IRSA Inversiones y Representaciones SA (IRS) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your IRSA conference call. At this time, all parties have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation.

It's now my pleasure to turn the floor over to your host, Mr. Eduardo S. Elsztain, CEO. Sir, the floor is yours.

Thank you very much and good afternoon everybody. We are going to talk about the results of the fiscal year just ended in June this year.

The net income for this fiscal year increased to nearly 300 million pesos comparing to the loss of like 500 million pesos last year. Those results were greatly effected by the exchange rates situation, and we saw how (inaudible) the increased value of the total on our balance sheet.

In the operating income (inaudible) like 10 million compared to a loss of last year like 40 million. Talking about the main line of business, the shopping center segment, we obtained a very important increase in the occupancy, achieving at very high levels. We are now at the best level of the history of the company. And our sales in our tenant sales improved a lot. We are comparing a 42 percent recovery year to year in nominal terms and eight percent in real terms.

In the development of land, we were postponing for three years the development because of the recession, and now we are starting. And I will go in later explaining the projects we are launching in this spring, from September to December of this year.

So I will introduce Gustavo to talk about many highlights of finance that the company achieved this year.

From the financial point of view, I think this fiscal year marked a major confirmation for both IRSA and (inaudible).

When comparing the financial picture taken in December of 2001 with today's situation, it is so much better that is not so easy to explain. But I'll try to do it quickly.

On a consolidated basis (inaudible) December 2001, we were having $470 million of debt and 60 percent of that was matured during 2002. At that moment, we had no cash. Today we have, $260 million of debt, all of that maturing in the long run, and 60 percent of that number is comprised of convertible bonds, which as you may know, they're already deeply in demand. So if we consider that equity and we deduct that number, we have a consolidated debt of already $110 million.

Also today we have about between (inaudible) nearly $60 million of cash. So if we deduct this cash position from the (inaudible) $110 million of debt, we have a net consolidated debt of only $50 million.

There are many reasons that explain this fantastic turnaround, but I think it can be summarized in two. One, are the strong capabilities of our own management to take advantage of the situation (inaudible) they did this crisis in Argentina in a great opportunity. And second, it's the support of our shareholders that invested fresh (ph) funds in November 2002 at a moment - at a very difficult moment in Argentina where many other companies were defaulting and many were diverting from the country.

To explain our financial situation today, leaving the convertible bonds aside because we believe they will be converted into equity. Alto Palermo is left with only 85 million pesos of debt, so less than $30 million and all of them maturing in the year 2005.

In the case of (inaudible) total of $83 million. This is basically the debt of the restructuring in November of last year that matures in November 2009 and has a coupon of LIBOR (ph) plus two percent. So nowadays, we' re only paying 3.1 percent per year.

Another issue that it is worth mentioning and but happened after the end of the fiscal year, was the prepayment of $60 (ph) million of our debt with a 32 percent discount. So providing us a profit of $5.1 million. This prepayment was not accordingly to the procedures established in the contract (inaudible) we have to offer this to all our creditors, but only HSBC (ph) Argentina (inaudible). (inaudible) you want to continue with the ...

Yes, I will introduce (inaudible) who will try to explain very shortly how difficult it is the understanding of our balance sheet. So he will give you a short idea of many points have changed in our balance sheet (inaudible).

Good afternoon. I would like to try to explain the differences that we have between the two years - fiscal year 2002 and 2003.

The main difference is that we had during these years, though we have a good improvement in our operations, is that during last year in Argentina, we have had very high inflation rates with about an average of 90 percent of inflation during last year if you take the average of the first semester and the second. While this year we have had only 12 percent of inflation. That means that all these figures that you are looking at in the fiscal year 2002 are in (ph) (inaudible) adjusted at the rate of 90 percent average, while the field (ph) that you're looking at during 2003 are only inflated - adjusted by inflation of 12 percent. These very (inaudible) because while you have (inaudible) there's a huge differences in the inflation figures adjustments, the figures are not comparable and will not be a good explanation of what happened one year compared to the other.

So for instance, in the case of (inaudible) that you are seeing net income this year was $286 million - sorry, pesos, and last year a loss of 539 million pesos. We can see that in the operating income we've had an improvement of 40 million pesos. And this is - this coming to the differences in the light (ph), we have had in the sales and development, offices (ph) and others, (inaudible) hotels.

