IRSA Inversiones y Representaciones SA (IRS) 2007 Q1 法說會逐字稿

This is a conference for IRSA and APSA about the results of the first quarter 2007. The conference will be hosted by Gabriel Blasi, CFO and David Perednik, CAO. You may begin your conference, sir.

Thank you very much. Good morning everybody. With us we have a regret, Alejandro is not available. [He's in travel now]. We welcome everybody to our call for IRSA first quarter fiscal year 2007 result.

You'll see into the presentation on the first page, we can show that Argentina has continued growing for 42 consecutive months. It's interesting to stress that in case all the growth is to stop as of today the Company will have already assured for next year a [flare] of growth of 3.5% approximately.

Going to the next page, we continue to have a very significant primary surplus and also a surplus on the balance of trade, which really makes pretty sustainable the situation in terms of continue growing, and adding more strength to the sustainability of the economic trend. We have -- we can also stress the fact that regarding the origin of the fiscal surplus as per the situation of the commodity price it's very unlikely that this situation may be significantly [harm] in the short run.

Going to the indicators directly related to the evolution of our business, we can show that, in spite of the recovery of the construction cost mainly reflected by the increase of salary, still the economy shows a good opportunity with the construction cost 20% lesser than before the crisis. Also, the construction activity, as it is shown in the right -- in the right graph, shows a very significant increase, more than 150% since 2002, showing us the best boom construction for the last -- for the recent history of the country.

On next page, we can address a similar situation considering the investment in residential construction compared to the GDP, with a rate that also has increased significantly for the last four years. And, at the same time, [in this result], [inaudible] Buenos Aires, where our biggest land reserves are located, you can see from the right graph also that the sales [did] have increased significantly.

As we can always address, on next page, is –- and Buenos Aires is still a city with a very low level of [leverage] as the country [is self story], although in the month of June, the new loans was the first time since the crisis of the new loans offset the maturity of the old loans. When we compare the situation of our mortgage stock to GDP, it still is very low. And this is very important because all the prices that we are showing on our real estate market still lack of a significant leverage component. This is -- most of them are on a cash base.

If we look at our business on next page, other important indicators, we can see the significant recoveries that the salaries have shown, both in terms of the -- of residential square meter and in terms of [gola]. Although, because of the very strong recovery of the price of the properties, still there is room to grow in the fully possibility of relations between salary and the price of the property.

Also, the recovery of salaries is well reflected in the important increase of sales, both in Supermarkets, and especially in our Shopping Centers, which is fully reflected by the figures of Alto Palermo.

Next page, important for the evolution of our Hotel business, the continued trend of growing tourism to Argentina, especially to the city of Buenos Aires, reflected both by the tourist [trend meters] shown in the green line on the left graph. And also with the tourist arrivals to the city of Buenos Aires which are increasing consistently year by year. On the other hand, the consumer confidence in this shows a very good pattern and a very good level, considering that the Government has still one year to go.

Let's go to the highlights for the fiscal year, first quarter 2007. Our net income which is ARS15m compared to ARS18m previous period last year. David is going to make a comment on that later. The operating income of Alto Palermo grew more than 50%, comparing the same period of last year. EBITDA generation of the Company shows an increase of 34%. And the sales segment has increased very significantly, reaching ARS29.7m, compared with a one -- with the ARS0.5m of the previous year on the same term.

The average occupancy rate for the office buildings reached 96.1%, also growing compared to the previous fiscal year, with -- which will close with 95% of occupancy rate. And the income for the Hotel segment reached $28.6m [sic - see Press Release] compared to $24.9m [sic - see Press Release].

As a general picture, all the business lines of IRSA show a significant strength and a growing pattern which is consistently reflected in our balance sheet.

Now David Perednik is going to make a comment on the income statement of the Company.

Good morning. With respect of the -- to the revenues of the Company, revenues increased 60% from ARS106m during the period ended as of September 30, 2005, to ARS169m in 2006.

