IRSA Inversiones y Representaciones SA (IRS) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Sharita and I will be your conference operator today. At this time, I would like to welcome everyone to your IRSA conference call.

[OPERATOR INSTRUCTIONS].

It is now my pleasure to turn the floor over to your host, Gabriel Blasi, CFO, and David Perednik, CAO. You may begin your conference.

Okay. Good morning to everybody. Sorry for the delay. We are going to start our call with as always with a brief description on Argentina and the economic situation After that, we'll refer to the company's situation. As you know, the country has been growing 49% for the last 19 quarters in a row. It is one of the longest periods in the recent Argentine history of continued growth.

Going to Page 3, you can see the evolution of unemployment, which the Argentine government has announced, the figure is 8.7% meaning that if you deduct from that figure, the people which are receiving unemployment subsidies, that would [in] 10% showing the strong recovery on the labor situation. Something also very interesting [from this] is the participation on the wage earnings in GDP, meaning that we are reaching one of the highest in the recent history. For your consideration, the record on this figure was 50% during the 50s, during the first Peron government and now the figure has also [peaked] best situation in the [inaudible]

If you turn to Page 4, construction activity. Although has a continuing recovery in terms of cost, it was due to the recovery of salaries, mainly. Still, it's 18% lower during the [90s], meaning that the still there is a very good opportunity in terms of construction. Construction activity as at the end of 2006, grew compared to 2002 148%, showing the excellent momentum that the business line has.

If we move to next page, Page 5, you can see the investment in residential construction, meaning that since 2002, it has grown almost 45%. And at the same time, showing the local [inaudible] supply which can be assessed with the improvement in the [inaudible]. As you know, the [rates] has been increasing steadily, especially on the consumer spending, but also it's beginning to show some recovery on the mortgage markets as we can see from the page. Page 6, other figures relevant to our business, the income of tourism to the country's, more than 4 million people spending $3 billion a year, giving a very good backdrop for development of our hotel business. As the consumer confidence, which is prepared by the [inaudible] University, is one of the highest in the recent years. It is reaching 60%.

Going to Page 7, the main development of the company shown for the period, was net result as of December 31 of ARS66 million compared to ARS29 million pesos as of the same period as of 2006. The operating result grew 24%, ARS85 million in the previous year, ARS106 million of December 2006. We have a [BPO] of ARS150 billion, almost 70% higher than the same period of last year.

Okay, going now to Palermo, the net income for the period was ARS40 million with an increase of [22%] [DPA] for the first half of 2007. Totalizing ARS117 million with an increase of 12% compared with the same period of the previous year.

n the six-month period of 2006, the sales and development segment recorded growth -- significant growth, [we are going to refer] specifically to this growth and the generally impacted margin.

During the first quarter, income from rental properties increased significantly, 71%, totalizing ARS23 million pesos compared with ARS20 million of the same period of last year. Occupancy also grew significantly, reached almost 99%. The income from the hotel business also increased 18%, reaching ARS62 million compared with 53 of the same period last year.

Now, if you will allow me, David is going to comment the main highlights of the income statement for the period.

Good morning. This is David Perednik. I'm going to refer to the P&L of the semester. First of all, our net income increased 128% from ARS28.9 million to ARS66.1 million. I'd like to discuss the revenues. Revenues increased 66% from ARS256 million to ARS400 million in 2006, which is reflecting an increasing [inaudible] from all of our business units.

Turning to the segments, shopping centers, the revenues increased 37.8% from ARS161 million in 2005 to ARS222 million in 2006. This increase is attributable principally to a 25.4% increase in revenue from [leases] and services mainly due to the increase of ARS22 million in our segment of shopping centers. And this is related to increasing the sales of our tenants that go up from ARS1,161 million of sales in 2005 to ARS1,422 million in the same period as of December 2006. And also, due to a 61.8% increase from ARS55.2 million to ARS89.3 million in the revenues in our credit card company Tarshop/

If we're going into development and sales of properties, this segment, the revenues increased by ARS63 million from ARS27.7 million in 2005 to ARS90.7 million during the period ended December 2006. This increase is attributed principally to a sale, in fact it was one, it was a [consolidation] of ARS59.9 million of the [inaudible] that our subsidiary Alto Palermo put into a new company called Panamerican Mall that is going to make a big construction of the shopping center, [inaudible] construction and ARS26.2 million in revenues from the sale of [inaudible]. Also, we made the sale of ARS3.3 million in revenues of [Edificio ceros].

