IRSA Inversiones y Representaciones SA (IRS) 2008 Q4 法說會逐字稿

Good morning. My name is Elsa and I will be your conference operator today. At this time I would like to welcome everyone to the IRSA earnings release fiscal year 2008 conference call. Today with us we have Alejandro Elsztain, Second VP; Gabriel Blasi, CFO; and David Perednik, CAO.

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 floor over to your host, Alejandro Elsztain. Sir, you may begin.

Good morning, everybody. We are going to talk about the fiscal year 2008 results that closed the 30th of June of this year. We are glad to talk about the very strong performance that the Company had this year.

We close a very big increase in sales, 47%. Very big increase in the operating income. We can see that was 46% in Shopping Centers, 166% in Offices segment, and 23% in the Hotels segment. So the rental part of the Company has showed a very strong year.

When we see the office rental growth, we see 81% in revenues. That is a combination of increase of prices plus the increase of size the Company had.

When we talk about Shopping Centers, we were very occupied; we are finishing the year at 99.3% of occupancies and very good sales from our tenants.

In the case of new offices we were adding buildings last year like Bank Boston and Edificio Republica. We are seeing rental prices of $37 and $40 in the new buildings we are achieving. This is giving on a very big improvement in size. We are now at achieving 163,000 square meters of leasable area; that was a big increase comparing last year. However, we want to increase more in the next quarters.

In the commercial development we are very active. We were continuing working in the shopping center located in (inaudible) [Panamericana]. The name will probably be announced in the next quarter. We are working in the marketing of that project that we are expecting to open in the autumn of 2009.

The other shopping center we bought but we didn't receive up to now is Soleil; that is in San Isidro. That will increase the size of shopping centers of the Company.

In the Sales and Devleopment we are active in the IRSA-CYRELA project, the partnership we launched with the Brazilian partner. That began with the sale of one project that was 100% sold in the past balance sheet; and we are now expecting to launch new projects for next campaign.

So I will introduce Gabriel Blasi.

Thank you, Alejandro. Good morning, everybody. Going to page 3, if you look at a couple of figures about Argentina, you know from 2003 the country has been growing steadily. Projected figures for 2008, a range in 7% according to the new developments in the international markets and also in the internal situation. Still the country is presenting a significant surplus, a strong primary fiscal surplus, and a positive balance of payments, giving enough strength in spite of the financial turmoil.

Because of the inflation, one of the issues that we have, we brought the comparison between the CER -- the coefficient calculated by the national agency -- compared with the calculation of the different provinces of Argentina, just as an example to show the type of difference that the market is discussing about. A 21% of a simple average between the provinces compared to the 8% of the coefficient.

Regarding international reserves, in spite of having paid this year to the Monetary Fund, the international reserve situation is still very positive.

Going to the second page, more related to our business -- construction activities in page 4 continue to be extremely strong. That is shown in the activity of the sector. Unfortunately as you see the local credit supply as a percentage of the GDP has not yet evolved positively, which in one way means that still this effect is yet to come to the market. On the other way, we can think that fortunately this brings less risk to the general price environment of the economy.

If we move to page 5, as a general consideration the Company continues with a strong evolution both in sales and EBITDA, with a compound growth 43% for the last five years in sales and 36% in EBITDA. And showing on the other hand, as Alejandra has commented previously, a very good momentum in all of the business lines, with a strong development.

If we move to page 6 and getting in to the Shopping Centers business, the EBITDA of this division continued to grow in the same period, 19% rate of growth reaching $79 million of EBITDA generation.

Sorry, Gabriel; this is Alto Palermo included tax shelter. The Shopping Centers alone, it is much higher than that.

Exactly. As we will see we have a poor quarter for the (inaudible). On the EBITDA and sales of the Shopping Centers segment on the upper right, here we have the evolution of the EBITDA from $62 million in last fiscal year to $84 million this year, representing 74% EBITDA margin and a growth of 36% from year to year. And in sales from $87 million to $114 million, 31%, confirming the excellent momentum that the business has.

