IRSA Inversiones y Representaciones SA (IRS) 2018 Q1 法說會逐字稿

Good morning, everyone, and welcome to IRSA's First Quarter 2018 Results Conference Call.

Today's live webcast, both audio and slide show, may be accessed through the company's Investor Relations website at www.irsa.com.ar/ir by clicking on the banner, Conference Call. The following presentation and earnings release issued last week are also available for download on the company 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 conference call of the first quarter 2018 in Page #2. And we can see the main events that happened on IRSA this quarter.

The quarter, we achieved ARS 74 million and is a decrease of 78% comparing to last year quarter and the attributable part to IRSA was ARS 553 million comparing to last year ARS 200 million. So very good results in the quarter.

The Argentine Business Center had a gain of almost ARS 2.3 million -- ARS 2.3 billion, sorry, mainly because of the higher rental results and the increase on the fair value of the investment properties of commercial properties. And from the other side, we are going to see some good results from Lipstick and Banco Hipotecario later.

From the Israel Business Center, we have received a loss -- noncash loss of ARS 2.2 billion that mainly explain by noncash effect in a debt exchange at DIC level, and Matias will explain a little later.

And when we speak about the adjusted EBITDA, we reached ARS 3.2 billion, it is a decrease of 28% comparing last year quarter.

Dividing the Argentine Business Center to the Israel Business Center, the Argentine Business Center had a very good rental segment this year, combined -- combination of 26% comparing year-to-year; occupancy of shopping, 98.8%; 96.2%, the office buildings; [68.4%], the hotels. Higher sales and development because of some sale of apartment and a lot of land of Baicom. There was a payment of dividend that was approved last assembly and is going to be done today, ARS 1.4 billion, representing a yield of 5% to the company.

There was a subsequent event, a very important sale in the secondary market for 10 million shares approximately for IRSA Commercial Properties, almost $138 million. And you have -- you know that we had the intention of increasing the liquidity of this company and finally we did after the election, that the market was much better situation so we sold 8% -- 13% of the company. Now we have 86% -- 86.5% of the share and the rest was done by JPMorgan 2 weeks ago.

That money entered to the company after the [30th] of September, so we are not seeing today on the figures of this number because it was done in October.

From the Israel Business Center, there is a second tranche of DIC dividend paid. Remember, we divided in 2, and was paid and IRSA received that payment, too, for ILS 181 million in total for those shareholders. There was a nonbinding offer from Hong Kong listed company to acquire the stake in Clal at book value, still working. And the concentration, we are working in resolving that on DIC transference of the shares to Dolphin in order to meet the requirements of the Israel law.

So now I will introduce Daniel Elsztain.

Thank you, Alejandro. Good morning, everyone.

On Page #3, we can see our main events at the IRSA Commercial Property levels. We're going to start with the rental operation figures. Shopping mall sales grew by 22.5% on the first quarter of this year versus last year, and occupancy increased to 98.8%. We had very good results coming from the office segments due to devaluation and lower selling expenses.

Regarding CapEx. We have the plan to develop about 21,000 square meters on our existing shopping centers. And also we have in progress the construction of the first stage of Polo Dot and the Catalinas office buildings. Both expected to be ready to produce rent by fiscal year 2019, the first one; and 2020, the other one.

Other investments that we did on the quarter. During this quarter, we acquired convertible notes of TGLT for approximately $22 million. Also in the Shareholders' Annual Meeting held on October 31, was approved a cash dividend for ARS 680 million, that is an approximate dividend yield of 2.2%.

The adjusted EBITDA for the first quarter reached ARS 755 million, an increase of approximately 35% compared to first quarter of 2017.

The adjusted EBITDA of mall and offices segment reached ARS 648.4 million, an increase of approximately ARS 100 million to the previous year, an increase of 26.2% and 39.4%, respectively. I'm sorry, the ARS 648 million is for the shopping segment, and ARS 100 million is the EBITDA for the office. And that was an increase of 26% on shopping and 39.4% on the office segment.

The net income for this quarter reached ARS 1,934 million compared to a gain of ARS 779.6 million last year, mainly explained by the higher results for changes in the fair value of investment properties.

