulations Opinion in accordance with Article 14, paragraph 2, letter e), of Legislative Decree 39/10 and Article 123-bis, paragraph 4, of Legislative Decree 58/98 Management of Pirelli & C SpA is responsible for preparing a report on operations and a report on the corporate governance and ownership structure of Pirelli & C SpA as of 31 December 2017, including their consistency with the relevant separate financial statements and their compliance with the law. We have performed the procedures required under auditing standard (SA Italia) 720B to express an opinion on the consistency of the report on operations and of the specific information included in the report on corporate governance and ownership structure referred to in article 123-bis, paragraph 4, of Legislative Decree 58/98, with the separate financial statements of the Company as of 31 December 2017 and on their compliance with the law, as well as to issue a statement on material misstatements, if any. In our opinion, the report on operations and the specific information included in the report on corporate governance and ownership structure mentioned above are consistent with the separate financial statements of the Company as of 31 December 2017 and are prepared in compliance with the law. With reference to the statement referred to in article 14, paragraph 2, letter e), of Legislative Decree 39/10, issued on the basis of our knowledge and understanding of the Company obtained in the course of the audit, we have nothing to report. Milan, 8 March 2018 PricewaterhouseCoopers SpA Signed by Paolo Caccini (Partner) This report has been translated into English from the Italian original solely for the convenience of international readers 9 9 4 5 of 6 6 of 6 ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertifications5 0 0 GRI CONTENT INDEX GRI Standard Disclosure 101: Foundation 2016 102-1 Name of the organization 102-2 Activities, brands, products, and services 102-3 Location of headquarters 102-4 Location of operations Page Number, URL 42, 202 42-45 202 42, 50-51 102-5 Ownership and legal form 202, 205, 231 102-6 Markets served 42, 46-47, 50-51 102-7 Scale of the organization 42, 65-66, 142 102-8 Information on employees and other workers 155-157, 160 102-9 Supply chain 102-10 Significant changes to the organization and its supply chain 128-130 42, 61-63, 102, 128-130, 155-158 102-11 Precautionary Principle or approach 79-84 102-12 External initiatives 102-103, 180-183 102-13 Membership of associations 102-14 Statement from senior decision-maker 180-183 6-9 102-15 Key impacts, risks, and opportunities 79-84, 103-107 GRI 102: General 102-16 Values, principles, standards, Disclosure 2016 and norms of behavior 108, 120- 121, 132, 159, 168, 173, 212, corporate website (www.pirelli. com) sezione sostenibilità /principali politiche di sostenibilità 102-17 Mechanisms for advice and concerns about ethics 109-111, 168 102-18 Governance structure 88-89, 204, 209- 214, 216-220 102-19 Delegating authority 103, 219-220, 222 102-20 Executive-level responsibility for economic, environmental, and social topics 102-21 Consulting stakeholders on economic, environmental, and social topics 102-22 Composition of the highest governance body and its committees 103 103, 105, 123 211, 216-220, 232-235 102-23 Chair of the highest governance body 211 102-24 Nominating and selecting the highest governance body 204, 209-210 102-25 Conflicts of interest 224 102-26 Role of highest governance body in setting purpose, values, and strategy 103, 219- 220 102-27 Collective knowledge of highest governance body 212 Omission Material Topic GRI Standard Disclosure Page Number, URL Omission Material Topic Disclosure and Transparency Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Corporate Governance Stakeholder Dialogue Stakeholder Dialogue Stakeholder Dialogue Stakeholder Dialogue Stakeholder Dialogue 1 0 5 102-28 Evaluating the highest governance body’s performance 102-29 Identifying and managing economic, environmental, and social impacts 213 219-220 102-30 Effectiveness of risk management processes 79-84, 219-220 102-31 Review of economic, environmental, and social topics 102-32 Highest governance body’s role in sustainability reporting 102-33 Communicating critical concerns 216, 219-220 219-220 219-220 102-34 Nature and total number of critical concerns Confidentiality Constraints 102-35 Remuneration policies 255-258 102-36 Process for determining remuneration 102-37 Stakeholders’ involvement in remuneration 102-38 Annual total compensation ratio 102-39 Percentage increase in annual total compensation ratio 102-40 List of stakeholder groups GRI 102: General Disclosure 2016 102-41 