IRSA Inversiones y Representaciones SA (IRS) 2017 Q3 法說會逐字稿

Good morning, everyone, and welcome to IRSA's third-quarter 2017 results conference call. Today's live webcast, both audio and slideshow, can be accessed through the Company's Investor Relations website at www.IRSA.com.ar/ir by clicking the banner Conference Call.

The following presentation and the earnings release issued last week are also available for download on the Company's website. After management's remarks there will be a question-and-answer session for analysts and investors. At that time further instructions will be given. (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.

Thank you very much. Good morning, everybody. We are beginning our quarter results nine months of 2017 in page number 2. And as you probably know, the Company has decided to change the valuation method, but from the next quarter -- from June 30 of 2017. So today the numbers are going to keep as they were before.

The financial consolidated results for the nine months, revenues grew up to ARS55 billion and, as you know, we divided from Argentina ARS4.2 billion through the Israel Center operation ARS51 billion. The EBITDA that we achieved in the nine months was to ARS7.5 billion and from those ARS1.8 billion came from Argentina and ARS5.7 billion came from Israel. The net gain of the nine months was ARS3.8 billion, a gain from Argentina ARS757 million coming from Argentina versus last year ARS148 million. And in the case of Israel bringing ARS3 billion from Israel.

The Argentine Business Center we have been achieving very good results in the rental segment. EBITDA for the rental segment grew by 32% -- almost 32% in the last -- in the first nine months comparing to the last nine months. There were lower results in sales of investment properties. We decided to sell less this year comparing to the strong sales of last year. And there is work in progress in two projects that Daniel is going to explain [in depth] a little bit later.

At our Israel Business Center, the main highlights for the nine months, these strong results coming from the Adama sale that increased a lot the results of DIC and later the IDBD. And the increase on the share for the price of Clal, one that we still hold on the balance sheet through the method of the valuation of the shares. And there was a recover on the market value of that share.

And some very good news of the quarter, IDBD has been able to issue notes at the Israeli market for almost NIS1.1 billion and these at a fixed annual interest rate of 5.4% to counter existing debt. So this is the first issue of the Company after many years of not having the possibility on the market. So now the Company was able to raise capital for this year and next year. So now I will introduce Mr. Daniel Elsztain.

Thank you, Alejandro. Good morning. On page number 3 starting on the Argentina Business Centers we are talking about shopping malls. We can see that the same shopping sales grew on this quarter 19.9%. This is a little below inflation, but it's above last quarter.

We can see also that the stock of our shopping centers grew a little bit by the expansion last quarter of Distrito Arcos and during this quarter of Soleil Premium Outlet for about 2,995 square meters, getting to a total stock of 340,000 square meters of GLA in shopping centers. Occupancy remains very stable, 98%.

We see a very small decrease of 0.4%; this is basically due to some movement on the [sales] on the tenants. So the sales went up, occupancy remained stable, sales went up in pesos and we are very stable in terms of visitors in our shopping centers.

On page number 4 we can see some about the office segment. We have 100% occupancy for the third quarter in a row in our portfolio. This doesn't mean that we don't have people going out, but our team was able to replace the old tenants with new tenants in a very, very fast way. Prices on the office segment are going up. We see landlords pushing a little bit on prices and demand is accepting those increases. So we went now to a total value of $25.09 per square meter per month excluding all common charges.

And talking about the stock, we have now a stock of 77,252 square meters. This is a small reduction from previous quarters due to a sale of a couple floors at the Intercontinental Plaza for $6.3 million at a price of about $3,700 per square meter.

But with the construction that we have underway we will have an increase of that portfolio for 62% getting to 125,000 square meters at the IRSA Commercial Property at -- and also a small balance of 14,000 at the level of IRSA. And that will give us, in the IRSA Commercial Property, an increase of about 80% of EBITDA coming from $19.5 million to an expected $34 million EBITDA per year and reaching a market share of approximately 12% of the market in Buenos Aires.

On page number 5 we can see some CapEx for the fiscal year 2017; total CapEx of $194.5 million. We can see the construction work of Alto Palermo. We finalized demolition. We are working with the contractors who are bidding on construction, a total investment of $28.5 million for construction of new GLA for approximately 4,000 square meters. But in this number we are including here the upgrading of the building up to 2017 standards and the city codes and requirements from regulators.

