IRSA Inversiones y Representaciones SA (IRS) 2005 Q3 法說會逐字稿

Welcome to the IRSA conference call[OPERATOR INSTRUCTIONS]. It's now my pleasure to turn the floor over to your hosts, Gabriel Blasi, CFO, and David Bereznik CAO. Mr. Blasi, you may begin.

Thank you, good morning everybody. Unfortunately Mr. Eduardo Elsztain was unable to attend the call. I will try to give you our news as brief and clear as possible. First of all I would like to address some of the highlights of the third quarter. The net income for the first 9 months reached almost ARS80m compared with ARS45m in the same period of the previous year.

On the other hand, there was a significant debt reduction at the [USAS] level, because of the exercise of almost $23m in warrants, and at the same time, because of the conversion of a similar amount of convertible notes, which were converted.

Begun in our office business -- that line of business is recovering, reaching 89% of occupancy during the first 9 months, which is a significant improvement compared with the previous year.

Also in the industry, in the hotel industry we are having some remarkable improvement, both in the occupancy rate reaching 79% in this quarter, as in prices going from ARS279 per room to ARS325 per room.

Regarding the evolution of our projects, our asset schedules [indiscernible] we are going to address later on them.

Our subsidiary Alto Palermo, operating income increased over 100%, reaching ARS65.6m. EBITDA also grew 44%. Its debt was restructured and a lasting financial structure for the future development of company planned, with a significant decrease in the financial cost of the company. Also [indiscernible] sales increased 31%, and we completed the second stage of Alto Rosario shopping malls as we opened in November in the first city of the country.

EBITDA for IRSA in the ninth period that ended on March was ARS134m. We had an increase of 42% compared to the same period of the previous year. Some level of -- first to give you an idea of situation of the economy, both the consumer confidence rate is still growing, and also the rate of confidence in the government is showing good figures as of today.

Construction is still growing 3% given the first quarter of the year.

Moving to each line of business, I will make a quick description on the result, and after that, David is going to comment the financials of the company.

Regarding the office and rental properties we gathered an income of ARS13.7m, with an increase of 35% compared to the previous year, the same period. The occupancy, as I mentioned already, got better to 89% from 78% during the first 9 months of the previous year.

Today in Buenos Aires city there is no available space for prime rent offices, which in fact is helping us to speed up the process of recovery, both in prices and in occupancy rates. As you remember, this was the business segment most affected after the crisis, but as you see today, the recovery is under way at a very good pace.

Regarding the shopping centers, this line of business is continuously giving us very strong satisfaction. The net income of Alto Palermo for the 9 month period was ARS21.2m, compared with ARS4.8m of the same period last year. We have high operating income in this line, almost 100% of increase to ARS64.6m compared with ARS32.5m of the previous year.

Also total revenues have increased significantly, 65% higher than the previous year. This is also including a significant improvement of our subsidiary [tershom], our direct label [indiscernible], which doubled from ARS21.5m to ARS43.6m.

Regarding Alto Palermo, we also went through a successful debt restructure, which allowed us to complete the acquisition of Perequenta, which was acquired, has a different type of [debts, only full] all those debts were already paid and restructured, with an excellent reaction of the financial cost of Alto Palermo, mainly due to the renewal of its ARS50m debt which was maturing in April, to the 2-year [term] and half of the interest rate.

Specifically talking of Perequenta Des, we acquired, as you remember, 60% of that company which we used to have 20% of it, this is a company which owns the shopping mall in Mendoza.

That shopping mall, that company, used to have 4 different types of debt, which [indiscernible]. All this debt was re-cancelled or rescheduled, by Absa extending an ARS11.5m loan to [Peresquesta], that allowing the firm to restructure the whole of its debt.

Regarding Alto Rosario, we opened the second stage of the shopping mall in the city of Rosario. We have there, together with Mendoza and Alto Rosario, 15,000 square meters of standing surface and, remember we take from 7 to 9 shopping malls, the amount of shopping malls that the company is currently operating.

This second stage for Alto Rosario means the increase of stores to a total of 141, which is adding 40 new stores on it. We are working currently in the third stage of these projects that we are expecting to open by the beginning of June. This includes the opening of Showcase Cinemas, with 14 state-of-the-art movie screens and 3,400 seats on them.

