IRSA Inversiones y Representaciones SA (IRS) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Nelson and I will be your conference facilitator today. At this time, I would like to welcome everyone to the IRSA conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer period. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Alejandro Elsztain, Second VP and Gabriel Blasi, CFO. Gentlemen, you may begin your conference.

Good morning, ladies and gentlemen. We're going to talk about the second-quarter fiscal year 2006 results and we are going to begin with Gabriel Blasi that will explain in a different format as the past. We are beginning to try to use a different format of presentation. We would like to spend a few minutes explaining how the Company is today. So please, Gabriel.

Good morning to everybody. As Alejandro said, today, we're starting with a webcast presentation. The first part of the presentation, we are going to highlight some economic data first of all for our businesses. After that, David Perednik, our CAO, is going to comment on our results and after that presentation, we are going to comment on the evolution of each of the businesses and some prospective.

Regarding the country figures, as most of you already know, on page 2, the quarterly evaluation of GDP continued to be very, very high. The government has just announced 9% of growth for the country, which has been growing for three years in a row with a very stable outlook for the following month. Also, the capital inflow costs recovered significantly, which has been reflected in the general prices of the Argentine (indiscernible) and already with the local interest rate.

On page 3, we can highlight two aspects related to the construction. The country is in the middle of a construction boom. Construction activity has regained its feet again and the costs already we have recovered in the range of 30% from the bottom after the crisis mainly due to the recovery of salaries. Here we have a gap of higher than 30% with the pre-crisis level after the '90s.

On page 4, we can comment on the situation of the mortgage sector. Although these loans have recovered, as you may know, the level of leverage in the Argentine economy in general is very, very low as a result of the crisis. This is true both on the corporate side and also on the individual side. Mortgage to GDP are still less than 2%. We have reached before the crisis a level of 7% to GDP, which is extremely low compared with other countries like Chile, which has 14% against GDP or of course compared with a maximum of the United States, which is in the range of 90%. This is really (indiscernible) because all the recovery in prices and on the real estate [touches] in general is not backed up by a leverage in the business, but most of the impasse we have discussed several times continued to be on a cash base. This gives us a very good outlook in terms of the effect of the recovery of the mortgage business is yet to come to the prices of the real estate.

Regarding the tourism, page 5, we have very, very good figures in terms of flows of tourism to the country. Almost 3.2 billion people have visited Argentina last year and also the total expenditure has increased significantly in the range of $3 million.

Page 6, we got into the consumption indicators. The private salaries, as I have already mentioned, have recovered 30% since the bottom of the crisis. This has fueled a very consistent recovery on the consumption, which is shown on the sales of the shopping centers and the supermarkets, which continued to grow steadily. Also the consumer confidence in this shows a very good level in the range of 55% considering that we have gone through two years of government is a very good figure.

Before getting into the comments of the results, we can highlight the quarter of the Company on page 7 mainly (indiscernible) a strong operating result that is showing. The operating results grew 44% from 59 million to 85 million. EBITDA was 126 million, 32% higher than the same period of the previous fiscal year. The [people] see also (indiscernible) material recovery on the office building reaching 92% as of December 2005. The revenues on the hotel segment also recovered significantly. The occupancy rate reached almost 80% compared to the 77% in the same period of the previous year. Also the rate improved with recoveries in room price up to 2 pesos, 357 compared with 314 in the same period of the previous year.

We are continuing the process of developing our projects. We are making progress significantly in the (indiscernible) sale of (indiscernible) San Martin de Tours and (indiscernible) Laguna Azul project.

Regarding the shopping malls business, the operating income from APSA grew 76% during the same period of the previous year reaching 73 million pesos. The EBITDA increased 45% to 105 million in this semester. The tenant sale increased 35% in a six-month period ended December 31 and the occupancy rates are almost at 100%.

Now David Perednik is going to comment on the income statement for the Company.

Good morning. I'm going to comment on the rest of the income statement year-to-year comparing six months '05 against six months '06. The real estate totals -- sorry -- the operating income increased 44% from 59 million to 85.6 million. Total sales increase 38.4% from 185 million to 256 million and the net income, the last line, decreased 48.9% from 65 -- sorry -- 56.7 million to 28.9 million. I'm going to comment on the sales and development line. With respect to the sale, it increased from 27 million to 27.7 million, 2.8%, mainly due to the Alcorta Plaza, the income through Alto Palermo, through APSA control company.

With respect to the office and other, sales increased from 8.9 million to 13.4 million, 51%, mainly reflecting the increasing occupancy levels and rates of our buildings and due to the acquisition of the new building, bouchard 710.

