IRSA Inversiones y Representaciones SA (IRS) 2016 Q4 法說會逐字稿

Good morning, everyone, and welcome to IRSA's fourth quarter 2016 results conference call.

Today's live webcast, both audio and slideshow, may be accessed through the Company Investor Relations website, at www.irsa.com.ar/ir, by clicking on the banner "Conference Call." The following presentation and the earnings release issued last week are also available for download on the Company website.

(Operator instructions)

Before we begin, I would like to remind you that this call is being recorded and that information discussed today may include forward-looking statements regarding the Company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the Company's earnings release regarding forward-looking statements.

I will now turn the call over to Mr. Alejandro Elsztain, Second Vice President. Please go ahead, sir.

Hello. Good morning, everybody. We are beginning our conference call of the fiscal year 2016, and this is the first time that we are consolidating the results of IDBD that represent half of the year of IDBD.

And if we go to page number 2, we can begin speaking about the financial consolidated results, where the revenues of the whole Company was ARS32.6 million (sic - see slide 2, "ARS32.6 billion"). This is coming --. We divided -- we tried to divide between the two operations between Argentina and to Israel to make easier to analysts and to investors. From those, ARS4,400 million came from Argentina and ARS28,000 million came from Israel operations.

And the EBITDA was ARS6,200 million, almost ARS3 million (sic - see slide 2, "ARS3 billion") coming from Argentina and ARS3.2 million (sic - see slide 2, "ARS3.2 billion") coming from Israel.

The net income of the Company, we achieved a loss of ARS1,872 million, comparing to a gain of last year. And this is a combination of a gain that Argentina brought -- ARS179 million came from Argentina -- and a big loss -- ARS2 billion -- from Israel. And attributable to the shareholders of IRSA, we achieved a loss of ARS1.2 billion.

This is -- we tried to make easier the analysis of the two, and we're going to show that majority of the losses came from non-cash things that happened to the balance sheet.

We talk about the Argentina Business Center. In this year, IRSA sold 1.2% of commercial properties, and we reduced our participation from 95.8% to 94.6% of the company.

There were very strong results at the rental segments and the sales of investment properties during this year, and we are beginning a lot of new developments in the next year like the Polo Dot, Catalinas, and Alto Palermo expansion that Danny will explain later.

We had the allocation of company structural debt at IRSA Commercial Properties. That is going to be maturing in 2023. And we issued a note very recently. This was this week. And we issued a note of $184.5 million at 7% and ARS384 million at BADLAR plus almost 300 basis points. And this is going to cancel the existing debt.

At Israel Business Center, we modified the tender offer obligation and the payments during March of 2016 and delisted IDBD.

And there was IDBD -- the DIC company accepted a very good offer that we received from ChemChina to sell the 40% of the stake that we own in Adama.

And there was some very good news, too, about the issue of notes at 4.25% plus CPI at an IDBD level. A long time ago, we did an issue and this was to refinance short-term debt and note issuance.

So, this is very good news from Israel, too.

So, I will introduce Daniel now.

Thank you, Alejandro. Good morning, everyone.

We'll start on page number 3 talking about the Argentina Business Center, with the shopping mall segment. As we can see the figures for this fiscal year, we have an increase of sales of 34.3%. If we compare same shopping centers, it's 29.6%. This is very high levels of sales. Nevertheless, we did not reach the full amount of inflation that we had for this year.

In terms of occupancy rate, we are running in shopping centers of 98% of occupancy -- 98.4%, exactly -- and this is really high, high levels of occupancy. We just had (inaudible), where we have some stores going out (inaudible) shopping, or renewals, whatever.

And in terms of visitors, we are very stable. We are having about 112 million visitors. We have a step that we can see from 2014 to 2015. And mainly this is explained by the opening of new shopping centers. Since then, we are very stable and our shoppings still are very attractive and we are having a lot of customers visiting our shopping centers.

