IRSA Inversiones y Representaciones SA (IRS) 2006 Q4 法說會逐字稿

Good morning. My name is Tracey and I’ll be your conference operator 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 will be a question and answer period. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the floor over to your host, Mr. Alejandro Elsztain.

Hello. Good morning, everybody. We are going to talk about the results of the fiscal year 2006 that was closed in June 30 of this year. We have very good results and we are going to share with you. So, I introduce to you Gabriel Blasi, CFO, and David Perednik, Chief Administration Officer, that will talk and will explain deeper the results we have this year.

Hello. Good morning to everybody. We’ll start with a quick wrap up on the Argentine macro and after that we go in on detail on the Company results.

As you know, on page two, the economy has grown for 42 consecutive months, achieving an excellent record up to now, consistently beating the expectancy of growth for most of the economy surveys.

Next page, on page three, we also can show that the administration has been consistent in terms of developing a conservative fiscal management, achieving a fiscal surplus for the time being.

Page four. We are, as many of you already know, in the midst of a very significant boom of construction. The construction activity has increased more than 145% from the first quarter of 2002 with a cost that -- although some of the costs related to this industry have recovered, since they’re bottom up. After the crisis we still have a positive gap in terms of advantages from construction of 12% compared with the situation prior to the crisis.

If we speak about the investment in real estate, you can see for the -- from the graph in page five that the investment has consistently grown after the bottom of the crisis, 100% to the figures in 2005, and that the amount of purchases have almost grown more than a third since 2001.

If we go to page six you can see also that the prices -- the U.S. dollar prices of the apartments in general terms, the used apartment and the new apartment, have increased consistently from the same period, growing more than 100%. This is -- today’s price for the apartment is roughly 20% higher than the prices before the crisis. But although that took place, we can see from page seven that Buenos Aires City, compared with other cities in the world, is still very, very cheap in terms of the prices for the real estate, especially for the apartment.

Having said that, we must take into consideration what we can find out in page eight, that this prices gap, this is cheap in terms of international prices, but it’s still growing very, very significantly. We can see that all that is achieved, as we continually mention, on a cash base, that the mortgage stock to GDP of the country is very low, as you see from page eight. Compared with other countries in the region we made more than double, almost triple, our stock of mortgages against GDP. And all this effect is still to come. It’s important to tell that this year was the first time since the crisis in the country that the new loans offset the maturity of the old ones.

Also, we can find out in page nine that this general scenario is changing. As I already mentioned, the consumer confidence, especially for houses and cars, is showing a significant strength. And the increase in local credit is also increasing.

If we go to page 10, you can see that what I have already mentioned, for year 2006 is the first year when the stock of loans [advantages] before the prior 2005. Today it is achievable to get loans in Argentina in pesos for mortgages up to 20 years. And today a new operation of loans has been launched into the market, especially those -- to those people which is renting homes, allowing these loans to get better terms and conditions to replace the rental by the acquisitions of new homes.

Speaking on the retail side of the business, if we go to page 11, we can see that the real wages have recovered consistently too in U.S. dollar terms and in peso terms after the bottom in 2002. On the other hand, on the same page you can see from the right part of the graph that the effect of that recovery is strongly shown on the shopping center sales and the supermarket sales, which continue to grow in spite of the seasonality that we always show by the last quarter of the year, which is the stronger quarter.

After completing this, Alejandro will tell us about the highlights of the year.

As you saw, the operating income increased 43%. We went from ARS140m in fiscal year 2005 and today we are in 200 -- a little more than ARS200m in 2006. And the EBITDA grew ARS270m, 44% above the last year.

We achieved the highest levels of occupancy of 99.1%, shows the part that we keep to try to improve ourselves, putting out the worst tenants and pushing the new tenants to the shoppings. And the sales grew 34% year to year with the combination of both bringing new tenants to the shopping centers and the change of [their sales] of each tenant here compared to the other. The operating income grew 37%, reaching ARS130m in the shopping centers.

In the regional expansion we keep the commercial businesses and APSA kept by Cordoba. You know that we bought a few years ago Mendoza Plaza Shopping and we built in the past Rosario -- Alto Rosario. This year we were able to sign a letter. We didn’t close up to now, because the due diligence didn’t finish, but we are near closing that deal. That is waiting for the approval of the - how do you say - [competenzia]?