With respect to the shopping centers, sales increased from 103.6 million to 161.5 million, 55.8%, which reflected the excellent sales momentum of our shopping centers and basically our lease and services revenues increased 35% in our tenant sales. Also we have been increasing the revenues of Mendoza Plaza shopping of 4.2 million pesos and the inauguration of Alto Rosario shopping, the main increase of 4.5 million pesos.

With respect to the hotel line, the sale from this segment increased from 45.3 million pesos to 53 million, 17%. That meant that given (indiscernible) year 2006 has accumulated an average revenue rate of 80% compared to 77.4% the previous year and the rate also improved with average price per room of 357 pesos per room -- sorry -- in 2006 compared to 314 pesos in the last 2005.

The line of (technical difficulty) inventory of net retail value of 7.4 in 2006 is (indiscernible) generated during the last quarter and results show that the valuation of the net sales value, the inventories that we receive, the balances in fixed prices mainly in the cruise, building and at all building and also Rosario with a total amount of 7.4 million pesos. Financial results increased from 9.7 million [low] to 32.3 million [lost]. The equity gain from related parties, the net result is a decrease from 49.5 million to a gain of 28.5, 42.3% of decrease basically due to a less gain of Banco Hipotecario.

The line of [R&D] interest increased from 6.9 million to a loss of 6. -- sorry -- to a loss of 13.7 million to an increase in the loss of the minority interest in Alto Palermo. In income [starts] and asset starts, the income starts increased from a loss of 29.6 million to a loss of 33.6 million mainly due to our related Company, Alto Palermo.

Okay. There is some additional data regarding our businesses. (technical difficulty) we can see how the sales are split between each of the business units. We continue to see a very important participation of the shopping center with 48% of the total sales of the Company. The office rental portfolio was 4.6%. Sales and development continued to show recovery with 18% share of the total sales and hotels was 18%.

Regarding EBITDA, participation of course we see here. The bigger piece of the shopping center was 77% of the total EBITDA origination of the Company. Office rental portfolio was 6.2. Sales from development was 5.8 and hotels with 10.2%.

On page 11, we can see and compare evolution of the sales and EBITDA for the Company from 2003, 2005 and first quarter of 2006. There we can see, considering each one of the business lines, that the compound growth for the sales has been 32%, 38%. For the first six months of 2006, the EBITDA evolution 60% of recovery, 32% for the first six months of 2005 showing growth, not only in the total amount, but in each one of the business lines illustrating very clearly the excellent momentum for the business development of the Company.

Regarding the (technical difficulty) evolution, we continue to show on page 12 significant sales in the shopping malls with growth, more than 250 million as of December 2005, of sales. The composition of the revenue continued to be almost 50% the base rent -- 70% sorry. The percentage rate, which is charged as a percentage of the sales and which boosts the recovery of EBITDA of the Company, 12% of parking, 5% of other, (indiscernible) 12% of the total revenues of the Company, which is the membership fee that we charge each time the leases are renewed and 9% of this time showing again the very healthy distribution of the income that the Company has.

Regarding the occupancy rate, as we have mentioned, we are almost in 100% peaking the highest level of the Company for the last five years. And EBITDA, as we have mentioned, we are recovering more than 50% for the last two years, 43% for the last six months. Also we have a very significant increase in the evolution of our related business on shopping. Our private label credit card, page 13, there you can see the revenues of the Company, which have improved almost 100% since the second quarter of 2004, up to 55 million pesos. This company holds almost more than 365,000 credit cards with a credit portfolio of 225 million pesos, an average amount of interest rate of 3%.

Do you remember for those who are not so familiar with this operation that these credit receivables have a security side and placed in the market, which are very well renowned by the quality by the individual investors locally.

Regarding the office rental business on page 14, we see how we have recovered 75% of the occupancy rate over the six months of fiscal year 2006 annualized, $8.8 million of EBITDA. Remember that we (indiscernible) this historically, used to provide (indiscernible) in the range of $22 million of EBITDA. As we have stated in many other presentations, the recovery of this business is very steady and we are very optimistic about the future development.

On page 15, you can see the vacancy, how it has been reduced almost less than 5% and other recovery of the rental price a square meter per month, which is today in the range of $18 on average in the market with a very, very quick response to the lack of space available in the city. Compared with some peer city in the Latin America area as of December as part of the research of Cushman and Wakefield, we find Rosario with a price slightly over $15, in the range of $17, $18. Like I mentioned, Santiago or (indiscernible) were $2. Montevideo is in a range of $15, Sao Paulo in the range of $22, $23 per square meter and Caracas near $25 per square meter showing the upside potential that Buenos Aires has in relative terms compared with the rest of the peers in the region.

On page 16, we can see the outlook of each one of our hotels where we can show you the recovery of the occupancy rate and the rate itself for the inter-continental and the Chateau Libertador reaching levels in the character of the Chateau Liberator near 90% of occupancy rate and in the case of the Intercontinental in the range of 75%.