Collective bargaining agreements 102-42 Identifying and selecting stakeholders 102-43 Approach to stakeholder engagement 256 256 105 171 105 105 Confidentiality Constraints Confidentiality Constraints 102-44 Key topics and concerns raised 105-107 102-45 Entities included in the consolidated financial statements 102, 379-384 102-46 Defining report content and topic Boundaries 102, 500-506 102-47 List of material topics 102-48 Restatements of information 106-107 102 102-49 Changes in reporting 106-107, 500-506 102-50 Reporting period 102-51 Date of most recent report 102-52 Reporting cycle 102-53 Contact point for questions regarding the report 102-54 Claims of reporting in accordance with the GRI Standards 102-55 GRI content index 102-56 External assurance 102 102 102 102 102 500-506 511-515 ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertificationsGRI Standard Disclosure GRI 103: Management Approach 2016 201-1 Direct economic value generated and distributed GRI 201: Economic Performance 2016 201-2 Financial implications and other risks and opportunities due to climate change 201-3 Defined benefit plan obligations and other retirement plans 201-4 Financial assistance received from government GRI 103: Management Approach 2016 202-1 Ratios of standard entry level wage by gender compared to local minimum wage 202-2 Proportion of senior management hired from the local community GRI 202: Market GRI 203: GRI 103: Management Approach 2016 112-113, 183 Indirect Economic 203-1 Infrastructure investments and services supported 112-113, 183-188 Page Number, URL 81, 112-113, 172-173 112 81 113 159-161 161 159 Omission Material Topic GRI Standard Disclosure GRI 103: Management Approach 2016 Page Number, URL 132-135, 143 Omission Material Topic Financial Health Financial Health 302-1 Energy consumption within the organization 144 302-2 Energy consumption outside of the organization 132-135 172-173, 339, 358 Financial Health GRI 302: Energy 2016 302-3 Energy intensity Financial Health 302-4 Reduction of energy consumption 302-5 Reductions in energy requirements of products and services 143-144 143-144 137-139 GRI 103: Management Approach 2016 132-135, 147 303-1 Water withdrawal by source 147-148 GRI 303: Water 2016 303-2 Water sources significantly affected by withdrawal of water 303-3 Water recycled and reused 148 148 GRI 103: Management Approach 2016 150-151 304-1 Operational sites owned, leased, managed in, or adjacent to, protected areas and areas of high 150 biodiversity value outside protected areas GRI 304: Biodiversity 2016 304-2 Significant impacts of activities, products, and services on biodiversity 304-3 Habitats protected or restored 304-4 IUCN Red List species and national conservation list species with habitats in areas affected by operations 150-151 150-151 150 GRI 103: Management Approach 2016 132-135, 145 GRI 305: Emissions 2016 305-1 Direct (Scope 1) GHG emissions 305-2 Energy indirect (Scope 2) GHG emissions 305-3 Other indirect (Scope 3) GHG emissions 305-4 GHG emissions intensity 305-5 Reduction of GHG emissions 305-6 Emissions of ozone-depleting substances (ODS) 305-7 Nitrogen oxides (NOx), sulfur oxides (SOx), and other significant air emissions GRI 103: Management Approach 2016 306-1 Water discharge by quality and destination GRI 306: Effluents and Waste 2016 GRI 307: Environmental Compliance 2016 306-2 Waste by type and disposal method 306-3 Significant spills 306-4 Transport of hazardous waste 306-5 Water bodies affected by water discharges and/or runoff GRI 103: Management Approach 2016 307-1 Non-compliance with environmental laws and regulations 145-146 145-147 127-128, 134- 135, 145 145-147 145-147 152 150-152 149-150 148 149 152 149 148 152 152 3 0 5 Responsible Use of Natural Resources Responsible Use of Natural Resources Responsible Use of Natural Resources Responsible Use of Natural Resources Responsible Use of Natural Resources Responsible Use of Natural Resources Responsible Use of Natural Resources Responsible Use of Natural Resources Business Integrity impact 2016 GRI 204: Procurement practices 2016 GRI 205: Anti-corruption 2016 5 0 2 203-2 Significant indirect economic impacts 112-113, 183-188 GRI 103: Management Approach 2016 204-1 Proportion of spending on local suppliers GRI 103: Management Approach 2016 128-130 128 108-109 205-1 Operations assessed for risks related to corruption 108-109 Business Integrity 205-2 Communication and training about anti- corruption policies and procedures 108-109, 122, 212 205-3 Confirmed incidents of corruption and actions taken GRI 206: Anti-competitive Behavior 2016 GRI 103: Management Approach 2016 206-1 Legal actions for anti-competitive