Going into our main segment, Shopping Centers business increased the revenues 37.2% from ARS73.7m during 2005, to ARS101m during the same period 2006. This increase is attributed mainly to a 23.8% increase in revenues from leases and services, from ARS49.3m to [ARS61m]. This was due to our increase in the sales of our tenants from ARS526m to ARS640m. That means a 21.5% increase. And also to a 63.9% increase from ARS24.6m to ARS40.2m in the revenues from the Credit Card -- cards of our Credit Card Company.

The average occupancy rate of our rental properties in our Shopping Centers was 99.2%, compared to 98.5% in the year 2005.

Going into the development and sale of properties segment, this segment increased by ARS29m, from ARS0.5m during 2005 to ARS29.7m during 2006. This increase was attributable principally to the sale of Dique III, plot 1D [set] ARS26.2m. And also to the -- of -- due to the sale of [Unicov and] [inaudible] sale for ARS2.8m.

Going into the office rental property, revenues increased 47% from ARS6.5m in 2005 to ARS9.5m in 2006. This increase was due to a 44.7% increase in revenues from office rents and also to a 1% increase in average occupancy rate. And also we had an increase in average monthly rate of the majority of the rents of our business.

The average occupancy of our office continued growing, reaching 96.1%, compared to 95% in 2005.

Going to the Hotel segment, the revenues from this segment increased 15% from ARS24.9m to ARS28.6m, mainly due to a 36.6% increase in average price per room of our hotels from ARS344 in 2005 to ARS470 in 2006. On the other hand, our average occupancy rate decreased to 68.1%, compared to 75% last year.

The gross profit increased 45.9% from ARS60.6m for the period 2005 to ARS88.4m for 2006. The line of gain from valuation of the inventories at fair market value, this line was ARS2.2m, principally for San Martin de Tours development of ARS1.9m. The selling expenses increased 27% from ARS11.6m to ARS14.8m, primarily due to an increase in the Shopping Centers segment.

With respect to the administrative expenses, they increased 40% from ARS19.7m in 2005 to ARS27.6m in 2006. This increase was due to the application of our [inaudible] we are working in the new procedures of [tavanofli]. And we are also making the migration of all of our administrative systems. We are applying SAP, the German system, and this has increased our costs in our Companies.

So, going on, the operating income increased 54.5% from a profit of ARS33.4m to a profit of ARS51.7m. The operating income from Shopping Centers increased 53.4% from ARS28.8m to [ARS44.2m] in 2006. The segment for development and sale of property increased 49.6m -- sorry, increased to 49.6% from a loss of ARS0.4m to a loss of ARS0.6m. The office rent on properties, the operating income, increased 127.6% from ARS1.6m to ARS3.7m. The Hotel segment, the operating income increased 21.8% from ARS3.3m to ARS4.1m.

With respect of the financial result, we have a variation of ARS9.9m from a loss of ARS13m last year to a loss of ARS3.1m in 2006. This -- the main reason of this variation was the increase of ARS6.9m in our financial operations. Also the exchange difference gave us a profit of ARS1.9m.

Going into the equity gain from related companies, our net gain on the equity investment decreased 92% from a gain of ARS19m to a gain of ARS1.4m, mainly due to a lower gain of Banco Hipotecario of ARS17.2m.

Income tax before tax as a minority interest increased 20.4% from a gain of ARS37.5m to a gain of ARS45.1m. The income tax and asset tax increased by ARS5.6m from ARS13.3m in 2005 to ARS18.9m in 2006. Minority interest increased 90% from a loss of ARS5.6m to a loss of ARS10.5m. And as a result of [this total], the net income decreased 16% from a gain of ARS18.6m in 2005 to a gain of ARS15.6m for the period ended in September 30, 2006.

Okay. Thank you. Continuing with the evolution of our business, going to next page, we can see how the sales evolution of the Company has been for the last three years -- four years, sorry. And also the comparison of the first quarter with the previous quarter last year. We can continue looking at the significant recovery of all the business lines, with an increase of 56% of last fiscal year, and at 60% the comparison the first quarter of this year.

