IRSA Inversiones y Representaciones SA (IRS) 2008 Q1 法說會逐字稿

Good morning ladies and gentlemen, my name is Pam and I will be your conference operator today. At this time I would like to welcome everyone to the IRSA earnings release first quarter fiscal year 2008 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 call over to your hosts, Alejandro Elsztain, Director, and Gabriel Blasi, CFO, and David Perednik, CAO. Gentlemen, you may begin your conference.

Thank you very much and good morning everybody. We are going to talk about our first quarter 2008, and the first thing is to explain what was a very good operational quarter, but reflected that the [last] line was bad mainly affected by financial returns. So we are going to enter very deep in details to be sure that you know each of the lines, but to begin with that we can confirm that the operation of the real estate business is going pretty well. So please Gabriel begin with the presentation.

Okay, good morning to everybody. Going to page two just a quick wrap up on the macro of the country. The country continue with fiscal surplus and primary surplus and this is going probably to continue as it is due to the new to addition to export taxes that has been just announced.

International results continue to grow steadily and unemployment continue with a positive trend. On the inflation the index shows a mild effect although we are all aware of the discussion about it has been calculated. But as a summary all these indicators show there is still a good momentum for the development of our businesses.

Following page the exchange rate devolution, well you have the real exchange rate showing a daily appreciation of the peso against the [basket] of Argentina international trade and also a very mild devaluation in terms of the multilateral exchange rate for the country.

Regarding the salaries which are a key issue for development of our real estate and consumption business, the salaries continue to recover very steadily especially on the private sector as you can see for the graph on page three.

Moving to page four a quick brief of the result of the elections. The ruling party has obtained not only the presidential seat, but also in the lower house 53% of the seats, and in the upper house, 67% of the seats assuring a very strong presence on the Congress.

So we when we see the net results that showed a ARS30 million loss that was mainly explained by the non-operational result coming mainly from Banco Hipotecario. This was a quarter where we able to keep growing in the office building segment, and we're going to show you the offers that we received. And the only segment that we can say that was negative in a bid generation was the one that is the residential, the Fidela development. And that segment has two combinations of factors.

One is, you know that we launched a society together with Fidela the Brazilian partner 50/50. And the beginning of that company was supposed to do in November of this year, but probably it's going to begin in March of the next year. And that delay of the launching the new company is the one that's affecting that line of businesses. Because almost all of the projects they are now going to go to that line to sell their development in [Sadesa].

The ones there that we keep in IRSA are, for example, the Renoir or the other land reserves. This quarter we didn't swap, but after the end of the quarter that was done after September 30 of this year, we closed what was a swap of launch of the second tower of Renoir for $18.2 million, that makes a near gain of $4.7 million off the balance sheet. So it's a near ARS15 million that will appear in the second quarter. So the only line that in the first quarter was not growing will change in the second, and in the third with the new company made with Fidela begin of working. So that is the outline I give to (inaudible) and David to explain deeply in each of them.

Good morning. I will explain briefly the profit and loss chart. We have an increase in the lines of sales of 15.3% from ARS159 million to ARS195.5 million in the last quarter. Also the line of the gross income had an increase of 29.3% from ARS88.3 million to ARS114 million. And operating income had an increase of 7.6% from ARS51.3 million to ARS55.2 million in last quarter.

With respect to the financial result, we had a loss of [ARS14.7] million accounted in last quarter compared to a loss of ARS3 million in the quarter of last year. The explanation of these lines was due to a loss in a holding of a financial instrument, but not realized. So we expect that this loss is going to recur in the future of ARS16.9 million.

The exchange rate generated by assets of ARS6.5 million due to an increase in the depreciation of the peso, the peso towards the US dollar had an increase of $0.6 in this year, in this quarter compared to $0.2 last year. So that reflected a loss in our books. And also the financial expenses had increase of ARS7 million from ARS10 million to ARS17 million; that explain the [ARS14.7] million loss.

With respect to the line of gain on equity in (inaudible) our holding in Banco Hipotecario had a decrease of -- we had a loss of ARS19.5 million due to our stake in the Bank of 11.76% compared to an increase of ARS1.4 million. And that was also originated in financial results that had an impact in the results of the Bank. And also we have a difference in the accounting method of the Bank is accounting its results with the Banco Central regulations so they can account the holdings in public titles at their technical value. But in our accounting Argentine GAAP system we have to account them at the market value, so that impacted us in our results. Though the net income of the company had a decrease of 292% from a gain of 15.6% last -- in the quarter, as of September 2006 compared to a loss of ARS30 million in the last quarter of 2007.

Thank you David, going to page seven we can see the sales evolution on a consolidated bas, on a (inaudible) base showing an increment of 28% for the last fiscal year and 15% for the period showing a very strong sales evolution in all the business segments with the only exception that Alejandro has explained regarding the sales of development segment which we think we are going to recover shortly.

On the next page, on page eight same situation with the [BTA] devolution with a year-to-year of 9% growth and 18% on the quarter. Going to each of the business segment David can make a comment.

