IRSA Inversiones y Representaciones SA (IRS) 2020 Q2 法說會逐字稿

Good morning, everyone, and welcome to IRSA's Second Quarter 2020 Results Conference Call. Today's live webcast, both audio and slide show, may be accessed through the company's Investor Relations website at www.irsa.com.ar by clicking on the banner Webcast Link. The following presentation and the earnings release issued yesterday are also available for download on the company website. After management's remarks, there will be a question-and-answer session for analysts and investors. At that time, further instructions will be given. (Operator Instructions)

Before we begin, I would like to remind you that this call is being recorded, and that information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's earnings release regarding forward-looking statements.

I will now turn the call over to Mr. Alejandro Elsztain, Second Vice President. Please go ahead, sir.

Thank you very much. Good morning, everybody.

We begin our second quarter 2020 results. We can begin in the Page #2, looking at the main events for the 2 quarter. The net result of the year is a positive of ARS 4.9 billion comparing to a loss of last year of ARS 8.4 billion. And when we see the net result attributable to controlling company, we see a small negative of ARS 1.4 billion comparing to ARS 8.1 billion of last year.

We see that related to the adjusted EBITDA of the businesses, we had improved year-to-year, and we improved this 16%, achieving ARS 11.7 billion this year. And we can see that in Argentina, we had a small drop. The Argentine Business Center had a small drop of 5%, and this is mainly because of lower results on the shopping centers, but better in some other segments that later Daniel will explain. And in the case of Israel Business Center, there is an increase and this is mainly driven by Cellcom that had the change under IFRS 16. So because of these 2 effects, there is a small increase of 16% year-to-year.

So let's go to Argentine Business Center summary.

Thank you, Alejandro. Good morning, everyone. On Page #3, we can see the Argentina business centers on the left side. We're starting with shopping malls, we see a consumption recovery, same store -- same sales stores, an increase of 5.6% in real terms compared to the same quarter last year. If we do the 6-month figures, we see an increase of 0.4%. Mainly this is driven by consumption policies from the government, industry programs, Ahora 12 and Ahora 18, 12 and 18. Occupancy remains stable at levels of 95%, and the leasing team is working to improve that number. Consumption has been the recovery -- recovered. We didn't got all that recovery in our revenues, but we are working to make it happen.

On the office segment, the industry remains very strong. Rent is stable at levels of almost $27 per square meter per month. Occupancy levels in our Class A and AAA buildings is at levels of 97.1%. This is very similar to previous quarters. We see a lower occupancy in the Class B buildings, especially in one building that we have in our portfolio. Nevertheless, the Class B in our total portfolio is only 14%, so it's not significant.

The progress at the working in the 200 Della Paolera office building is at 86% progress. We expect to open sometime during the third quarter of 2020. We expect to have occupancy from the first tenant to start working on the premises during this month and next month. And leasing activity on this building has been also very good. So we expect to be close to our total occupancy levels and not to decrease our occupancy level by the incorporation of this building. And also the rent that the buildings were achieving is exactly what we underwrote. So we are very happy with the progress.

In the hotels line, we see a lower sales due mainly to Libertador deflag, used to be a Sheraton, now it's Libertador. The deflagging made some distress for a certain period of time. There is now a recovery, but this mainly explains the reduction in sales. And also other successful events that happened during 2019: we had the B20, the G20 and also other significant events that we had previous year that we don't have this year.

Respecting the land reserve during this period. We did 2 barters. We swapped land to developers so they can build the buildings. And we're going to receive units and cash for those buildings, the 2 ones are -- one is the Abasto airspace. And next to our shopping center, there is a supermarket. We own the air space, the air rights. And we barter those air rights for some developer that is going to build 8,400 square meters of apartments, and we will receive in apartment and cash, the combination of cash and apartments, worth $4.5 million in the first tower. And there's another tower to be built on the same location, that the same developer has an option in case that he is successful, and we are happy with his work. And in the case of Caballito, there are 4 plots of land, that total make 80,000 square meters to be developed. This is a mixed use in between residential and commercial. The first plot is 11,400 square meters that will develop by a developer, and we will receive in between all -- the value of all the apartments and the retail space, we're going to take all the retail space on this development. It's approximately $5.5 million in value.

Regarding the financial and international segment of the company, Banco Hipotecario brought us losses for ARS 923 million due to impairment over government notes and doubtful accounts, that those accounts also -- a lot of banks in the system had the same problem. And Condor Hospitality Trust is under sale process. Settlement is expecting for third quarter of 2020. Estimated proceeds for IRSA will be in the range of $29 million, and this is in progress, and it's all public information.

So now we move to the Israel Business Center to Matias Gaivironsky, CFO of the company.

