IRSA Inversiones y Representaciones SA (IRS) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Carly and I will be your conference facilitator today. [OPERATOR INSTRUCTIONS]. It is now my pleasure to introduce today’s hosts, Mr. Alejandro Elsztain, Vice President, Gabriel Blasi, CFO, and David Perednik, CAO. You may now begin your conference.

Good morning to everybody. This is Gabriel Blasi. Unfortunately, Alejandro is on travel today and we were not able to put him to a stable telephone line. We are going to proceed with our conference call for the third quarter results for IRSA.

First of all, a quick introduction and some relevant data on Argentine economy, and after that we are going to go directly to the Company result.

On page two we can see the GDP is still growing with a projected for this year of 7.5%. Also the capital inflows, as you can see from the graph on the right side, have recovered. And all of this is helping the business environment for the developing of our business in a very positive way.

The following page, we can see the evolution of the fiscal surplus, ARS49b for the period, 15% higher than the same period of the previous year, showing the effect of the economic policy regarding the tax collection that has been implemented.

Next page, we still have a very, very strong construction activity. As you can see from the right graph, from the crisis as of today the construction rate has increased more than 126%. And the construction cost, although we have a significant increase in the cost, 20.5% for the second quarter of the year, still we have a significant gap, 25%, compared with the previous situation before the comparability end.

Next page we can review that still we have a very, very low rate of mortgage to GDP. And although the amount of loans has been increasing, the growth in the GDP has been higher than the rate of growth for the mortgage loan, ending that the mortgage to GDP ratio, this is still very, very low compared with other countries in the world.

On the next page we can find out how the salaries continue to recovery. And it’s important to address that our employment has increased 9% in the period, and the salaries have increased 3.5% on the same period.

Again, also consumer index and supermarket and shopping center sales have increased significantly. If we compare, for instance, the shopping center sales against the same period of the previous year, those have increased in general terms 16%. And with this we finish with the general environment of business for the quarter.

Addressing the result of the Company and before David tells us about the result of the period, we can highlight that the operating result for the Company grew 44%, from ARS85m to ARS122m, almost ARS123m. And also the EBITDA generation increased 31% for the period. The occupancy of the office business also continued its strong recovery by reaching 92% for the first nine months of the period. And also on the hotel business we are presenting an increase of 17% in the revenues for the same period.

We are going to discuss also the project and the evolution of the sales and development business line, which is also on a strong recovery. And we can see that also the shopping mall figures have increased significantly with 65% operating income increase and EBITDA 43% increase too, with an increase of 35% in our tenants.

Now David will comment on the results of the Company and its business line.

Thank you, Gabriel. This is David Perednik. Good morning. I would like to comment the P&L of IRSA.

First of all, sales increased 40% from ARS271m to ARS381m. The gross profit also increased 40% from ARS154m to ARS217m, while the net profit decreased 47% from ARS78.2m to ARS40.9m.

Going to the different lines of business, beginning with the shopping centers, the sales increased from ARS161m to ARS245m, 52%. That is reflecting the excellent sales momentum of our shopping centers.

The leases and service increased, due to an increase in our tenant sales that increased from ARS1,235 during the nine-month period of 2005 to ARS1,654m during the same period of fiscal year 2006. Also the increase in the leases was due to the increase in the revenues of Mendoza Plaza Shopping and to the inauguration of the Rosario Shopping on November 9, 2004.

With respect to the gross profit of the shopping centers line, gross profit increased from ARS99m to ARS159m, 61%.

Going to the hotels business line, the sales from this segment increased from ARS68.3m to ARS79.7m. That means 16.7%. This result reflects the increase in average prices, with average price per room of ARS379 per room compared to ARS325 in the previous period. The occupancy rate of the hotel segment remains stable at 79%. The gross profit increased from ARS31.9m to ARS36.6m. That means 15%.

Going into the offices and others line, the sales from this segment increased from ARS13.6m to ARS21.5m. That means 58%, mainly reflecting the increase in the occupancy levels and rates of our buildings, due to the acquisition of a new building, Bouchard 710. Occupancy of our office buildings continued experiencing a mature recovery, reaching 92% compared to 85% in the previous year. The gross profit of this line increased from ARS8.1m to ARS14.7m. That means an 82%.

Developments and sales. The sales increased from ARS28.3m to ARS32.8m and the gross profit decreased from ARS15.5m to ARS5.7m. That means a decrease of 63% in the gross profit line.

