IRSA Inversiones y Representaciones SA (IRS) 2008 Q3 法說會逐字稿

Good morning. My name is Barbara and I will be your conference operator today. At this time, I would like to welcome everyone to the IRSA Earnings Release Third Quarter Fiscal 2008 Conference Call. All lines have been put on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period.

(OPERATOR INSTRUCTIONS)

Thank you. It's now my pleasure to turn the floor over to your host, Alejandro Elsztain, Second Vice President, and Gabriel Blasi, CFO. Gentlemen, you may begin your conference.

Thank you very much. Good morning, everybody. We are going to talk about first quarter results. We had a very strong performance in the first nine months of the current fiscal year. We grew 59% to nearly MXN800 million and the operating results were up, up to the 40%. EBITDA went to MXN311 million, an increase of 39% comparing last year and the EBITDA margins of rental were very favorable. The net income amounted near MXN33 million for the nine months.

In the office, we exercised the purchase of reported liability at $70 million. We are adding 20,000 square meters to the portfolio. And we near the process of finishing [Nico Quattro] projects, that is the building that will be on our portfolio at December of this year.

In the shopping center segment, the level of (inaudible) kept very high. We increased a little from the last quarter because we opened [Fona Billa] stores in [Alto Visionera]. That was an increase of 12,000 square meters of new area for that shopping center. And we grew 27% compared in revenues, the last year, to this year. And we are in the process of growing in Pan American Mall, the one that we are doing in (inaudible) de Americana.

In the central development segment, we have revenues that increased a lot from last year. We sold nearly 30% of [Decreasa La Nation] and we sold the rights that we had to [Totas Venaris], that was the (inaudible) the Company had and instead of receiving this -- the apartments, we sold them.

In the rental segment, in the office, we kept 98% occupancy and we are increasing letters of rental. Today we are writing to $22 per square meter and we are going to show you how that is growing inside and in price per square meter.

In the hotels, the average occupancy kept very high at levels of 35% and in the sales and development segment, the [waterfront] project that is the first that we are launching with our partner, Fidella, the Brazilian company, [Regard]. And with regard to the results of that, all of that is reserved, so that company, Regard, is selling and reserving all the apartments in three weeks. So I give to Gabriel to continue the conversation please.

Thank you, Alejandro. Going to page three, a quick wrap-up of the general figures of the company. You can see that the sales continued to be very positive 41% of [inbound] growth in the last four years, 59% for the first nine months of fiscal year 2008.

[Penstitution], we did (inaudible) generation, where the growth has been 40% the last four years and in the last nine months, 39%, showing the excellent momentum that the company figures have.

Going to future EBITDA plans, starting with the shopping malls on page four, the depreciation generation of the company that grew 22% in the last four years has grown in the first nine months of this year, 14% from 56.8 million to 65 million. The tail-end sales evolution on the same period, on the upper left -- on the lower left, sorry for that, grew 38% in the last four years to 29% in the first nine months of the fiscal year 2008, reaching 842.6 million in the period.

Going to the situation of the credit cards, the credit card business, as you will see in the different figures, it's the only business line that is sliding somehow in the cash generation. The reason for that is due to the turmoil of the financial system.

First of all, in the last two quarters, related to international situations, and this is very more related to the present situation with the conflict between the government and the -- our counter sector. That's effecting the liquidity of the [upper marker] and that's effecting the margin of the credit card business.

As you can see, EBITDA margin for 2008 for the first nine years has grown from 19% to 6%, but if you compare same margin for the shopping center as a whole, it has grown from 74% during the first nine months of 2007, to 77% for the same period during this fiscal year. We are working towards improving the capital structure of [Tire Shop], we may refer to that later.

Regarding the growth of [salaria] of the Company, thanks to the project that Alejandro's going to describe, the [profitable area] is going grow 31% with an occupancy rate that continues to be very consistent, 98.5% in spite of being remodeling all of our portfolio.

In the page five, we see one [total graph] of (inaudible) commercial center. That is not the name of the shopping. We are now launching the name very soon and this is progressing. Today we have 23% in fiscal projects. It's a project that needs less than a year to be finished and this will add to the company 36% committed. So if we combine these (inaudible) we are going to achieve nearly 300,000 square meters to the [local] area of shopping centers in the company with these 13 shopping centers.

