IRSA Inversiones y Representaciones SA (IRS) 2009 Q1 法說會逐字稿

Welcome to IRSA earnings release first quarter fiscal year 2009 conference call hosted by 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 session. (Operator Instructions).

Thank you. Now, I will turn the call over to Mr. Alejandro Elsztain, Second VP. Go ahead, sir.

Good afternoon everybody. Talking about the third quarter of IRSA results, as you probably already are aware, the international financial crisis and economic slowdown is impacting the international and the local worlds and it's changing some of our activities that we are going to explain you later.

But up to now when you see the rental businesses, that they are still very [thin] and we are going to explain each of them. If you see in the case of commercial real estate performance, we see how the shopping centers and the office rental payments continue to show good levels of growth in terms of operating results. But these showed 65% year-to-year increase, and the occupancy of them is still very high.

When we talk about the sales of the Company, total sales, they grew 11%. But when we deduct the consumer finance segment in which we add to Tarshop, the growth was 23%. Here in the Tarshop we had some bad environment and we had -- the local and international financial environment resulted in need to review the Tarshop prospect, which we have financially supported. In turn, Tarshop have taken actions in to improve its operation and commercial performance that we are going to explain later.

In the case of new developments, we are in the construction of the Shopping Center in General Paz and Panamericana, but in few days we are going to announce the name, the ground of the shopping center. That is on construction today and we are thinking on opening next autumn. And in the case of Dique IV, Puerto Madero, the office building is under construction and we are very, very near the end of that building which we are going to be finished at the end of 2008.

In terms of development lines we have completed the Solares de Santa Maria draft project that we are going to show you later, and we have held informative meetings with various competent government office while we await the resolution of challenge filed in court. IRSA-CYRELA, the company we joined with our Brazilian partner, has made progress in the excavation work of Horizons, the first project we made in Vicente Lopez and is expecting to launch two new projects for 2009.

So I introduce Gabriel Blasi that will make up an introduction of the outlook of Argentine financial market.

A very good afternoon. A couple of considerations from page three, the evolution of the reserves in Banco Centrale de la Republica Argentina showing us in most of the marketplaces a significant change in the quarter for the last month, during October. That has been also reflected in the [currency] risk measures in September. Up to now we have a significant increase from 700 points to almost 4,000 points.

And in spite of this, the effect in the foreign exchange rate has been relatively mild, thanks to the foreign exchange control, meaning that the peso have devalued in the range of 10% to 15%. And the corresponding on the peso market of these has been a very significant increase in the peso interest rate.

You have here in the lower left graph the huge revamp in BADLAR, which is a percent of the deposit rate in the local market meaning that probably as you know, this very significant difference can last for a very long time period.

On the opposite, if you look at the lower right graph, you see also the evolution of the time deposits in pesos showing an increased appetite for the retail investors to move to dollars, which are at the same time placed in local banks for the time being.

If you move to page four, you can see that although these not significant effect has yet affected the construction activity. And on the opposite the local credit supply continues to be pretty stable, meaning that the level of leverage of the economy is not dramatically changed in spite of all the turmoil of the market.

Moving to page five, we have there a quick view of the sales evolution of the Company on each of the different segments. We are positive evolution of 47% between the last three years, and on a special situation we have decided to show separately the consumer finance because of the significant impact in this quarter specifically where you see that including the consumer finance operation, the period between the two quarters compared year-to-year has increased 12% in terms of sale, excluding the consumer finance 23%. The big difference is because as part of the restructuring process we are establishing there, we have significantly decreased the volume of sales of this vehicle.

If you look at the EBITDA with the same rational, EBITDA evolution has shown still growth of 25%. Without considering the consumer finance segment that growth has been 36% and a significant decrease with the inclusion of that because of the effect we are going to explain [approximately].

Moving to the next page, we see there specifically the shopping center performance of the sales. If we look at the figure last year, we see there that the EBITDA was roughly 48% of sales, 65 million. The situation today is different because of the one-time impact of the consumer financing business, which has affected the result of the Company, practically offsetting the complete consideration of that area.