With respect to the financial results, we had a decrease in our financial results from ARS3.3m loss to ARS42.7m loss, mainly due to the higher exchange difference losses that we had suffered due to our depreciation of local currency of 6.9% compared with the same period of 2005. With respect to the line of equity gain from related parties, this line decreased from a gain of ARS58.7m to a gain of ARS37.2m, principally due to less gains recognized in relation of the results of Banco Hipotecario.

With respect of the net income for the year, this line decreased from a gain of ARS78.2m to a gain of ARS40.9m. That means a decrease of 47.7%.

Thank you, David. Going on page 10 to some color on the business line of the Company, you can see there how the EBITDA is composed as of today, with still a very strong presence on the shopping centers due to its excellent performance both in terms of sales and in terms of EBITDA generation. But also with an increase in the participation of the sales and developments business line, due to its strong recovery.

When we go to page 11, we can see there that both sales evolution and EBITDA evolution for the last three years, and for this specific quarter, are very strong for each of the business lines. And also on the consolidated base, grew 40% for this nine period on sales and 31% for this nine-month period for the EBITDA generation.

Considering the shopping mall business in particular on page 12, you can see there the occupancy rate in the range of 99%. A strong increase also in the sales of our tenants compared with the previous sales from 2005, with [five years] increase in sales for our parent, totalizing a net income, as David has already addressed, of ARS32m, ARS11m higher than the previous period. The operating income increase of 65%, 66% increase in revenues and 66% increase in the gross profit showing us the excellent momentum of this business line.

Page 13 we can also see there the evolution of Tarjeta Shopping, our private label card, totalizing an income of 186% higher than on the same period for the previous year. The net revenues of this credit card increases 106% and the operating results 177%, also addressing the excellent situation for the consumption business in Argentina.

Going to the office rental, we continue to see the recovery of this business line, totalizing 92% of occupancy rate and ARS9m of EBITDA generation for the period.

Remember that historically, when the price per square meter was in the range of 32/33% -- $33, sorry, per square meter, the EBITDA generation of the Company in this area was $22m. And when you compare, on page 15, the evolution of the business –- of the rent price as of today, we can see regarding the independent research that today price is $24 per square meter. Our portfolio is in the range of $13 per square meter, showing us that there is room for continued growing in this business line too.

When we go to page 16, we can see there the open evolution of the hotel business. Remember what David has addressed. The income grew to ARS79m compared to the ARS68m of the same period in the previous year. The price per room on average [for each] hotel increased to $379 compared with the previous -– sorry, pesos, compared with the previous ARS325. We had occupancy rates in average of 79%, showing also the very positive situation of the hotel industry in the country as indication.

We shall show - we are on page 13 - we are continuing with the development of 42 new luxury suites, which are all -- are being built beside the lake.

Going to the future development, we are finishing the sale of Edificios Cruceros, that’s page 18, where we have already finished the construction. Torres Renoir we have increased in this quarter the progress of the construction from an 11 to a 23%. This is, remember, in the Puerto Madero area.

And an important development has taken place on page 20, in Caballito. We have made a swap agreement with KOAD S.A., providing them with the land that IRSA had in the area of Caballito. Caballito, remember, is a central neighborhood, very populated in the city of Buenos Aires, for the building of two residential towers of 30 [sic - see documentation] floors each. We're going to receive 25.7% [sic - see documentation] of the total built area and 25% of the parking spaces. The saleable area will be in the region of 28,000 square meters physical structure, and it's not related to the Group.

And we are going to receiving in 39 months 118 apartments and 55 parking units for selling. And the result of this swap is going to be -- this was fulfilled after the closing of the balance sheet. The result is going to be shown on next quarter.

Page 21, you have the actual picture of Laguna Azul. This is located in the center of the country in the province of Cordoba. Cordoba is one of the three biggest cities in the country and the Laguna Azul is an area that we acquired there. And we are going to make a new [urbanization]. This is located in the outskirts of the city.

We hired the Chilean architecture firm URBE for the development of the project. We have designed the master plan and we are in the process of defining the investment for the development of the project.

El Encuentro; remember that we have also made a swap and we have received 110 lots in exchange of the development made on our land. And we are analyzing the possibility of starting to make sales of these lots.

Going to the -- sorry, to the situation of the convertible bonds, a significant evolution has taken place here, as you can see from page 23. From the total original outstanding of $100m, as of today only 28m of convertible notes are outstanding, meaning that a significant debt reduction has taken place on IRSA. The warrants outstanding is $56.2m. That also meaning that there is still a significant amount of money to be put into the Company with the exercise of those warrants.