behavior, anti-trust, and monopoly practices 109 109 109 GRI 103: Management Approach 2016 129-130, 152 301-1 Materials used by weight or volume 129-130 GRI 301: Materials 2016 301-2 Recycled input materials used 301-3 Reclaimed products and their packaging materials 130 152 Information Unavailable: % of employees trained on anti-corruption currently not disclosed by category and region Business Integrity Business Integrity Business Integrity Circular Economy/ELT Circular Economy/ELT Circular Economy/ELT ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertificationsOmission Material Topic GRI Standard Disclosure GRI Standard Disclosure Page Number, URL GRI 103: Management Approach 2016 120-122 GRI 308: Supplier Environmental Assessment 2016 308-1 New suppliers that were screened using environmental criteria 308-2 Negative environmental impacts in the supply chain and actions taken 120-121, 125-127 126-127 GRI 103: Management Approach 2016 157, 160, 173 401-1 New employee hires and employee turnover 157-158 GRI 401: Employment 2016 401-2 Benefits provided to full-time employees that are not provided to temporary or part-time employees 401-3 Parental leave GRI 402: Labor/Management GRI 103: Management Approach 2016 Relations 2016 402-1 Minimum notice periods regarding operational changes GRI 103: Management Approach 2016 403-1 Workers representation in formal joint management–worker health and safety committees 173 160 171 171 173-174 173-174 Information Unavailable: return to work rate currently not available 5 0 4 GRI 403: Occupational Health and Safety 2016 403-2 Types of injury and rates of injury, occupational diseases, lost days, and absenteeism, 175-177 and number of work-related fatalities Confidentiality Constraints: absentee rate not disclosed publicly 403-3 Workers with high incidence or high risk of diseases related to their occupation 403-4 Health and safety topics covered in formal agreements with trade unions GRI 103: Management Approach 2016 177 173-174 165-168 404-1 Average hours of training per year per employee 168 GRI 404: Training and Education 2016 404-2 Programs for upgrading employee skills and transition assistance programs 404-3 Percentage of employees receiving regular performance and career development reviews GRI 103: Management Approach 2016 405-1 Diversity of governance bodies and employees 405-2 Ratio of basic salary and remuneration of women to men GRI 103: Management Approach 2016 GRI 405: Diversity and Equal Opportunities 2016 GRI 406: Non- discrimination 406-1 Incidents of discrimination 2016 and corrective actions taken 166-168 165 160 155-156, 204, 211-212 160-161 109-110 110-111 Sustainable Procurement Sustainable Procurement Employment Governance and Responsibility Employment Governance and Responsibility Employment Governance and Responsibility Employment Governance and Responsibility Employment Governance and Responsibility Employment Governance and Responsibility Employment Governance and Responsibility Employment Governance and Responsibility Employment Governance and Responsibility Employment Governance and Responsibility Page Number, URL 120-122, 172 125-127, 172 120-122, 172 125-127, 172 120-122, 172 125-127, 172 Omission Material Topic Employment Governance and Responsibility Sustainable Procurement Sustainable Procurement GRI 407: Freedom of Association and Collective Bargaining 2016 GRI 408: GRI 103: Management Approach 2016 407-1 Operations and suppliers in which the right to freedom of association and collective bargaining may be at risk GRI 103: Management Approach 2016 Child Labor 2016 408-1 Operations and suppliers at significant risk for incidents of child labor GRI 103: Management Approach 2016 409-1 Operations and suppliers at significant risk for incidents of forced or compulsory labor GRI 409: Forced or Compulsory Labor 2016 GRI 410: Security Practices 2016 GRI 103: Management Approach 2016 - 410-1 Security personnel trained in human rights policies or procedures GRI 411: Rights of indigenous Peoples 2016 GRI 103: Management Approach 2016 411-1 Incidents of violations involving rights of indigenous peoples GRI 103: Management Approach 2016 412-1 Operations that have been subject to human rights reviews or impact assessments GRI 412: Human Rights 412-2 Employee training on human Assessment 2016 rights policies or procedures 412-3 Significant investment agreements and contracts that include human rights clauses or that underwent human rights screening GRI 103: Management Approach 2016 413-1 Operations with local community engagement, impact assessments, and development programs GRI 413: Local Comunities 2016 153-154 110 153-154 120-122, 172 153 120-122 