On the opposite, if you move to the upper-right, you see that without that effect, the positive evolution of the shopping mall continues to reproduce a strong 29% increase in the cash generation and 19% increase in the sales showing that the Company still has the ability to provide good margins.

Regarding the tenant sales and the customer flow, the growth continues to be very positive with 20% growth for the period and without any significant change in the composition of the rental income.

Regarding Tarshop, a quick comment on the situation. Of course the role of the local financial market has impacted very severely interest rates with a huge impact it undergo to the financing activities worldwide. This has affected also the systemic delinquency rates moving out in a situation to charge larger allowances for markets and an increased coordination on the issuance of credit Tarshop certificates, meaning that this increased coordination affect the financing ability of the Company.

Together with these, the increase in the coordination, and a local change in tax treatment of the credit card trust, increased very significantly the operating cost of the funding sources for the Company that effected very strongly in the environment of the market that we had during the last quarter.

As you probably know, on the other hand, the big barriers of these trustees which were the Argentine Pension Fund, now are in the middle of a significant market change in terms of the nationalization of the pension fund system, which provoked some type of delays in the float of the trustees acquisition by the pension fund, which has slowly been coming back with different rates; some of these credit card certificates are now being acquired directly by the national pension fund agency.

And during this week and last week, the acquisition by part of the [buyout] pension funds has coming back to the market, but we have something in the range 30 to 50 range without these, which has also affected the financial ability of the market.

On the other hand, the specific situation of Tarshop, which is important to take in consideration, which as a company have a very significant portfolio, almost ARS100 million security side with no capital injection for Alto Palermo almost from the start of the Company.

That's why the Company decided to increase the capital base with a capital contribution of ARS60 million and also providing another ARS66 million in a loan that we might likely also credit to capital to provide a much efficient funding base for the Company considering the circumstance.

According to what -- how you're all saying we started a plan, several measures, in fact, we have a very significant recovery in the collection between July and September, the trend now is more stable and beyond this term regarding the transformation of local financial system relating to the pension fund, it's completed.

It's important to address that we charge a significant loss in the period. David, if you can make a comment on the figure?

Yes, our invested results have been ARS73.7 million north, before the income tax and that was -- the breakdown of that figure is that we have had increases in our allowances for (inaudible) market and also delinquencies for an amount of ARS47 million, while our operation result was a negative result of ARS26.6 million for which ARS18 million were due to the difference in the interest rates that we have suffered during this year.

Thank you, David. Finally, as part of our plan leaving aside the funding of the Company, which I started with a significant provision for reviews, 17 selling points to reviews the structured cost, we have reviewed 17% also of the headcount of the Company, and this is something that we may decide to increase.

So it's -- we closed 13 selling points. We have reviewed, centralized, this area by 10%. We are cutting down consulting services of the Company. We have changed all the commercial side, the cash-lending plans of major financings to adjust that to the present environment.

And the -- on the other hand, it's important to address the situation that the government is fully aware in the same way that it's happening today in the United States, that the internal consumption should be supported as part of the outer corporate crisis.

So the sector as a whole is having important conversations with the government in that extent. As approval of that, as I mentioned the national pension fund agency has already appointed a couple of trustees related to consumer financing activity. We have seen that we are going to have this Company in a breakeven situation by the end of the year.

Going back to the shopping center segment, we can see in page seven, that the PAMSA, the General Paz commercial center, the 38,000 square meters. It's near half of the physical progress.

We are thinking in the opening of this at the end of next Autumn of 2008 -- 2009, sorry. And these -- it's an investment that we are waiting to be opened because the cash generation (technical difficulty) will be one of biggest shopping center. It will comparable to Abasto or Alto Palermo.

And we have an amount -- like to finish this shopping center, the Company has like $65 million left to invest in the near future. In the -- this will open with all of the branches. We have the clients, we have signed almost 80% of the contracts and this will add 24% -- 23% of municipal area to the Company. If we calculate Shopping Soleil, at Soleil we are expecting to add to the portfolio at the beginning of 2009. So with the (inaudible) shopping, we get credit shopping we're going to grow 33% of gross [literal] area.

In the case of office rental segments, we have the portfolio almost full in page eight, and our price is still $23 per square meter comparing to the market that is above $33. We have near 1% of vacancy.