Regarding tenant sales and customer flow, a compound growth 31% of the sales for the same period. In the last year we went from ARS2.8 billion to ARS3.7 billion. Regarding the incoming foot traffic, it has extended from 70 million of people to 74 million during 2008.

At the lower right when you look at the revenues of the Shopping Centers, the growth for the last five years has been compound 31%. In the last year we went from ARS271 million to ARS347 million. When you look at the revenues compared as a percentage of the tenant sales, we continued to have a very strong development in each of these years.

If we see in page 7 we can see the breakdown per shop [for] each of the shoppings. We see how three of them are the largest in the case of Abasto, Alto Palermo, and Alto Avellaneda. We can see the breakdown in base rent, variable supplement, and others; that shows commissions, fees for entrance, parking.

So we can see that this year we are going to have a big part that is renewed; 44% will go to this year. This is mainly explained because of Alto Rosario. Alto Rosario is a shopping center that was opened in 2004, and this year it is renewing almost all.

Plus big tenants that are renewing like in the case of a cinema in Alton Abasto or Musimundo in Paseo Alcorta. So it is a very big year of renewal, so we think we are going to take a very good benefit renewing these, having new [fees] for the Company.

We can see here what is the average rental we are achieving in each of the shopping centers with an average of $41 per square meter compared to the $20-something in the case of shops in office buildings.

In the last part of the graph we can see that the 10 shopping centers today we are running have a near-zero vacancy, 225,000 square meters. If we add to these the new two that are coming next year -- Pan-American Mall of 36,000 square meters and Shopping Soleil with near 15,000 -- we are going to be at levels of 276,000 square meters. This will be an increase of 23% of gross leasable area.

We are expecting Panamerican Mall -- that won't be the name -- will be one of the large shopping centers, at the level of Alto Palermo, Abasto, [Avellaneda].

We can see next page, in page 8, some pictures of that where we see physical progress of 36%. We are expecting I said before in the autumn of 2009 the opening of this shopping center. That includes a Wal-Mart, [Calabela], big tenants. So it will be a full shopping center for next year.

Sorry, just a mention regarding the graph of income breakdown in the previous page. There is a typo. The 45% belongs to the base rent, and 38% to the others concept. Sorry for that. We are going to correct the presentation. Sorry, Alejandro.

Okay. In the other part of the graph in page 8, we can see the pictures about Soleil. That was a purchase that up to now we didn't receive; we are waiting for the last approval for this year or next year at the beginning. We expect that.

Apart of that, you know that we bought the Beruti Plot. That it is a fourth -- a third of a round block of Buenos Aires in front of Alto Palermo. We think we are going to add more leasable area to that shopping. That is the reason why we bought. So we are deciding what is the future use for this land. That will be probably a combination, maybe all residential or for office plus some commercial to add to Alto Palermo.

Apart of that, the progress of the improvements was very strong this year. We were improving the quality of our shopping centers, and it is almost done, all of the projects we had in the basket of the Company.

Going to the Offices business on page 9, starting from the upper left, here we have the evolution of the market continuing with an excellent momentum. Our rent price has gone up significantly with almost no vacancy, as you can see there, 1.3% of vacancy and 37% (sic - see presentation) as an average rent price, dollars per square meter according to Colliers International.

Also if you go to the next graph you'll see that regarding which type of neighborhood we are referring, prices go from 37% (sic - see presentation) to $26. It is important to [others] that most of our acquisitions of the last two years are located in the first two of these neighborhoods. You can see that in the picture that is including the construction figures.

When we go to the rent in the portfolio market, as we saw it about $35 with a vacancy of 1%. Our portfolio is today at an average of $23. Remember that in our previous consideration this was $19 with a vacancy of 0.5%.

To show the potential prices in -- the prices of our last acquisition, you see there the room for increasing prices.