Page 17 shows (indiscernible) with continued growth in terms of occupancy near 80%. This hotel remember is located -- it's the flagship of the (indiscernible) hotels located in the Patagonia and on page 18, because of the excellent performance of the hotel and the huge foreign demand, we are in the process of building the 42 new rooms. There you have the project -- the outlook of the project and a satellite picture with new rooms added in the real location. We are in the process of this construction, which has already started.

As a final note to the future development, page 19, you have (indiscernible) Dique 2 Cruceros. Remember, this project, which was developed under a soft agreement where the Company put the land and received for 40% of the total 69 square foot to be constructed. The construction has been already almost finished. 88% of the construction, tenancy, 3 departments already sold, 16 departments available to be sale.

On page 20, (indiscernible) Dique 3, (indiscernible), the same criteria with a soft option agreement where you have the three amounts of square meters to be received from the exchange of the land. The product of this construction today is 11%. Palermo, Chico, San Martin de Tours, the last project we are going forward. We are beginning to sell this smaller part and this is the best location in Buenos Aires City. We are in the progress of the construction, 94%. These 20 apartments are going to (indiscernible) to the market during the next month.

A final comment on the convertible note. There you have on page 22 the tenancy as of today of this note where it will be interesting to address that the outstanding -- the total outstanding of the convertible is 57 million with a warrant outstanding of almost the same amount, 57.6 million for IRSA and 5 million were converted after the closing of this financial statement by our controlling company, Cresud. There you have also the perfect division of Alto Palermo, which are completely held by IRSA and Bank [Aronco] from Chile.

On page 23, we can see the outstanding shares, which have gone since the inception of this convertible bond, from 212 million to the present situation is 368.8 million of shares on a fully diluted base assuming that those are conversion. Our next on site will be 579 million shares in total.

Finally, the price evolution coming where we see the pick of the shares will reach almost 17 in a year of (indiscernible) change is a moment where Argentina announced it has restructured after that it drove and now we are recovering prices in the range of $12 per AVR.

Regarding the financial results, we would like to address that although the final result of the Company has been adversely affected by the net effect of a small valuation of the dollar, especially affecting the convertible net position, we have to remember that most of our assets are dollar-related, but they are not marked to market, which is why this effect, which is affecting us today, may be considered temporary.

What we saw in the presentation is how our activities are recovering and I would like to add that in each of the lines -- I know one I would like to point is the rental office. That was more delayed and we were not expecting the recovery we had and today, we are discussing the rental per square meter, the renewals. Beginning of 2006, we're talking about $22, $24 per square meter. So we are seeing a recovery that we thought it would last a little more. The delay would be for one or two years later, but what we found is that companies are recovering size. They are growing. They are looking for more flats and there is not a lot of buildings under construction. That is pushing up prices. And we don't see all the fates of the recovery in the results because this takes time because we have only a few months of good recovery in rent. But you'll see soon, not levels of the $20 million we had in the past, but not the levels of $5 million we had two years ago. So we think that rental office is one of the lines that need a little more time than shopping centers but will receive very good results in the next quarter.

Shopping centers you saw, in both lines, in shopping centers and in office, we are trying to buy more or build more. We are in the process of both, trying to buy and build more buildings for the Company using the cash the Company is generating. The [Ciao Ciao] will be finished one year later from today. I will be today at the property. We're beginning the furniture decision and that will be open probably in February or March of next year.

What do you think and we are seeing that we are a bit fit in the largest real estate play in Argentina and we are receiving offers for things that we're beginning the construction and they are making us to doubt that the prices are enough to sell or to keep it. To give you an idea, we have begun the story of making a new office in the Puerto Madero area. When we begun the decision at that time, the square meter value was at the level of $150 to $200 per square meter for the land.

Now, we are beginning the construction and today, the price of that same land is $800. We are receiving cash proposals for purchasing this property at the level of $800 in Puerto Madero from another person and we are discussing now in the Board of Directors about what to do is to build it or to sell it. So to give you an idea of one time change, four times price in Puerto Madero area. So this $700, $800 per square meter value of the land is normally Puerto Madero. As you have seen and in our balance sheet in Alto Palermo, we reflected the sale of a property we had in front of Paseo Alcorta. We bought in the past 2000 square meters and we sold in the price of $7.7 million. That represents $1800 per square meter of incidents. So that gives you more than double what Puerto Madero has. So that is the kind of situation in the real estate market of Buenos Aires. So we are seeing in all the portfolio, we're not reflecting the real value because you know that we're keeping up costs, flat inflation, but in the case of (indiscernible) what is the portfolio worth today in these two small examples.