Regarding our sales and development line of business, the revenues were ARS28.3m compared with ARS17m to the same period of the previous year. This means that we are currently developing [indiscernible] [on marking the two]. [indiscernible].

And what is still pending [indiscernible]. These projects are going to show significant improvements in the cash flow generation during the next fiscal year, mainly because the way the result of these sales are accounted. The company recognized the profits of these sales only after the signing of title deeds is complete.

Regarding the hotel line of business, we have a significant increase here, in the income, from ARS54.6m to ARS68.3m. This is 25% more in income. This was achieved both for improvement in the occupancy rate, as I've already said, from 72% to 79%, and also because of an increase in prices, on average from ARS279 to ARS325.

We have already started with the construction of the 42 luxury suites of the Llao Llao hotel, taking advantage of the low construction cost that still we have in [indiscernible], at the same time, we have significant improvement and prospective for this business.

Regarding the financials, there has been a significant amount of conversion and exercise of warrants in this period. As you already know, warrants were exercised for $19m par value, which means that almost $23m of cash [indiscernible] to the company.

There was also a significant amount of convertible bonds exercised, $22.8m of par value, meaning this, that at the end of March 31, the outstanding, from the original $100m of convertible notes, the outstanding bonds are $63.4m. You also have to consider at this stage, that debt to equity ratio for the company decreased 24% because of these conversions.

Also we have to mention that after March 31, additional conversions took place, and the total amount outstanding today, of convertible notes issued by IRSA, is $58.6m of convertible notes outstanding.

We also went through the reduction of analysis like [indiscernible] with Alto Palermo, which was repaid. We repaid a first principal payment of the note activities loan of $37.4m that the company held, and also, we went in execution of an agreement in contract with Credit Suisse First Boston by which the company intend to reschedule the debt of [Altenes] Argentinos.

As you remember, this was a debt originally issued by the Bank of Boston Argentina when the bank was sold some years ago in the United States to Bank of America through its controlling entity Fleet. The bank sold all of its Argentine portfolio.

Among that portfolio, we were able to repurchase this loan together with an agreement with Credit Suisse, and at the same time achieve a reduction from its face value to an $8m, and rescheduling those outstanding $8m which we think to conclude by September of this year.

On IRSa's debt the most important development was the final payment of IRSA's ARS48.4m which were accruing 14.875% peso rate on an annual basis. These notes, as I mentioned, were rescheduled by a ARS50m syndicate loan from two local financial institutions at a fixed rate for the first year of 7.78% and with a floating rate for the following years, allowing us to have a very good platform to adapt the financial structure of the company to the future development.

David is going to make some comments on the financials of the company, after that we shall make some Q&A if you wish. Thank you.

Good morning. We're going to make some comments on the financial statements of IRSA. With regard to the net profit of the company, it increased 23% compared to last year. We have a net profit of ARS78.2m compared to ARS45.2m.

With respect to the sales of the company, we had ARS271m in this period compared to ARS185m in last period, at March of 2004, and we made a gross profit of 80%, improvement of ARS154.4m compared to ARS85.8m in March 2004.

The operating result of the company increased by 120% from ARS38.6m in March 2004 to ARS85.09 in March 2005. If we open the [indiscernible] operating result in the different segments of the business, we see improvements in all of the lines, as, we can begin with shopping centers, the commercial, the malls of the company, that they increased their sales from ARS103.3m in the last year to ARS161.6m showing an improvement in the operating result of 99% from ARS31.4m last year to ARS62.4m.

With respect to the hotel line, the sales increased from ARS54.5m to ARS68.2m in this year, and it gave us an operative result, an operative improvement of 28% from ARS8m to ARS10.3m.

With respect to the office segment, the sales increased from ARS10.9m to ARS13.6m, giving us an improvement of 146.% in the operative result of the company from ARS1.3m to ARS3.2m

And with respect of development and sales, the sales increased from ARS16.9m to ARS28.3m, and the operative result increased from a loss of ARS2.2m last year to ARS9m this year.

As a conclusion, as you can see before going to the Q&A, all of our business lines are having a very good development, especially on the shopping malls. We have an excellent cash generation, we at the same time we are having significant improvement both in our financial both in our financial goals, and our business structure, allowing us to have the best structure for the future developments of the company.

If you wish we will address some minutes for Q&A - Operator, please help us.

[OPERATOR INSTRUCTIONS]. [CONFUSED INTERLUDE] Your first question comes from Steve Trent from Smith Barney. Please pose your question Sir.