Thank you very much, Daniel. Good morning, everybody. So if we move to Page 4, we can see the structure of Israel right now, our corporate structure there. You'll remember that we have been working hard in order to fulfill the Concentration Law that established that we can't have more than 2 layers of public companies. So we have been do -- working hard there in order to accommodate our structure. Now we fulfill 100% our obligations. So we -- basically, what we did was to dispose shares of Gav-Yam and we lost control on Gav-Yam shares.

Regarding Ispro, that was another of the companies, we privatized the debt. And regarding Mehadrin, that used to be a subsidiary of PBC, we distributed Mehadrin shares as a dividend. So now the shareholder is DIC. DIC today has around 38.6% of the shares, and we are increasing some. So with this, we finished the Concentration Law. Other important event was the appointment of a new CEO in Israel. So we have a new CEO, Eran Saar, since December 2019. So now we have already the management team in place there.

If we move to Page 5, we have the other important challenge on our structure there. That was the ownership of Clal. You'll remember that we couldn't control Clal, and the regulator forced us to dispose the shares. So here, you have all the evolution. At the beginning, we tried to maintain all the economic rights on the shares, but at certain point, the regulator forced us also to sell the economic rights. So at the beginning, we did the total return swaps, then we have to start closing those swaps and selling the shares in the market. So here, you have the whole evolution. Today, we have a stake -- an economic stake of 15.6%. 8.5% are direct stake and 7.1% is through swaps. So price of the shares were -- the performance were bad, and we will see in more detail later. But today, the market value against book value is only 53%.

The other subsidiaries in Page 6, more in the operational side. We have good result in most of them. If you see PBC, what PBC is doing is selling noncore assets and selling commercial properties more in the retail space. So PBC sold Ispro Planet and Kiryat Ono Mall.

Ispro Company, not Planet.

Ispro -- sorry, Ispro Company, not Planet, and Kiryat Ono Mall and other noncore assets. In Shufersal, we don't control more the company. We have a direct stake of 26%. And the company's focus in cost reductions and synergies in the farming retail with the Be acquisition. They are doing large capital investment in the logistics center and the automatization of the logistics center.

In Mehadrin, was appointed also a new management. So we have a new CEO in the company. We -- as I mentioned, we changed the controlling shareholder. We used to have a partnership 50 -- or the same stake with other company, they distributed the shares, we distributed the shares. So there is no more that JV. And we have been acquiring some shares also in the market. And in Cellcom also, we appointed a new CEO. And they did a capital increase in the company that DIC subscribe. Shares revamped sharply in the last 6 -- or 4 months since the minimum price of the shares increased by 88%. So a good performance also in the price of the shares.

So if we move to Page 7, we can see the financial situation of IDB. So here, we can see today, the net debt of each of the 2 holding companies. In IDB, we have $525 million, and in DIC, $830 million. In DIC, we have a strong cash position of $345 million. And you can see the debt amortization schedule scale. And in IDB, we have our cash position of $68 million, with a debt amortization this year of 78. So we will need to keep selling our stake in Clal, and that is the area to cover that debt amortization.

During the last quarter, we did a capital -- a new bond in IDB with Clal shares as collateral. So we raised ILS 236 million at a yield of 4.7% with the collateral of the shares. And in DIC, what we are doing? And with some of the liquidity, we are buying back bonds. So we did a buyback of almost ILS 100 million that generate a good profit.

So if we move to Page 9, we can see our consolidated financial statements. We are finishing the semester with a gain of ARS 4.8 billion against a loss of ARS 8.3 billion last year. Here, we have several effects. So I will try to describe the main ones. So I will leave the operational part to the following page. And then we should focus in this page in Line 4, that is the change in the fair value. So in Argentina, this semester, we recognized a gain of almost ARS 3.9 billion against a loss last year of ARS 9.5 billion. This is more related to the macroeconomic situation of Argentina and the volatility of the macro variables like the exchange rate and the cost of capital of the country that affect our valuation in shopping center. But in peso term, it's positive because all the rest of the assets that are dollars, like the offices and the land bank, we are recognizing a gain.

Then the other important effect in Argentina is in the Line 9, the net financial results that I will explain in the following page. Then other important effect is in the Line 12, deferred tax, that this year, since we are recognizing a gain in the fair value of our properties, also, we recognize the deferred tax on that potential appreciation. Last year, we have the opposite. We have a loss. And then we recognize a gain in the deferred tax. And also here, we have the implementation of inflation adjustment in our tax balance sheet. This is the accounting balance sheet. But when we perform the inflation adjustment in the tax balance sheet, that generates also a loss. That is in the part of Argentina, important changes.

In the part of Israel, we have in the Line 14 the main effect, that is the deconsolidation of Gav-Yam. That automatically generated a big profit of ARS 16.6 billion against ARS 3 billion last year. And the other effect is in the financial line that I will open in more details in the following page.