153 105, 153 413-2 Operations with significant actual and potential negative impacts on local communities 153 GRI 103: Management Approach 2016 120-122 GRI 414: Supplier Social Assessment 2016 GRI 415: Public Policy 2016 GRI 416: Customer Health and Safety 2016 414-1 New suppliers that were screened using social criteria 414-2 Negative social impacts in the supply chain and actions taken GRI 103: Management Approach 2016 415-1 Political contributions GRI 103: Management Approach 2016 416-1 Assessment of the health and safety impacts of product and service categories 416-2 Incidents of non-compliance concerning the health and safety impacts of products and services 120-121, 125-127 126-127 113 113 119 119 116 5 0 5 Information Unavailable: % of security personnel trained on human rights currently not available Information Unavailable: number of hours of training on human rights and % of employees trained currently not available Information Unavailable: information currently not available Information Unavailable: information currently not available Sustainable Procurement Sustainable Procurement Product Performance & Safety Innovation Product Performance & Safety Innovation ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertificationsGRI Standard Disclosure Page Number, URL Omission Material Topic Areas of the Global Compact Global Compact Principles Directly Relevant GRI Indicators Indirectly Relevant GRI Indicators GRI 103: Management Approach 2016 137-138 GRI 417: Marketing and Labelling 2016 417-1 Requirements for product and service information and labeling 417-2 Incidents of non-compliance concerning product and service information and labeling 417-3 Incidents of non-compliance concerning marketing communications 119-120, 140 116 116 GRI 418: Customer Privacy 2016 GRI 419: Socioeconomic Compliance 2016 GRI 103: Management Approach 2016 108-109 418-1 Substantiated complaints concerning breaches of customer privacy and losses of customer data GRI 103: Management Approach 2016 419-1 Non-compliance with laws and regulations in the social and economic area 116 116 116 Disclosure 402: Labour/ Management Relations Disclosure 403: Occupational Health and Safety Principle 3 – Businesses should uphold the freedom of association Disclosure 407: Freedom of Association and of workers and recognise the Collective Bargaining right to collective bargaining. Disclosure 410: Security Practices Disclosure 102-11: Precautionary Principle or Approach Disclosure 102-41: Collective Bargaining Agreements Labour Standards Principle 4 – Business should uphold the elimination of all forms of Disclosure 409: Forced or Compulsory Labor forced and compulsory labour. Disclosure 410: Security Practices Disclosure 412: Human Rights Assessment Business Integrity Principle 5 – Business should uphold the effective elimination of child labour. Disclosure 408: Child Labor Disclosure 412: Human Disclosure 410: Security Practices Rights Assessment OTHER MATERIAL TOPICS IDENTIFIED (not covered by the GRI Standards) Material Topic Future Mobility Product Eco-Innovation Raw Materials Eco and Safety Innovation 5 0 6 Road Safety Service to Customers UNGC PRINCIPLES SUMMARY TABLE Page Number 115-116, 181-182 137-141 119, 137 183-184 116-118 Principle 1 - Business should promote and respect internationally proclaimed human rights in their respective spheres of influence. Human Rights Disclosure 407: Freedom of Association and Collective Bargaining Disclosure 408: Child Labor Disclosure 409: Forced or Compulsory Labor Disclosure 410: Security Practices Disclosure 411: Rights of Disclosure 413: Local Communities Indigenous Peoples Disclosure 412: Human Rights Assessment Disclosure 414: Supplier Social Assessment Disclosure 103-2: Grievance Mechanism Principle 2 - Business should ensure that they are not, albeit indirectly, complicit in human rights abuses. Disclosure 410: Security Practices Disclosure 412: Human Rights Assessment Disclosure 414: Supplier Social Assessment Principle 6 – Business should uphold the elimination of discrimination in respect of employment and occupation. Disclosure 401: Employment Disclosure 404: Training and Education Disclosure 405: Diversity and Equal Opportunity Disclosure 406: Non-Discrimination Disclosure 410: Security Practices Disclosure 102-8: Information on Employees and other Workers Disclosure 202: Market Presence Disclosure 401: Employment Disclosure 412: Human Rights Assessment Disclosure 414: Supplier Social Assessment Disclosure 102-41: Collective Bargaining Agreements Principle 7 – Businesses should support a precautionary approach Disclosure 102-11: Precautionary Principle or Approach to environmental