Antitrust.

Antitrust office that it has to approve because we bought a society, so we are waiting for that approval. That will be very soon, we hope, because we have any activity in Cordoba Province. So, we are very optimistic on that.

So, with that, we were able to buy in Cordoba Province. That is one of the largest of Argentina. And we were keen on buying that and we did after a few years of negotiation. We bought -- we are going to buy 35,000 square meters of total area. It’s a very mature shopping center. And we have planned to change tenants and to improve the gross lettable area very, very soon.

In the office buildings we reached 94% of occupancy and we are beginning the improvement in prices. We’re going to show you later how this segment is changing dramatically. And in the hotels, again, 78% of occupancy and the operating income increased 31% to ARS14.6m in 2006.

So, in -- we had a lot of plots. For land we were able to finish with the Renoir. That is growing the construction of Renoir in Puerto Madero. We closed in Caballito a new project. So, we are moving our land reserve that the Company had for many, many years and this year is beginning to show part of the result.

And we were able to change our rating, both of the [inaudible] from BB+ to BBB and overcoming the investment grade. So, we have from all the sides of the Company good news.

So, I give you David to talk about the balance sheet.

Good morning. The result of operations for the fiscal year ended June 30, 2006 are the following. Revenues, the revenues increased 56.2%, from ARS369.9m for the fiscal year -- peso, sorry, for the fiscal year ended June 30, 2005 to ARS577.7m for the fiscal year ended June 30, 2006. This increase is due to an increase in revenues from all our business units.

With respect to the development and sale of property, this line increased 221%, from ARS32m in 2005 to ARS104m for the fiscal year 2006. This increase in revenues was due mainly to the sale of Alcorta Plaza through our affiliates, Alta Palermo, with ARS23m, the increase of ARS22.8m from the sale of Block 36 of a block named Torre Caballito, the increase of ARS41.8m from the sale of Plot Y of Dique 3 and the increase of ARS10m from the sale of units of Edificios Cruceros.

With respect of the line of offices and others, the revenues in this line increased 57.3%, from ARS19.4m for 2005 to ARS30.6m for 2006. This increase was due to an increase of 52% in revenues from office rent, from ARS18m to ARS27.4m, and is mainly attributed to the increase of the occupied room percentage and of monthly average rent of the majority of the buildings, principally Bouchard 710 for ARS5.4m, Libertador 498 for ARS0.8m, Maipu 1300 for ARS0.8m, Laminar Plaza for ARS0.7m.

The percentage of room occupancy in this segment increased 3%, from 94% in 2005 to 97% in 2006.

With respect to the shopping centers line, the revenue from this line increased 46.9%, from ARS230m during 2005 to ARS338m during 2006. This increase is attributed mainly to an increase of 30.2% in revenue from leases and services, from ARS155.8 to ARS215.9m.

And we have an improve in our sales of our tenants of 33.9%, from ARS1,698m for 2005 to [ARS2,233m] for 2006. And also we had an increase of 90.5% in our Credit Card associated company, Tarshop of Alto Palermo, with an increase of -- from ARS64.6m to ARS123m in revenues.

The average occupancy rate in shopping centers was 99.1% for the fiscal year ended as of June 30, 2006.

With respect to the hotels line, these hotels -- this line increased 19.1%, from ARS87.1 to ARS103.8m, due to an increase in average price the room of our hotels and an increase in average occupancy in many of our hotels - Llao Llao, Intercontinental - from 75.4% during the fiscal year 2005 to 78.7% during 2006. Revenues from Hotel Intercontinental increased ARS6.1m. Revenues from the Hotel Llao Llao increased by ARS5.8m and revenues from Hotel Sheraton Libertador increased ARS4.8m.

The gross profit increased 65.4%, from ARS201.8m in 2005 to ARS333.8m during 2006.

The gain from valuation of inventories at fair market value, this line is [inaudible] of the result of valuating at the net realizable value those inventories which are received [at bank a fixed price]. And this was due -- this total, ARS9.1m, due to Cruceros ARS4.6m, Torres Rosario ARS3.5m, and Dique 3 [block 7] for ARS1.6m.

