Q-1: Mr. Gotelli, could you elaborate on the historical background of Alpargatas, a company that has a very long tradition in Argentina.
A-1: Alpargatas started in 1885 as the manufacturer and marketers of a French and Spanish brand of shoes. It was a very successful company. As the time passed, we started to manufacture and assemble the shoes. The company became the leader of the Latin American Footwear companies and one of the leaders in textiles. In the beginnings of 1900, we bought a Brazilian company that was having financial problems and we established a subsidiary in San Pablo. Afterwards, we established another one in Uruguay. In the middle ´70s, the company took the decision to enter to a very aggressive diversification program. The company was so large in each of the markets that it was almost impossible to continue growing. So it was a way to face the risks of the Argentinean economy and to enter to other sectors. We entered into the oil, fish, banking and insurance businesses. The problem was that the economy decreased during the ´70s and ´80s. This situation represented a lot of financial problems for us and generated debts in the balance of payment. In the beginning of the nineties, we were one of the groups that thought that a change was coming when Menem became president. So we started with the transformation of the company. We decided to focus on our core businesses. It was not only that we needed capital to grow but also we felt that our core business was very demanding in terms of management. So we sold the oil, bank and the insurance companies. We sold the 50% of the fishing company. Alpargatas became a foot marketing company. We took the Nike representation in the Brazilian market. The results were very good because we sold footwear for 60 million dollars per year. We found a strategic US company that bought the 20% of the company. We launched the operations in Brazil. The sad part of the story was that we suffered the Tequila Crisis and the Mexican devaluation during the beginning of 1995. So we started with an important short-term debt since then. Then, we have been working on the financial restructure of the company. The financial liabilities were completed on December 2000.
Q-2: According to press releases, the debt grew up to 700 million dollars. What were the main reasons for this to happen?
A-2: The debt was around 500 million dollars. That was the restructured debt. The essential cause of the debt was the investment we made in Brazil. We had to enlarge our operations in Argentina to support the Brazilian operations. When the Argentinean crisis started, we had a cost of debt of approximately 10% per year. This crisis hit Alpargatas because we were in a very weak position. We started to borrow at an extremely heavy interest rate. If you analyse the debt, the 90% of that increase were due to interest charges. So we started borrowing short-term money to pay part of the capital markets debts. At the end, we started borrowing more marginal money at outrageous costs.
Q-3: How are you facing these financial problems today?
A-3: Today these 500 million dollars were swapped into bonds and equity. The bonds had an NMP of 150 million dollars and the equity was exchanged for a value of 120 million dollars.
Q-4: The whole textile sector has been suffering severely during the last five years. Can you explain our readers more about this situation in Argentina?
A-4: If you take a look at what Alpargatas did during the ´90s, you would see that we had very good initial years in ´91, ´92, and ´93. Our operation results were very good too. We still have very good and competitive costs. The problem was that Argentina opened its markets very aggressively. The big mistake is that Argentina was not prepared to manage the administration of the external trades and the unfair trading practices. We are facing the illegal import of products. The black economy is represented by the 35% of our markets. The foreign players took a substantial part of the markets and decrease the margins creating a lot of financial risks. In terms of the textile sector, the problem was that Brazil was literally dumping the products in Argentina. To give you a number, we had a market share of 70% in the jeans industry in 1993. We exported between 30 to 40% of our textile capacity. Those jeans went to Brazil, Europe and the United States. Today, the Brazilians have the 60% of the markets and we have only the 40%. We had to close factories. This situation was due to the prices that they were using to compete with our own cotton. We have the same technology. In fact, Argentina had many advantages in comparison to Brazil. Brazil was taking more and more market shares mainly because they were not growing as they had expected. Alpargatas presented an antidumping project to the National Trade Commission, which is an independent bureau, and they said this was causing damages to the Argentinean industry. I would say that we were leading the industrial incentives and Brazil was entering into the industrial incentives especially in the North East of the country. So we start fighting because we thought that this was unfair and, obviously, destroying our company. We call the attention of all the authorities: the PJ administration and then, the new administration. So we told them that they need this industry and that this situation will hurt the whole country. Argentina does not have the infrastructure to do vertical integration. The lobby in front of us was very strong. So Argentina has the right to use the safeguard as a mechanism to protect damages in its industries. When we started finding the different tools that the WTO permitted to Argentina, we had to help the government with the different regulations that were needed to apply and to work with the WTO. The problem is that the Argentinean government did not know how to use this tool. So that is why I said that we were not responsible. The problem begins when you do not use the same tools and you do not have the same infrastructure for the trading transactions. We did not have enough people and money to defend our case in Geneva. The private sector had to find that. It is not easy to fight against the United States. The United States were the big fighter against the safeguards. Today you cannot see any sector that is making money here, except for the privatised companies. The Argentinean economy is suffering today because the private and productive sector does not have benefits. We are exporters. We can compete. We are saying that the government is not prepared. Our government does not understand that when they are sitting in front of Europe or the United States, they have to defend what we are selling to improve our terms of trade. The most important asset that Argentina imports is capital. The capital that we import costs twice or three times more than our competitors. So if you want to compete with that, you would have to think about a country that cannot depend as much on the foreign capital.
| Q-5: What would you say are the main differences between the Machinea and the Cavallo administrations?
