Mid-Year Report: Pirelli expects 'progressive recovery' in second half

When the coronavirus pandemic hit, Pirelli Tire North America Inc. took action quickly to respond to the pandemic, optimize investments and prepare the company for a strong future, according to Pietro Berardi, Pirelli North America CEO, who said the company expects "a progressive recovery of sales in the second part of 2020."

Q. How would you best sum up the first half of the year for the company?

A. This first half of the year has been enormously challenging for everyone. We nevertheless approached it as an opportunity to further consolidate our position in the market, to work even more closely with our customers, and to optimize investments in people, technology and processes to pave the road for a successful second half of the year.

Q. Do you expect any supply difficulties in the second half of the year?

A. Pirelli took several actions to avoid any type of disruption in our supply-chain operations due to COVID-19, in particular reviewing production schedules and focusing on improved forecasting accuracy and incentives for the make-to-order.

We engage closely with our business partners to monitor demand and uncertainties in the market. This close collaboration allows Pirelli to maintain expected service levels in every step of the supply chain, from demand planning and production planning to final delivery to customers.

Q. What type of practices has Pirelli implemented in light of COVID-19?

A. In response to the COVID-19 health emergency, Pirelli implemented a series of actions aimed at safeguarding the health of our employees and the wider community. Pirelli set up a global task force and monitored developments with local authorities, in all the countries where the company has facilities.

In the U.S., in a first phase, in an effort to protect the health and safety of workers amid the spread of COVID-19, Pirelli shut down operations at our tire plant in Rome, Ga., and began ramping up again at the end of April.

The factory was fully sanitized following strict COVID-19 protocols based on our experience in China and Europe. Pirelli has also promoted initiatives to support the wider community, particularly in the Milan, Italy, area where Pirelli's global headquarters are located. For example, after canceling the 2021 edition of the Pirelli Calendar, the calendar budget was used instead to make a donation to coronavirus research.

Q. What are some of the pleasant surprises you are seeing in the industry right now?

A. The second half of May has shown a good pace in market recovery, following the reopening of most states and the return of many vehicles to the road. At the same time, the necessity to review retail operations with new standards of sanitation, touchless service and investments in digital tools has brought a fresh approach with many retailers for the benefit of all consumers.

Q. The USW has petitioned for anti-dumping and countervailing duties on passenger and light truck tires made in Thailand, South Korea, Taiwan, Thailand and Vietnam. What is your company's reaction to that?

A. Pirelli, generally, is in favor of free trade. We don't comment on specific petitions or investigations.

Q. Where do you see the industry markets heading during the last half of 2020?

A. The market dynamics are highly uncertain and every estimate requires a lot of caution. Based on the most recent signs from the market, we are expecting a progressive recovery of sales in the second part of 2020.

Q. What kind of trends are you seeing in the marketplace?

A. The past few weeks have seen consumer demand shifting towards value products as a result of the spike in unemployment rates and the drop in consumer confidence. This seems to be affecting mostly the generic replacement market, while specialties and OE specific homologations have shown more resilience to the current conditions. Therefore, we continue with our focus on trade and consumer educational activities about the overall advantages of specialty products and marked tires, specifically engineered with each OEM to maximize performance and safety of premium vehicles.

At the same time, it is even more important to be able to offer market-specific products, specifically developed for the US consumer, in particular with enhanced mileage performance.

Therefore, we have further accelerated our product plans in this direction with new initiatives.

Q. What sectors look to be strong?

A. The light-truck segment has been the most resilient in the current scenario, especially on the higher rim bands above 18 inches.

It is a combined effect of the specific composition of the car parc in the U.S. and the geographical areas that have been less affected by the recent lockdown. This market segment will continue to play an important role in the future as well.

Q. What sectors are struggling? How soon do you expect them to rebound?

A. In the past couple of months, the UHP segment has been most affected by the effects of stay-at-home orders nationwide. As limitations to travel are lifted, we expect to see a progressive recovery in the second part of the year.

Q. Do you expect to roll out any additional products in 2020?

A. Pirelli strongly believes in providing our customers with the best product solutions. Therefore, we are now evaluating the timing of our road map for new product introduction in light of the current situation and the modified market scenario.

Q. Do you foresee any price hikes in the second half of the year?

A. Pirelli has been very quick to react to the market slowdown with significant adjustments to the output of our factories, in order to preserve value for all stakeholders and partners of our supply chain, straight to the end consumer. Of course the unpredictability of the scenario requires caution and the necessary flexibility that might be dictated by external circumstances in the months to come.

Q. Do you expect any major investments in the next six months?

A. The COVID-10 emergency will impact the global economy with a general fall in production and consumption. Pirelli expects a global decline in 2020 GDP of about 2.8% (compared with a projected 2.7% outlook announced in our strategic plan in February). To deal with this new scenario, Pirelli has implemented a series of actions aimed at protecting profitability and cash generation. In particular, Pirelli decided to revise investment plans for the current year in line with the new market outlook.

Q. How has the market shift to light trucks, SUVs and CUVs impacted your product mix?

A. The Scorpion product lines designed for SUVs/CUVs/pickups have been a steadily increasing part of our mix, from both original equipment and pure replacement sides of the business. Our Scorpion Verde All Season is very popular among domestic and European OEMs for their latest vehicle fitments. The Scorpion Verde All Season Plus II launched in 2019 for the replacement market features improved wet performance and the same comfortable ride and 65k mileage warranty as its predecessor.

We then have our performance-oriented tread pattern, launched in 2018: the Scorpion Zero All Season which has been very popular on high-end SUV and CUV vehicles. Its replacement market counterpart, with a 50,000-mile warranty and excellent dry and wet performance, is the Scorpion Zero All Season Plus. Finally, we have the Scorpion All Terrain Plus also launched in 2018, an on/off-road tire that receives great reviews for off road performance with aggressive shoulders and tread blocks, combined with quiet and comfortable on road manners.

Q.How has the UHP market fared in light of the proliferation of LT, SUVs and CUVs?

A. With lighter materials and new technologies, we expect high performance SUVs to continue to grow share as consumers expect more space and comfort and less of a tradeoff in terms of performance. The UHP market apart from CUV/SUV is still growing from what we see. That being said, the latest CUVs and SUVs easily rival their sedan and coupe kin in terms of performance, and as mentioned above, our Scorpion Zero All Season is our leading tire for UHP CUVs/SUVs/LTs, but we also feature our summer P Zero on many high performance vehicles in this segment.

Another major industry trend is electrification, with vehicles having lower weight distribution, higher torque levels off the line and low road noise requirements, so we have developed tires specifically for electric vehicle needs and marked such tires with our newly launched "ELECT" marking.

Q. What is your online strategy? How is it evolving?

A. The recent situation has represented for Pirelli the opportunity to further accelerate our online strategy of engagement and service to our partners and consumers. We recently launched a new version of our U.S. website, with dramatic improvements in speed performance for the end-user and a more complete and user-friendly interface for the fitment selector, which remains the focal service for consumers looking at the Pirelli Perfect Fit for their vehicle. At the same time we've been working on further enhancements of the digital interfaces with our customers, with specific focus on training programs.

Q. What are some of the challenges of the industry going forward?

A. We see the proliferation of alternatives in the standard segments as an opportunity for Pirelli, as we're confident that consistent investments in product innovation, sustainability and technology will certainly be rewarded by consumers' preference for the optimal lasting performance and safety of premium vehicles.

As the market reopens, we are looking with attention at the possible evolution of the U.S. retail and distribution footprint in the months to come, in order to be able to provide the best support to our partners as we grow together.