On page number 4, we can see some office buildings numbers. We finished this fiscal year on a 98.6% occupancy, which is very similar to last year, but we can see that we went up from the previous quarter. This is mainly explained because at the end of the previous quarter we had some renewals and rolling on one of our buildings. So, now, we are back to the levels of 98%, 99%, which is very high, and we're very happy to have these levels of occupancy.

The whole market is going up in terms of occupancy, and also it's going up a little bit on terms of pricing.

On the bottom of this page, we can see our stock in terms of office space. In December 2014, our portfolio was 10% of the market share of Buenos Aires city on A+ buildings, and the total portfolio was 95,000 square meters. Since then to now, we had sales. So, we reduced our portfolio from 95,000 to 79,000 square meters. So, we reduced the market share from 10% to 8%. We took advantage of high prices, low cap rates, and those buildings that we wanted to get out, to fly to quality.

So, now, we are developing, and we already launched, these two big projects in office segment. One is Polo Dot, which is the first phase; and also, Catalinas. That will put us in a situation when we finalize these two projects to have 125,000 square meters, and that will be approximately at 12% of the market share at that time -- not at today's time, but at that time -- with all the incorporation of buildings by 2019.

The incorporation of these two buildings will increase about 80% our EBITDA. So, it will be from today's $19.5 million to approximately $34 million.

On the following page, we can see some pictures of these two projects. First, the Polo Dot is an investment of $55 million, GLA of 30,000. As I mentioned, we still have here some more place to build, but we didn't start and we didn't announce yet.

The opening of this building will be for fiscal year 2019. Something amazing. We just started to do some demo because it's an old building that will be converted in a Class A building. We already have signed two contracts on the building. So, the majority of the building, like 70-something-percent -- 75% -- of the building is already leased. First time this happens ever in our history in office segment.

On the right side of the page, we can see the Catalinas office building project. This is an investment of about $100 million, total GLA of 35,500.

The opening of this building will be one year after the other one. On this building, by December 2015, we sold to Globant, which is a developing company in Argentina, the biggest in Argentina -- software developing. We sold four floors for ARS180 million plus $12 million that we'll collect during construction.

Also, on April 2016, there was a sale from IRSA to IRSA Commercial Properties for 16,000 square meters. The idea is to have a long-term lease on this space.

Still, IRSA has a balance of 14,800 square meters. The idea here is to hold or to sell. That is yet not defined in the strategy. We'll see what would sense.

The construction will start very soon; estimation will be by the end for fiscal year 2020.

On the top left of the page, we also can see something. We already announced and we are in the middle of -- we just started construction. It's the expansion of Alto Palermo shopping. This is our flagship shopping center. It used to be the name of the company in the past.

This is an expansion that will require an investment of approximately $25 million. This is new GLA of 4,000 square meters. And this is not only the investment for the expansion; it's also to upgrading the shopping center to new standards, to the level that the shopping deserves today.

We are very happy about this. We are actually getting a lot of demand from tenants, even before we started construction or right in the middle that we're starting construction. Estimated opening for fiscal year 2018.

And one comment I want to make, this is all the big projects that we have. On top of this, we have a lot of small projects underway in expansion of shopping centers, small construction.

Every center when we see an opportunity to add new square meters, we take it, because it's very profitable. Any expansion we have in our shopping centers, we don't have to build usually no parking, no food courts, nothing new, but just the new stores. So, it's very profitable.

On the following page, we can see the hotel segment. This year, although we see a reduction in the average price, from $182 to $175 per room, the average price, remember that there's a big difference in the exchange rate. So, the business, it's a little bit better. Nevertheless, it's very low in terms of total revenues, and it's also very low when we compare with our whole portfolio.

By saying that, the trend is good. We are coming from having zero returns or very low returns. And this is growing a little bit on this year. We expect to have some better times in the future.

Some sales and developments we had during 2016, starting on the left side of the page with Dique IV office. This is a full building we sold. It's about 11,000 square meters that we sold for ARS649 million at that time. And that represented a 9.5-times book value, just to have an idea of the difference between book value of our assets and the selling price that we achieved at that time. And the same is for what we still have in our portfolio.