A-5: I think that Cavallo is doing two things at the same time. One of them is the restructure of the Argentinean liabilities. This issue was successfully completed. During the previous approach, he was trying to seduce the markets to maintain the transactions. His strategy was to tell them that we are very orthodox and that he was going to control the fiscal discipline and establish an opening economy. So that is the way he used to convince them that Argentina was able to receive investments. That costs a lot to Argentina because the tax reforms killed the private sector. He also told the private and productive sector that he needs their production. The country also needs more exports and investments. This is a right project to me. The only way to solve the Argentinean capital structure is to have a better production. The stock of debt is too large for our GDP and for our exports. Machinea knew it very well. He agreed with the Union Industrial that this was the only way to grow but he did not do it. Cavallo is doing it. The competitive agreements have three components. The first one is the elimination of disturbing taxes like the taxes on interest rate, taxes on capital and transaction taxes. The second one is the old restructure of the sector. We have a new labor agreement with the unions. We have always worked very closed to them. I also think that the government made another commitment that is to manage and control the local and international illegalities of trade. Finally, the financial component of the sector is extremely significant. It is almost impossible for all the players of the production sector to have the same access to the markets in competitive terms. We need to rebuild the working capital of the companies. The government decided to help our sector with the use of assets but they did not give us any money. The government made the commitment of reinvesting the money they owe us. The famous 10 million dollars are starting to come to our company.
Q-6: Alpargatas is present in several provinces, but it had to close all the plants a few months ago. Now - after the commitment made by the government - 3 plants were reopened again. What are the next steps in this regard?
A-6: In fact, we are present in six provinces and we have nine plants because we have three in only one province. Next Monday we will be reopening the third plant. We will continue with this plan if the government does what they had been telling us. Alpargatas have opened these three plants by itself because we would like to give them the clear signal that we still want to be a manufacture company. Someone said during this crisis that Alpargatas have left their historical reputation of being a manufacture company and also a big player in terms of employment. The problem that we have to face is to rebuild the wepping capital and to return to the same level of operations that we had before.
Q-7: Will you continue with the same financial partners, or do you have plans to find new capital sources?
A-7: We are working very actively with three funds that are Brado, Newbridge and Outree. There are another funds and banks. Our strategy is to conclude the reopening of the factories and regain the size we use to have. The second strategy is to continue with the diversification of some non-core assets and to find strategic partners for some businesses. I think that these funds will have the right to invest in some of this new ventures. Alpargatas will conduct its growth through its own subsidiaries, which will issue capital to the investors. They said that they are going to invest if they find the right opportunities inside the company. Obviously, we have to pay the debt, restructure the balance of payment and rebuild the working capital. Each new project will be carried out by its own subsidiary but then, they will de controlled and operated by Alpargatas.
Q-8: Around 60% of the Alpargatas total turnover - USD 108 million in 2000 - resulted from sportswear and shoes manufacturing, 30% from the textile production and 6% resulted from its activities in the fishing sector. Can you tell us more about this sector?
A-8: We found a fishing company like Irvin & Johnson that are our investors. Fishing is an excellent sector to invest in Argentina. We do not have the same fishing resources that we used to have. We got rid of two or three cities in Argentina that lead those activities. So we have run out of fish. This situation represented a financial problem for Alpargatas. On the other side, Argentina does not have efficient fishing laws. We are now working with the Congress to create a good fishing law. The new authorities are privileging on shore activities. The big advantage of this fishing company is that they export the products already packaged. That multiplies the export value in three times. This is a very profitable business when you look at it under these conditions but this is not our priority. Our priority is to do footwear and invest in our brand.
Q-9: What are your future business plans? Do you see Alpargatas as a company that will produce mainly for the domestic market or do you focus on foreign markets?
A-9: In the short term, Alpargatas will be an exporting Argentinean company but we depend on the results of the trade agreements. If the North American Trade Agreement has good results, we will have to focus more in Mexico and try to find there the proper partner. If the Mercosur delays the Free Trade Agreement with the American market, we will have to reconsider our relationship with Brazil. Our exports should be around the 30% of our sales. The exports are very important not only to build a good volume but also to test our different products in the foreign markets. We have our own footwear brands but if we see some international companies looking for the domestic integration, we will be able to give them this service.
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