IRSA Inversiones y Representaciones SA (IRS) 2008 Q2 法說會逐字稿

Good morning. My name is Ray and I will be your conference operator today. At this time, I would like to welcome everyone to the IRSA first half fiscal year 2008 earnings release 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)

Thank you. It is now my pleasure to turn over to your host, Alejandro Elsztain. Sir, you may begin your conference.

Good morning everybody. We are going to our conference call, the second quarter of fiscal year 2008. The highlights in page two. So welcome everybody. We had a very strong performance the first six months of this fiscal year. We increased almost 46% and the results -- the operating results were up 35.5%. The EBITDA of the Company increased 37%. So we are achieving ARS200m in the first half of the year. And the margins of rentals, they made a very good profit too. So we are showing very, very profitable of operational businesses.

In the Santa Maria del Plata project, our land reserve of 70 hectares, we received in November of this year -- of last year, 2007, the manager of the TP approved that project as recommended by the Council of the Urban Environment Planning and now we are evaluating which steps we are going to follow for the definition and implementation of the project. We are going to explain a little deeper later.

We continue our expansion and we were able to purchase a new shopping center, Soleil Factory, that is located in the north of Buenos Aires City in the Province of Buenos Aires on the [Fanalicana] Highway. And this will be formalized, we hope very soon in the near future, obtaining certain conditions that we have to -- they mainly council people have to meet.

Apart of that, we were able to open the [Shaushau] expansion, the (inaudible) and they opened at the end of December. And in this quarter we've begun to recover on the reverse part of the negative results that the first quarter we had in the Banco Hipotecario but made the balance sheet appears that to be negative, so we've begun to recover that part of that. And the higher interest expenses occurred during the first half, reflected improvement in the Company's debt profile. And we changed our debt rating to be plus.

In the same time, development line of business, in the coming months we are expecting to launch an account from that project to launch the first project together with Cyrela, the realty, the Brazilian part of it that is a 50/50 partnership with IRSA beginning the construction of buildings -- residential buildings in the City of Buenos Aires. And we are beginning of opening that very soon. I think in a week or two weeks we begin the sales of the third new project.

Apart of that, in the first half of the year we sold -- or we had a swap with one owner who have to give up apartments and instead of receiving the apartments, we sold directly the rights to Torres Renoir and we made a gain -- a record gain of near $5m extra that we had in the past. So instead of receiving apartments and selling apartments, we sold the whole property of Renoir II.

In the capital structure, in November our bonds finished and matured and today they're not more outstanding convertible bonds or warrants to be exercised. And during that quarter, the Company cancelled other publications on part of the convertible bonds that they exercised and were converted. So we cancelled near -- almost 40m more. So that is -- makes a better picture -- financial picture of the Company. So I'll introduce Gabriel Blasi that will explain more.

Thank you, Alejandro. Moving to page three, just a couple of comments on the general outlook of Argentina situation. The economy has been growing for 60 consecutive months, reaching an 8.7% growth -- yearly growth of GDP year-to-year, keeping up the -- doing surplus that you can see from the left upper graph. And both surpluses, meaning in the range of 3% of GDP.

It's interesting to agree the situation if you will look at the graph on the down left corner, that the -- although it is related to surplus to the price evolution of the commodities, if you compare the price situation of the commodities -- Argentine exports year of 2007, compared to the prices of December 2007, that significantly increased in prices. It only means a 0.5% of increase on the fiscal surplus, while we can say keeping the present level of expenditure, a 12% drop in the value of the price we export, it keeps primary surplus at 3% level, meaning that there is a very strong situation.

On the foreign exchange side, the country continued to increase very highly its international reserve, having $46b as we said.

Moving to page four, a good ramp-up on the Company's situation in sales and EBITDA evolution. We confirm a 41% growth of sales from 2004 to 2007. And for the six months of 2008 fiscal year, an increase in sales of 46%, confirming the very good moment of all the business lines.

Same situation with EBITDA, where you see that from 2004 up to 2007, the growth has been 40%. And in the first six months of the year we grew nearly 37% on EBITDA generation, from more than ARS146m to ARS200m. And again on -- in all the business lines confirming the very good moment of the Company.