On Page 4, we can see the construction story of the Catalinas office building. It's under construction. This is an estimate invested of ARS 1.7 billion. As we expected, we are on time and on budget on the construction. This is going to be open for fiscal year 2020, a total construction of 35,000 square meters of GLA.

On Page #5, we can see some figures on the hotel segment. Remember, this is a very small segment for the company. Nevertheless, we can see an increase on occupation -- on occupancy from 65% on the previous year to 68.4% on this quarter and also on the average price, ADR, from $183 to $190 per a regular room. So revenues went up 23%, and EBITDA went down, not because of the business because of the cost allocation of the company cost into this segment.

On Page #6, we can see some figures on the Lipstick Building. During this quarter, we see some decrease on the occupancy. Now we are 95%, a little decrease on 2016, but the same of 2017. And the price remains very stable.

The good news here is that we were able to have a refinance on the debt. We initiated the quarter with an initial debt of $113 million. There was a cash payment of IRSA for $20 million. Our partner invested another $20 million and we have a haircut from the lender of another $20 million. So the outstanding debt now is only $53 million compared to $113 million when we started the quarter.

And on top of that, we had a decrease on the rate from LIBOR plus 4% to LIBOR plus 2% and an extension to April 30, 2020. So this is very good news for the building, and we are working now on negotiating with tenants.

Yes. Now we're going to speak about -- this is about Banco Hipotecario.

In Page #7, we can see the main event of the first quarter for the bank. The bank generate a gain of ARS 371 million comparing to a gain of ARS 39 million last year, so much bigger. And mainly explained by the increase in present value for financial assets.

The bank is spending a very good time. We can see here on the graph on the right the market value for IRSA for the 30%, almost 30%, of IRSA shares, growing 69% comparing year-to-year. So this is a big growth of the banking industry in the country. And the bank is in a good moment of continuously developing the solution for housing deficit in Argentina, mortgages coming to the country, increasing the share of the financial consumer market and boost the corporate products business. So very good news are coming to the banking industry for the country and for Banco Hipotecario, too.

If we go to Page #8, we can see main events of IDBD where, here, about Israir, we spoke in the past the signing of the transaction for the sale of Israir. That was the tourism company and airplanes company of Israel. This transaction was done and will be received part in cash and part in shares depending of crucial terms that represent the approval of the antitrust authority that is under process today -- these days.

The debt at IDBD level, there was a raising on the rating -- of the rating, strengthening of the liquidity, continuing the lowering of the yield of the bonds and renewal of the loan concern from -- and the clause and the covenant from the balance sheet of IDBD. There was -- we issued a note, number Series 14 for ILS 360 million at 4.72% fixed rate, shows a big drop in the past year. Before, rates were more than 10%, but today it is below 5% fixed in shekels.

DIC debt replaced Series 6 to 10 in ILS 1.85 billion. Today, the net debt of IDBD, it is $783 million and the net debt for DIC is $769 million. So a big drop in number and big restructuring in period. So much, much cash on the company level for the next years on the company in cash.

There was a payment on DIC completed in September for ARS 694 million (sic) [ILS 694 million]. That came back to IRSA, too. This is to pay dividends divided in 2 and we received the payment in IRSA and in IDBD.

Clal Insurance. There was an offer that is in process, in due diligence and it's for book value. So this is under negotiation today. We had -- from the last quarter, we had forced to sell 5% again in a swap transaction and we did the second tranche of 5%. So we did 2 swaps of 10% up to now.

In the concentration law, we are not allowed to have more than 3 layers of public companies. And we are working on that with the sale of shares of DIC to a new company that will be controlled by IRSA, and with that, we can follow the law of Israel. So this is under process today, and Dolphin made a nonbinding offer to acquire all that stake of IDBD in DIC. So we are in the last days of execution of the final approvals of this process. So this is very important for the company, too.