Okay. The operating income with respect to the line of sales and development segment decreased ARS3 million from ARS0.7 million in 2006 to ARS3.7 million in 2007 due to a few transactions closed. With respect to the office and other segment, the operating income increased 79.8% from ARS3.6 million in 2006 to ARS6.4 million in 2007.

Going into our shopping center segment, the operating income increased 19.2% from ARS33.1 million to ARS39.5 million in 2007. In the hotel segment its operating income increased 20.4% from ARS4.1 million in 2006 to ARS4.9 million in 2007. And finally the operating income of the credit card segment decreased 27.9% from ARS11.1 million in 2006 to ARS8 million in 2007.

Okay going to page nine we wrap up on the shopping mall situation. First quarter tenancy devolution you see ARS270 million showing a very -- $270 million, sorry, very significant in strength compared to the annual figures of each of the previous years. Also the composition continued to show a very strong base, with a base rent [meaning] 58% of the total revenues of the company.

On the following page, page ten you see the occupancy rate 97%. The small decrease is due to the refurbs that we are doing with our re-modernization in most of our shopping malls. And that generates some type of space that cannot be used until the re-modernization is finished, and that explains that small decrease. But at the same time, the strong cash generation for the period of 15% continued to show excellent momentum of the business.

Page 11 our investment schedule. We have completed 15% of the budget for the investment of the (inaudible) [Chacarel] project of the shopping mall that we are building there. And on the re-modernizations of all of our portfolio you have the execution having completed, in fact the almost acquisition of the building, and [roughly] in Alto Palermo half of the investment, in Paseo Alcorta almost all the investment, and Alto [Regionera], three quarters of the investment, and Patio Bullrich (inaudible) nearly half of the investment and in the case of the Abasto, 60%. Regarding Tarjeta Shopping on page 12 the cash generation on an annual base continued to be good with a slight increase in delinquency rate the same way like in all the Argentine financial system, and the company continued to grow in that great portfolio.

We move to the offices in page 13. We can confirm the excellent momentum of the business both in occupancy, with an 99% occupancy rate as we have reached the portfolio, with a cash generation of $6.6 million for the quarter doubling this figure for the same period of the previous year and leaving us very comfortable with our expectations that almost will double the final figure for the fiscal on this business segment.

In page 14 you have the last acquisitions and developments for the business. We are continuing consolidating our market position of almost 20%. The acquisition of the Bank of Boston building, the option to acquire [Republica] we are near to complete in the next month, few months. And the starting of the construction of (inaudible).

Regarding the hotel businesses, David has explained the business is very good result, the occupancy rate going from 68% to 74% and the price increase drop back to ARS537 from ARS470 on an aggregate base. You can see there that in all the hotels we are having very steadily figures on price and occupancy, and having almost the completing the demolition of (inaudible)

Page 16 on the Llao Llao you see the very significant revamp of the occupancy rate of the hotel. And we are [re-modernizing] the original capacity with 85% of the work which has been already completed in the original project in (inaudible) that will bring the final number to 200 rooms to the hotel.

That will be done very soon, the opening of the new rooms; its going to be in November of this year, half of the project, and the rest, the other half before the end of the year. So the 42 new suites are going to be working in 2008.

Going to page 17 the description of IRSA [Seville] as Alejandro has explained, the project for reconstruction of 110,000 square meters is going to be by March of next year. They are now building the showroom which is very massive and bringing a new business model to this segment of the market to the country.

On next page, page 18, we can find some figures related to our investment in Banco Hipotecario. Banco Hipotecario continues to have the leadership in the mortgage market by 15% of the market according to Banco Central and Bloomberg (inaudible) with the strongest market -- with the strongest capitalization in the market, as you can see from the right graph. And also very efficient in terms of the administrative expenses against the gross margin showing also the best ratios in that area.

If you move to the next page you will find the return on assets and return on equity of Banco Hipotecario compared with some peers, showing that the Bank had a very good return in both cases. And it is important to address that the Bank has paid dividend to IRSA last that time in 1999. That situation stopped because the Bank -- you have to comply with different regulation. One is to replenish certain reserves, the second is to complete the restructuring of the debt and the third one is to repay to some loans that were acquired from Banco Central during the crisis.

The process is to be completed in the next 18 months meaning that the Bank will be able to being to pay dividends again. It has a cumulative result of $61 million since we started the investment in 1999. The market value of $150 million, an investment of nearly $50 million and has yield to us as a result of all this almost 18% of IRR in dollars since we made our investment in the Bank.

To complete the financial picture of the company there you have the situation of the aggregated of the company. We (inaudible) $167 million as of October with a net debt of $140 million, and in the case of Alto Palermo, net debt of $87 million and $187 million. It is important that I raise the issue that at the beginning of this month we have already paid, sorry, by November we have already paid a the FRN that IRSA had and the loan agreement related to that FRN. This is a repayment of $24 million and $15 million, meaning that the consolidated debt after that repayment as of October 25 for the Group at this stage is $354 million to the convertible note showing a very strong financial situation both in composition, cost and also in total figure.