If you move to page five, we can see the breakdown of the different business lines, showing that development and sales of property have increased 100%. Mainly here we reflect the impact of the Torre Renoir deal that Alejandro mentioned.

On the offices, 95% of the increase in sales goes to the very good acquisitions that we made on one hand. And on the other hand, we are continuing to recover the price -- the rental price of our portfolio. On the shopping centers, the (inaudible) in Argentina, and especially in our malls, compares this very good moment, almost 30% of growth of sales.

Credit card operations is 57% of growth. 21% of growth in the hotel segments.

On the EBITDA side, there is significant increase on the sales and development of minus ARS3m to ARS4m. In the case of the office, 122%. We are really putting into the -- here our expectations in terms of the development of this business segment. Shopping center with a good also evolution in margin, confirming the increase in EBITDA of 30%.

Credit card operations decreased in EBITDA at a rate of 30%, which is most relating to the impact of the financial crisis. In the low loan financial sector we are going to give a different mix to this very soon. And the hotel operations also increased by 20%.

If you move on the same page to the low left graph, you have there a breakdown of the margin evolution on a quarterly base, and you can see that all the margins of the different segments have recovered comparing the first half of 2008 compared to the same period of last year after the small turmoil of the financial markets and also considering the increase in expenditure that the Company incurred last year due to its improvement of the -- on the high speed platform.

On the right side, the EBITDA increase breakdown by the different business segments, confirming as we can see, the very good contribution of all the segments. We are increasing participation of the office segment and the -- with a small (inaudible) we are -- that is going to be recovered in the project that we are announcing pretty soon. Now David is going to comment the breakdown on the income statement.

Good morning to everybody. First of all, I will introduce the performance in the segments -- operations of our Company for the last semester. The operating income increased 35.5% from ARS104.7m in 2006 to ARS141.9m in 2007, mainly due to an increase in shopping centers, office and brand properties. (Inaudible) properties and also operational segments, as Gabriel has already commented.

With respect to the operating results arising from development and sale of property segment, it increased to 144% from a loss of ARS2.9m in 2006 to a gain of ARS4.2m in 2007, mainly driven from our result of ARS14.8m profit on the sales of the rights of the Torre Renoir II project.

With respect to our operating result arising from the office and other non-shopping center rental properties, the segment increased 67.7% from ARS10.4m in 2006 to ARS17.5m in 2007. Our office buildings continued to have almost full occupancy rate reaching 98.6% during the first six months of fiscal year 2008, compared to 98.1% in the first six months of the year 2006.

With respect to the operating result from the shopping center segment, it increased 37.9% from ARS68.7m in 2006 to ARS94.8m in 2007 and the occupancy rate was 98.7% as of December 31, 2007. With respect to the hotel operations segment, the operating results increased 15.5% from ARS10m in 2006 to ARS11.5m in 2007. The operating income of the credit card operation segment decreased 32.2% from ARS17.8m in 2006 to ARS13.8m in 2007.

Although we recorded an increase in revenues from our critical business segments, our net income for the six month period ended in December 31, 2007 was ARS5.8m, compared to ARS66.1m in 2006. And with the financial result -- with respect to the financial result, it decreased from ARS12.3m in 2006 to a loss of ARS54.8m in 2007. And this was mainly driven to a higher debt of the Company as Gabriel is going to explain a little bit later.

With respect to the equity gain from related companies, we are showing a decrease of ARS24m, from ARS15m last year to ARS9m loss this year. And this was due principally from a decrease of ARS25m in the Banco Hipotecario from an income of ARS15.6m last year compared to a loss of ARS9.4m in this year.

Okay moving -- thank you, David. Moving to page seven on the shopping mall operating indicators, we can see there the increase in the EBITDA generation, 22% over the last four years. And for the first six months of the period under consideration, 20%. The tenant sale evolution continued to be extremely good, 38% of growth in the last four years of compound growth, 32% for the last six months, confirming the momentum of the business.

At present, we have almost 280,000 square meters of gross leasable area. We had occupancy rates of nearly 99% confirming the strong momentum that the business has. And we continued to confirm the good health of this business. Alejandro.

If you move to page eight, we can see some pictures of our new project, General Paz Commercial Center, that it's not the name, and we didn't decide the name up till now. But it's running the construction and we see here how incredible that it's going. And that is a shopping center that intends to be open in 2009 -- of the probably first semester of 2009. And we have -- we are going to invest more than $100m in that, making only half of the project.