If we go into the offices and other non-shopping center rental properties, the revenues increased 71.6% from ARS13.4 million in 2005 to ARS23 million in 2006. This is due to an increase of 25.4% in revenues from office rent from ARS12 million to ARS21.3 million. This increase is attributed to a 6.1% average occupancy, an increasing average rate of the majority of the buildings.

Going into the hotel segment, these revenues increased 18% from ARS63 million to ARS62.7 million mainly due to a 31.7% increase in the average price per room of our hotels from ARS357 in 2005 to ARS470 in 2006. Also, the occupancy rates decreased slightly to 24% from 29.6% in the previous year.

The gross profit increased 37.8% from ARS143 million in 2005 to ARS197 million in 2006 . The line of the gain from valuation of inventories at fair market value, this line is the result of the change in the accounting principles that we had last year. We have the valuation of the net realizable value in the inventory that have received purchase price or lease advances at this [inaudible] because of terms and conditions of transactions that we signed takes confirmation of the sales and the gain. The amount is ASR7 million which was principally applied to the development of [inaudible] for ASR4.6 million from [inaudible] ASR2.2 million and the sale of land that Alto Palermo had in [inaudible] for ASR0.2 million.

Selling expenses increased 63.6% from ASR26.3 million to ASR43 million mainly due to an increase in the shopping center segment of ASR13.9 million. The shopping centers, the selling expenses, increased ASR[72.5] million from ASR19.2 million to ASR33 million due to the increase of 7.3 million of charges corresponding to credit card operations in our company Tarshop due to an increase in advertising expenses. Also, taxes related to the sales because the company had a the big increase in the operation.

With respect to the development of [sale of] properties. The selling expense has increase 144%, or ASR1 million to ASR2.3 million. The offices increased from ASR0.5 million to ASR1.4 million. And [inaudible] increased from 9% of ASR5.6 million to ASR6.2 million.

Administrative expenses increased 49.4% from ASR40.9 million to ASR61.2 million due to an increase in administrative expenses related to all our business units. The shopping centers administrative expenses increased 71.7% from 20.7 to 35.6 mainly due to an increase in fees and service to third parties of ASR1.8 million, increasing directors' fees of ASr1.5 million, ASR1.2 million of increase in taxes. Also, ASr1.1 million in salaries, and an increase of ASR8.8 million in the credit card segment corresponding to Tarjeta Shopping.

With respect development of sales properties also the expenses, the administrative expenses increased 27% from 4.9 to ASR6.8 million. We had similar increment in the offices segment. In the offices segment, we have an increase of ASR27.2 million, [inaudible]% from ASR4.6 million to ASR6 million. In the hotel, an increase of 21% from 10.6 to ASR12.8 million.

The operating income increased 23.6% from a profit of ASR85.6 million to a profit of ASR105.9 million in 2006.

With respect to the equity gained from related companies, our gain from equity investment decreased 47.3% from a gain of ASR28 million in 2005 to a gain of ASR50 million. This is mainly due to a lower gain in Banco Hipotecario of ASR12 million pesos and [Cafta] ASR1.3 million pesos. Banco Hipotecario in the first quarter had a change in the accounting GAAP that affected particularly that quarter so we had ASR1.5 million of result of gain in the first quarter from Banco Hipotecario. And in the second, we see ASR13.5 million pesos, so we think that the results are going to follow like this around the second quarter.

Net income increased 128.1% from a gain of ASR29 million to a gain of ASR66 million in 2006.

Thank you David. Going to Page 9, I'll review figures just to make a quick wrap up. Sales of the previous 66% of increase during the six months that you can see from there. Each of the business lines with very significant improvement as we have already described.. Same situation with the [BPA], BPA on Page 10. 35%, year to year, and for the last 12 months 34%, and you can see also the way that the growth has been very consistent in each of the business lines.