A part of that we were making improvements for near MXN95 million and we were integrating -- we were remodeling Alto Palermo in Alto in light of [Parsel] quarter, we increased an anchor store, but I said 2,000 square meters in [Arco de Janeira]. We're expanding a new building in Patio Bullrich, remodeling in Abasto, that is almost done in all of them and the company that is why, probably, it's increasing so much its revenue because the projects are improving their situations every day.

Continuing with the present slide, on page six, going to the offices, as you can see from the upper-left graph vacancies continue to be very low, 2.6%, with a [rim] price, which has slide to 37.2% according to [Coleus] -- sorry $77 per square meter according to Coleus, to show the different momentum that the business has.

On the revenues of the segment, if you look on the upper right, 82% has grown in the last two years from 9.9 million to 17 - no, $18 million. And in the last -- in the first nine months of the fiscal year, 2008, it has improved 87%, growing from 12 million to 23 million, showing the excellent momentum that the business has for us.

It's important to address that although we have recovered significant part of our price in our portfolio, remember at the time of the [visit] and the possibility of doing the automatic adjustment make us [lack] somehow from the market price. We have, from our last call, we have improved our price per square meter in the portfolio from $80 to $22, but still we have a significant room to grow, reaching the levels of the market between 36% to 40% for our AAA buildings.

On the office portfolio, thanks to the new acquisition that Alejandro has mentioned and the works in the Nico Quattro, our gross (inaudible) area is going to improve 21%. With that, we are going to achieve 175,000 square meters of the best buildings of Buenos Aires City and here we can see in page seven, the big picture of Republica that adds to the portfolio, nearly 20,000 square meters, that is designed by famous architect, (inaudible). And the other one, the building that we are constructing -- we are building now, is 11,000 square meters, that we estimate that will be finished in December of 2008 and maybe will be built to suit.

What does that mean? That will be for one client that will be renting the whole building. A part of that we were selling, 30% of the area of (inaudible) that was where (inaudible) is, we sold that for $34 million, making a profit of MXN19 million. And that line was recognized at the sales and development segment revenues.

On page eight, going to the hotels, we have already finished the increase of the capacity of the [Jou-Jou]. There you have the picture of the new room, very [presentable] capacity. We are improving the facilities of the Inter-Continental and Sheraton, with 80% of physical progress in Inter-Continental and 60% in the Sheraton.

Regarding the average price of the hotels, as you can see in the center of the page, they have improved very -- $308 for the Jou-Jou, $451 for Inter-Continental, and it was $124 for the Sheraton Libertador, with an occupancy rate in the average of 75% for the three hotels. Showing that in spite of the currency being (inaudible) in real terms, the occupancy rate and the tourism is still very positive in the country.

If we go to page nine, we can see the residential development business that has allowed the latest development that IRSA is launching. This partnership, the use of [Tarella] launched it's first project, the name is [Horizon] in the [Center Lopez] in Great Buenos Aires in north of Buenos Aires City. And the strategy of that was to launch residential projects for high, middle, and low end.

This case was high-end. There are six buildings in two clubs and they are total of 467 units from those 351 are IRSA -- sorry, are IRSA [Sierra]. The others are from the owner of the land that kept many apartments, like payments for the land. From this 351, all of them, all of the units were reserved ad we are signing the papers next week or in the next two weeks. We are beginning to sign the first payments, but it's a project to be finished in the three-years period, so the payment of that begins. We only paid the reserve and the first papers are going to be in the next two weeks; 100% of that was sold, was the first show room we made in Argentina at different times that the Brazilians do and was very, very successful.

Apart of that, the company intends in this year to launch two new projects using land reserves that IRSA has in its talk. Apart of that, in the sales line, we were able to sell the tower one of Renoir, which sold 96% of the apartments we received and the apartments are 94% finished. So the ones that she bought from us it's finishing the first tower and we sold from the apartments 96% of them.

In the case of the second tower, instead of receiving apartments, we sold directly the whole building for -- to the one that she bought to make the apartments and she bought them from us at MXN56 million, giving us an extra gain of $5 million that is in our line of sales and development results. So instead of keeping those apartments and waiting for the construction that didn't begin, we sold directly to them, making what we think is a very good, again, cash situation to purchase new land reserves and directly we have that in our focus again.