challenges. Disclosure 201: Economic Performance Disclosure 301: Materials Disclosure 302: Energy Disclosure 303: Water Disclosure 304: Biodiversity Disclosure 305: Emissions Disclosure 306: Effluents and Waste Disclosure 307: Environmental Compliance 7 0 5 Disclosure 301: Materials Disclosure 302: Energy Disclosure 303: Water Disclosure 304: Biodiversity Disclosure 305: Emissions Disclosure 306: Effluents and Waste Disclosure 201: Economic Performance greater environmental Disclosure 307: Environmental responsibility. Compliance Disclosure 308: Supplier Environmental Assessment Disclosure 103-2: Grievance Mechanism Principle 9 – Businesses should encourage the development and diffusion of environmentally Disclosure 301: Materials Disclosure 302: Energy Disclosure 303: Water friendly technologies. Disclosure 305: Emissions Anti-Corruption Principle 10 – Businesses should work against corruption Compliance Compliance Disclosure 102-16: Values, Disclosure 102-16: Values, in all its forms, including Principles, Standards, extortion and bribery. and Norms of Behavior Principles, Standards, and Norms of Behavior Disclosure 205: Anti-Corruption Disclosure 205: Anti-Corruption Disclosure 419: Socioeconomic Disclosure 419: Socioeconomic Disclosure 102-17: Mechanism for Disclosure 102-17: Mechanism for Advice and Concerned about Ethics Advice and Concerned about Ethics Areas of the Global Compact Global Compact Principles Directly Relevant GRI Indicators Indirectly Relevant GRI Indicators Environment Principle 8 – Business should undertake initiatives to promote ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertifications SDGS SUMMARY TABLE Sustainable Development Goals (SDGs) Paragraphs describing the Group’s activities in support of the SDGs and relevant targets Sustainable Development Goals (SDGs) Paragraphs describing the Group’s activities in support of the SDGs and relevant targets 13 - Climate Action 14 - Life below Water 15 - Life on Land CDP Supply Chain (pp.127-128) Management of Greenhouse Gas Emissions and Carbon Action Plan (pp.145-147) Main International Commitments for Sustainability (International Commitments against Climate Change pp.182-183) Targets: > Specific Energy Consumption: -19% by 2020 compared to 2009 > Specific CO2 Emissions: -17% in 2020 compared to 2009 > Green Performance Revenues: >50% of total revenues and >65% on High Value Product Revenues by 2020 compared to 2009 > Improvement of product performances in 2020: >> Car products: -20% average rolling resistance, +15% performance on wet surfaces, -15% noise (vs 2009) >> Moto products: -10% average rolling resistance, +40% performance on wet surfaces, +30% for mileage (vs 2009) >> Velo: +5% braking performance, +10% wet surfaces (vs 2017) Water Management (pp.147-148) Sustainability of the Natural Rubber Supply Chain (pp.122-124) Company Initiatives for the External Community (Training pp.185-186) 16 - Peace, Justice and Strong Institutions Programs of Compliance 231, Anti-corruption, Privacy and Antitrust (pp.108-109) 17 - Partnerships for the Goals Sustainability of the Natural Rubber Supply Chain (pp.122-124) Main International Commitments for Sustainability (pp.181-182) Company Initiatives for the External Community (pp.183-185) 9 0 5 1 - No Poverty 2 - Zero Hunger 3 - Good Health and Well-being 4 - Quality Education Company Initiatives for the External Community (Solidarity pp.186-187) Company Initiatives for the External Community (Solidarity pp.186-187) Welfare and Initiatives for the Internal Community (pp.169-171) Occupational Health, Safety and Hygiene (pp.173-178) Company Initiatives for the External Community (Road Safety pp.183- 184, Sport and Social Responsibility pp.186, Health p.187) Target: > Accident Frequency Index: -87% by 2020 compared to 2009 Training (pp.166-169) Company Initiatives for the External Community (Training pp.185-188, Culture and Social Value pp.188) Target: > Training: investment in employee training of at least an average of 7 man days 5 - Gender Equality Diversity Management (pp.159-163) 6 - Clean Water and Sanitation 7 - Affordable and Clean Energy 5 0 8 8 - Decent Work and Economic Growth Water Management (pp. 147-148) Target: > Specific withdrawal of water -66% by 2020 compared to 2009 Energy Management (pp.143-144) Management of Greenhouse Gas Emissions and Carbon Action Plan (pp.145-147) Targets: > Specific Energy Consumption: -19% by 2020 compared to 2009 Our Suppliers (pp.120-130) Internal Community (pp. 155-178) Company Initiatives for the External Community (Training pp.185-186) Target: 9 - Industry, Innovation and Infrastructure > For specific product segments it is foreseen, by 2025 