Turning to each of the business lines, shopping centers, Page 11. Sales from our tenant has also increased very significantly during the period. You can see there on the graph on Page 11. And the composition has changed slightly because of the huge jump of sales due to seasonality. The percentage rent has reached 21%, the base rent represents 35.7. That's slightly [below] our average but this is due because of the special seasonality of this quarter.

Moving to the next page, the occupancy has slightly gone down to the range of 99%. This is always related to minor changes in the mix of tenants and some refurbishment in some in shopping malls. You can see there the EBITDA generation in the right graph for the shopping mall. 38% from the 2006 compared with 2005. As for the last 12 months, ending this period, 21.8, of EBITDA increase.

You can see all the projects and this has been a really outstanding quarter in terms of developments related to investment and company growth. We are going to review [inaudible] but just to remember the acquisition of [La Polita] building, the acquisition of [La Torre Richarde] building, the acquisition of Dock del Plata building in Puerto Madera, the acquisition of the participation in [Ivosa], one of our subsidiaries to Goldman Sachs, the acquisition of Cordoba Shopping, the acquisition of Patio Olmos in the city of Cordoba We are continuing with investment in [inaudible] to add more capacity and also to develop a project that we are going to [inaudible].

As you can see from the list, we really have continued to steadily growing in each of the business lines with specifically focus in those lines that are cash generation ones, but at the same time moving, as David has described, with the plot that we sell, turning that land we sell into a new project, moving our land reserve quicker to increase the turnover of those assets. So we have started that project in [inaudible] for an additional mall.

If you go to Page 14, you can see there. We choose only two of them, the most important grocery center from the shoppings which are [inaudible] Cordoba, it's the one we acquired. In December, the deal was approved by Antitrust commission, having a new shopping in the form of [inaudible] of purchasing power with a total surface of 45,000 square feet. On the right side, you see there the project of [Savalia]. This is the project that David was describing that impact on the sale of IRSA [inaudible]. This property really allows us to build the most important shopping mall in the country. It's located at the conjunction of the two main accesses to the city. We are going to develop there a shopping center, supermarket, cinemas and an office and residential building complex. We really think that the impact of this project to the business line is going to be very, very significant.

Moving to the next page, the evolution of Tarshop, our credit card company, amounting almost 600,000 accounts outstanding. If you will remember this means that the company has almost added 100,000 accounts in the last year and the credit card portfolio has reached ASR 560 million. This is a very significant increase. As you can see, has not shown a significant increase in terms of delinquency for the three-month period. I think that it was the figure that we -- was published in the press release was referred only to the one-month period, which by the way is much higher but because many people tend to take that additional financing and the [available asset] situation after that. This also means a significant source of capital for the company, so that delinquency dropped from a figure of near 10% in the 31st day to and average of 3 to 4% for the 90-day period.

This credit card is the fastest-growing credit card in the country as you can see from the ranking. And the EBITDA generation for the period of the company has also shown an increase of almost 50%. More than 50% showing an increase over the last three years of 300%.

Going to the offices business, we can see there the recovery and the market share of the company. 11% on AAA, 20% on the AA. With the acquisitions that the company is fulfilling, thanks to the options that we have recently acquired, that share of 11% of the AAA is going to climb to 20%, too. There you can see also the price evolution and the vacancy showing the momentum that the addition has had.. Price per square meter [inaudible] our average is over $25 per square meter and going up.

We continue to be very optimistic about the impact that this is going to have in our cash generation. As you see from the next page, you can see there recent eveloution, we have reached 24% occupancy rate and $10 million of EBITDA generation for the last period. And you also see the increase for the quarter 2006 compared to 2007. We have significant increase, 3% in the occupancy originate 9%, almost doubling the EBITDA generation.

It's important to consider that one of the acquisitions that we are completing is our [Republica building], which is completely empty. Allowing us to price that building solely to market value in the very short term.