You see in the picture that the part that is under construction is the left. But the right part, the buildings, not the field that is in front in the highway, but the other buildings that they have (inaudible) on top, they are property of Alto Palermo too. So we have half of the project under construction. That is really going well. And that will be one of the high biggest shopping centers of our portfolio and will be open in a year from now.

Apart of that, we are very active in improvements. And we were investing like ARS100m in the remodeling of Alto Palermo and the new parking in Paseo Alcorta, additioning an anchor store in Alto Avellaneda, expanding Patio Bullrich, all remodeling of our (inaudible) Company. In the meantime it's making news and meantime recovering the state-of-the-art in each of them.

When we go to page nine, we see two new projects. One is the Soleil Factory Shopping Center. That is a shopping center that (inaudible) but it's the leading high supermarket chain in Argentina (inaudible) the deal in the end of the year to sell us this property. They have (inaudible) market and they sold us the shopping but they don't know how to build it very well, so we are waiting for the last approval to acquire that property that was (inaudible) $21m and proposed almost $8m are paid to date and the rest are back six years. So while we think it's a very profitable business. We hope this will be happening in the year 2008.

Apart of that, a small sale that they didn't want to is the last reserve that they have in the province of Tucuman, so they sold us part of the land that they want us to make a shopping center in Tucuman province in the capital city. They opened, very recently, a hypermarket and they -- after we closed the Soleil acquisition, we have the obligation of making a shopping center in the Tucuman province. So that is a small purchase of $1.5m and that is subject to the closing of the Soleil Factory Shopping Center. So we are going to, after finishing that, to begin with the business plan of making a new shopping center in the province of Tucuman.

Apart of that, you remember we have nearly ten shopping centers. We have that, like we said, since a long time ago. And now we are driving the project be paid to the government to (inaudible) of intent. So we are finishing all the attempts to begin the construction that we think will be beginning the end of the year 2008 for a shopping center and residential projects in the province of Neuquen.

On the offices business, page 10, we can see that the rental revenues increased 82% last year and 92% in the first six months of this fiscal year, from $7.4m to $14.2m. On the other hand, on the lower left graph, we can see there that the market price today for the triple rating segment where we have most of our buildings, it's at $35.38 per square meter range. For the vacancy, we have 2.6%. And in the portfolio of the Company, it's at present $19 per square meter, 1.4% of vacancy.

So we have here again, room for additional upside and a stronger return on our rental income. Our share in this segment is in the range of 20%. And remember that the visible area has increased from 143,000 square meters to more than 173,000 square meters with the new buildings that we are planning for the next months. We exercise the option on the (inaudible) Republica building. And the work is in progress in this quarter.

These two projects are explained in next page, in page 11, where we can show the option to acquire the Republica Office. This is the graph in the left below. And this is 20,000 square meters. And it is $74m, half cash and half to be paid in installments. And we expect to close that deal very soon because the papers are near prepared to sign. So we think that this will be an operation of this balance sheet of 2008.

And the other building, the one that's under construction that I count from there too, it's the building in Puerto Madero area (inaudible). And it's under construction and we hope this will be finished at the end of 2008, the beginning of 2009. Today it's under construction in the hands of IRSA. We had a sale in this quarter of near 30% of Edificio La Nacion, so near 10,000 square meters at this price of $34m, making a profit of $6.5m. But the main intention of that was our intention of purchasing the most representative buildings of the city, and without entering to the market new real estate competitors.

And bringing, like in the case of the (inaudible), the family group, of the [Roca] Group, a great part in to purchase these two buildings because in both cases in La Nacion and in [Barbosos], we have been like partners. But there are people that are using those square meters. They're not renting. It's for their use, their own offices and keeping us a first refusal in both buildings for to be sure that this is not going to the market for a rental company. So this is why we made this operation. And we see here the pictures of the buildings where we think that we are increasing this big portfolio of buildings in Buenos Aires City.