In the case of Santa Maria, we are working and with the [local] government. We are not going to court. We think we are going to be resolving this project this year. The things are going very well.

Going to page 10, giving a deeper look to our business lines. We can see that the evolution by segment has been very positive in terms of sales as we have been saying, the development of (inaudible), this has increased significantly from MXN175 million in the three under consideration. The first nine months of the fiscal year, 93% of increase on the office sales, 37% of increase in shopping centers, 42% on the current car operations, and 32% on the hotel operations showing the extra momentum that all the division lines have.

Regarding the EBITDA evolution by segment, on the upper right, we can see that there is a significant improvement in the segment. The property from minus 2 million to 25 million, which is very positive, 135% increase on the office EBITDA generation and 31% on the increase on the shopping center cash generation. On the current accounts, we have the increase, as I mentioned. This is mainly effected with the significant increase on the financial total and the doubling of the margins of the business. But at the same time, we are working towards achieving a better situation that would allow this company to continue its growth and recovering the results. On the hotel operations it was a 22% increase in the cash generation.

Going to the [DTA] margin data, we can see that the businesses have been developed positively for the first nine months of the year with a 12% increase in certain developments; 76% of offices, 77 %on shopping centers, credit cards 6%, here the margin has, as I mentioned, has been effected by the financial situation, and the hotel 25%, meaning that in spite of the strong inflationary environment, the Company has been able to keep its good margin behavior.

On the lower right, you have there an EBITDA breakdown, showing the contribution of each of the business lines. All of the business lines with very positive outcomes, only as I mentioned, liquid (inaudible) somehow.

If we move to page 11, a final consideration regarding the income stated of the Company. I would like to stress the very significant change in the operating profit of the Company, 40% of increase. Financial results, which are mainly effected because of the stronger debt that the Company has, remember that here we are including the issuance of the bonds that go to the market at the beginning of last year, $320 million of debt. We are going to review that later. But that explains the differences here. And the difference in the gain of investment is referring mainly to (inaudible), which results have been severely effected by the price of the government securities.

That gives us a net income of $22 million, that compares with the previous year -- sorry, pesos, it doesn't fully reflect the better operational results, it's mainly effected by the performance of the banking subsidiary.

Going to page 12, if we consider the net debt of the Company, we can see that our financial situations is very strong. IRSA has a total debt of $154 million, mainly represented by $150 million notes, 8.5 [coupon] that would be maturing in February 13th, with the cash position -- the strong cash position, thanks to the deals that Alejandro has described.

The net debt of the Company today is $110 million and to Palermo, the cash situation, the total debt of the Company of $173 million of debt is there. You have the series two notes, which is the peso-linked notes that we established to the market of $50 million last year and the 120 million ten-years notes that we placed in the market also last year.

And there we have the $122 million total net debt of the Company, leaving aside the convertible notes, as you remember, is owned by IRSA and a significant cash position, which is going to mainly fund the construction that Alejandro has already described, our projects under development. But it's still thanks to that cash flow, a very positive situation on the future. There is a -- we have tight -- or sorry the -- oh, it's okay. Alejandro wants to make some remarks.

As you see, the Company is following its strategy of looking for its generation of cash. We are very active, purchasing new assets in shopping and office buildings and increasing the Jou-Jou. We have begun to rotate more fast the [down] reserves with the Renoir, with the (inaudible) projects, so that line of business too is becoming important line of business for IRSA.

The only companies that gave us not very results is the [Touch Up Tory] and we thinking and probably launching a different kind of capital, probably going for a listed company, a financial listed company and separating from Alto Pallermo, or increasing its capital because historically the kind of debt the Company is too high. So what we think is we have a very strong financial situation, we were lucky that we went for the bonds the year before and we could be able to have the debt that's a big part of that, it's a ten-years period at a very low rate and really all the segments are generating a lot of cash that's allowing us to increase each of the lines.

So we are very optimistic in the growth of the Company. Many projects are entering, bringing their cash like the [Deficio Republica] that was received two weeks ago. And we have 20 new floors to be ready that it's rental, I don't know, like $7 million to give you an idea of what kind growth you're going to see in many projects or parts of it. It's a project that will be next year, and it's a lot of million dollars that is coming to revenues. So we are very optimistic on the Company's forecast and so we are ready for your questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question is coming from Steve Trent of Citibank -- Citigroup.