We have also had significant evolutions in terms of the financial situation of the Company. The syndicate -- and as you’ll note, on our secured notes, after the payment of principal installments, the total exposure now is totalizing [$52.84m]. As I already mentioned, $1.55m of convertible notes have been exercised before the closing of this period. And as of today -- or after March 31, 21.4m of convertible bonds were exercised, with the already [inaudible] this transaction.

On our subsidiary, Canteras Natal Crespo, which is the company making investments in the Province of Cordoba which we have already discussed, we increased our holding there to 43%.

And the indication of Hoteles Argentinos, we have already finished the rescaling of its debt. Remember that the hotel used to have a debt of $12m, which was acquired after the crisis with 24 swaps together with Credit Suisse. The hotel has paid up $2m and the present situation of that debt is that after rescaling and a reduction to $8m and that payment of $2m, the financial situation of the debt is a balance of $6m.

Regarding our subsidiary Alto Palermo, the financial debt of the Company is ARS25m of today, plus a remaining $3m of the acquisition -- of the loan granted by Deutsche Bank for the acquisition of our subsidiary in Mendoza owning Mendoza Plaza shopping.

So, finishing the general comments of the Company, we have seen that both from the operational side as from the financial side, we have a very, very good development and with significant reduction in debt.

And I also would like to, before going to the Q&A, to address that our subsidiary Alto Palermo, through its bondholder assembly, has extended the tenure of its convertible bond to year 2014. This is reaching a very successful way of keeping the Company with a sound debt and at very good terms for the development of the growing project.

With no further consideration, we would like to go the Q&A session.

Thank you. [OPERATOR INSTRUCTIONS]. Your first question is coming from [Stephen Charles] from Citigroup.

Yes. Good morning, gentlemen. Can you hear me okay?

Yes.

Great.

Hi, Steve. How are you?

Very well. How are you? Just a quick question or two. The first point, I was wondering if there is some update on your expectations for the receipt of building permits for Santa Maria del Plata and some of your other large developments.

And my second question - forgive me, I had trouble accessing your presentation - of the 28m in convertible notes that are left outstanding, can you share with us roughly what percentage Cresud’s now holding of that balance?

Yes, of course. Now I’ll give you the exact figure, Steve. Regarding the question about Santa Maria del Plata, as you’ll remember, the administration for the city of Buenos Aires has recently changed. And because of the price evolution for the Puerto Madero area, the Company has not taken a significant [speed] or pressure to speed up the process.

I will say that I -- as we have already discussed, we have already cleared the project aspect of the permit. This is -- we will not have other discussion with the city authorities regarding the shape of the project, leaving aside the issue that in the city of Buenos Aires it is not allowed to build a closed neighborhood. So all the discussion is focused in how to keep the project with trying to resemble a private neighborhood, but at the same time complying with the ruling that established that.

Having said that, I do not have too much to say to you regarding this issue, although I will repeat what we have already said many times. The lots in the Puerto Madero area are coming to an end. There is almost like three to five pieces of land still pending to be constructed. And after that, the only space available in this area with a present price of $2,300 as a selling price. Just to give you an idea, the market price for the land in Puerto Madero today is in the range of $700 to $800 only for the land. So we are very happy to still have these 70 hectares available for the near future.

Regarding your question about the convertible notes, the percentage of convertible -- the percentage of holding that Cresud has on a fully diluted base is 27.7 -- is 34.3% on IRSA’s holding, 28% as of today.

Okay, very helpful. Thank you very much.

You're welcome.

Thank you. [OPERATOR INSTRUCTIONS]. Your next question's coming from Ben Laidler from UBS.

Good morning. I actually just wanted to follow up on the Santa Maria del Plata question. The Buenos Aires administration changed a while ago. Is this just bureaucratic inertia here waiting for the final permit, or is there anything else going on?

No, just it’s just the time that the government takes to -- you remember, Ben, that there was a significant problem on the administration of the city of Buenos Aires for the last two years that finished with the impeachment of the previous major at about three months ago. So I will say that we are still in the process of gaining speed again as a city in terms of the development of the project, but no specific issue has been raised regarding this project.

Yes, great. I guess just a quick follow up. Would you be able to put a range on high-end residential construction costs in Puerto Madero per square meter, roughly?

The construction cost, as I already mentioned, has increased like -- since the beginning of the crisis like 25% and -- give me a minute. For a premium building I would put it in the range of $700 to $800 per square meter, with a price for the land, for instance, in the Puerto Madero area on the same range, Ben.

That's great. Thanks very much.

You're welcome.

Thank you. [OPERATOR INSTRUCTIONS]. Thank you. There appear to be no other questions.

Thank you very much for your attention and we have you in the next call. Thank you.

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