If we move to the next page, we can see the PBC, the Property & Building Company, the real estate, the more international real state and residential, this is -- the occupancy on this is 97%. There was a very important increase of value for the HSBC building that is for 2020 increasing the rental per year of $11 million because of the HSBC leasing. Majority of the tower is under the rental. We are thinking -- examining the possibility of selling Ispro, that is the retail company that the company has in Israel. Ispro has a retail in the whole country, like ILS 70 million of net operating income, and we are studying the market conditions now to sell it or not and we are in that discussion. We distributed a dividend of ILS 150 million. And the net debt of PBC, it is ILS 8.2 billion. This is the total net debt of the company. In other words, a very good increase on prices in dollars. Year-to-year, 20% increase on the PBC shares.

If we move to Page #10, the Gav-Yam. In Gav-Yam, that is pure Israel. This is the commercial property company in Israel. Gav-Yam is leading the high-tech parks. Here, we have the market cap surpassing $1 billion, first time in the history of the company, a 28% increase in price in dollars year-to-year. And this is 99% occupied, more than achieving 1 million square meters of rental in Israel, paying dividend of ILS 180 million, developing 5 new buildings at the same time: Tozeret Haaretz in Tel Aviv; Cyber Park in Be'er Sheva; Matam Yam, this is in Haifa; Rehovot, in -- close to Tel Aviv. And there is a -- so the 5 projects at the same time. Here, there is (inaudible) but it's not included here.

The net debt of the company is ILS 2.6 billion, and there was a credit rating upgrade to AA from AA-. So very good rentals in Israel.

Shufersal, the main supermarket company, the leading retailer of the country with a market cap of ILS 5.2 billion. Paying dividends, again, in the year, ILS 160 million. Increasing a lot in the private label today, 21% of the revenues comparing to 19% of last year. The online is growing dramatically, too, from 8.6% last year to 11.1%.

Purchase of a pharmacy company, a chain that is today under process of obtaining regulatory framework because they are asking us to sell 11 branches because of competition. So this is under process today.

And Shufersal finance replacement of a credit card, from Leumi to Cal, added to the net debt of this company today at low level of ILS 2.2 billion.

And their increase of price in dollars, 64% year-to-year on the share of supermarket company.

And finally, the Cellcom. Cellcom is the largest cellular provider in Israel. Here, the increase of the price of the share went to 30% in dollars year-to-year. There was a Cellcom TV HBO deal, fiber optics negotiation regarding IBC project.

The net debt of the company, ARS 2.9 billion. So these are the main -- ILS 2.9 billion, sorry.

So this is the main events of the main subsidiaries of the company.

So now I will introduce Mr. Matias Gaivironsky.

Thank you, Alejandro. Good morning, everybody. So if we go to Page 14, we can see a summary of our financial results.

So starting with the Rental segment. The adjusted EBITDA increased by 26%. So we are happy we are growing more than inflation, achieving ARS 754 million in the first quarter. This is the Argentina Business Center.

Sales and development. We only had a few sales during the quarter regarding the Beruti project in front of Alto Palermo shopping center that we'll receive some units from the Baicom plot of land. So limited results here than some costs that we allocate to this segment.

Also the financial and corporate expenses. Here it's basically all our corporate structure that we allocate to a segment. So we have ARS 72 million negative against ARS 65 million of the last quarter.

Going to Page 15. We can see the impact on the Israel Business Center. So here, we included both figures, adjusted EBITDA and net income, and you can see a positive evolution in all the ratios and the figures of the -- of all the subsidiaries -- the operating subsidiaries. So Real Estate is growing; Supermarket and Telecommunication, all are growing both in the adjusted EBITDA and the net income.

When you include the corporate structure of IDB, all the debt of IDB and DIC at the structure, and this quarter we have a negative impact because of a restructuring that we did under DIC level that we issue a new bond and we extend tenure of the bond. That generate a negative impact that I will explain in the next 2 slides.

So when you go to Page 16. Considering all the effects of Argentina and Israel, the gross profit of the company increased by 19%, achieving 600 and 400 -- sorry, ARS 6,486 million.

Then, we have positive results on the fair value of investment properties, 44% increase compared with the first quarter of the past year. Most of the increase is from Argentina. We have a reduction in the cost of capital of Argentina and also some devaluation that impact positively in our assets. So with this, we finish with an operating income that increased 94%, 2.2 came from Israel, 3.1 came from Argentina.