One main issue that we are having in this year is that is (inaudible) changed the percentage of shares of - from 48 percent to 55 percent. This is consolidating (ph) after (ph) the figures during 2003. This is very critical also in the figures that you see, because each line of (inaudible) during (ph) is including the figures of their shopping centers company (inaudible) 55 percent of shares.

So this year, we have - this year we have incorporated also new rules in Argentina that are adjusting our figures also in the deferred taxes. We are discounting long-terms of credit (ph) liabilities (ph) by an interest rate. And the rules in Argentina are more comparably a huge GAAP (ph) this year.

I think that's a short explanation the reading of the balance sheet. And I will try to go in the lines of businesses to explain the highlight of the view of how that business is working.

Beginning again, and if after have more questions about the balance sheet, we'd like to hear your questions.

In the line of business of shopping centers, Alto Palermo, we saw that our income was like 77 million pesos this year. We achieved 96 percent of occupancy rate at June. We are recovering letters of prior of the crisis. The term of our tenants increased to 32 percent in nominal terms, and eight percent in real terms. That is a big recovery and that is making us very sustainable. Today we are not so important like a percentage of their sales. And that is making them to pay us very well.

And we see that in the allowance for (inaudible) were in the shopping centers were decreased 93 percent comparing to the prior fiscal year. So if all of this begin to give you an idea of the conversion (ph) that we saw in this line of businesses.

We saw a big growing demand. We now are allowed to choose a better quality of customers and a (inaudible) appropriate for each shopping center. We are working strongly (ph) (inaudible) the different segments in trying to have different, not like chain (ph) so having (inaudible) shopping center like a very special (inaudible). We are working a lot focusing in the segment of each trade area.

We saw this year that we are very competitive. Compared to our competitors, we were 87 percent higher sales per square meter to the competitor's when a (inaudible). This - there's a recovery (inaudible) and the (inaudible) allowed us to restate the price of our (inaudible). We are - not in all of our shopping centers, but mainly in Alto Palermo, in (inaudible) where we are (inaudible) the (inaudible) rate (ph), the reference that we (inaudible) that it's the index rate we can (inaudible) to the old contract. This is (inaudible) was (inaudible) that in the rental office, we could apply that because of the (inaudible) we have on them. We are now charging (inaudible) to the tenant and we see that this year, the percentage (ph) the compliment (ph) that the tenants are paying are very high comparing to last year, talking about like 12 percent. And last year was like two percent of the total income coming from compliment. And that is as have this adjustment for inflation in that compliment that is a key part of the shopping center industry.

We reduced a lot that doubtful (ph) account and now we'll have (inaudible) big account of the company to receive. We have, through this year, we get very (inaudible) 66 percent of growth (inaudible) area in the city of Buenos Aires.

Finally, in the shopping center, we have made the decision of going to the project of Profabio (ph). Now we're working on the project. We're budgeting (inaudible) soon. We're going to introduce the project to the board of directors to make the decision of going to a shopping center that may be will be open at the end of next year. It will be a 20,000 square meters of growth (ph) visible area in the city of (inaudible) and will be the first shopping center in that city.

A part of the (inaudible) that (inaudible) 96 percent, today we're decreasing to a 10 or 11 percent of the total sales. So we are now (inaudible) easier (ph) for the tenant to pay, and we will go a little higher. Remember that the cost, the average cost of the (inaudible) percent, and today we're talking about 11 percent. And that is making us to be receiving like 15 to 16 million pesos a month, having a net cash flow of the year that will close like 5.5 million pesos on average. That is giving us a very deep (ph) positive cash flow, that is making the (inaudible) the growing on this with no (ph) shopping center in (inaudible).

About (inaudible) Shopping (ph), (inaudible) Shopping (ph) is our credit (ph) card (ph). It were very effective after the collapse of the (inaudible) with (inaudible) be part of the trade. We went from 17 (ph) million to 36 million. But we went from negative that we had many months of last year to positive. And we made a positive cash flow finishing the year. And we go from the crisis, we (inaudible) down the competition and now we're thinking again on growing the credit of that company.

We launched the first - in August of this year, we were (inaudible) the capital market, and we place a trust for 11 million pesos, that was fully (ph) subscribed (ph). So we think that this will be taking a big portion of the market share that a lot of players are not there more. One of the big (ph) of them is (inaudible) to give you an idea, that two to three years ago, we had a credit of 400 million. And today, that has (ph) grown (ph) like 30 million. So the (inaudible) a lot, and we're taking part of the share of this market, too.