The selling expenses had an increase of 63%, from ARS36.8m to ARS60.1m, mainly due to our shopping center line. And in Alto Palermo, due to the charge from credit card, increased from [ARS13.5m] to ARS30.9m, due to an increase in advertising expenses, turnover taxes and also increase in charge for bad debt, in line with the growth of our credit portfolio.

Administrative expenses increased ARS37.5m, from ARS59.6m to ARS95.6m, primarily due to expenses related to the final implementation of our new systems, salaries, fees, etc.

The gain from operations and holding of real estate assets, this line decreased from one year to another by ARS15m, from a gain of ARS27.9m for the year 2005 to a gain of ARS12.6m for the 2006. And this difference is due to a lower amount of recovery of the allowance of the impairment of long lease assets. As a result of this, the operating income increased ARS43.5m -- sorry, 43.5%, from a profit of ARS141m to a profit of ARS202.4m during 2006.

Financial result saw a variation of ARS29.2m, from a loss of ARS12.2m during 2005 to a loss of ARS41.4m during 2006. And this variation was mainly due to the exchange difference loss with regard to the previous year amounting in ARS21.7m, a decrease of discounts obtained in 2006 was ARS2m and a decrease of ARS10.6m in financial operations.

The equity gain from related companies had a decrease by ARS25.6m, from a gain of ARS67.2m during 2005 to a gain of ARS41.7m in 2006. This decrease is mainly due to a lower gain in Banco Hipotecario of ARS8.2m. In last year, 2005, the Banco Hipotecario gained ARS55.2m, while in 2006 the result was ARS47m.

The income before taxes and minority interests increased 1.6%, from a gain of ARS179.6m to a gain of ARS182.6m during 2006. And income tax and asset tax increased by ARS5.6m, from a loss of ARS53.2m to a loss of ARS58.8m. And as a result of the foregoing, the net income of the Company decreased 6.5%, from a gain of ARS103.2m in 2005 to a gain of ARS96.6m during 2006.

Okay. Thank you, David. Just to complete the general outlook of our result, page 14 you can see the sales participation per business unit and EBITDA participation per business unit, where we can find out that the share related to other businesses than shopping centers is growing. In spite of the excellent performance of the shopping center, we can see from page 15 that, both in sales and EBITDA evolution, all of the business lines are developing in a very positive way and growing consistently with recoveries of 50% in most of the cases.

On the general picture on the shopping center industry, we can see on page 16 the evolution of the sales of the tenants continues to grow. Occupancy rate is still more than 99%, with a very strong growth of the EBITDA for this business unit, where the base rate continued to be almost half of the revenues of the Company. And the percentage rent has grown slightly, 2 points, almost beating 20% of the total revenues of the shopping center business unit.

Regarding Tarshop, David has already spoken about the result but we can show the very impressive growth of this credit segment business.

Going to the office market, we can see there that the outlook for the business is very, very positive. According to third party surveys from Cushman and Wakefield, still today the market price for the offices like the ones that we have in our portfolio is $24 per square meter per month. We have still to recover part of that value in our portfolio because of the term of the leases. There you can also find out the market share of the Company in this important market, where future investments are going to take place in the near future.

Going to page 19, we can see there the excellent sales that this business had for us. From 2004 up to now we have recovered more than 50% -- 50%, more like 100% EBITDA for $4.6m, to $9.9m. Remember that when the square meter in the market was priced in the range of $32 the Company used to get more than $20m of EBITDA from this business line –- of revenues, sorry. Both the rent and the occupancy rates are recovering consistently.

Regarding the business hotel, David has already commented at the excellent behavior of each one of the business units. We can see there the evolution of the average price in U.S. dollars and the occupancy rate, both with positive outlook. In the other hand, remember that in the case of the Llao Llao we are continuing with the construction of 40 new rooms that are going to be added by next year.

Now on the projects, these projects you got at the review and then considered which has been already constructed are almost already sold out. Torres Renoir, which we -- on page 22, where we have constructed 37% of the tower, and remember that we are making swaps for constructing apartments in that project too. And also we have started in page 23 two important towers through the same type of agreement. This is with [Fusilla]. The third party makes the development with a construction cost in a very populated area of Caballito, which is located in the center of the City of Buenos Aires.