In next page, in page 12, we can see the first picture of the new 42 suites that were finished and open. We had two steps but we finally opened on the 22nd, I think, of December of 2007. And these were -- they're going to give us a big growth in size. Remember that the [Shaushau] was 150-something rooms. And to these an addition of 200 rooms. And you can see here the average occupancy of all of them -- of the three hotels, that they are levels of 75% or 90% in the case of Sheraton, and how their room rates are very high and increasing mainly in Buenos Aires City, coming from very low levels. Remember two years ago we were talking about $50 to $80 and today it is $150 or $125 per room per night, average price.

And in all of them we're making investments, the [Shaushau] I explained but even in the Continental we are improving and refurbishment like in the Sheraton. So there's a lot there. We're making all the rooms a part of the suites. And all the rooms are under transformation. There's 200 rooms, 100 transformation because they were beginning to be old. And the hotel is achieving a very, very good shape these days. So as we saw, the total rental of the office buildings, the shopping centers and the hotels, there are three lines of EBITDA generation higher, bringing a beautiful moment.

If we talk about the residential business, here we see three pictures. The first, in the left, the new project that Cyrela-IRSA is going to begin. And the show is ready. Next week is beginning to sell -- the next two weeks, it's beginning to sell. There are six towers that we're going to begin. So that is a part of the strategy that appeared in the balance sheet and took up more time. But now it's a line of business that will appear in the balance sheet of (inaudible) growth. 2008 will be the beginning. And that company tends to make a share of a lot of million dollars, much more than what we did at IRSA in the past. So this is something that we appear (inaudible) very, very near in the future.

In the case of Renoir, I explained before. Instead of overseeing the apartments, we sold the whole land and we are receiving $18m on the forecast because it's in the six-month period and that makes us a new case of nearly $5m for the balance sheet that appeared in the first semester.

And in the case of Solares Santa Maria, Santa Maria de Plata, 35 hectares is going to be assigned for public uses. That is something that we gave to the government and they are going to be parks, boulevards and waterfront. On November 2007, after following all required instances, we received final authorization for development and it was executed by the chief of the government of the City of Buenos Aires.

Minor approvals involving operational matters by the chief of Buenos Aires urban agencies, still pending. And there was a City major approval that was challenged at the courts by one congressman. And then we are evaluating courses of action to protect acquired rights. But we are optimistic in that. We were having a lot of conversation from this subject, imagining that this project for IRSA is really very representative. And we think that this is a project that this year, 2008, we received a lot of the basis. That was a big achievement and so that we were looking for, for many, many years. And now we have to finish the last steps that we hope that will be fixed to be resolved in this 2008. Gabriel.

Okay. Going to our financial investments, the page 14, we start to give you a quick wrap-up. On Tarshop, receivables of the credit card grew in the last year 55%. Banco Hipotecario loan portfolio grew 34%.

Going to the margins, we can see that the margins of the upper right in 2007 prior to the market turmoil, both for Tarshop and the Banco Hipotecario were 18% and 39%. As of December of 2007 and due to the financial crisis that hit the market, those margins were insignificantly. The reason to that is that is very, very clearly understood with the lower running graph on the lower left. You have the region of the Argentine can be showing a huge increase in the country with the (inaudible) at the end of the year. But now this is stabilized. And on the other, on the right, you can see the strong increase concurrently with the increasing EMBI that factored the bottom line into the spread, which is an index rate -- related to the deposits that shows the huge increase that suffer from almost the end of last year. But now the situation is normalized.

On the other hand, which I comment that the average payout of deposits in the country during that period went from 16 to 30 days on the bigger amount, showing that the significant -- that the financial markets were affected by the crisis. But fortunately, the situation is already over, as we can see from the recovery in the low levels of interest rate.

If we turn to the next page, page 15, just to remember the [financation] of the convertible bond part was already mentioned by Alejandro, showing that if the notes were issued as of today, the amount of share increase from $212m to more than $578m, but for the same period, the result of the convertible bond issue strategy, yield will increase on the market cap as of yesterday of seven times and the price per share increased by 2.6 times, confirming that the decision was appropriate and has helped the Company with a very strong platform for growth.

Moving to the next page, page 16, on the debt situation of the Company, on the left side, the highlighted net debt both for IRSA and for Alto Palermo. You can see we keep a very mild level of debt, [127m] in net debt on the IRSA. And on Alto Palermo, $92m of debt -- of net debt. On the period we repay in advance, the remains of the $15m of (inaudible), that was paid during -- in November of last year. That was a significant reduction.