We sold also a partial sale on the Maipu building of 3,400 square meters. Again, 8.5-times book value. And that sold was for ARS123 million.

And also, we sold Isla Sirgadero in the province on Santa Fe. We bought some time ago a big piece of land to have reserved. And this time, we decided to sell. We didn't find any good use so far. We had a good offer for 7.7-times our book value. So, we took the opportunity. We sold, but we kept some rights to have a percentage of the future development on this piece of land, too.

Now, on page number 8, we can see some of the international things we were doing. On the Lipstick Building, we still have our position. We got the LEED gold certificate during this year. Occupancy went up from 92% to 97%. Really, the building is doing the best performing building on Third Avenue in Manhattan. This is well known in the market.

Prices went up from $65 per square foot to $67 per square foot per year. I'm sorry. It's meter here. It's meter per month, too. Sorry. It's meter per month.

And the NOI grew from $24 million, approximately, to $26 million, approximately.

The building is doing very well. It's really got back to the high iconic place that it always had. It's a special building, built by Phil Johnson, architect. And it's back on the market that it is, and we have high demand. Every space that we have empty, it's easy to fill it up.

Page number 9, we can see our Condor Hospitality Trust investment. The news that we had here during this fiscal year is we have a new partner that injected $30 million and is in a partnership. Also, it's part of the Board. They have three Board members.

The preferred shares, that was exchanged from preferred C shares that we had to preferred D shares. Now, the dividends are back. So, there's a preferred dividend paid quarterly of 6.25% annual interest that is back. It's reinstalled. So, we are collecting the preferred dividends.

The company, it really has been a big transformation from economy and very low-end hotels to select service hotels, top 100 MSA cities in the country of USA. So, there were a few good acquisitions. The management is completely new. New offices in Bethesda.

So, we consider that the company is a completely different company with a very good -- we expect a good future.

The S-11 form is already filed, and we expect there will be a follow-on very soon and more acquisitions to come.

If we go to page number 11, we can see the Israel Business Center and our investment --.

Sorry. I skipped the page number 10, the Argentine Business Center, the financial about Banco Hipotecario. Here, we can see that we are still almost 30% of the shares of the Banco Hipotecario. The results that Banco Hipotecario brought to IRSA this year was ARS257 million, an increase of 80% comparing to last year numbers.

At the same time, this year we were able to acquire one important office building in the middle of Buenos Aires area. This is in front of the Obelisc and very dense on traffic. And this is going to be refurnished soon. We are going to reconstruct this building almost all and in the middle of a very, very, very good location of Argentina.

And this, we were able to acquire in this same year an additional 6% of Banco BACS that are exercising the convertible bond that we bought before. BACS is the [second-floor] bank of the country and the third largest underwriter in the local market. So, today, we have 40% through IRSA and 60% through Banco Hipotecario.

And our share of the Banco Hipotecario valuation, the market value, today represents $220 million, the stake of Banco Hipotecario at IRSA level.

If we now, yes, move to page 11, we can begin our discussion about the investment in IDBD. Here, IRSA controls 68.3% of this company. We are invested up to now $515 million.

And in here, we spoke but we are still trying to explain a little more in here to explain about the company.

Controls the largest telecommunication company; the largest agrochemical company, that they're going to probably be selling soon and we are going to explain a little deeper now; and the largest supermarket company, too. At the same time, the controller of PBC, leading real estate company and farming company, through Mehadrin, in Israel; the controller of the second insurance company of the country. And the companies are listed in Tel Aviv stock exchange.

On these last months, the main issues were the appointment of the acting CEO and CFO for IDBD and DIC for both of them together.

In March of this year, there was a renegotiation of the tender offers, the float acquisition, the delisting, and some bonds that they are beginning to appear in this company, too.