The second line is the Polo Dot Office Building. This is an office park we are building adjacent to the Dot Baires Shopping Center, one of our largest shopping centers. This is going to be a building -- the first building will be 32,000 square meters of GLA. We estimate the opening for the end of this fiscal year and the occupancy will be for that time approximately. Construction is underway all the contracts with the construction company and vendors are signed. So it's on time and on budget.

And the third one is the construction of the Catalinas Office Building. This is the best location today and the most [extensive] for class A buildings in downtown Buenos Aires. This is a total investment of about $101 million, a total of GLA of 35,500 square meters. Estimated opening for fiscal year 2020. Again, as we said on the previous one, construction is underway and on time and on budget.

On page number 6 we can talk a little bit about our hotels. We have three hotels. Here we are seeing on this quarter good news. The average price went up, now reaching about $186 per room. Room occupancy also went up to 69.6%, so we consider revenues went up almost 40% on this nine-month period reaching ARS568 million and EBITDA went up 63%. It's a big, big increase reaching ARS49 million, but again it's a small piece of our total business here in Buenos Aires and Argentina.

Something about our International on the IRSA level -- Condor. Remember we have a participation here in Condor Hospitality Trust. This was the micro rate dedicated to economy hotels and there was a big, big transformation on this Company. Now it's Select Service Hotels. On March 2017, Condor issued 4.7 million [new] shares at a price of $10.50 so today market cost after the conversion and this new issuance of shares is about $120 million to $130 million.

Also in May there was -- Condor extended a revolving credit line for $90 million to $150 million and the proceeds of the new line of credit and the new issuance was basically to refinance short-term debt and acquiring hotels in the fly to quality strategy, so the Company is sound. Remember we changed here the whole team, the CEO, CFO, the administration.

So this is a working Company, now it's really speeding the strategy to achieving the results. Now they have a very good portfolio and achieving very good results. Here as you can see, now we have IRSA and Stepstone that own a little bit more than 50% of the Company and the rest floats on the market.

So now going back to Alejandro who will explain a little bit about the Israeli Business Center.

About the structure of the business in Israel, here we see on page number 8 today IRSA controls through Dolphin 68% of IDB and IRSA owns 6% of DIC we can see here in the graph. And from DIC we see Cellcom with 42%; (inaudible), that is PBC, the real estate branch that we control 64.4%; Elron 50.3%, that is research in (inaudible) medicine; and [shopper side], the 60.7% that recently had a capital issue on the capital markets in Israel too.

And plus that, IDB Tourism that is under sale negotiation, 100% on that. That is the airline that is under negotiation today and the very famous Clal Insurance that we have still 54.9% that there was some news and about that we are going to explain a little deeper. This is still at market value of the share and we were forced to sell up to 5%. So now I will introduce Matias to explain some details on the Israel business center and about the sale of Adama.

Thank you, Alejandro. Good morning, everybody. Going to page 9, here while we disclosed this information in the previous quarter, the disposal of Adama generated very good results for DAC and IDB and generated strong cash flow. So we finished the transaction, the final gain recognized for IRSA was ARS4.2 billion and the DAC net cash flow positive was $800 million -- sorry, NIS800 million.

Page 10 you see the evolution of the price of the shares of Clal. Remember that we value Clal at market value, although we used to have 55%, now 50% of the Company. We value this at market value since we don't have the voting rights of the shares.

The evolution of the shares was very positive, so generated a strong gain for the nine-month period for ARS2.2 billion. The shares increased in this period 27%. And then you will see the last year in this nine-month period decreased significantly, so we will have positive results against a loss in the last year.

An important development happened in May this year. Remember that here we have a claim from the regulator that is forcing us to sell shares in the market. There was a rule for the court that ruled that we have to sell the 5% in the market. Although we have appeal rights that we will define if we will exercise or not in this quarter or in May, we enter into a disposal of the shares together with a swap agreement, a total return swap on the shares.

So finally we sold 5% of the shares, but we keep the right on the economic value of the shares for the next two years. So if the shares go up we will capture the evolution of the shares and if the price goes down we will have to pay the difference.