Same situation on the EBITDA evolution where the significant grew of 45% for the last year also [inaudible] on the first quarter of this year, with an increase in participation of all the -- of the business lines in a general cash generation of the Company.

The next page, continuing the revision of all of our business units. To go to Alto Palermo, we can see that our tenant sales are still growing very steadily, showing the strength of the [compunction] in the country. Also it's important to show that the percentage rate which was, of previous year, reached 19%, reduced share of the total revenues of the Company to 17%, because that 2% [as it shows us], was increased directly in the base rent.

The occupancy rate of Alto Palermo continued to be significantly high, of more than 99% for the period. And the EBITDA generation improved 38%, 35% for the period under consideration.

Alto Palermo has recently acquired a shopping mall in the city of Cordoba. [It is] the [full city in] purchasing power in Argentina, and one of the three biggest cities of the country, with a total surface of 35,000 square meters adding one unit in the expansion plan of the Company. Of course, this is an acquisition depending on the approval by the Antitrust Commission that all the transactions which are made in the country, will be -- [I am almost] certain they will -- should be disclosed to this authority and should be approved by it.

Regarding the evolution of Tarshp, Tarshp which, because of the huge growth of this business segment, were including it in our presentation. It's the fastest growing [card] in the country. It has a complete portfolio of credit over $120m. We have to remember that the Company doesn't finance this credit. This credit is financed directly in the local capital market by the securitization of the [calculated] receivables which, by the way, are one of the most well-renowned and with a local investment grade of its class in the country. The EBITDA evolution of this business shows a growth, for the last two years, more than 300%. And the delinquency, as you can see from the picture on the left graph, is really low.

Next page, going to the market of office buildings, the excellent situation continuing in the city of Buenos Aires, where the Company with a participation of almost 20% on the Class A and [13%] on the Triple A buildings, is taking advantage of this by recovering the price of its portfolio. Today, according to third party sources, price per square meter is over $24, coming from almost $6 during the crisis, and the vacancy has reduced almost to zero. There is very little space available in the city of Buenos Aires as of today. That's why we are planning to increase our investment in that business line.

Continuing to show the evolution of this business segment, what we were describing, we used to get, in the worst moment, $5m with [60%] of occupancy rate. Today we are completing $10m with a 94 occupancy rate for the last fiscal year. And the first period of this fiscal year goes to 96% with a cash generation of $3.1m, confirming the excellent moment that this business line is giving to us.

Regarding this, just three days ago the Company has acquired an increase in this business in 9.2%, acquiring an important location in Puerto Madero with -- of price of almost $9m, almost 9,000 square meters, as you can see.

From there it’s interesting to address that the price of the property is related to our latest acquisition of [distressed] asset, which is disclosed in our balance sheet as the Note regarding to the credit [inaudible] swap agreement that the Company has signed previously. Market price for this transaction is well above this value.

Continuing the analysis of our business, the two business hotels that the Company has in the city of Buenos Aires, show also a very significant increase. The last bar, in fact, represents a different period of time in the quarter [bar] [since the] quarter period, instead of annual period of the previous one. And the increases you can see from there is based [on a nationality] issue because this quarter doesn't show the best situation in the year. We are, as we have already disclosed, we are in the process of making additional investments in the Sheraton Libertador, allowing the future increase of the prices of that hotel.

In the Llao Llao, the same situation, we are continuing with the construction of 42 new rooms to be open in 2007, increasing the capacity of this hotel by almost 30%, reaching 200 rooms in total.

Going to the future development, Dique Dos Cruceros, which we almost have already sold 85%. And, as David has explained, having a significant impact in the result of this business segment. And there you have the disclosure of the swap agreement that the Company made with the total square meters, as we have already [received them so] there wasn't that pending [wholesale] with the taking it that we have already discussed several times with you, [of] previous [inaudible] to a third party for the development, are making a swap by which we'll receive the construction -- a percentage of the constructed square meter as payment for the value of the land. Remember that the Company has to recognize the result until the deeds of the properties in the sale are signed.