We are receiving interest on the swaps of the land reserves the Company had. So we are going to show you probably next quarter a lot of more operations than they are today in more discussion. So with that, we think we explained the situation on the whole group of the Company and we would like to share with you your questions. So thank you very much and we wait for your questions.

(OPERATOR INSTRUCTIONS). Alexander Green, Citigroup.

I have a few questions. On the general sales and development over the next few quarters, if you could just give us a little bit more of an update on what you see happening, as well on the Santa Maria del Plata development. Wondering if you have all -- if there's any update on that. If you have all building permits needed for that.

We are going to reflect a lot of land in that line of business. There are a lot of properties under swap agreements and on the sale today -- direct sales -- that will reflect big gains. I cannot confirm this because there are decisions today but this line will recover what we saw is a small drop in results comparing year-to-year. Probably at the end of this balance sheet, you'll see big growth because there are big operations under discussion and big million dollars. All of them, they are discussions they are trying to buy in cash. So I think the final effect of that will increase the line result at the end of this period.

In the case of Santa Maria del Plata, we think that the environment for development that is better because of the growth of Puerto Madero. In Puerto Madero, there are no more places left and all the land reserves was in the past today disappeared. The prices are 40% higher year-to-year and there is no more room to grow. So the only property at all of the developers are asking us and now we are discussing in the board how to develop (indiscernible). We are receiving interest not only from Argentina developers but from foreigners who, because of the size and the quality of the property, and we think the environment with the local government today will allow us to approve it easier than what it has in the past. But we have not up to now the approvals, but we think we have more chances in the near future.

Thank you very much. I have one more follow-up question. On the shopping mall segment, are you still looking to launch one to two new shopping mall properties per year?

Yes. We are trying to build one, to buy another one. So we are very keen to keep this growth in the center because we have that position and because that is generating so much cash. So it will be a year to grow with the general money that the Company's making

[Alexis Pankin], [Marathon].

A real quick question on office development on the office business, did you -- after the crisis in 2002, were a lot of the contracts with existing tenants renewed for sort of two or three-year period and if so, are we now seeing contracts being renegotiated at higher levels than we had over the last two or three years?

Yes. What we did is -- remember in 2002 when the crisis became huge and we had to keep them in our office because at that time we had levels of 60% occupancy and 40% vacant. So what we did at that time was making smaller contracts and we achieved prices of $5, $6, $7 dollars per square meter. What we're doing now after this contract is finished and that's what we are -- I won't say explained before that the renewals of those contracts that went to $5, $6, $7 today are at levels of $15 to $25. So the new contracts are contracts of three years in general and we are making steps and in general, (indiscernible) we sign a contract that is 18,20,22 first, second and third year.

So this is a kind of contract and we are going to make the opening of this, the data, to be sure that you are going to project the effect because (indiscernible) we need to project because you will see the contract signs. You will see the actual rate at 15, but you will note that that (indiscernible) will go to 17 for example. So you'll see that recovery in the results in the next quarters. But it is true that we tried to make it smaller in the past because the prices were awful and now we are doing normal contracts that are in general three to four years.

(OPERATOR INSTRUCTIONS). [Bob Milsalas], Trilogy Global Advisors.

I just had a quick question on the capital structure upon full conversion of the convertibles. Could you just update if assuming that conversion goes to full conversion and there are 579 million shares outstanding for IRSA, what will be the cash proceeds from that conversion to the Company and what will be the net debt or net cash position after that?

That situation, if you consider not only the conversion of the bond but also the exercise of the warrants and such, the net cash position for the Company as of today considering the breadth and level of debt for the Company, it will be no debt and $80 million of cash.

So after full conversion, you would have net cash of 80 million and shares outstanding of 579 million?

Exactly, no debt at all.

18 million.

18 million, 18 million of cash, no debt at all. That is already our situation.

(OPERATOR INSTRUCTIONS). [Herman Romero], Altima Partners.

This is Michael [Hall] from Altima and I have Herman here with me. Congratulations on a great quarter. The question I had was more of an accounting question. Basically, if you talk about the FX loss that had an impact of your financial expenses, assuming the convertible gets converted in a year and a half time, what accounting entry will you do to reverse the hits you are taking today? Thank you.

The effect will be in the fact that you will have more pesos for each share because the equivalent will be higher. We are going to have a higher level of debt in pesos and that will be exchanged by a higher amount of capital in pesos.

(OPERATOR INSTRUCTIONS). Gentlemen, there appear to be no further questions.

Thank you very much, gentlemen. We hope the rest of the year will be (indiscernible). Thank you very much and we hope you like the system we tried in time to make it easier and to come off about the story of the Company. Thank you for much and have a good day.

Thank you. This does conclude today's IRSA conference call. You may now disconnect.