Good morning gentlemen, Steve Trent from Smith Barney A quick question for you on the sales and development line. You certainly mentioned that you are in the kind of pre-sales phase on certain properties and overall momentum seems to be going in the right direction for that line, but on a 3 month basis, it looked like this time around for the 3-month period ended March 31 that the revenue was a little bit light. And I was wondering if you could give us a sense as to what might be the run rate from a revenue perspective over the next quarter or 2? Thank you.

Okay, thank you Steve for your question. Well in fact, if you are departing from the second period of the current year, there was an extraordinary result on that line.

If -- as of today we are a scale, as I mentioned, it is not -- it is not very likely that you are going to see significant improvement by the rest of this fiscal year. And this is not because we are not going on schedule with our sale, but because the way that we recognize the result, these sales are recognized only when the deals are issued in favor of the buyer.

And that only takes place when the payment is complete as all these states and development include a certain degree of installments, different type of payments, that is going to take -- the accounting recognition of the result for a significant time ahead, that will be by mid term of next year.

Okay then. So in terms of the -- it's the recognition issue essentially that you have a conservative method of recognizing revenue on this line. And if I may just ask if you are able to provide a figure as to what was the size of the extraordinary item that affected the 3-month sales and development result, if that's available.

Yes, that is the information that we already said. It's in the range of $8m.

Okay. Great. Thank you.

You're welcome.

Thank you. Your next question comes from Javier Finkman from HSBC. Please pose your question.

Hi. Good morning. Just 2 quick questions relating to general macro issues. You state on the press release, and we know that there is some acceleration on construction growth. Your view on potential impact and what do you expect going forward about that.

And also regarding inflation, I would like to know if there are general clauses of price adjustment on the rent contracts, if any. And what's your estimate on inflation going forward and the potential impact if inflation accelerates or consolidates at higher level, the potential impact on the P&L. Thank you.

Okay. Regarding inflation, in general asset prospect, we may say that there was some -- how would you look at the market there was, I would say, a fear of -- for an increase of the inflation during the first quarter of the year. As the year is developing and the monetary measures that the Bank of Santander and [indiscernible] Argentina has incurred.

I expect in -- we are seeing, and this is very preliminary because the effect has been stated just for the last month, a decrease in the rate of inflation increase. That seems to be probably today the general expectance of inflation compared with the one that the market had a couple of months ago, may be less.

Having said that, regarding how that would impact our business, I don't know if [indiscernible] or Argentina is for period to include in the closings of any type of lease, any type of adjustment related to inflation. In fact, there are very, very few instruments in the economy as a whole, which can be related to inflation.

I would say that leaving aside certain debt notes, issues and bank certificates, which recognize the [sale], which is the provision that is popularly named there that reflects more exactly the way inflation is behaving. Leaving aside those instruments, there are not any legal way that you can address the development of that index.

On the other hand, on our shopping mall business, we capture a nominal aspect of inflation because we have a percentage of the sale of our [indiscernible]. And that's the way the Company captures the increasing sales -- the nominal increase in sales produced by the inflation.

OIn the other hand, in the office business, we have like a step up [indiscernible] that allows us under certain periods, I would say typically a 6-month period, to review the terms and conditions, probably with the [total right of] payment 6 month, 1 year. It will review the evolution both of the inflation and the evaluation rate, which is also important in that case because, as you know, the properties Argentina has -- has historically been an asset related to U.S. dollars. So, in fact, for that business itself, it would be the dollar, the most important issue.

Regarding the construction costs, after the evaluation, as you know, the construction cost plan today, after a certain degree of recovery from the floor, they have been relatively stabilized with a decrease of around 42% of this -- of which original level before the evaluation.

We don't think that in the short time, although there is a very good amount of construction, significant risk for a jump other than the inflation increase on this -- on this -- on this business. Some other aspects that can be addressed relevant for the future development of our business is what's happening in the mortgage lending market itself.

As you know, after the financial press release and the specification of the loans, the mortgage almost disappeared to a rate lesser than 2% of GDP. That is really an existent compared with the [indiscernible]. And we wait in the order of the people [stand] on par with the United States. We -- related to GDP or mortgage to GDP in the range of 90%.

That means that all the prices and all the construction costs that we are having today are almost on a cash base. January was the first month since the crisis of 3 years ago where the new loans -- the new mortgage loans were bigger than the maturing ones.