On next page, we can see we are following -- we are recovering [to the] developing the Puerto Madero area. Dique III, Torres Renoir, we have constructed 57% of the Torre, the Torre one, the Tower one. And we have increased significantly the visibility of the Company in the area by this very good project which has brought significant expectations to the market.

Next page, also we are beginning the Tarjeta project, a pair of torre, of towers, in the center of the city of Buenos Aires in a neighborhood very populated. Not so [harien] as Puerto Madero, but we have already, with the permits already granted [by] the authority of the city.

The last torre we have here is Barrio Chico. 80% of the units have been already reserved by buyers. This property is located in Palermo Chico, which is the most expensive neighborhood in the city of Buenos Aires with an average price per square meter in the range of $3,000 per square meter.

One important deal already done during this period was the acquisition of -- a participation of [inaudible] Palermo Invest by which IRSA controls today 100% of [Imparsona Bolivar]. Important to stress that [inaudible] is the owner of [Puerto Madero] as you can see in the red part of the picture is one of the most important land reserves. Also, a significant tax benefit because of the acquisition of the [Maipu] and participations in the Intercontinental Plaza, the building where our offices are located, the Hotel Intercontinental.

Regarding our financial situation, as you can see from the following page, the Company has a very mild debt compared to its cash flow generation add to which total assets and the quality of the leasing were $72m. And Convertible Notes as you may remember, a significant part of those Convertibles Notes outstanding of almost $28m are held by the consolidated [inaudible], which owns $12m of Convertible Notes.

We have a fine in the local authority for issuing a bond in the next 60 to 90 days depending on market conditions. Fighting a [problem] of up to $150m and a [inaudible] issuance of $150 -- sorry $200m and the running of an issuance of $100 to $150m under that program, offers long-term financing which is going to be directed as the finance of the developments of our different business lines and projects.

Regarding Alto Palermo then, the company has a debt of less than $4m in pesos. It is very likely that the Company incurs an additional peso debt to support its growth. And also remember, that we have -- that Alto Palermo has a Convertible Note outstanding on the [inaudible] entity IRSA and our partner [Parc Arampo from Chile]. IRSA has also achieved a local investment grade in its classification and Alto Palermo continues to be one of the highest paid rating in the country.

Regarding the situation of the Convertible Notes, as of today, only $27.6m of convertibles are pending to conversion. Whereas 49.6m of warrants from the original 100m of issuance, the depreciation on a diluted basis of today is $436.5m of shares. And the full evolution will be achieved before or in November 2007 by 579m -- total million shares.

You have there the evolution of the price showing that the convertibles have allowed us to a full recovery of the price shares. In spite of the evolution we have a full recovery of almost 200% since the issuance of the Convertible Notes.

On next page you have the description of the convertibles outstanding and the warrants where we can address also that they are very deep in the money as you can see from the information contained in this [issue.]

Having completed the information, we are open to Q&A regarding the evolution of the Company. Operator?

[OPERATOR INSTRUCTIONS]. We'll pause for a moment to compile the Q&A roster. Our first question comes from Ben Laidler of UBS.

Hi good morning, two quick questions. Could you be a little bit more specific on the use of the bond proceeds, exactly what projects are they going to be used to finance?

And secondly, would you just be able to talk about any impacts on the freezing of construction permits in Buenos Aires? Thanks.

Okay, regarding the first question Ben, the proceeds of the bond are going to be used especially in all of our business lines. The Company's spending additional investment in the office business specifically. We take construction of [acquisition] of at least two more buildings in the area. We are also planning additional investment in the development area. And we are beginning to study the development of residential development too. And we can say that we are investing in the hotel segment only on an opportunity basis. And, of course, additional land reserves investment are included in those projections.

Regarding your second question, we can say that there is an historical presence in the city of Buenos Aires, of the [situation] you are describing. It lasted for 90 days and the situation is that you have the groups of neighborhoods [blaming] around the possibility of the neighbors being turned into big building [neighborhoods]. It is related to the pure growth of the city, the country is growing at a 9% pace.

