Pirelli & C.

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Economic and financial analysis

(in millions of euro)

12/31/09 12/31/08
Consolidated net sales 271.7 365.1
Operating income before restructuring expenses and property value adjustments (4.5) (17.7)
Net income from equity investments before property value adjustments (21.6) (42.0)
Operating income including net income from equity investments before restructuring expenses and property value adjustments (26.1) (59.7)
Financial income from equity investments 19.5 23.0
Operating income including net income and revenues from equity investments before restructuring expenses and property value adjustments (6.6) (36.7)
Restructuring expenses (23.9) (44.2)
Property value adjustments (31.4) (135.8)
Net operating income incl. net income from equity investments (61.9) (216.7)
Financial expenses (35.1) (49.0)
Income tax (7.8) (1.9)
Net income before discontinued operations (104.8) (267.6)
Discontinued operations - 74.6
Net income (104.8) (193.0)
Net income attributable to equity holders of the company (104.3) (195.0)
Equity 663.1 366.4
of which attributable to equity holders of the company 653.4 361.7
Net financial position 41.3 289.5
Receivables for Shareholder Loans 404.5 572.3
Net financial (liquidity/debt) position gross of shareholder loans 445.8 861.8
Gearing ratio 0.67 2.35

Although 2009 brought negative net income again, which reflects the effects of the trend in the property market, the results of the period, however, show the first signs of recovery. Not only was the net loss at December 2009 almost halved compared to the last period, but at the level of operating income including net income from equity interests and interest income from financial receivables with associates, joint ventures and others, before restructuring expenses and property value adjustments, the amount is close to the break-even point (-6.6 million euro), despite a number of specific negative effects described below.

It should be noted that during 2009 the actions undertaken made it possible in fact to obtain savings on overheads of 68 million euro (of which roughly half referable to staff cuts), amply exceeding the original target for the year 2009 initially set at 50 million euro.

Consolidated net sales amounted to 271.7 million euro compared with 365.1 million euro at December 31, 2008. It must be remembered that in 2008 the Real Estate Group benefited from approximately 49 million euro of revenues relating to the sale of a single asset in Poland. More in detail, in 2009 revenues from services represented 69% of the total compared with 61% in 2008.

At December, 31 2009 operating income, including net income from equity investments before restructuring expenses and property value adjustments was -26.1 million euro, compared with a negative of 59.7 million euro at December, 31 2008. The Real Estate Group thus confirmed the target previously communicated to the market of loss income in 2009 between 25 and 35 million euro, positioning itself at the better end of the range.

Adding to the above indicator the amount of interest income from financial receivables with associates, joint ventures and others, the 2009 operating loss was 6.6 million euro compared with a loss at December 31, 2008 of 36.7 million euro. The improvement over the previous year was even more significant when compared with the data in like-for-like terms, net of the one-off components, of income from sales of equity investments, of the impact of impairment of non-performing loans and of the impact of derivative hedging instruments.

Net of the components indicated above operating income - inclusive of net income from equity investments and of interest income from financial receivables with associates, joint ventures and others, before restructuring expenses and property value adjustments at December 31, 2009 would be a positive 20.8 million euro compared with a negative amount of 34.1 million euro of the previous period, therefore with a total positive change of 54.9 million euro.

In particular net income at December 31, 2009 includes: income deriving from the sale of equity investments of 13.5 million euro resulting from the sale of 10% of Pirelli & C. Real Estate SGR S.p.A. and 20% of Pirelli RE Credit Servicing S.p.A.; a negative impact of impairment of non-performing loans following the redefinition of certain business plans of 30.4 million euro and a negative impact of 10.5 million euro deriving from measurement at fair value of derivative hedging instruments.

Net income at December 31, 2008 included: 32.0 million euro of one-off income made up of 15.0 million of income from the sale of a single asset in Poland and of 17.0 million from the compensation received for the replacement of Pirelli & C. Real Estate SGR S.p.A. in the management of the Berenice Fund; a negative impact of 17.4 million euro deriving from measurement at fair value of derivative hedging instruments and a negative impact of impairment of non-performing loans following redefinition of certain business plans of 11.2 million euro. Moreover net income at December 31, 2008 included a pro quota loss of 6.0 million euro on the equity interest in the commercial joint venture Rinascente-Upim.

Following the classification of the equity investment in Rinascente/Upim among “assets held for sale” (sale of the equity investment in Upim already completed in January 2010), the net income for the proportion attributable in 2009 of these assets was included under financial operations.

With reference to property value adjustments, 2009 brought a total negative balance of 31.4 million euro compared with a balance, also negative, of 135.8 million of the previous period. The revaluations carried out, with a positive economic impact of 67.4 million euro, resulted from the formalization of the “hold” strategy for most of the residential properties in Germany (a positive impact of 31.6 million euro) and for selected prestigious assets in Italy held by the Retail & Entertaiment Fund and by the Fondo Regione Sicilia (a positive impact of 35.8 million euro): these assets were revalued on the basis of IAS 40 which provides for the possibility of adjusting the estimated value of properties which it has been decided to maintain in the medium term in the portfolio for strategic reasons. The figure for revaluations was however more than offset by devaluations of other portfolios of 98.8 million euro, relating for 52.3 million euro to the portfolio in Italy and for 46.6 million euro to properties in Poland and Germany (of which 40.8 million euro relating to the Highstreet portfolio alone).