On the lower left we will see how is come -- the breakdown between the increase in the 2007 figures and 2008, with an almost $10 million regarding coming from square meter additions, $10 million of the rental revenues coming from there. And $5 million coming as part of the renewal process of the leases to the new price. Alejandro will later comment more deeply on the evolution of the portfolio.

On the rent and the vacancy evolution, we went up $14 million to $23 million. As I mentioned the vacancy has gone down to 0.5%, with a compound growth rate for the last five years of 26%.

It is important to address that half of our square meters are going to be renewed in leases during 2009. I think this is a very positive outcome to mention.

In page 10 we can see some examples of the buildings the Company had from historical times, what recently we did. In the first part we see the more historical where we have [Volero] and the Pirelli. We can see in the middle the late investments of Dock del Plata, La Nacion, Bank Boston that we did last year.

In the last part we can see latest, the Republica building that is entering to be occupied only in 2008-2009, because we are now fulling this building and we expect to be at the end of this year 100% occupied. Remember that we bought this and it was almost empty. And we are fulling; at the end of this year probably will be near or surrounding this 90%, 100%.

In the case of Dique IV, it is the new building we are doing. We are constructing now, and this will be finished at the end of 2008. We are occupying this too.

Apart of that, we sold 30% of the La Nacion building, deducting 10,000 square meters. So when we combine the effects of purchase and sales, we see we are going to grow from here to next year from 154,000 square meters to 174,000 square meters. So we a 13% increase again, plus the very big increase of prices because we have 50% of renewals -- or more than 50% of renewals this year that are going to go at very different price that we come in the past.

On the hotel business on page 11, a quick couple of comments. The occupancy rate continues to be positive 76% compared to the prior 74%. The average price has gone up from $152 to $184.

Regarding the improvements, we have finished the addition of new suites there. We see a picture in the Llao Llao; 43 new suites which are completely operational. We have completed 85% of the refurnishment in the Inter-Continental, which is going to be finished by the beginning of 2009; and 70% of the Sheraton which is going to be finished at late 2010 with a complete refurnishment of the hotel.

If we move to the next page, a quick comment on our IRSA-CYRELA joint venture, just to give you more insight on the project, the location. Vicente Lopezon, a northern neighborhood very close to the city of Buenos Aires. The joint venture sells to the market 467 units representing 59,000 square meters of property with 32 different types of amenities. During the first month of being in the market, 96% of the units were presold. Of course this joint venture is evaluating new projects that we hope we are going to communicate soon.

In other developments we had in the case of Torres Renoir the Tower I that was swapped in the past, is 94% done; and 96% of that is sold. In the case of Tower II we sold it instead of receiving the swap that was originally signed. We sold and was reflected in the last balance sheet directly the sale of 100% of the property.

In the case of Caballito, that property that was swapped in the past, today the work in progress of that project is 50%.

In the case of Santa Maria del Plata, the decree -- as you know, that has been judicially challenged on formal and procedural aspects. But recently we were negotiating and finding political and judicial solution to unlock the impasse that we are situated today. So we are optimistic in this to resolve the last points of this project too.

In the case of Torres de Rosario, we had made this swap of land for square meters; and we are going to receive this 1,500 square meters of constructed area.

Other development that took place during this year is the acquisition that IRSA made of a minority stake of 30% of the Society owner of the Lipstick Building in New York. It is midtown Manhattan, emblematic building. This building was designed by Philip Johnson and John Burgee. [Obtained] in 1987 and 1990 Boma award winning. 34 floors with 59,000 in square meters of space.

The rationale for this acquisition, of course being obvious. The very significant asset that the Company was willing to acquire is that the acquisition at the same time implied the acquisition of the debt, with a restructuring at a discount higher than the bonds that the Company had at present. And also with the potential appreciation of the leases. This building has secured leases and expiring in the next three to four years; and we expect a significant upside from there with a long-term debt on the counterparty.