and compared with 2017, the doubling of the weight of renewable materials used and the reduction by 30% of raw materials derived from fossils 10 - Reduced Inequalities Diversity Management (pp.159-163) 11 - Sustainable Cities and Communities Main International Commitments for Sustainability (pp.181-182) Company Initiatives for the External Community (Road Safety pp.183-184, Solidarity pp.186-187) Target: >> Car products: -20% average rolling resistance, +15% on wet surfaces, 15% noise (vs 2009) >> Moto products: -10% average rolling resistance, +40% performance on wet surfaces, +30% for mileage (vs 2009) >> Velo: +5% braking performance, +10% wet surfaces (vs 2017) Energy Management (pp.143-144) Management of Greenhouse Gas Emissions and Carbon Action Plan (pp.145-147) Water Management (pp.147-148) Waste Management (pp.149-150) 12 - Responsible Consumption and Production Company Initiatives for the External Community (Training pp.185-186) Targets: > Specific Energy Consumption: -19% by 2020 compared to 2009 > Specific CO2 Emissions: -17% in 2020 compared to 2009 > Water Specific Withdrawal: -66% by 2020 compared to 2009 > Waste Recovery: >95% by 2020 ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertificationsCORRELATION TABLE WITH TOPICS LISTED IN ART. 2, D. LGS 254/2016 Topics from D. Lgs 254/2016 Reference Paragraph Page Number Enviromental Aspects Use of Energy Resources (from renewables and non-renewables) Use of Water Resources > Risks Related To Environmental Issues > Energy Management > Risks Related To Environmental Issues > Water Management Greenhouse Gas Emissions and Air-Polluting Emissions Health and Safety Training and Development Welfare > Risks Related To Climate Change > Management Of Greenhouse Gas Emissions and Carbon Action Plan > Solvents > NOx Emissions > Other Emissions and Environmental Aspects > Employee Health and Safety Risks > Health, Safety and Hygiene at Work > Risks associated with Human Resources > Development > Training > Welfare and Initiatives for the Internal Community > Litigations Risks 82, 143-144 82, 147-148 81, 145-147, 150-152 83, 173-178 82, 165-169 169-171 Social Aspects Dialogue with Employees > Listening: Group Opinion Survey 83, 169, 171 5 1 0 Actions for Gender Equality Respect for Human Rights: Measures Taken and Prevention Governance Aspects Fight against Active and Passive Corruption > Industrial Relations > Diversity Management > Sustainability and Diversity Policies > Risks in term of Corporate Social and Environmental Responsibility, Business Ethics, and Third-Party Audits > Human Rights Governance > Diversity Management > Risks in term of Corporate Social and Environmental Responsibility, Business Ethics, and Third-Party Audits > Programs of Compliance 231, Anti- corruption, Privacy and Antitrust 159-163, 204 84, 153-154, 159-163 84, 108-109 Pirelli & C SpA Independent auditor’s report on the consolidated non-financial disclosure pursuant to art. 3, paragraph 10 of Legislative Decree 254/2016 and to art. 5 of Consob Regulation 20267 for the year ended 31 December 2017 1 1 5 ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertifications5 1 2 Independent auditor’s report on the consolidated non- financial disclosure pursuant to art. 3, paragraph 10 of Legislative Decree 254/2016 and to art. 5 of Consob Regulation 20267 To the board of directors of Pirelli & C SpA Pursuant to article 3, paragraph 10 of the Legislative Decree 254 of 30 December 2016 (the Decree) and to article 5 of CONSOB Regulation 20267, we have performed a limited assurance engagement on the consolidated report on responsible management of the value chain / non-financial disclosure of Pirelli & C SpA and its subsidiaries (the Pirelli group) as of and for the year ended 31 December 2017, in accordance with article 4 of the Decree and included in the section Report on Responsible Management of the Value Chain of the annual report 2017 of Pirelli group, approved by the board of directors of Pirelli & C SpA on 26 February 2018 (the NFD). Responsibility of the directors and of the board of statutory auditors for the NFD The directors are responsible for the preparation of the NFD in accordance with article 3 and 4 of the Decree and with the Sustainability Reporting Standards, issued by Global Reporting Initiative in 2016 (GRI Standards), and with the process suggested in AA1000APS (AccountAbility Principles Standards). The directors are responsible, in accordance with the law, for the implementation of internal controls necessary to ensure that the NFD is free from material misstatement, whether due to fraud or unintentional errors. The directors are responsible for identifying the