The equity attributable amounted to 653.4 million euro compared with 361.7 million euro at December 31, 2008. The change of 291.7 million euro was substantially due to the effect of the capital increase completed at the beginning of July net of the closing costs (+394.8 million euro) and to the net income attributable for the period (negative of 104.3 million euro).

Thanks to the work done on redefining the structure of the Group’s borrowing relationships and to the aforementioned capital increase, the gearing ratio came out at 0.67 compared with 2.35 at December 31, 2008.

The net financial position at December 31, 2009 is a negative 41.3 million euro compared with 289.5 million euro at December 31st, 2008.

The net financial position gross of shareholder loans at December 31, 2009 is a negative 445.8 million euro compared with 861.8 million euro at December 31, 2008.

The improvement with respect to December 31, 2008, of 416 million euro, was due to a positive effect of 516.7 million euro, made up mostly of (i) 399.3 million euro from the capital increase and of (ii) 113.6 million euro referrable both to the agreement that led to the sale of 20% of Pirelli RE Credit Servicing S.p.A. and which enabled Pirelli Real Estate at the same time to recover its shareholder loan to the European NPL investment platform, and to the sale of 10% of Pirelli & C. Real Estate SGR S.p.A.. This is offset by a total negative effect of 100.7 million euro referable mainly to the payment of restructuring expenses (40.4 million euro), to equity investments (31.1 million euro) and to the contribution of equity in vehicles and funds in which the company holds an equity interest (29.2 million euro).

The Net Financial Position of the vehicles and funds in which Pirelli Real Estate holds an equity interest at December 31, 2008 was 11.1 billion euro and is made up of 9.7 billion of net bank debt relating to real estate and 1.4 billion of net bank debt relating to NPLs.

The total portion attributable to Pirelli Real Estate in the banking indebtedness of funds and vehicles of 3.0 billion euro is divided into 2.5 billion invested in real estate and 0.5 billion in NPLs.

The main features of the pro-rata net financial debt of funds and vehicles are:

  • a very limited amount of recourse guarantees (45.8 million euro pro-rata). Considering operations already concluded by the end of February 2010 the figure would come out at 41.6 million euro pro-rata. If we consider also the sale already being finalized of the stake in Turismo & Immobiliare the figure would come down to 28.7 million euro;
  • a high proportion of hedging of interest rate risk and an average maturity of approximately 2.6 years, which if we consider also the new maturity of the Highstreet loans relating to the restructuring process in progress would go up to 3.4 years.

The average bank leverage (excluding NPLs) is 67% of the market value of the assets, which allows for safety margins in regard to existing covenants.

Loans set to mature in 2010 amount to Euro 219 million euro pro-rata and, in the two year period 2011-2012, represent more than 40% of the existing portfolio and amount to 1,226 million euro, excluding repayment instalments. Considering the new maturity of the Highstreet loans relating to the restructuring process the pro-rata amount of loans in the two years would be 816 million euro.

Services

Thanks to cost-cutting actions in 2009, management services (fund & asset management) and real estate services (property management, agency), including general and administrative expenses, achieved a positive operating income, including net income from equity investments before restructuring expenses and property value adjustments, of 7.8 million euro (a negative 5.7 million euro net of the aforementioned revenue of 13.5 million deriving from the sale of equity interests), a significant improvement on the figure at December 31, 2008 negative of 30.3 million euro (a negative 47.3 million euro if we exclude the one-off income of 17.0 million mentioned above). It is worth noting that the net income at December 31, 2009 in relation to the real estate services platform, excluding the loss for the period deriving from the restructuring of Pirelli RE Credit Servicing S.p.A. of 5.7 million euro, would be at the break-even point. The improvement in the period net of the components mentioned above would be positive of 41.6 million euro.

Investment

At December 31, 2009 the business relating to investment initiatives recorded instead negative net income of 14.4 million euro (a positive 26.5 million euro net of the aforementioned negative impact of 40.9 million of derivative hedging instruments and of the impairment of non-performing loans mentioned above) compared with negative net income of 6.4 million euro at December 31, 2008 (a positive 13.2 million if we exclude the negative impact of 28.6 million illustrated previously and referable to derivative hedging instruments and to impairment of non-performing loans, the one-off income of 15.0 million euro from the sale in Poland, and the pro-rata loss of 6.0 million of Rinascente/Upim). The improvement in the period net of the components mentioned above would be positive of 13.3 million euro.

At December 31, 2009 sales of properties of 1,031.4 million euro had been completed compared with 864.9 million euro at December 31, 2008, thus exceeding the target of 1 billion euro announced to the market, and NPLs of 322.7 million euro were collected compared with collections of 514.2 million euro at December 31, 2008. Despite the unfavourable trend of the macroeconomic situation, during 2009 Pirelli Real Estate managed to complete its real estate transactions at amounts in line overall with the estimated values. The margin on sales at December 30, 2009 was approximately 14%, while in the same period of 2008 it was 19%. At December 31, 2009 total rents amounted to 780.6 million euro (669.2 million in 2008, a figure that includes rents from the Highstreet portfolio for only six months); the pro-rata attributable to Pirelli Real Estate on the rents amounted to 193.6 million euro (164.9 million at December 2008).