Going to page 15 as a quick comment prior to David's comments on the figures of the Company, we see the sales evolution by segment. Confirming the excellent growth on development and sale of properties, 159%. On the Offices 80% growth. 27% growth in Shopping Centers. 36% growth in the credit card operation. 21% growth in Hotels.

On the EBITDA side we have a significant decrease on development from ARS6 million to ARS20 million. In the Offices from ARS35 million to ARS75 million, 120%. On Shopping Centers 33% (technical difficulty).

On the credit card operations, this is the only business that is lagging; mostly affected by the financial turmoil. We continue to work in the direction of finding a structure to minimize the impact of this business in the balance sheet of the Shopping Malls. The Hotels operation we are increased 14%.

If you go to the lower left, the EBITDA margins evolution from fiscal year 2007 to 2008. On the sales and development it grew from 8% to 10%. On the Offices it grew from 61% to 74%. On the Shopping Centers from 71% to 74%. On the credit cards, because of the impact that we have already discussed, it went down to minus-5%. David is going to make some comment regarding our provision policy on the business. And the Hotel operations from 22% to 21%.

A quick wrapup on EBITDA increased evolution. There we see that the most significant impact comes from Shopping Centers and Office, with a growing impression of development as we have stated in our last two fiscal years, and with a minor increase on the Hotels, and the impact of the credit card operation, as I mentioned. David?

Good morning. With respect to the income statement as of June 30, 2008, IRSA had an increase of 46.8% in the sales from ARS1.084 billion that we have in 2008 compared to ARS738.7 million in 2007. Our cost of sales increased 57% from ARS311 million in 2007 to ARS489 million in 2008.

The gross profit of the Company increased 39% from ARS427 million in 2007 to ARS594 million in 2008.

The operating profit increased 28.4% from ARS198.5 million in 2007 to ARS254.8 million in 2008. The result from assets exposed to market valuations -- that is the holdings in investment funds -- we had a decrease of 162% from a profit of ARS54 million last year, 2007, to a loss of ARS34 million in 2008.

With respect to the net interest expense and Others, we had an increase of -- in fact it was a decrease in a negative figure of 14% from ARS50 million 2007 to ARS42.7 million in 2008.

It is important to mention that we had a positive exchange difference because we had in the last month of the year, in June, we had a decrease in the dollar exchange rate that we have our debt. Most of our debt is in dollars. We had [about] $0.15 of exchange difference, positive exchange difference that we are having. It is impacting us in ARS19 million positive. That means that perhaps during the next year we will have a negative impact because if we assume that that is going to be again in the $0.15 we are going to be recovered.

With respect to the gain on equity investees -- that is our holding in Banco Hipotecario, mainly -- We have a loss of ARS13 million in 2008 compared to a profit of ARS40 million in 2007.

With respect to the line of income tax, minority interest, and others, there we have the income tax of our Company that decreased 10% from ARS87.5 million in 2007 to ARS78.1 million in 2008. The minority interest also we had a decrease of 14% from ARS32.4 million in 2007 to ARS27.9 million in 2008. That is the share that we are having from our partners in the case of Alto Palermo.

So the net income of our Company decreased 48.8% from ARS107 million in 2007 to ARS54.8 million in 2008.

If we go to the operating profit, I am going to discuss a little bit the segments of the Company. With respect to the Company, the operating income it increased 28.4% from ARS198.5 million in 2007 to ARS254.8 million in 2008. The [EBIT] due mainly to an increase in Shopping Centers, Offices, and rental properties, development and sales of properties, and Hotel Operations segments, and partially offset by a decrease in the operating income of our credit card operations, the consumer financing line.

The EBITDA amounted to ARS366 million, 24.9% up compared to last year of ARS293 million. Operating income arising from development and sales properties segment increased 212% from a gain of ARS6 million in 2007 to a gain of ARS19 million in 2008.