There was an offer to sell the 40% of Adama -- $230 million -- that they are going to help a lot at DIC level to cancel the loans of this company. And we're going to explain a little deeper that operation.

And there was some very good and very important the issuance of debt at IDBD and DIC levels. And here, these are going very good news, because the companies are beginning to refinance. After the investment of a lot of cash from Argentina, now the companies are beginning to issue at local markets. But one of them is still subject to approval, because we are trying to pledge the shares of the Clal company that we run, and we are still on that waiting for the approval from the supreme court of the country.

If we move to page number 12, a short description and some news that are happening on the companies level about PBC that we are very involved. This is the 1.1 million square meters of income-producing properties in Israel; 1,200 residential units under construction this year. We own 100% of HSBC building; and 50% of Tivoli -- that is a mall in Vegas; 45% of the stake in Mehadrin, the leader of citrics exports and avocados in Israel.

And there was some very good news about the expansion of debentures. And look at what the rates the companies are achieving. This is a bond of 10 years, and we raised for 1.86% plus CPI. And we had a case of one other bond that we issued in a subsidy that was at 3.1% fixed for seven years, no inflation. So, this is the kind of rates that the operational companies are achieving at the local market.

And what they are doing with that, they are raising money and they are building a lot of new buildings. In the case of PBC, it's under construction of a lot of office buildings through Gav-Yam and some retail through ISPRO.

In the case of Shufersal, the largest foods retailer: 275 stores, 512,000 square meters, 18 commercial properties, and three big warehouses. So, this company is recovering a lot from the bad moments that had in the past. Today, became stronger and very positive results last quarters.

If we move to page number 13, about Cellcom, the Israel's leading mobile telecommunication operator: more than 2.8 million subscribers, market share of 27% of the country. And this is the evolution of the TV consumers and new business for Cellcom, too.

Clal is the only company that up to now we couldn't enter. This is one of the leading insurance, pension, and finance groups and over $43 billion assets under management. This is the 15% to 20% of market share of the country.

But in here, we couldn't enter to the company. Still under the process of resolution of some of part of the government that it's asking us to sell. This is under discussion.

And there was a big drop of the shares. And this is the main issue of our balance sheet. This is affecting our balance sheet a lot -- we are showing the market price of the shares, having 55% of the shares -- because of that situation with the government of Israel. That is why we are showing that loss in this balance sheet.

If we move to page number 14, we can what happened on Adama. As you know, DIC owned 40% of Adama. But there was an agreement to sell this 40% to ChemChina, our partner. And this is because of the issue ChemChina is intending to buy Syngenta. And there was a price that was achieved for $230 million in excess of the total loans. That cancels some debt that we had on the company.

Really, what comes to DIC is a net of almost ILS800 million. So, almost the $200 million. And this is -- up to now, it's not result on the balance sheet. This operation was done later to the 30 of June. So, this is a big gain that will come to DIC if this is signed, and we expect to be signed before October of this year.

I will introduce now Matias Gaivironsky.

Good morning, everyone.

Going to page 16, we have here what we did regarding the consolidation of IDB. To remember the structure, now we are consolidating. We closed our fiscal year in June. IDB closed its fiscal year in December.

And we are using a three-month gap to consolidate their results in our financial statements. Due to the impossibility to have both at the same time, we will have a lag of three months, going forward.

So, now, we are consolidated our June figures with their March figures, and we are using six months for their results. So, we will use -- since we took control of the company in October last year to March this year, that is the six months that we will include in our financial statements.

So, as we mentioned previously, we separate the structure of our financial statements in two business centers: one, Argentina, with the same segments than before -- the shoppings, the offices, the sales and development, hotels, international, and financial and others; and the business segment in Israel with the different segments -- real estate, supermarket, agrochemicals, telecommunications, insurance, and others.

So, that is the structure that we have in the financial statements, and you have all the information segregated by each of the segments to facilitate their reading.

So, going to page 17, we have the different results on the Argentina Business Center. So, the rental segment went very good. We grew 33%, from ARS1.3 billion to ARS1.8 billion.