content of the NFD, within the matters mentioned in article 3, paragraph 1 of the Decree, considering the activities and characteristics of the group and to the extent necessary to ensure the understanding of the group activities, its trends, its results and related impacts. The directors are responsible for defining the business and organisational model of the group and, with reference to the matters identified and reported in the NFD, for the policies adopted by the group and for the identification and management of risks generated and/or faced by the group. The board of statutory auditors is responsible for overseeing, in accordance with the law, the compliance with the Decree. Auditors’ independence and quality control We are independent in accordance with the principles of ethics and independence disclosed in the Code of Ethics for Professional Accountants published by the International Ethics Standards Board of Accountants, which are based on the fundamental principles of integrity, objectivity, competence and professional diligence, privacy and professional behaviour. Our audit firm adopts the International Standard on Quality Control 1 (ISQC Italy 1) and, accordingly, maintains an overall quality control system which includes processes and procedures for the compliance with ethical and professional standard and with applicable laws and regulations. Auditors’ responsibility We are responsible for expressing, on the basis of the work performed, a conclusion regarding the compliance of the NFD with the Decree, with the GRI Standards and with the process suggested in the AA1000APS. We conducted our engagement in accordance with International Standard on Assurance Engagements 3000 (Revised) – Assurance Engagements Other than Audits or Reviews of Historical Financial Information (ISAE 3000 Revised), issued by the International Auditing and Assurance Standards Board (IAASB), for limited assurance engagements. The standard requires that we plan and perform procedures to obtain a limited assurance that the NFD does not contain material errors. The procedures performed in a limited assurance engagement are less in scope than those performed in a reasonable assurance engagement in accordance with ISAE 3000 Revised and, therefore, do not provide us with a sufficient level of assurance to become aware of all significant facts and circumstances that might be identified in a reasonable assurance engagement. The procedures performed on the NFD are based on our professional judgement and consisted of interviews, primarily with company personnel responsible for the preparation of the NFD, in the analysis of documents, recalculations and other procedures aimed at obtaining evidence as appropriate. In particular, we have performed the following procedures: 1. 2. 3. 4. analysis of the relevant matters reported in the NFD relating to the activities and characteristics of the group, in order to assess the reasonableness of the selection process used, in accordance with article 3 of the Decree, with the reporting standard adopted and considering AA1000SES (Stakeholder Engagement Standard); analysis and assessment of the criteria used to identify the consolidation area, to assess its compliance with the Decree; comparing the financial information reported in the NFD with the information reported in the group consolidated financial statements; understanding of the following matters: o o o business and organisational model of the group, with reference to the management of the matters specified by article 3 of the Decree; policies adopted by the group with reference to the matters specified by article 3 of the Decree, actual results and related key performance indicators; main risks, generated and/or faced by the group, with reference to the matters specified in article 3 of the Decree. With reference to such matters, we have carried out some validation procedures on the information presented in the NFD and some controls as described under point 5 below; 3 of 5 3 1 5 ANNUAL REPORT 2017ANNUAL REPORT 2017 CertificationsCertifications5. 6. understanding of the processes underlying the preparation, collection and management of the qualitative and quantitative material information included in the NFD. In particular, we have held meetings and interviews with the management of Pirelli & C SpA and with the management of S.C. Pirelli Tyres Romania Srl, Pirelli Deutschland GmbH, Pirelli Industrie Pneumatici Srl, Pirelli Tyre SpA e HB Servizi Srl and we have performed limited analysis and validation procedures, to gather information about the processes and procedures for the collection, consolidation, processing and submission of the non-financial information to the function responsible for the preparation of the NFD; analysis of policies and procedures in place and of the coherence of the sustainability management model compared to ISO26000 principles, among which: governance, human rights, relationship and work conditions, and environment. 