Operating income arising from the Offices and rental properties increased 166% from ARS19 million to ARS52 million in 2008. Shopping Centers segment increased 46% from ARS124 million to ARS182 million in 2008. The operating income of Hotel Operations increased 23% from ARS14 million to ARS18 million in 2008.

With respect to the consumer financing segment the Company decreased 154% from a gain of ARS32 million in 2007 to a loss of ARS17.7 million in 2008. That was mainly driven by an increase in the interest rate; and also we increased our provisions of delinquency for the this year.

Finally on page 17, regarding the debt situation of the Company, the leverage of impact continues to be very mild with a debt rate in the range of 0.33.

The net debt of IRSA is $165 million. Remember we haven't had a significant development in our debt book composed by a minority of short-term debt; some sellers notes regarding the acquisitions that we have been making; and there is a note of $150 million due in February 2007.

On Alto Palermo the situation also is pretty similar with total debt of $175 million. Remember that we also have the convertibles that are mainly held by IRSA and our partner Parque Arauco. Although they are nominally debt, we consider them not equity. And a cash of $111 million, leaving a net debt position of 79% (sic - see presentation). Confirming that it really is very unusual to find this collection of assets with this amount of leverage and the type of [infraction] that we have.

There you have also the remark that as of November 2007 we finished with the conversion of the convertible bonds issued by IRSA. As of that, the outstanding shares amounted to 578,676,460 shares.

On the margin, Alto Palermo has bought back roughly near $5 million of the peso-linked note in the open market.

With that we invite participants to make questions.

(Operator Instructions) [Sergio Ruiz], [MCC].

Thank you very much for the release. I was wondering about -- I am looking at the Alto Palermo results. I was wondering about the selling expenses. I have seen that the last quarter we have seen an increase from 56 million to 90 million since the sales -- from [80] to 93 -- I mean for million dollars.

That means an increase on 60% quarter over quarter. It seems that the sales increased 17% quarter over quarter. I was wondering about that huge increase in selling and administrative expenses, please.

Okay, we are going to call you later. We are going to study it, and we will call you later because this is a very detailed question, and we have to analyze what happened in the last quarter. Okay?

All right.

[Gonzalo Wegner], Raymond James.

Good afternoon. I would like to know what are your perspectives regarding the delinquency in the credit card division and how you're seeing that going forward.

Also I would like to know if you could give us some more information on the Caballito Project that will be developed by IRSA-CYRELA. Thank you.

Can you repeat the first part of the question?

Yes, sure. I would like to know what are your perspectives regarding the delinquency in the credit card division. How do you see that in the near future?

Okay, regarding delinquency rates, as you have seen we have made a significant increase in the provision to cover that. The reason is pretty simple. It is related to the local impact of the financial turmoil. This is in regard to the combination of the international situation and the evolution.

Remember we have a very tough year in Argentina. Although the figures of the Company do not reflect that, remember that we have more than four months of the agriculture sector confronting with the government. All that brings a lot of turmoil in the country. Although it is not reflected by the Company figures, it has some significant impact in other aspects of the economy.

One of them has been very [markedly] the financial sector. As a result of that, the availability of long-term credit decreased, although the consumption has not been affected significantly yet.

As a [cause of] precaution, all the system as a whole increased the delinquency rate. If you look at the figures of the Banco Centrale de la Republica Argentina, which are published on a monthly basis, you will see that the system as a whole went up from an average of 5% -- which we might consider the more normal structure -- to something in the range of 10% to 12%.

I will say the delinquency rates are going to be directly related to the general credit environment in the country. As of now the interest rates have decreased. We had a very huge surge because of the local turmoil a couple of months ago, when the rate for this type -- the passive rate for this type of business went up to something in the range of 25% to 28% on a year base. Today it is again at 12% rate, which is more reasonable.

If the situation prevails as it is today, we think that we will see the recovery on the delinquency rate to a more normal situation. On the contrary, if the interest rate went up so significantly as we have in the worst moments of the local crisis this year, you will see probably increases that can be 20% to 30% on the delinquency rates to go.