From the page 21 as a comment to the approval that was achieved in the last assembly to the capital increase. That approval will allow us to increase up 280 million shares represented at a price as of November 5 $490 million of final value. This rights offering is going to be conducted in the near future and, at the same time, the coupons will allow to get a warrant approximately two shares will give right to a coupon that will give you the right to the new share and the warrant. Each new share will allow you to receive one third of the future share in the warrant.

The warrants are going to have five year tenure, extra shares four times a year are going to be released to the Buenos Aires stock exchange and the strike price is yet to be defined. It's important to address the situation that as we still do not have the final approval from [BCT] for the transaction we are not going to disclose -- to give details on this. This is what has already been approved by the assembly.

Going to next page to complete the general picture regarding the convertibles and the final dilution. Now we are as of September 30 in total shares of 551.8 million shares; [saying that defines] full conversion would mean 579 million of shares. The final maturity of the convertible bonds is in November 13 and the warrants are maturing November 14. Is also important however that all this brought a very significant deduction to the company and, at the same time doing the period, the price of the share in spite of the strong dilution went from around $4.22 to $17.44. You have that information on the left upper graph on page 22, meaning that the market cap of the company grew significantly for almost ten times.

We went through all of the lines and we see how today is enough strong to keep growing. We have a lot of operations in the pipeline in all of the segments, the company is very active. And the thanks that we, this year, we were able to issue the bonds at very, very attractive coupons, banks allowing the company to build new buildings and purchase new assets. So we think that we are going to keep buying in these next quarters. So please, if you want to make questions we're here.

Operator we can begin Q&A.

Thank you. (OPERATOR INSTRUCTIONS). We'll pause for just a moment to compile the Q&A rosta. Thank you. Your first question is coming from Steve Trent with Citigroup. Please go ahead.

Yes good morning gentlemen and thank you very much for the presentation. Just one question from me for the meantime. Looking at the potential capital increase in the growth projects you're pursuing I'm with you on these projects you're pursuing; I'm also with you on wanting to increase your stake in Alto Palermo. The one thing I would like some more clarity on is your intentions on Banco Hipotecario. Even though their ratios, according to your presentation looked pretty good, I believe they recently had their first net loss in a while. And how do you see that business developing vis-a-vis the government's potential plan to induce the banks to offer more mortgages? How do you see that fitting into the big picture?

Okay Steve, thank you for the question. Just a couple of considerations that we made before going into this is that most of the effects that we mentioned on the lower lines of the balance sheet are due to the financial turmoil that we suffered a couple of months ago in the country related to the pre-election volatility and also to the market liquidity event.

This is very important to address because it is not necessarily considering that that situation is going to continue affecting the results of the banks in Argentina and our liability too. All that happen at the same time with, as David mentioned, one of the strongest devaluation patterns that we have in a quarter. So all that effect together bring this type of very poor result, not only in that part of our balance sheet, but also in the financial market as a whole in Argentina for that quarter.

Having said this, although what you have mentioned is right, we would prefer not to comment too deeply regarding the use of proceed at this stage as we still do not have the final approval. And we don't want to be a significant bias to us as a very important considerations and the final price of the offer, the price of the offer, the price of the asset that we will be willing to acquire are not yet very well established. So I can be sometimes misleading if I go to deep in that. But what I can only say is that your comment reflects somehow the intention of the company of increasing those stakes.

Regarding on your specific question about Banco Hipotecario ability to the mortgage -- to increase the mortgage leverage of the mortgage market. As you know this is a concern from our side, but very likely an historical concern. Of my personal view if you think what has happened in the last four years in Argentina the economic policy has [feel] very strongly consumption. The people acquired new clothes, get better home apparels, better cars. Now we have a very, very important record in terms of cars, but we are lacking of new homes, and this is something that in some stage of the process we should address the issue.

We will be very happy if we are able to go to model similar like Mexico or some other [house] although we cannot assure that it's going to happen. But just to remember our ratio of mortgage to GDP is the lowest in the region, 1.6% still. And they try recover the situation prior to 2001 we, not to grow farther than that, just to recover the stocks of loans that we had prior to 2001 we should multiply that figure four times.

So really we think that there is still room to grow and a very important issue that you have. My [personal] consideration is that, although that growth has not been a very, very strong, one reason was that the property prices are very high in terms of salaries, but that situation has been changing very strongly during the last year. The salaries recovery on the other hand is closing the gap between the price of the square meter and the amount of salary that you need to buy a square meter.

Okay, thanks for that Gabriel.

Thank you. (OPERATOR INSTRUCTIONS). There appear to be no further questions. I'd like to turn the floor back over to Mr. Alejandro Elsztain for closing comments.

I think we enter very deep to the presentation and each of the lines explained how good moment we are spending in this real estate company. And so we are sure that next are going to show more of these results; we are seeing figures in October that they are still very good so we are very optimistic on the industry. So thank you very much for the conference and let's talk at the end of the year. Thank you and have a good day. Bye.

Thank you. This concludes today's IRSA earnings release first quarter fiscal year 2008 conference call. You may now disconnect your lines and have a pleasant afternoon.