And we can see also that in spite of the growth of the interest charges as David has already commented, because of the increase on interest -- on debt due to the issuers of the two bonds, the level of the loan write down the cost -- the average cost of the debt compared to the interest expense with the average amount of this is in the range of 8%, confirming that the Company has a very, very strong capital structure to finance its future investment projects.

With that, we invite you investors or shareholders, if you want to make questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Steve Trent of Citi. Please go ahead.

Good day, gentlemen. Just one or two quick questions for me. First of all I was curious if there's any updating or thinking as to how you're looking at funding future projects, either through debt or equity.

And my second question is, given the volatility we saw, earnings-wise, stemming from your Banco Hipotecario's debt that occurred in the first quarter of fiscal year 2008, can you give us a little bit of color as to what might be the driving force behind possibly increasing your stake in that company? Thank you.

Okay. I will answer your first question, Steve, and Alejandro the second one. Regarding your first question, of course the Company is continuing and constantly pursuing additional investment opportunity, especially on these days where thanks to the market volatility, new opportunities are coming out. The way that we are going to finance the different opportunities is clearly really related to buyback situation.

As you see and many of you already know, we have filed on the SEC the possibility of a capital increase -- a future capital increase. Of course the decision of doing a new decision for a capital increase will be mainly related to the market situation. As far as the market is not recommending on that, we might not do it. I might say that the general outlook of the Company, as you can see from the Argentine crisis as of today, has been -- constantly been conservative in terms of the debt profile that we keep.

We were very lucky and say that last year we were able to achieve this $320m in debt at the rate we achieved. Last year we were saving in the capital increase but we decided to delay that. For the last year we expected that the Banco Hipoticario investment to increase and it definitely was a good idea. We think these days that it sounds that it is a good idea. So we are now on the process of seeing what the market opportunity can give us again and do again what this year gives us.

Okay. Thanks very much, gentlemen.

International expansion we are expecting that -- we are thinking in how we would like to do that. We would like to IRSA to increase its stake in the whole region, not only Buenos Aires where we are very thin players. And we are thinking how to do that for this year, too. So we are actively thinking on that too.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from [Carl Matelbegna] of Raymond James. Please go ahead.

Hi. Good morning. Last month we had some data from [Anzac] saying that shopping center sales as a whole in Argentina fell in December. I would like to know if -- how do you see that? How are you seeing the performance of your shopping malls?

And I also have a second question. When you announced the capital increase, one of the use of the proceeds would be to increase the stake in [IRSA] --

(Inaudible).

The recovery is complete on the -- sorry but we did not understand the question but now we understood. The conditions of December were great and the increase comparing year-to-year I think was [17%] to 30% year-to-year. And we were a little bit worried about how the public came this year and started (inaudible). It was a little bit different than last year and we were a little concerned, but finally December was great and the whole semester was great, and January and February, too. So still very firm, the demand, so a lot of consumption -- domestic consumption for us, a lot of tourists.

Argentina is full. We've seen the hotels. And in the shopping, the tourists purchase a lot. And in the case of the shares of [Altapalermo], we didn't receive any intention for other shareholders to (inaudible) and we are going to see -- if that day appears, we are going to see if there is something interesting on the cap (inaudible) for that so we can decide that day. But the market is changing so much every day, so nobody knows what will happen next week.

Thank you. (OPERATOR INSTRUCTIONS) There appears to be no further questions at this time. I'd like to turn the call back to management for any closing comments.

Thank you everybody. We post a very (inaudible) half. We expect to keep that -- to keep that strategy of purchasing, build, constructing and refurbishing like we are doing so actively and recovering the return. The EBITDA that is showing and we expect to keep the portfolio strategy. But remember we have a small investment we made, $3m -- almost $3m in the (inaudible), but it is a museum in the(inaudible). But it's a project that we made, we sold and we purchased after 10 years at like the same price. But it's a very modest asset of the City of Buenos Aires. So we keep that strategy of having the (inaudible) portfolio of the country and maybe in the region. Thank you very much and have a good day.

Thank you. This concludes today's IRSA conference call. You may now disconnect. And have a great day.