Yes. Good morning, gentlemen. Just one or two questions for me. First I was curious, could you refresh my memory in terms of your JV with [Cirella], will you plan to actually record that as equity method type income or will it be proportional consolidation.

And my second question, and thank you for the great deal of color you gave on the various segments, what's your view on bank (inaudible) now that Tire Shop is giving you some slightly negative operating results? Thank you.

Okay. Regarding the [Due Tracedella] registration receipt, good morning. We are consolidating 50% of the Company in our balance sheet and this will not reflect the income generated by the Company, [mainly] the cost.

(spoken in foreign language)

Only costs.

(spoken in foreign language)

Okay. Great.

We cannot be including the assets.

(spoken in foreign language)

Those are very structured costs and commercialization costs.

Okay. Great.

And I -- would you please repeat me the second part of your question?

Yes. Absolutely. And thank you again for giving such thorough color on your various business segments. Looking at the slightly negative result for Tire Shop that you mentioned, what is the Company thinking now in terms of [Banco or Potecario].

Well, you know, the Banco or Potecario as usual, you know, has been really a very good investment for IRSA. It has yields of 17% in dollar terms since the first investment that the Company did on a yearly base. So really I would say probably because of different issues, not regarding the Company, we haven't yet seen the full recovery of that market that we expected.

Now I'm speaking not only as an [opportunist] user, but really as a consideration for the marketing that's there. This is -- we still do have a huge debt in terms of country, regarding the residential. There is a very significant need of new housing for the people and yet the market has not find out the correct way to develop that.

It's very curious because this is -- when you speak of mortgages today, in this -- in the rational environment, we always have to stress that our situation is completely the opposite of the rest of the world. In the rest of the world, you have huge volumes of bids supporting the real estate market, here the situation is completely different.

People have acquired or have sustained the growth of the real estate sector in the last five years, where we sold resources almost without any debt at all. As you can see, for instance, in our own balance sheet, we have a Company, $1.5 billion, that's with a debt less than $100 million and with a cash generation that almost allows the Company to pay its debts in one yearly period. So really, I will say, of course, we will be much happier if the market has shown the better response, but this is something that in one way or the other, it must take place because the people at the end need to have a home for [may] they're leaving.

Okay. That was very clear. Thanks very much for the color guys.

(OPERATOR INSTRUCTIONS). Our next question is coming from [Conrado Vagner] from Raymond James.

Hi. Good morning, gentlemen. My question is regarding the delinquency rates and the Tire Shop business. I don't know if the figures I have are comparable, but apparently the portfolio that is 90 days due [prevents you] almost 7% this year compared to around 4% last year. I'd like to know if you have any thoughts on that, where you see that going forward? If this is something that has changed and we must now see higher delinquency rates or if this is just temporary?

Okay. Thank you for you questions. Yes, you are right with your figures, due to two issues. One is if you look at the average on the Banco Central statistics, there were delinquency rates in the market, you will find out that a [touch] of this aligned with the system as a whole, with a particularity that the Company in fact works with a credit line that is not directed to the highest income people. In fact, as I [related] to people with difficult access to banking. Meaning that, although, it is a bit more difficult a segment, the delinquency rate of the Company is in line with the system delinquency rate.

Having said that, we are changing the mix -- the business mix of the Company to cash loans that have much more profitability, but at the same time, it has a marginal delinquency rate that's higher than the credit card, and to offset that we are investing in new software that allows us to have a better management of that great risk.

I will say that if you look at the system statistics as a whole, you will see that, of course, the cost of the huge jump that the interest rate had in the last of last year and in the last 30 days, the local interest rate has had a very significant increase. That means that in the short run, you may see some volatility on the delinquency rate, but we think that in the longer term, that will grow normalized as far as the interest rate, they need to get more normalized too.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Gentlemen, there appears to be no further questions at this time.

Okay. Thank you very much everybody. We are going to close the -- meet next quarter, the fiscal year. And we expect to keep the growth we were taking the last quarters. Thank you very much and have a very good day. Bye, bye.

Thank you. This does concludes today's IRSA Conference Call. You may now disconnect.