Sales and development decreased a little, 21%. That is mainly because of sales that we did last year compared with the sales that we did this year. Mainly, remember that in fiscal year 2015, we sold the Bouchard building, the Intercontinental, and Madison. This year, we sold the Dique IV, some floors of the Intercontinental Plaza, some minor floors in Maipu, and other plot of land in Santa Fe. So, that is the comparison there.

The financials and others decreased 66%, from ARS146 million to ARS49 million. This is basically the result that we received from Banco Hipotecario, [Tarjeta] shopping, Lipstick, Condor, and, before September, from IDB. So, there are different components in each of the lines.

In page 18, for the first time, we are including this information. That is the operating income and the EBITDA from each of the segments in Israel. We can see here we don't have comparison, because it's the first time that we are including the information. Going forward, we will compare with the previous year. But since it's the first time, this only includes the current situation.

So, PBC, the operating income you can see here is all positive. The EBITDA, all positive figures.

Something important to mention. This is not exactly the same information that you will see in Israel. There are different accounting treatments in Israel than in Argentina. It's the same rule is IFRS, but inside IFRS there are different alternatives.

So, for instance, in PBC they recognize the investment properties at fair value; we have here all at book value. So, going forward, we have to segregate from their information and [amortizate] the buildings to go to the book value historical and with amortization.

So, there are different accounting treatments in each of the segments. So, it's important to mention that this information won't be equal to the IDB information.

But you can see here the trend is EBITDA and NOI positive in all the business lines.

In Cellcom, the operating is minus ARS71 million, but when you deduct from there the amortization, goes to ARS1.4 billion EBITDA positive.

In page 19, we describe the operating income that grew from ARS2.5 billion last year to ARS3.4 billion, almost ARS3.5 billion, this year. Some came from the Israel Business Center: ARS720 million. The rest came from the Argentina Business Center. Here again, Argentina, we have 12 months; IDB, we have six months inside.

Then, the other important effect in the financial statement is the net financial results. Here, you can see that we had a negative result. From ARS942 million in the previous year, that went to ARS5 billion this year.

So, to open this information, first, you can see here that ARS1.8 billion came from Argentina. This ARS1.8 billion, you have in the bottom left of the slide the breakdown.

The net financial cost was ARS1.2 billion. That is the interest that we paid. And here, we have a devaluation during this year. So, in pesos term increase to ARS1.2 billion.

Next, FX losses. ARS664 million that we have a devaluation that you can see in the bottom right, from ARS9.1 to ARS14.8 at the end of this year. We hedged some, but not all. So, we protect part with forwards here in Argentina that generate a cash gain that compensate these FX losses that is not cash.

Other fair value of financial assets generate a gain of ARS74 million.

On the other side, on the side of the Israel business segment, we have ARS3.2 billion negative. Part of this is the net financial cost of IDB -- ARS708 million -- and the rest is the fair value of Clal.

As Alejandro mentioned, the shares of Clal decreased 33% during this period -- from October to March, it went from ILS58 per share to ILS38 per share -- that generate this ARS1.9 billion of losses. That is -- again, it's non-cash. So, we haven't sold anything. To give you an idea, Clal is trading around 56% of book value. We believe that is not the fair value, the real value, of the company.

With all these components, we finish the net income with a gain in Argentina of ARS179 million. ARS2.0 billion came from Israel. So, we finish with a loss of ARS1.9 billion. Attributable to our controlling shareholders, ARS1.2 billion.

Going to page 20, we have the breakdown of our debt. One important development that happened this week, we were able to issue debt in the local capital market. We issued two bonds: one, $184 million at 7% rate, three-year tenure; and the other, the same tenure, ARS384 million at BADLAR plus 299.

So, with this, we were able to refinance all the short-term debt of the Company. So, we extended tenure to 2019. So, now, the Company, we don't have any amortization in the short run. So, we are prepared to keep growing.