And, on the other hand, because of the stronger demand on certain areas, they get the impression that if you have your house there it will be like having a town house in Manhattan, you will have to pay the same taxes that the building, which can built there is willing to pay. So, there is like a situation where that negotiation has to be in place between the Government and each one of the neighborhoods.

On the other hand, we can think on what has already happened in the country with examples like the situation regarding the exports of agriculture, where finally an agreement was reached allowing the growth to be continued. You must take into consideration that the projects that we have described are already approved by the authorities of the city.

Would you just be able to give a number for total CapEx for your fiscal 2007?

Well, as you know, I will say we have a projection but because of the opportunity issue, it's somehow difficult to [reckon] completely. Of course, we are planning to deploy in a reasonable timeframe, the issuance of the bonds. The cash position of the Company is at $20m of cash today plus the issuance of the bond and we hope to deploy that in a way and in a timeframe that is adding value to the Company. But that -- I will put it in a range of one year, one year and a half.

Okay that's great. Thank you.

[OPERATOR INSTRUCTIONS]. The next question comes from Ian Crook of Raymond James.

Your next question comes from Adrian Patterson of CIN Investment.

Hi good afternoon gentlemen. Sorry, I joined the call late but I have a quick question about the credit card operation, Tarshp. Could you please explain the capital structure behind that business alone and how we should look at it in terms of the Group balance sheet? Thank you.

Yes, of course, the ownership of the Company is 80% owned by Alto Palermo. 20% is owned by the operator of the Company, who is an individual very well known in the market and really especially [inaudible]. He formally had another operation who sold some years ago to Citigroup. The Company is -- the exposure of the Company to those [credits] is in the range of $20m at most by keeping the subordinate certificate of those securitizations. The rest of the securitizations are regularly placed by the subsidiary in the local capital markets.

Okay well -- but could you just show me the balance sheet line items? Do is assume that the whole of the mortgage notes and other receivable lines under both short-term and long-term assets pertain to Tarshp?

Tarshp represents a slightly 20% of Alto Palermo cash generation as of today.

Okay, is that the most you're going to tell me? Okay fine, thank you.

[OPERATOR INSTRUCTIONS]. Our next question comes from Ian Crook of Raymond James.

Good morning gentlemen. Gabriel how are you? I just have a couple of questions. Firstly, the new office building or the office space, which you recently bought in Puerto Madero that you just announced last week, can you tell me a bit more about what kind of office space that is, what class of office space that is?

When do you expect -- is it -- have you bought that with rental agreements in place or will that - will they be coming on line down the track?

And can you explain a bit more about the distressed asset nature of this office space?

And the second question is just -- I'm not sure I understood exactly whether the [Koad] project in Caballito has already had the permits granted by the city of Buenos Aires, or is it actually affected by this 90 day freeze?

Okay the -- excuse me. Yes, regarding the Caballito project, which is the shorter question, the project has the permits granted by the city of Buenos Aires already in place. So, it is not affected by the present situation.

Great.

The [inaudible] Plaza, of course, is a class A building with a typical shape for those who know Puerto Madero area of the old docks of Puerto Madero refurnished. This acquisition was completed. In fact we work on it almost one year. The Company -- the owner of this operation had [a dispersed loan] which was sold when Argentina gets into a crisis by a foreign investor and kept it in its portfolio. And we achieved an agreement with a foreign bank to establish a transaction, a credit [inaudible] swap, which allows us in certain way to take control all of the possibility of getting that asset. After a significant amount of negotiation the situation end very successfully, and we are in the possibility of announcing the acquisition of this property.

Regarding the leases, they have been -- after negotiations these are -- they have been put, somehow, on hold in terms of not generating any -- a very significant future liability for the Company in terms of being engaged in long-term agreements. So, we think that we are going to align this property with our portfolio on a similar base to the rest of the portfolio.

Okay, thanks very much.

Sorry?

[OPERATOR INSTRUCTIONS]. Sir, there appear to be no further questions.

Okay, as there are no further questions, thank you very much to all of you. I hope having you in our next conference call. Thank you and good bye.

Thank you. This does conclude today's teleconference. You may now disconnect.