Here the three big buildings we purchased recently, this is not including the repository building that was recently added. And this building today at the end of this year we are thinking that 60% or 65% will be occupied. So will they -- the rental of this building will appear on the balance sheet of 2008 -- 2009, sorry.

About page nine, Nico Quattro project, which investment was a budget of near $20 million, ARS61 million with 80% done. We had only to pay for this project we need to put only ARS15 million more. And this will be finished at end of 2008 adding to the portfolio 11,000 square meters to the rental office portfolio.

Regarding Santa Maria del Plata on page 10, you'll see there the actual draft project of the site which have completed up to one-year work, the complete draft for the project. And we have already begun the technical discussion, but detailed discussions on this project with the different sectors of the government agency related to this.

And we have very good response and we are waiting to -- for the final result on the challenge that has been set into current.

Here we see a picture that in the past was not. Here we see the new future project with a building consisting how the project is presented today and how it's near to be approved for the third time the pressure in this picture.

In volumes this -- in contraction volumes, this represent exactly what has been happening. In the case of hotels, it's almost the same. We didn't have a big change in this sector. We see that the price have grown a little. We keep on seeing almost the same. Here we see the average price per room and in next page, in page 12, we can see how the hotel operation the EBITDA was almost the same, from eight to nine. So we've only 9% increase year-to-year comparison.

Here if you consider the information on page 12, leaving aside the credit corporation that we have already explained with a decrease in sales as part of our restructuring program under the heat of a one-time [remediation] generation, the rest of the business lines are providing a sustainable cash generation with the (inaudible) at the point of the environment, both it's difficult difference in the case of (inaudible) to the prior period of last year.

And with respect to the incomes in the statement as of 31 June, 2008, the total sales increased 11.7% from ARS195.59 million to ARS218.38 million. Our cost of sales increased also, but at a higher rate, 28.8% from ARS81.38 million to ARS104.84 million.

The gross profit of the Company was almost the same, decreased 0.6% from ARS114.2 million to ARS113.53 million. And the operating profit decreased 101.6% from ARS55.2 million to a loss of $888,000. These figures are including the segment of a consumer financing. Our related company Tarshop, okay.

The operating loss decreased mainly due to the decrease in our consumer finance operations, as already was explained by Gabriel. Excluding the effect of the operation -- operating losses recorded in the consumer finance segment, our operating income of the other segment increased 64.1% from ARS47.2 million to ARS72.8 million.

With respect to the financial result, we have had an increase in our financial result of 51.6% from a loss of ARS40.7 million last year to a loss of ARS61.7 million this year. This increase of our financial cost was due mainly due to our depreciation of the peso regarding the dollar is that we have had this year. Last year, we have had the depreciation of only $0.6. Once the dollar was in 2008, we've had a depreciation of $0.11, and that increased the depreciation from ARS6.6 million last year, to ARS23.3 million this year.

While our net financing costs increased from ARS34.2 million in 2007, to ARS38.4 million in 2008. With respect to the loss on equity investments, this loss is from related companies were mainly due to losses in our related companies Banco Hipotecario that was closed by the decrease in the evaluation of it's portfolio of financial assets resulting from the current financial condition. We have had a loss in 2007 of ARS19.5 million. And in 2008, our loss from -- was from ARS28.6 million.

With respect to income tax minority interest, the result was increased for 191% because last year we have had a loss of ARS25 million and this year we have had a gain of ARS20.5 million. Our net financial -- our net income was a loss of ARS70 million this year, whereas it was ARS30 million last year. That was an increase in the loss of 134%.

Moving to page 14, other financial relevant information, as part of the hedging policy on a consolidated base, we'd have hedging through local foreign exchange purchases in the future. We are not allowed -- are not being exporters to assume for what's outside Argentina. That's only allowed due to local regulations for exporters. So all the hedging is constructed by buying forwards with local (technical difficulty) banks, meaning that the Company intends to keep hedge afloat, assuming that the stocks of debt -- or any sort of exposure is hedged by the asset themselves because all the real-estate assets in Argentina are very resilient in terms of lower evaluation and that's the way the Company hedge has been exposed.