If we move to Page 10, we can see on the operational side each business line. So shopping malls, as Danny mentioned, we have a performance 18.7% below last year. This is with inflation adjustment. Although we are seeing here a recovery in tenant sales, we haven't translated yet to our income. And so we are -- compared with the last year, in real terms, we are around 13% below revenues and in EBITDA 18.7%, we have some extraordinary events below the revenue line.

In offices, we have a very good performance, 38% above. Here, we have a new building, the Zetta building that today is operative, and we are recognizing the full revenues from the building. And also, the devaluation helped us because our revenues are in dollar terms, so our agreements are in dollar terms. So we are -- we have all the depreciation on the peso -- on the dollar.

Hotels, as Danny mentioned, is 29.2% below last year. This is more related to the Sheraton Hotel and also an extraordinary income last year in the Intercontinental. So leaving aside that effect, we are close to the last year.

And then in Israel, the real estate part here, to compare apples with apples, it's important to mention that the devaluation between -- the real devaluation between the shekel and the peso was 13%. So that is to compare results with the previous year. So real estate, we are above that. We are at 26.8%. This is basically related to a cost reduction. And telecommunication, 41%. This is more because of the implementation of IFRS 16. And in revenues, we are almost the same than last year.

In Page 11, when we see the consolidated financial results we have in the Argentinian part, basically, the main effect is in the Line 2, the net foreign exchanges, that if you see in the graph below, we have this semester a real devaluation of 13.5%. And in the last -- in the previous semester, we have a devaluation of 3%. That impact in that -- in all our dollar-denominated debt and is reflected in this Line #2. The other effect is in the Line 3, the fair value of financial assets and liabilities, that last year, we have an appreciation of our assets, and this year, a decrease. That was after the elections in Argentina that the market collapsed, and we have some financial assets that we are recognizing a small loss of ARS 120 million, but against a big gain last year.

And in Israel, the 2 effects are, one, related to Clal, in the Line 3, that if you see in the graph below, during the last year, we have get our appreciation of the share of 3%. And this semester, we have a drop of 15%. And that is reflected in the Line 3, that we have almost 2 billion -- 200 -- sorry, ARS 2.858 billion against a gain of ARS 57 million last year. And the other effect is in the Line 5, that we have a gain of ARS 2 billion, That is related to the buyback of bonds in DIC. So that is the ARS 2 billion.

So we have many, many impacts -- accounting impacts. Almost all of them are noncash effect, so -- but it's important to understand what were the impacts in the net results.

If we move to Page 12. To finish with the presentation, we have our debt amortization schedule. So we have the challenge to refinance debt during the fiscal year 2021. So starting in July, we have some debt repayments. So we will be working on refinancing this during the year. The total net debt stayed stable at $367 million.

So with this, we finish the formal presentation. Now we open the line to receive your question.

(Operator Instructions) Today's first question comes from Alvaro Garcia of BTG.

My question is on Israel, on IDB specifically. My question is on what's the refinancing strategy heading into December 2022? I was wondering if you could sort of walk us through what you're thinking now that you've sold down most of your Clal stake.

Thank you, Alvaro. So regarding the debt of IDB, we have the -- when you see basically 2 bonds that start to expire in 2022 and then until 2025, the idea there, we decided that, basically, the assets that are under IDB are for sale. So we are trying to sell the -- our stake in the tourism company and -- or doing an IPO of the company. So we -- basically, we are disposing those assets. And the same with another asset that is a real estate asset in Las Vegas. So we are trying to find a way to maximize the value of those companies and sell. And also, the Clal shares we're going to sell. So with this, we perform all the disposals. Probably, we will have funds for the next 2 years. And then for -- going forward, we will see what is the best structure in terms of the capital structure, if we need to change something in the capital structure. Remember that the main asset after this disposal will be DIC, so we -- it's something that we need to decide how to move forward after that.

And just one quick follow-up there. I'm assuming the plan is to remain Israel isolated from the overall structure. There's no plan to sort of fund it via any sort of Argentine subsidiary at this point?

Up to now, the only commitment that we have in Israel is -- we've signed an agreement that -- to inject 200 and...

10. 210.

ILS 210 million. From that, we already contributed $20 million. So it's a remaining commitment of $40 million. And that is our only commitment to IDB today.

(Operator Instructions) This concludes the question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Alejandro Elsztain for any closing remarks.

We are seeing how the companies are focusing on its strategy as we are doing in the case of PBC, focusing on not having the retail in Israel, selling the 2 shopping centers. We are raising almost $0.5 billion between these 2 at very low cap rates. So we are going to keep doing these kind of things in the portfolios. I think this gives a much more clear picture on the mission of each company, and so each of the segments of IRSA are doing exactly like that.

So thank you very much, and we see you next quarter. Bye.

Thank you. This does conclude today's presentation. You may disconnect your line at this time. Have a nice day.