In the shopping segment and finalizing this one, we're seeing that we're going to try to grow in other regions of Argentina and in Buenos Aires. We are thinking if we can make the land (ph) reserve (ph) that we have on store (ph) two (ph), we are going to offer a growth rate on commercial offering in all our shopping centers. And we are going to continue the ground work vision (ph) of each shopping like it's (ph).

So jumping from the shopping centers going to the land of the office on rental, this - that is not so big like the shopping, but it's one of the lines that in the top was very positive. This year had not positive because of big vacancy which had the whole year at the rate like 60 percent. And the figures of last year were reflecting an average of 73 percent whereas the average of this year was like 58 percent. And that is the biggest reason why the income per month or the total income went down so much. Plus that the vacancy allowed our tenants to ask us reductions on costs, and we couldn't apply - in the majority of the case, we couldn't apply the interest (ph) of like we're talking the shopping center.

So at the end - the line of businesses, it's very positive. It's still very positive. But (inaudible) recovery. And we are expecting from this, and we saw the last week and months, I will say that it's - we will expect to finish it a year having numbers of 70 to 80 not the 60s we are taking today. But again, achieve levels, we are talking about square meters of six to $10 per square meter.

In Argentina, many are coming to operating their offices, seizing (ph) the opportunity of going to better high-end (inaudible) offices. So we think we are going to full (ph) a little more, but not going to the prices we have in the past of the 20 or $30 square meter.

In the sales and development, the lack of investment as we have in the last years. (inaudible) to sell the majority of the stuff we had. We think that today we have a very small stock. We have like (inaudible) in average and a few more things to sell. And now we believe that it's the right moment to take advantage of the growth that - between the growth of - between the growth (ph) in construction prices and sales prices of apartments. And we are going to launch two or three projects.

The two first that they're moving is one small one in the area of Palermo, that we bought a land and we are now making a building of like 3,000 square meters. We are finishing (inaudible) but they are two buildings that we have the basement and now we are finishing and making like 5,000 square meters now. We are closing the deal with a company that is making the construction and that is finishing now. We are seeking on giving to a third party a building to in the - in the (inaudible) area. We are going - we are discussing about the big percentage of payment of development that we will launch (ph) it soon.

And we are now presenting the (inaudible) project that probably will be presented to the board of directors before the end of the year. The land (ph) the stage (ph) of development will be negative with the generation of cash, but in negative (inaudible) comparing the cost and the sales we did last year that we closed. And the thing we are - on (inaudible) we are going to sell this year (inaudible) will be in the positive numbers. We have a recovery a prices of the assets from the (inaudible) to today and today in dollar terms the prices are (inaudible) soon (ph). So the sales this year they're going to be in the positive numbers. And the development are going to give positive numbers for a little (inaudible). Not in 2003 to 2004 because we take more time of the sales for those projects.

The lines of hotels, this line was - segment that was favorably affected by the devaluation. And we had an increase of 55 percent of occupancy compared to 48 of last year. And the average run rate was 55 percent, comparing to 270 of last year. So that gave us a very positive cash flow mainly in the (inaudible) was a more positive cash flow that was affected by tourism. Whereas the other two hotels where they depend more on corporations, but last year, were not very (inaudible) were not so good. And so, we saw that the (inaudible) gave us very good positive (inaudible) by the three of them in last year were positive. And we'll see next year, the hotels are going to continue in the same trend, maybe recovering a little, the Buenos Aires (inaudible) and the (inaudible) is still very soon. June, July, August, that our (inaudible) were (inaudible) in the (inaudible) of the shopping, of the hotel (inaudible) and gave us very positive (inaudible) those two months (inaudible).

So finally after talking about all of the lines of businesses, we are very happy of the results. We think that they are hard to understand, but at the end, what is easy to understand is the company has not any time of hard time of paying the interest or of it coming soon. We have enough room, we have a lot of liquidity, and now we are starting a lot of purchases of land, of (inaudible) of land that are on sale in Buenos Aires area. And we think that we're going to take advantage of this opportunity of having the company (inaudible) to generating cash, and having that (inaudible) not so the times we had a year-and-a-half ago.