Page 21, this is the breakdown of the Israeli IDBD debt. So, the total debt as of March is $692 million.

You can see in the bottom left the decrease in the debt of IDB since we started our investment. So, most of the money that we injected in IDB went to cancel debt. So, we haven't sold assets. The assets remain the same. We decreased the debt from ILS4.8 billion to ILS2.8 billion. So, an important decrease in debt, with the same assets.

And regarding the debt amortization schedule, still concentrated some in the short run. So, we are working trying to refinance this in the local market or selling some assets to reduce debt. So, the idea is to [lead] with the 2017 amortization. The 2016 is in cash. So, we have the cash in the company.

We are dealing with an authorization to pledge the shares of Clal. If we get that approval, we will have the money to refinance -- to cancel the 2016 debt. And the 2017 debt, we are planning either to issue more debt or to refinance in the local market or to sell assets.

And also, if the company close the Adama transaction, DIC will be almost in conditions to start paying again dividends to IDBD. So, there is another source of flows that we will have open hopefully this year.

So, with this, we finish the presentation. And now, we open to receive your questions.

(Operator Instructions) Jorel Guilloty, Morgan Stanley.

So, my question is regarding the debt amortization schedule, specifically your needs for 2017. You mentioned that there were a couple of alternatives in order to finance that at the IDBD level. But what I was wondering is, will any financing --? Or those capital needs, are they just -- is the sources of those capital just going to come from IDBD? Or, would you also consider further investments from IRSA or IRSA Commercial Properties in order to fulfill those needs?

As I mentioned, the sources to cover the debt of IDB are, first, the assets. We can sell assets. Remember that we haven't sold anything in Israel at the level of IDBD yet. Second is to issue debt in the local market. Third is to receive dividends from the subsidiaries. We can receive dividends either from Clal or from DIC. So, the companies will decide the dividends.

So, there are the sources that we have open to refinance the debt in the market. So, we are not planning or we don't have any commitment to provide funds from IRSA to IDB.

Great. My other question is regarding your development pipeline. So, you've mentioned already that you have Alto Palermo expansion. You have Polo Dot. But in the earnings release, you have, if I remember correctly, about 300,000 square meters of opportunity. And I was wondering what would likely be next? And what would it take for those developments to occur within the prospective pipeline that you have?

What we typically do is we just announce what we are launching. So, there is no certain pattern of the future construction we're going to have.

What I can tell you is that for this year we increased a little bit our typical construction growth, and we already announced that we have a few projects that might be launched in the near future. I can tell you most probably something on San Martin, something on the next phases of Polo Dot, and other potential expansion on shopping centers that we have. But we didn't announce them because they are not going to start yet. So, we didn't announce them. But they will be in the near future.

But is the issue more on the permitting side? Or, is it more capital needs? Or, is it just it makes more sense to do it on a more prolonged basis?

We always try to keep up supply with demand. So, when we see the opportunity that it really makes sense, that we have enough demand in terms of shopping center, we try to move ahead.

There is only one exception to that, which is Caballito, which is a piece of land that we have in the center of Buenos Aires city that, if we get permits --. And this is the one that we are still waiting for permits, And so, that case is really related to permits.

But on the other constructions or projects that we have, typically we will wait the right time, because we cannot -- first of all, we are not going to build everything at the same time, and typically we put ahead what it makes more profitable.

Okay. Thank you very much.

(Operator Instructions) It appears we have no further questions at this time. This concludes our question-and-answer section.

At this time, I would like to turn the floor back to Mr. Alejandro Elsztain for any closing remarks.

Thank you very much. Just to finish, we had a very good rental year. Very profitable in refinancing here and in Israel and decreasing the level of debt. And our assets are every time more valuable. And the interest rates are going down in Argentina and in Israel.

So, we expect a very good path of growth to the two companies, and we expect to keep doing the business in the two places of the world as big as we can.

So, thank you very much, and have a very good day.

Thank you. This concludes today's presentation. You may disconnect your line at this time. And have a nice day.