In the rest of the country we have the project in Cordoba, in Laguna Azul, near the city of Cordoba, one of the three biggest cities in the country, where we have already hired the Chilean architectural firm, URBE, to make the master plan for that development. Also we have acquired - Alejandro?

Cordobo Shopping Center, as we mentioned a little. And here we have a more deeper explanation about what we signed. That is 35,000 square meters, 160 stores, 12 theaters, movie theaters, and 1,000 -- 1,600 spaces for parking. And so we are in the due diligence and finishing that process, I hope before the end of the year.

So, finalizing the presentation of [that side] of the book, if we go to page 26 I would like to stress really the convertibles. That is from the original issuance of $100m, pending to convert from here up to November 2007. We have $28m of loans outstanding. Remember that, from that, Cresud has a significant amount, and that $50m of warrants are pending, yet to be converted, and that cash is getting into the Company.

On page 27, just to address the general situation, we can see the total debt of the Company is $51m, and in the case of our subsidiary Alto Palermo $47m. Considering the convertibles, without the convertibles only $8m of debt. We have reached investment grade locally once again for IRSA and also the local rating for Alto Palermo has already been improved by the rating agency.

So, we were talking about all the lines of business. I would like to conclude talking about the [lines] that happened to the Company and the cycle that we suffered. After the [convertibility] collapsed, the first who recovered was tourism and the local consumption. And we worked with that to solve the effect of that in the shopping centers and in the hotels, mainly to the Llao Llao.

But the recovery came not only to these segments and we are seeing very good numbers today. Now we see offices coming, I would say, from the [dark]. We, and you probably remember, were renting the square meter at levels of $5 or less. Today we are beginning to make new contracts at levels of $20 and in [skills] we are achieving near $30 in two, three years. So, what we began to see in the $10m revenues of office this year is the piece of the cake, because we are only renewing less than a third of the total tenants.

So we are going to see that line of business growing a lot. To give you an idea, all the buildings of AAA are jumping the $20, $25. So there is a lot of demand for office and there are not new buildings up to now under construction. That is putting our portfolio in very good shape, so that will be reflected in the new balance sheet.

So in the other lines of business that we saw very strong market was high end residential. We saw that the high end in Puerto Madero and Recoleta and Palermo were very strong and we were able to swap our land reserves, making very, very good businesses. And now we seeing in Argentina not only that demand. We are seeing the middle class moving, and that is pushing Caballito project, it’s pushing Abasto that we are talking about. And we’re beginning to think if we have to enter, to make the residential, we -- instead of giving the swaps too.

It was a very good business up to now and we’ve made a good profit, being hedging the properties in apartments and we are taking a big part of that business, but we are now considering if we enter in that line of business of IRSA doing residential for [itself] too.

In the shopping centers, we achieved with Cordoba the number 10. We are going to achieve with Cordoba the shopping number 10 for the Company. And now we are expecting the approval of Caballito. We presented to the government –- local government the project of Caballito. We have the land, the reserve, in Alto Palermo to make a shopping center in a size like the Abasto, a big shopping center, very [inaudible]. And we present that to the local authorities, that received the project very well and we are optimistic in the approval of that project. That will be a big investment for Alto Palermo and we hope that we are going to make it soon.

In the –- we were very successful in the bid of shoppings we introduced to the Company. If we talk about Mendoza Plaza shopping or Alto Rosario, we were able to buy basic properties and the result after two, three years of operation is very positive. And if you want more numbers on that, as to investor relations, to compare to the competition.

We saw in the hotels the inflow of tourism that came to Argentina, and Buenos Aires became one of the more famous cities to go cheaper than most of the big cities of the world. And that is pushing us to make a big investment in rooms. Today we are in a process of refurbishing the Sheraton Libertador. We made only one floor. We are going to make, two years, a change of 200 rooms, 100% of them. We needed to do that and so that is under process. And in the Intercontinental we are doing the same, we are remodeling the 300 rooms.

So we’re seeing that the business is going very well and needs to adapt to what we were not investing last years, we are doing this year, apart of what Llao Llao is doing, the 42 room suites that are going to be finished probably in May of 2007.