5 1 4 b) Moreover, for significant information, considering the activities and characteristics of the group: - at a group level, a) with reference to the qualitative information included in the NFD, and in particular to the business model, the policies adopted and the main risks, we carried out interviews and obtained supporting documentation to verify its consistency with available evidence; with reference to quantitative information, we performed analytical procedures and limited tests, in order to assess, on a sample basis, the consolidation of the information; - for the following industrial sites Breuberg (Germany), Slatina (Romania) e Settimo Torinese (Italy), which were selected on the basis of their activities, their contribution to the performance indicators at consolidated level and their location, we carried out site visits during which we met local management and gathered supporting documentation regarding the compliance with procedures and calculation methods used for the key performance indicators. Conclusions Based on the work performed, nothing has come to our attention that caused us to believe that the NFD of the Pirelli group as of 31 December 2017 and for the year then ended has not been prepared, in all material respects, in compliance with articles 3 and 4 of the Decree, with the GRI Standards and with the principles of inclusivity, materiality and responsiveness of AA1000APS, as described in the Methodological note of the Report on responsible management of the value chain. Other aspects With respect to the year ended 31 December 2016, Pirelli group prepared a Report on Responsible Management of the Value Chain whose information has been included, for comparative purposes, in the NFD. Comparative information was subject to a voluntary limited assurance review performed by another auditor in accordance with ISAE 3000 Revised. The other auditor issued a limited assurance report on 4 April 2017, with no exception. Milan, 8 March 2017 Signed by Paolo Caccini (Partner) Signed by Paolo Bersani (Partner) This report has been translated into English from the original version, which was issued in Italian, solely for the convenience of international readers. s n o i t a c fi i t r e C 5 1 5 7 1 0 2 T R O P E R L A U N N A 4 of 5 5 of 5 ANNUAL REPORT 2017 Certifications PIRELLI IMAGES by 2017 B a c k s t a g e P i r e l l i T h e C a l ™ 2 0 1 8 | P h o t o b y A l e s s a n d r o S c o t t i – I m a g e c o u r t e s y o f P i r e l l i A r c h i v e , M i l a n o Lucio Fontana – Fonti di energia, soffitto al neon per “Italia 61”, a Torino, 1961 Photo by Agostino Osio | Image courtesy of Pirelli HangarBicocca, Milano – Copyright Fondazione Lucio Fontana Il Canto della fabbrica, the Orchestra da Camera Italiana conducted by Maestro Salvatore Accardo. Performance in the Packaging Department of the Pirelli Industrial Centre in Settimo Torinese, 8th September 2017 Image courtesy of Fondazione Pirelli, Milano. Concept & Art Direction Le Balene Illustrations Emiliano Ponzi Layout SERVIF/LAB Printing Grafiche Bazzi – Faenza Group Spa Photo Credits Tom McCarthy | Photo by Eugenie Dolberg. - Moshin Hamid | Photo by Jillian Edelstein. - Emiliano Ponzi | Photo by Emanuele Zamponi. - Backstage Pirelli The Cal™ 2018 | Photo by Alessandro Scotti Image courtesy of Pirelli Archive, Milano. - Lucio Fontana | Fonti di energia, soffitto al neon per “Italia 61”, a Torino, 1961 Photo by Agostino Osio Image courtesy of Pirelli HangarBicocca, Milano Copyright Fondazione Lucio Fontana. - Il Canto della fabbrica, the Orchestra da Camera Italiana conducted by Maestro Salvatore Accardo. Performance in the Packaging Department of the Pirelli Industrial Centre in Settimo Torinese, 8th September 2017 Image courtesy of Fondazione Pirelli, Milano. Images courtesy of Pirelli Archive, Milano. - In line with Pirelli’s Green Sourcing Policy, the planning phase or this report included an analysis of the environmental impact of the material used with the help of the supplier chosen, which has been certified by way of an environmental management system. Thanks to this approach, in order to carry out this project, we have used FSC® certified paper, vegetable-based inks, and water-based paints. The final package is made out of recyclable cardboard and polypropylene. www.pirelli.com 

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