On the next page, you have the picture of the main characteristics to the two buildings [audio gap] As I mentioned because of that reason is the only empty building in the city of Buenos Aires, only a couple of floors were still working. [inaudible] of almost 20,000 square meters, 20 floors.. And the Bouchard building property value, [inaudible] building also located very near the [inaudible], this is Puerto Madero area and about 5 minutes walk from downtown. [inaudible] building with a price $84 million. The company made a reservation in commission. In this case, there is a possibility that the finalization of the acquisition, the company may have some partner included in the transaction but we are going to keep at least 57%, 50% of the building. The building has a total gross leasable area of 23,000 square meters.

In the case of the [above] building, I mentioned that the acquisition price was $24 million. It's interesting to think because of these two transactions really represent the market situation for the offices business, what would be the impact of this on the total portfolio of the company.

Moving to the next page, the situation of the hotels, which are benefiting from the excellent [level of] tourism to the country. There you see, please take in consideration that the period under consideration are yearly periods, except from the last bar which is the quarterly period shows some degree of seasonality effect that you can see and the average price showing there. But interesting to note is the [inaudible] room for $85 for the [inaudible] $87. Remember that this hotel is going to go for a major refurbishment. That will allow a significant increase in prices. On the [inaudible], the rack price is $214. Remember, we are adding here the new rooms that will allow to increase the capacity of the hotel almost 30%. [And these] figures, the total cost [inaudible] and shows excellent momentum that this will [has done in doing this deal].

Just to make a quick wrap up on the rest of the projects. Barrio Chico, remember the project is the most expensive neighborhood in the city which almost sold completely, 96% of the units have been already sold, and there is a remaining unit [have been built] We're finalizing this small but very important project. And on the right side, you have Vicente Lopez residential project. This is a very significant project for the company because we are going to change through of the construction of [inaudible]. We are going to make this business. We are going to change the business model for the residential development. As you remember, we can review in the other project, up till now, most of this development has been made by shopping the land. We [inaudible] construction and receiving its [inaudible]. And after that the company begins to sell taking advantage of the price situation and the price trend of the market.

In this case, this is a very significant property located ten miles from downtown of Buenos Aires City. One of the best accesses to the City, a very residential area. The company acquired two plots of more than [inaudible] available for the project. We are going to construct there four small but very significant buildings with a lot of amenities. The transaction has been already cleared by the antitrust commission.. And as I mentioned, we are going to change the business model, and we are establishing a vehiclewhich I have not completely disclose up till now more details on that, but we are going to presell the property before the construction begins.

On the next page, the rest of the projects that you already know. [inaudible] and Puerto Madero and as you can see from there we're almost completed with the selling of [details]. At Puerto Madero the progress of construction of the first twoer is [55%] and the second tower has just started, continues upon schedule.

Page 21 shows a very important investment that we made during this period. We acquired the participation of Goldman & Sachs in the [inaudible] and we have a subsidiary. It was exposed in our balance sheet, continuing the process of simplifying our corporate structure by reducing the amount of subsidiaries that we have. The picture below gives you an idea of what was [inaudible], mainly the Hotel Inter-Continental, the Inter-Continental Plaza, the AAA building where our office is located, the land reserve of Puerto Madero, the [Avril]. That gives you an idea of the type of properties of participation that we with this acquisition with the a total price of $18 million.

Changing to Page 22, going to the financials of the company, debt situation. Total debt as of December is $222 million plus the convertible outstanding of $24 million. And in Alto Palermo ASR178 million, roughly $60 million. And [$27] million of convertible bonds mainly owned by IRSA. And our rating was improved from BBB to A- by Fitch in December and Alto Palermo has also been improved from A+ to AA-.

As you know, going to Page 23, the company has recently launched an issuance of 150 million senior secured notes at a return of $200 million. The use of proceeds is mainly the payment of the two acquisitions that we have recently contracted plus some opportunity acquisition that appear plus the new project of Vicente Lopez that we have already discussed. The rating has been B+ by S&P and B for Fitch. Ten year, non-callable for five years and [inaudible] 8.5% the semi-annual coupon. And the transaction ended and we are very pleased with the result of this [inaudible]. We have found out an excellent response from the investor and [satisfies] the amount of almost $400 million. There you have the most [inaudible] date we got with investors in the loans. This means that the company is going to have a very sound financial structure to take advantage of [inaudible]. We have very attractive interest rate and very long-term financing available for the development of the business plan.