In the other question about the project of Caballito, the IRSA-CYRELA company is now deciding which of the -- that project; or the Abasto Project, where we are on top of Coto, the supermarket that is in front of the Abasto Shopping Center; and a third project that we are now buying. The company is in the time of deciding which first is going to launch.

So the company after selling these six towers that today is under construction -- it is just beginning that construction -- is deciding in the second and third project very soon.

With respect to the first question that you asked us about the commercial expenses in the last quarter of Alto Palermo, as Alto Palermo consolidates our Company into our [shop] the credit card segment, the provision for delinquency in the last quarter was the reason for the increase in the commercial expenses of Alto Palermo consolidated. Okay?

Steve Trent, Citigroup.

Good morning, guys. Two questions for me and forgive me if I didn't catch them the first time, if you have already answered them. But looking first of all at Solares de Santa Maria, you mention that negotiations are ongoing. By any chance can you give us a timetable as to what those negotiations look like?

I prefer to be -- we prefer to be conservative, Steve, because up to now we were waiting for so many years. But we expect to -- do you know how important it is for the results of this Company? This is the largest land reserve the Company owns, and it is a very high [reload] in the past.

We have a very big rental company that we can survive by sure without doing. But you can imagine how dramatic can the figures change. So imagine how much we are pushing for that. So we would like not to be too optimistic, but we are doing we think enough good negotiation to do it as soon as possible.

Okay, that's fine. Also with respect to your answer on the credit card side, within the June quarter itself would you characterize any of those expenses as nonrecurring? Either what you mentioned about the credit card provision, I believe, or any of the startup/acquisition related expenses that you may have incurred.

The biggest part of that is directly related to what we have said regarding the delinquency rate. If we think that the market continues to develop as it is at present, with the present environment of interest rate, and not with the situation that we have a couple of months ago in Argentina, which was a huge surge that increasing -- doubles the financial cost for this industry as a general, you won't see again additional effects on this side of the balance sheet.

But if the turmoil comes again, I cannot assure you that you won't see new surges of delinquency. Of course we are putting a lot of attention to this to be prepared and try to minimize the impact of a negative outcome.

Okay, thanks very much, guys.

(Operator Instructions) [Gustavo Singaret] with Merrill Lynch.

Hi, Gabriel. A quick question. Can you please give us some guidance of what are you expecting to do in terms of tackling the Shopping financial situation?

Well, as I mentioned we are working in several directions; and we will see on the most open scenario that we can find regarding the present condition of the market. The Company is being prepared to be IPO'd if the market allows us to do so at a sensible multiple to Alto Palermo.

That can be one way to strengthen the balance sheet of the Company, and we are also analyzing other alternatives that can range from bringing up some strategic alliance or mergers. We are working a lot on this. I can't go deeper, because it would be to release information that at this stage it wouldn't be sensible to give.

Thanks.

Thank you. There appear to be no further questions at this time. I will turn the floor back over to you.

Thank you very much. We can conclude this presentation talking about we expect to keep the [trend] of expansion and this increase in prices because of the delay that we bring in contracts. That will be generating a very big cash flow for next year that we expect to keep growing. And in the first two months where -- in the case of the land reserve it is in movement; and every time that you are taking one land reserve and putting in production or selling the apartment, you are improving the -- and we are doing every quarter faster and faster.

So you see that every year we have less land reserve on stock, and we have a very organized cash in the Company after the two bonds that we issued in 2007. That can allow us to finish all the projects that are under construction today. So within the Company today it is very well organized financially and in business.

We have been working in volatility since a long time ago, and we can think that we can make very good opportunity from the Company to see how the markets not only in Argentina are working. So we are very optimistic on that.

From the side of the Company we think we are going to have a very good year next year. Thank you very much and have a very good day. Bye-bye.

Thank you. That does conclude today's teleconference.