Then moving to Page 15, comment on the (inaudible), the Company, IRSA has a net debt of $205 million and in the case of Alto Palermo, the net debt of Company $115 million. The important is to --important to tell that last week due to the foreign exchange restriction that have been imposed in the country, the rating for the debt of the country and vis-a-vis for the rate of the Company has decreased to B minus in the case of the [102] ranking.

Alejandro, if you want to make additional comments.

No, I want invite the questions and answers. And now if you want, please operator.

(Operator Instruction). Your first question comes from the line of [Penella Hetzler] with Credit Suisse.

Hi, good afternoon. I wanted to know how do you see the outlook for the real estate business in Argentina next year and which segment do you expect to show a bigger growth? Thank you.

In Argentina, as you thoroughly know, lot of these are in the [15s]. And so you know that the ratio we have as mortgages to the GDP is less than 2%. That shows that (inaudible) Argentina are valued on cash. So you don't see (inaudible) in the market. And up to now it's a safer environment, and a lot of Argentineans are purchasing and it's something amazing that we are being able to sell things that never like small, I don't know, (inaudible) that we have in stock.

It's kind of like today we are being able to sell them because Argentina, seeing that we will take you to a safe place, and that is making the market and us full and that is allowing to sell their apartments like we do in the case of (inaudible). And then once we are given details of the stocks of smaller units we have on the Company.

For the citizens we are taking here is less dramatic than US because of the situation of mortgages, because of the quality of Argentina having loose dinner pocket when they talk about France or the international situation. And that in this significant place that there are analysis --- people that talks about if we will have drop or not next year, and some of them, they're talking about 10% drop or 15% drop. But up to now nothing happened because a lot of Argentineans are going through these kind of opportunities.

Okay, thank you.

(Operator Instruction). The next question comes from the line of [Stuart Safavi with Ace Galleon].

Hi, gentlemen, thanks for putting up the call. Just a couple of questions. The first one is related to your outlook for the consumer finance business. Obviously, it's been a very difficult year so far and you have injected substantial amount of cash. I just wonder where the bottom is on this business.

And you tried to IPO it. That didn't go very well. You have now injected capital. Are you expecting to inject more capital? Is there any exit strategy here? To what extent do you think you will be able to actually stabilize the portfolio? That's the first question.

And if I can just follow up on one more. I am not sure if I understand the list of the occupancy rates and your expectations on GLA or total leasable land for '09. Do you see any softening on rental prices? Do you see any softening in demand from retailers? Are there a lot of leases that are coming up in the next couple of quarters that you think will be at risk of not being renewed? That will be great, thank you.

Okay, thank you. Regarding the first part of your question, regarding Tarshop, as I mentioned, we have put together a plan, which is mainly to have the Company on there given by the end of the year, meaning that -- as I also mentioned a -- the government is completely aware of the impact in the sector, think that we will have -- like, helping in range of 50 to 60 small consumer finance companies in Argentina.

The most significant capitalization of the market has been the support from AIG to its own operation in Argentina with $175 million of capitalization that takes place like one month ago or so. And in your native (inaudible). Of course, as I mentioned, we expect that the regiment of the Company will give us a much better situation on the future outlook.

You must really take in consideration that what is happening in the local operation fund and the reform really means a very significant financial distress for a short period. On the 20th of this month, the law going to be approved, and since then as I mentioned the flow of financial trusts will increase again rapidly as it has shown in the last days.

On the other hand, regarding the exit, what we have learned during the last crisis -- each financial crisis that we have in Argentina, with that the conservation process is almost similar. It is something that you are seeing now in the States. 1995 when we began it at Argentina, we had something like 270 banks. After six to eight months, that field decreased to 150 banks to consolidation.

In 2001, we have also significant consolidation of banking operations apart of the results, for instance, on the banks over the recent provinces were acquired by private banks. So probably you want a scenario where you will see there's significant consolidation in this segment as part of the say to solve. So you know that the construction of mall -- of additional portfolios indeed bring significant efficiency. There's a business with a scale, which is very significant, that you're able to manage the portfolio with the same structural process.