Certain local banks, including Banco Hipotecario, have begun to lend money to 15 years in pesos with a first tranche of around half of the term of the loan at fixed rate in the range of 10 to 12% of fixed rate. We think that that will be a significant improvement of the future development of the market.

On the other hand, also something important that you may agree for the future development of the market is that because of the final release of the court of the United States to the external debt swap of the country, during next week -- during this and next week we are going to have in the market probably one of the most liquid assets of the emerging market, which will be the rescheduled bonds for Argentine debt. Meaning that $85m of new bonds are going to be in the market.

Of that amount of bonds, 35% is going to be peso denominated, with a 30-year term. That is, we will have for the first time in recent history an instrument that will allow to the financial community to create a long-term interest rate for peso lending, which is very, very important for the future development of the lending market related to property.

Thank you.

Thank you. Your next question comes from Mr. Jim Palmer from RBC Dain Rauscher. Sir, please pose your question.

Hello [indiscernible]. My wife asked me how much you're going to sell the apartments in that building on Dique 3. What will be the prices on those apartments?

Okay. I don't have -- I don't have the final price -- the final price today. I really can't give you any. What I can give you is just a range of what is happening on the Puerto Madero area as a rate.

I would say that the Puerto Madero market is going on the lower end and -- of course this is related to the quality of the construction, to the floor that you are acquiring, to the final location of the property, many other issues. This will -- means that it will go from the range of 1.8 -- 1.7, 1.8 thousand dollars up to $3,000, depending the type of apartment we are referring to.

Sorry to not give you the exact -- but if -- in case you are interest I can put you in contact with our commercial people.

Okay. DYPSA -- DYPSA, who are they? How are they involved with this prior to the time you did this transaction in September?

Okay. Hold on a second. It's one of the -- it's one of the main constructors that are developing our property in the Puerto Madero area. You must have in consideration that when we do this transactions, the Company is not taking any type of credit risk because the Company keeps the property as a guarantee and property of the land. And until the finalizing construction is released, we do not -- until the final -- the new assets are generated, we do not release the properties.

But similar are a construction company that are developing a different type of building in Puerto Madero and in Buenos Aires itself. Of course, it stems the company just as one of them. It is related to the future outcome that we are looking for.

If you ask me why don't we do all this by ourselves, the reason is that we want to speed up the process. And if we don't engage in such different type of properties, it would [indiscernible] that we require a future [core] for our site. And we will not allow us to carry on on our growth at the same time at the pace that we are looking for.

That means, for instance, we are preparing to build 2 new shopping per year. And offices -- new offices investment are probably another type of investment like the new hotels that will require a lot of effort on our structure, how we would like to keep the [indiscernible] and flexible structure as the one that we have today.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. Your next question comes from Christopher Edwards from SPP. Sir, please pose your question.

Good afternoon, from my point of view anyway. Just on the accounting for the warrants and the convertibles, the conversions that you've had there. Could you talk me through very slowly, in a buy-side friendly way, how you account for the warrants and convertibles as they are converted through the P&L?

While they are debt, they are accounted at the straight value. That is while they are debt. And each time a conversion takes place there is on -- on -- in which case -- you are referring to what convert -- to what convertible specifically?

And the warrants please.

For the -- for the warrant it's just an issuance of new capital with the corresponding dilution that the issues of that capital affects. All this was already disclosed when the notes were -- were -- the market -- to give you an idea, in the case of IRSA as a whole. And you know that you had the information specifically addressed on the press release, from the outstanding of 647.4m shares as of today, the maximum dilution that is going to accrue after all the -- all the warrants and the convertibles are exercised will give a total of shares truly diluted of 579m shares.

We must have in consideration that, leaving aside the dilution effect that you have here, you have also a massive debt reduction. To give you an idea, I am not aware if they are completely one-off, the division of the structure, but this allows the Company on a consolidated base to go from a debt of $500m to a debt less than $80m.

In fact, before that conversion takes place as of today for IRSA and Alto Palermo, only -- in a complete way, that will mean that the companies as a whole won't have any debt at a net cash position of $20m. Just to give you an idea of the final effect that this will have.

Thank you.

You're welcome. Okay, thank you very much for your assistance. And in any case you may contact by us usually by mail in case that you have any further questions. Thank you.

Thank you ladies and gentlemen, that does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.