Going to our convertibles outstanding, as of December, you can see from there on the next page, 448 million of shares issued [inaudible] on a fully diluted base 579 is going to be issued once all the convertibles are exercised. Remember that the finalization of this convertible is November, 2007 -- this year, meaning that it's only nine months to the finalization of this process. It means that the company will be able to [inaudible]. If you go to next page, you see the conversion evolution, and the price evolution for the shares since the convertibles were issued.

And on the next page, Page 26, you have the financial situation as of December for the covnertible, meaning that all of the $24 million are turned in to be converted. Remember that the group owns roughly half of these outstanding and they are going to be turned into equity during. this year. IRSA is[ pending] to receive a capital injection of $60 million by the exercise of the warrants that are also pending to be converted.

Finally, before going to SG&A, I would like to stress that we continue with this, with our investment plans. As I already mentioned, we have completed a very successful quarter in terms of results and in terms of investment activity with, as I mentioned, a focused investment - regarding a good stream of cash flow and speeding up the process of turnover for our land reserve by turning into projects a significant part of that.

Having said this, I'm going to give you time for the Q&A. Operator?

[OPERATOR INSTRUCTIONS]. Our first question is coming from Paula Oliveira with Citigroup.

Good morning. We're having some audio difficulties so I apologize if this question has already been answered, but I would like to know what are the motivations of this considerably higher SG&A? And what would be your estimate of a normalized SG&A going forward?

Okay. [David] is going to give a [inaudible] of the main composition of the SG&A but mainly it is devote to a couple of subjects like the SarbOx and the system's implementation expenses. The acceleration [inaudible], David, if you'd like to address again the issue.

Yes, first of all, we have finished the last year, the other year of this year, the implementation of SAP in the companies in Alto Palermo and also in IRSA, and we have set the whole cost of the project to the P&L due to it's convenient for taxation subject and our loss permits to send to the exercise to where you spend the money for the project. We have only took as an asset the licensees of the system.

Where we are implementing, also, we have to certify the 404 standard of the SarbOX law -- new law, and this we have working a couple of things of different big 4 audit companies. We have to, yes, we have to make implementation. It's going to take at least one more year. We also had the impact due to the Tarshop increase in operations. This, our credit card company, is increasing its operations very much, and this is increasing not only the sales line but all costs of our company as we are consolidating this company is affecting all our rates in the commercialization line, the administration line. And I would tell you that the big impact in thinking about the cost is from the Tarshop, from Tarjeta Shopping, from the increment that we are having in the structure of the company. This is service company so the increments in the sales have to come with increments in the structure of the company, more employees and more costs, advertising costs, et cetera.

With respect to the follow up of this cost, we believe that SarbOx is going to affect us at least one more year. We have to certify in 2008, but I would tell you that this is going to affect us, I would say, marginally. We don't believe it is going to have a big impact in our next financial statement. We believe that Tarshop is -- as long as the business is going on, increasing its operations, Tarshop is going to bring us more administration and commercialization costs. And the fixed cost of SAP have already been paid. So this is not going to be repeated.

The main line of cost that this is implying in Tarshop is the salaries. So more people working in a service company is incrementing the salaries line.

Thank you.

Thank you. Your next question is coming from [Hernand Romero] with Ultima Partners.

Hey. Good morning, gentlemen. If you could provide an update on [Santa Mara del Plata permits, expect the construction and partnership with, a JV with a partner?

We [inaudible]. The project, as you know, has cleared the technical committee in Buenos Aires but we cannot -- remember that this is an election year for the city. We are having some delays due to that. We cannot disclose any major improvement to the one that we have already established the previous period.

Okay, thanks.

[OPERATOR INSTRUCTIONS]. Thank you, and at this time, there appear to be no further questions.

Thank you very much.

Thank you. This does conclude today's IRSA conference call. You may now disconnect and have a wonderful day.