Regarding the second question about the declaration of consumption, maybe these impact some of the businesses and maybe in the shopping centers, the retail stores. And -- but we have been seeing the first -- let's say up to now, the first five months, and they were a small impact up to now.

We were able to avoid the impact of that reducing cost like we're doing. And so some -- if they are growing in sales for three months, not at the rate of where we were growing years before, but they are still growing comparing year-to-year. So we're seeing that the impact is something that up to now the first semester, it's not affecting a lot in the case of the shopping center sales. From then maybe in the electronics, they're hurting more and we're giving them some discount on the (inaudible) to help them in their financial situation, but it's not affecting, I told you, our numbers.

And you know that the consolidation that (inaudible) has in the Shopping Center have the best asset from the seat of Buenos Aires where the consumption is. So we are keeping almost a phase like we had last year.

[Steber Nove with Standard and Poor's] has the next question.

Hello, good afternoon (inaudible). I just want to confirm one thing regarding the Shopping Center segment. The project, the PAMSA project, the presentation said that if the Company estimates -- finish that project by Fiscal Year '09, meaning that June '09, but currently the -- but the current progress is 46%. In the seven month, the Company is going to finish this project?

You're right. We're thinking on reopening up, I don't know, maybe April, May, June, which is just three months to open. Not only they want to impact the balance sheet, we want to (inaudible) but it's true what you say, but 50%, but you have to add, it's prepared and the Company can't do that. We are now in November and the [even years] are prepared to finish this in eight more months.

Okay, and --

And the (inaudible) percent it was on September too. It's was the 13th of September of this year. It's not November. So we have October, November -- so we have like nine months from that.

Okay, okay, fair enough, thank you.

Our next question comes from the line of [Gustavo Singaret] with Merrill Lynch.

Hi (inaudible). Three questions I have four for you. The first one is the one related to the [Carchitta] Shopping Center that has been in some news in the newspaper in the last couple of days. Can you make some guidance of when this is going to be discussed in the register in terms of the certification for the development of the Shopping Center?

The second one is related to allowances for bank debts, if you're expecting new increases for the next quarter. And third is what are you expecting related to Santa Maria del Plata project and when it's going to be forwarded or will it be funded in the situation?

The case of Carchitta will be heard in the press. It's -- we passed one of the steps and we began to do projects in long time ago. And we were approved by one of them, not the final approvement on project. But it is a good part. We are optimistic because we passed it, and we are thinking that this is -- it is possible to keep for the beginning of next year the approval of that. But it's not finished and with that said, they passed one, but we had to go through the (inaudible) not to make more debts to have the final approval. But it's much better than what we had before. We see this is a great project. It's again one of the big shopping centers like the one we're opening next year, PAMSA. Carchitta project is one that is in that region. This is in the middle of Buenos Aires City where there is no available shopping center, then that would be again a big piece for the Company. And the day we're going to receive the approval, we like to make it because it is a great project. But that is said in the press. It is not signed, so it is not (inaudible) up till now.

In the case of Santa Maria, we're passing (inaudible). And what we're saying is we receiving good finance from the government service facilities about the approval that we are representing for a long time. So we think we have follow more on the due, can make a lot of movement of the Argentine economy and maybe able to receive all of this approval that we are expecting for a long time.

Gustavo, would you repeat the question about that?

Yes, in terms of allowances for bank debt, if you're expecting a similar number for the next quarters.

Well, as I mentioned we expect that the Company is going to get into breakeven and that the situation is going to get more normal compared to the very poor performance of the last quarter in the sense on the system.

Of course, as you know, the disruption that the local financial system had on the pension fund ability to be part of that and the consequent hiking interest rates will have a toll on the delinquency rates in the next quarter. It's difficult to establish how strong yet because the Company result is not going to be there. For the first time, in the last days, I would say this week, it's flat week where the rate continue to get more flat and vision continue to grow. I think that's the first thing we should look at to try to find out what would be the final result of the delinquency rate.

Thanks.

(Operator Instructions). At this time there are no questions.

Okay, gentlemen, thank you very much for the conference call. Let's talk next quarter that ends in December. Thank you very much and have a good day. Bye.

That ends today's conference call. You may now disconnect.