If you go to Page 17, then the other important effect that we have is in our net financial results. The net financial results that came from Argentina stayed stable, increased a little from ARS 418 million to ARS 486 million. It's basically because this quarter we have a higher devaluation than the previous quarter, there was a devaluation of 4% against a devaluation of 1.8%. Remember that we have most of our debt in dollars so we have that impact in there -- in the results.

And then, the other important effect came from Israel. 3 point -- almost ARS 4 billion from those ARS 2.2 billion is this debt exchange that you can see in the bottom of the slide that we used to -- when we started to consolidate IDB, we value all the debt of IDB as fair value. So at that moment, market value of the debt was lower than the face value. Remember that at the moment that we acquired, the company was in a bankruptcy process. IDB and DIC was affected because of that. So at that moment, the market price or the yield of the bonds was much higher than what is today. Today, the company's investment grade again and the bonds that trade at market are probably higher than the face value. So when we swap that debt that we used to value at the historical value against the market value today, we have to recognize an important noncash loss of ARS 2.2 billion.

So with this, we finish with a net income of ARS 74 million against ARS 344 million of last year. When you see the part attributable to IRSA, leaving aside the minority interest, we finish with ARS 553 million positive against ARS 200 million of the last quarter.

Finally, in Page 18 you can see the debt of the company and the breakdown, the debt amortization schedule. We remain with a net debt of $355.9 million. This -- not consider the recent disposal that we did of the IRSA Commercial Properties share and the dividend that we are paying today. When you combine all the effects after the September, we have a positive cash or a positive effect of $90 million. So considering the dividend on the part of the shares that we sold and the dividend that came from IRSA Commercial Properties, this generate a cash effect -- cash generation [full use] of $90 million that you will see in the next quarter.

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

(Operator Instructions) The first question will come from Álvaro Garcia of BTG.

Just one quick question regarding your commentary on IDBD in the release. The question is how should we think about IRSA's ownership in IDBD going forward? Is it something that you'd want to consolidate at 100% in the very short term? Or is it something that you'd want to sort of sit on, on your 1/3 ownership stake over the medium term?

Thank you, Álvaro. We -- when we wrote the perspective for the year in our financial statement in June, we include that sentence that said that we may increase our stake in IDB. The reason why we included that statement is because we, today, have an option to acquire our own 14% of the shares of IDB. Remember that at the moment that -- we used to have a partnership when we entered in Israel, 50-50, and then there was a buyback option or buy-and-sell option that we exercised. And finally, IFISA acquired that stake, was around October 2000 -- or July 2015. At that moment, IFISA granted an option to IRSA to acquire those shares at the same price that IFISA acquired, plus an interest rate of 8.5%. So that option expired in February 2018. So by February, we should decide if we will exercise or not that option. But if we exercise, we will increase our stake in IDB. So that is why we included that sentence. So if we do something, we will do it from now until February. So that is the reason why we included that.

That's clear. That's very helpful.

And in terms of cash, that part of the option, remember that at the same time, IRSA granted a loan to IFISA. So if we exercise the option, that is a cashless transaction because we will exercise the option, but at the same time we will receive the cash so that won't represent an increase in the cash for that portion. Then, IFISA has another portion, around another 18% of the shares of IDB. Remember that today we control 68% and IFISA almost 32%. So for the other portion, if we decide to acquire, then we'll represent some cash. But for the option, not.

Yes. I guess, Matias, my question was, that 18%, that sort of second portion that will be remaining, is that something that you'd want to take on sooner rather than later? Or something that you're not very, let's say, active about and you'd be okay with not controlling that or -- over the longer term?

Álvaro, we haven't defined yet that so I can't comment on that. But the fact is that we have the right and the option to acquire a portion of that, so that is something that we need to decide prior to February.

(Operator Instructions)

So if there are no more questions, we can close the quarter expecting the momentum of Argentina in the Rental segment and the momentum on the Rental in Israel, too. So good results and financial results and being able to raise capital in a different vehicle. So we thank everybody for the conference of today, and we have the next one on the second quarter of 2018. 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. Have a nice day.