In page 11, other important event for IDB was the DIC dividend payment. DIC announced dividends that will go directly to IDB and the rest of the shareholders. IRSA remains -- remember that we control 6%, so IRSA received ARS165 million of dividend from DIC.

And here in the graph on page 11 you can see the evolution of dividend payments of the companies, the different subsidiaries, that if you see the evolution since 2010 to 2014, almost eliminates all the dividend payments. Now is recovering and 2016 and 2017 start to pay again PBC and Shufersal and DAC paid for first time since 2014.

So next page in page 12 you can see the evolution of the debt on IDBD and DAC. Since our investment we decreased significantly the debt of IDBD NIS2 billion from NIS4.8 billion to NIS2.8 billion and also DAC decreased from NIS9.5 billion to NIS2.8 billion.

Important news regarding our debt and our financial statements in this quarter. After the refinancing in Israel for first time in the last three years IDB eliminated the going concern remark in the financial statements and the auditor signed for that. Also there was a removal of the bank's financial covenants; all the restricted financial covenants on the bank loans were eliminated so now IDB has a much more flexible debt structure.

Then for the subsidiaries, the market remained very strong. The interest rate environment in Israel is very low. A lot of liquidity, so the subsidiaries are taking advantage of that. PBC issued In April 2017, NIS446 million at a fixed rate of 3.68%; Gav-Yam NIS430 million at 1.69% interest rate with a maturity -- final maturity in 2026. DAC also issued at NIS555 million at 4.6% (sic - see slide 12 - 4.06%) fixed. So all the subsidiaries are taking advantage of the market and issued debt without any problem at very low interest rates.

Also an important news was the credit rating upgrade in DAC from BBB minus to BBB and IDB from CCC to BB with a positive outlook.

Going to page 14 regarding our financial instrument, Alejandro mentioned our decision to change the evaluation of our investment properties that basically will include malls, offices and land reserve. We will start to give impact to this change for our next financial statement that we will plan to release in September will be our fiscal year.

Remember that in IRSA Commercial Properties we already started, but for our financial instrument at IRSA level we are eliminating all the effects of this appraisal and we maintain everything at historical book value for this quarter. So for the next quarter you will see a big change in all the figures. We engaged [Newark] to do the appraisal of our properties so it will be a third-party appraisal.

Going to page 15, here you have the evolution of the main lines of our financial statement. So starting with our operating income, in the rental segment the results were strong, 32.9% increase in our operating income. Basically all the lines, shopping centers, offices and hotels are with very good results so that is the evolution.

In sales and development you will see here a big decrease from 944 to minus 42. Basically last year we sold more investment properties than in this year. We sold -- remember that we sold in the last year (inaudible) [cuatro], that was -- if I'm not wrong -- a $42 million, $43 million disposal; and this year we only sold two floors of the Intercontinental Plaza building.

Financials and others, also a decrease from ARS81 million to minus ARS71 million. Here you have two effects, Banco Hipotecario that we have lower results this fiscal year against the last nine-month period; and also was a reserve of conversion of Madison building that we sold last year that was a positive impact in the previous year compared with nothing in this fiscal year.

In page 16 regarding the Israeli Business Center, the operating income were positive for most of the lines. Here we haven't included the comparison between the last year against this year because in the last year we only consolidated for three months and here is nine months. So for that reason to more accurate the comparison we haven't included, but you have it -- that numbers in the financial statement.

So positive in real estate and supermarket, negative in telecommunications. Here we have mainly the amortizations of all the infrastructure of Cellcom. So, if you see the EBITDA figure for Cellcom is positive, also when you see the numbers in Israel for Cellcom are positive in the operating income, in our case it's negative because we have higher asset valuation because of the PPA when we acquire and higher amortization. And in the others basically we are including all the headcount of IDB and DIC, so the results are more for the holding companies, there is no income and expenses.

Page 17, you have the rest of the lines. The operating income we finished stable against last year, almost ARS3.3 billion against ARS3.1 billion this nine-month period. The net financial results, here you have an improvement from a negative result of ARS3.3 billion in the last year against almost ARS2.4 billion in the current fiscal year.

From Israel here you have the evolution of Clal shares that was much higher in this year than in the previous year. And in Argentina you have the lower devaluation. Remember that last year we have a devaluation of 56% and this year we have only 2% devaluation, so we have better results on all the exchange difference on our debt.