So, we are growing in all of the lines of business and we are using the cash the Company is generating to cancel debt and to grow, and we expect to do that. In Argentina, as you know, there is not a [double] because there is not leverage up to now. That is growing but it’s still very small. And we think that the market has a lot of room to keep growing. So that’s why the Group is investing more and more in real estate in Argentina.

So, with that, I wait for questions. Thank you.

[OPERATOR INSTRUCTIONS]. Your first question comes from Charles [Lantay] of Smith and Barney.

Hello, gentlemen. First of all, congratulations on a fantastic quarter. What I was curious is just about the stock. Obviously, with a couple of good years behind you now and a fantastic quarter, you’re trading at a pretty low price to book value. Your long-term debt to equity has come down a lot and you have strong earnings and cash flow. And I was just wondering if you, at this point or given those situations and what appears to be a pretty undervalued stock, are considering returning money to shareholders either through dividends or share buybacks.

Okay. Thank you for your question. Well, we just would like to address the issue that the stock in fact peaked just before Argentina went through the restructuring of the debt. In that moment our ADR peaked to 17 and after that has been in the range of 10 to 17 since then. One important issue to address is, although the market is very aware of the effect of the convertible, we cannot avoid the situation that from the beginning of the convertibles up to today we have doubled the amount of shares available in the market and of course that has an impact.

Regarding the question about dividends, today I cannot make any statement on that specifically.

Thank you.

[OPERATOR INSTRUCTIONS]. Your next question comes from Chris Varco of Threadneedle.

Yes, hi, good morning. I was just wondering if you could give some broad color on your expectations for sales and development revenues for the next couple of years, given some big projects are coming up.

Pipeline of projects for us up to now, I would say that is the hardest to predict, because it’s not up to now a factory that has a plan of the number of square meters to be sold. And I have -- we review that, it’s a big part. And one thing, when you launch a project, a big project, you can be changing dramatically the numbers of the Company. But up to now we cannot predict and be sure to [inaudible] that.

What we have on line today is the projects we’ve shown in the presentation, like the Caballito swap. We are now planning the Abasto swap or making ourselves the sale with Alto Rosario. We have a land reserve surrounding the shopping and now we are entering into a swap agreement, maybe in a local player, so it can be affecting Alto Palermo name -- numbers if we enter into this agreement.

So I understand that it’s the hardest to predict up to now but maybe with this, this needs to be a line of business that the Company begins to make itself will be more predictable for the future. And there are a lot of -- and maybe you can take from the balance sheet all the land reserve the Company has, but it’s a lot. We have neighborhoods in Buenos Aires that surround great Buenos Aires, in Buenos Aires City, in Caballito, in Abasto. So you will see that there are a lot of projects underhand and maybe you are going to see part of them under our construction or under swaps of third parties. So, but hard to predict now because it’s not up to now one plan of this is inside of IRSA.

Okay, thanks very much. Any more color on any timetable for Santa Maria del Plata?

We are under negotiation with the government and we -- but I’m a little ashamed of talking about that because up to now we were more optimistic in the past that we could achieve the final agreement with the government. We think we are nearer than it was but we didn’t sign the final. So it’s still under negotiation.

Great, thanks very much.

[OPERATOR INSTRUCTIONS]. Your next call comes from [Michael Hall] of Altima.

Michael?

Hello. I don’t know if you can hear me. My question is how many convertibles does Cresud own of IRSA at this moment? Thank you.

Michael, yes, from the outstanding of $28m of convertibles, Cresud owns $12m of convertible and $32.9m of warrants pending to be exercised.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. There appears to be no more questions at this time.

Okay, I will close the conference. Thank you very much, gentlemen. As you saw, we are seated on a real estate play, very valuable. As you saw, our assets recover a lot and you see the real estate value per square meter in Buenos Aires and in Argentina, the whole country. So we have today the combination of a very good generation of cash plus a very good portfolio of assets, what we think is the biggest in the country and the most valuable.

So, thank you very much for being in this conference and let’s see you in next quarter result. Bye.

This concludes today’s IRSA conference call. You may now disconnect.