So we are glad, very glad of talking about these numbers. We come from very negative, and now we are positive. And we think that again, it (inaudible) and we are going to see the results in the future, too.

So thank you very much. And we would like to invite you to the questions. Thank you very much again.

Operator.

Ladies and gentlemen, if you do have a question or a comment at this time, please press the numbers one, followed by four on your telephone keypad. Questions will be taken in they're received. And we do ask that while posing your question, you pickup your handset to provide optimal sound quality.

Once again, ladies and gentlemen, if you do have a question or a comment at this time, please press the numbers one, followed by four on your telephone keypad.

Our first question is coming from Ricardo Cavanaugh (ph) from Raymond James. Your line is live.

Yes, hi - good afternoon, Alejandro and Gustavo. My question would be related to the amount of cap ex that you are considering to build the (inaudible) shopping mall and also the building (inaudible)?

In the (inaudible) we didn't finish the budget in time, but this will be a project of 13, $15 million project. In the other two, we are thinking, because of what - the (inaudible) in Palermo is an investment of a million-and-a-half dollars (ph), and the other (inaudible) will be a project that the third party (ph) will put all the money on top, and we're going to receive square meters on payment of our (inaudible). So that (inaudible) any cap ex.

OK. So you are referring that you might also use cash to buy some land in Buenos Aires?

That's correct.

We are now in the process of trying to purchase pieces of land in the region of Buenos Aires City.

OK, thank you.

Thank you.

Our next question is coming from Ben Ladler (ph) from UBS. Your line is live.

Good afternoon, everyone. Just on the office segment, it seems that occupancy was flat quarter over quarter and monthly rental income went down 10 percent. I just wondered a) why you're not seeing a recovery there and why you're actually seeing average pricing seems to be coming down still?

No. We're seeing that, first, we do (ph) see it going down to the 60s and perhaps it's something that is not so bad to keep it in the 60s. It's correct what you say about we had to adjust the old contracts (inaudible) to new prices, and we had to accept instead of losing them. And we don't think that next prices will drop a lot more. We think from this levels we are going to keep, and the new rent are near the levels we are charging. So we don't think there's a big drop on that.

Instead of that, we think we're going - because of the recovery of occupancy that we were talking before about the 60s going to the 70s or something more, we're going to recover the income per month.

OK. And could you just tell me what the quarter over quarter change in the bad debt allowance in Alto Palermo was?

Quarter to quarter

(SPEAKING IN SPANISH)

In the last quarter, we had four million pesos sent to the - allowed to the provision (ph) allowance for (ph) collections, in the last quarter of Alto Palermo in the shopping center business, OK. While in the other quarters, we haven't had any provisions made.

OK. And the increase was driven by what?

Basically what we did was we annualized what was the behavior of our - of our clients. And we made in our provision, because we wanted to have our cost, you know, aligned and we wanted to have our ...

Conservative ...

... conservative criteria, OK.

OK. So my final question, if I may, just the significant right (ph) in SG&A in the quarter, what was driven that 18-and-a-half million pesos from 11.8 the quarter before?

Repeat the question. I mean, what (inaudible)? Can you repeat? We ...

I'm sorry. I'm talking about SG&A for IRSA, in the consolidated numbers ...

SG&A.

... .16 in the press release. I think it was 29 million in the fourth quarter, 12 million in the second quarter - sorry in ...

Operating (inaudible) yes. We have here, this are consolidated figures. And this are including taxes on sales - on raw (ph) sales, 5.1 million that we hadn't had before. These (inaudible) including this line because of the new (ph) (inaudible) in Argentina. Before we had this net of sales. Then we have the allowance of doubtful (ph) collections of 12.5 million, that coming from the other company, from the (inaudible) and the credit card (ph) company. And we have also (inaudible) the right (ph) of (inaudible) of 8.7 million of all the companies, IRSA, APSA (inaudible). OK. So that's the difference of 81.3 million that compared to a normal 11 million we have had in each quarter, OK.

OK. That's great. Thank you.

Thank you. Once again, ladies and gentlemen, if you do have a question or a comment at this time, please press the numbers one, followed by four on your telephone keypad.

At this time there appear to be no further audio questions. I'd like to turn the floor back over to management for any further comments.

OK. Thank you very much, and a pleasure. And welcome any questions. It's hard to understand this balance sheet, but we are here. So thank you again and good afternoon. Bye.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.

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