And with this we finished net income with a positive value of ARS3.8 billion against a loss in the previous year of ARS1 billion. The controlling shareholder part attributable to our controlling shareholder is ARS2.1 billion and the non-controlling interest is ARS1.6 billion.

Regarding our debt, the only news -- we took a loan of $50 million basically to finance the development of Catalinas, the part of IRSA. Remember that 45%, it belongs to IRSA Commercial Property. So we increased a little our debt. The net debt is $337 million today as of March. After that we received dividends from IRSA Commercial Properties and also from DAC. So probably we will reduce a little this debt going forward.

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

(Operator Instructions). [Durrell Galotti], Morgan Stanley.

Good morning, gentlemen. So I have two questions. So the first one is on the consumer in Argentina. So does it seem like the consumer has turned a corner, that is that they are improving? Because if I look at your shopping center sales, they seem to have pretty much stabilized around 20% same-store growth. They actually did a little better sequentially in this past quarter.

And then the second question is at what point in time do you believe that IDBD can reach a sustainable debt level or do you think it's already there?

Thank you. The first question, I would say that construction today -- I mean, we see that we turned a little bit this quarter compared to the last one. But I would say that if you look today the picture, consumption is weak today. If you talk to retailers you will hear that the consumption is weak. And we think that this is just because of what's going on today in the country as a whole.

We expect that for the future if the country grows we will follow that path in terms of real growth in sales. But I will tell you that that increase that you see is because we had some promotions and it was a better quarter than the previous one. But I wouldn't say that we completely turned the corner in terms of consumption.

With respect to the second question about the financing of the debt in Israel, very good news that DIC and IDB were able to find issuing bonds locally and at good rates -- a little more expensive comparing to [subseries], but still very good comparing to the compression the price they were paying before.

Remember this was surpassing 15% and they went to the market close to 5%. So this in the holding level is giving a lot of room. And in the subseries you are seeing that the cost of capital is really going down and down and the companies are doing in the first quarter and in April, the majority of them, they finance what they need for the whole year. So that gives us much more room to the Company level to decide what to do, quieter in each level of the assets.

But I guess what I was trying to get to is do you believe that the debt level -- you still have a ways to go in terms of refinancing and deleveraging or are you near where you want to be?

That will depend on disposals basically and dividends that will come from the subsidiary. So for instance, the Clal share disposal will impact directly a decrease on the debt. So we are in a process of trying to sell some non-core assets at IDBD level. So probably if we are able to conclude those sales we will have a lower leverage for IDB.

And DIC, I would say that today we are in very sustainable levels with a loan-to-value close to 50%. So also it will depend on disposal or investment, but there I would say that all the debt is trading very well so no problem.

Okay, thank you very much.

(Operator Instructions). Gordon Lee, BTG.

Hi, good morning, thanks again for the call. Just a quick question regarding the new accounting methodology as it affects IRSA Inversiones y Representaciones as a holding Company. Obviously that impacts the assets held under IRSA Propiedades Commerciales, but I was wondering -- I suppose we should assume the same treatment for the land bank at IRSA for the international holdings, the Lipstick Building, etc.

But will we also see that for the investment properties in Israel, for instance the properties held by PBC, the [HSBC] building, etc., will those also be impacted by the new accounting method?

Yes, Gordon, we will have to have an equal system for the whole group. So, so far for instance, in Israel they already are releasing a financial statement with the fair value of the properties. And in IRSA we eliminate it. So going forward we will have 100% of our investment properties of the whole group at fair value.

That will include Israel, will include the IRSA Commercial Properties -- not necessarily Lipstick Building because Lipstick Building we are not consolidating the asset, we are evaluating at the equity method not as an asset. And then for the land bank we will have the valuation.

Perfect. That's very clear. Thank you.

(Operator Instructions). Okay, as there are no more questions at the present time this concludes the question-and-answer session. At this time I would like to return the call to Mr. Alejandro Elsztain for any closing remarks.

I think we are finalizing a good quarter and next quarter we will include this, the fair value at the IRSA level that will take and affect a lot the balance sheet too. And the real estate is very filled. We have very good occupancy and a lot of things under construction.

So thank you very much to the analysts and investors helping us in this conference and we will see you next quarter. Have a very good day. Thank you very much.

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