IRSA Inversiones y Representaciones SA (IRS) 2018 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to IRSA's Second 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 the 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 day for everybody. We are beginning our second quarter 2018 conference call.

If we go to Page #2, we can see the main events for the 6 months of the year. The net income for the 6 months we achieved at IRSA level, ARS 10.8 billion, almost 59% comparing to last year numbers; and attributable to IRSA, almost ARS 9 billion versus ARS 3.8 billion of the last half year.

In Argentine Business Center, the gain was ARS 12 billion and mainly explained by the higher change on the fair value of investment properties and higher rental from the rental segments in Argentina, plus the results of Lipstick and Banco Hipotecario.

In the case of Israel, we received a loss this quarter of -- the first 6 months of ARS 1.3 billion, and it's explained mainly because of the debt exchange at DIC level that partially was offset by the sale of small business subsidiaries in Israel.

The adjusted EBITDA for the whole reached ARS 7.2 billion, 38% higher of last year numbers. And dividing Argentine Business Center, we can see that the rental segment grew by 18.4%. Our occupancy reached 99.1% in shopping and 93.2% in office buildings, 71% in the hotel portfolio. There was a higher sales and development comparing last year because of Beruti, Maipú and Baicom sales. We approved a dividend shareholder of ARS 1.4 billion that represented a yield almost 5%. The sale in the second markets -- secondary markets of 10.2 million shares of commercial properties, we had the chance to begin to give liquidity to the shares of IRSA Commercial Properties. Today, the liquidity is at 13.5% and still, we run 86% of the shares, with the intention of giving more liquidity to the market.

In the case of the Israel Business Center, we, in November of '17, we transferred DIC shares from IDBD to Dolphin in order to meet the concentration law requirement, and Matias will explain to you later a little more. In December '17, we acquired -- IRSA acquired through Dolphin the remaining 31.7% of IDBD. Today, Dolphin owns 100% of the stake of the company of IDBD in Israel. And in January of this year, we sold additional 5% of Clal shares through a new swap transaction. Today, the stake that we are running through IDBD, it is 39.9% of Clal.

So now I will introduce Daniel.

Thank you, Alejandro. Good afternoon for everyone.

On Page #3, we can start with the Argentina Business Center, starting with the rental of the shopping mall sales. We grew 22.6% on the first 6 months of this fiscal year compared to the last year, and occupancy level went to 99.1%. We grew a little bit below inflation, but we can say that the activity is normalizing. It's getting more easy to predict for our tenants and also to import in the country, so routes are clear for the next future.

On the case of the offices, the average rent of the office portfolio increased to $26.5 per square meter per month, and the occupancy was reduced to 93.6%. This is mainly the vacancy of 2 floors, 2 new empty floors on one of the buildings, and we were not able to sign the contract during the quarter, but we have now a lot of prospects and we might see these 2 floors rented in the near future. The activity in the office segment is still strong, and prices are still going up, not as much as they were in the past, but still going up.

When we see on the right side of the Page #3, the adjusted EBITDA for shopping malls grew to ARS 1.3 billion, ARS 1.3181 billion ( sic ) [ARS 1.381 billion]. It's an increase of 23%. And when we see on the office segment here, the adjusted EBITDA looks like a reduction of 3.6%, but this is mainly explained because the last year, it's included here a onetime effect when the company acquired a minority stake on the entertainment holding. That is the company that's dedicated to the exhibition on convention center in Buenos Aires. There was a onetime effect of a gain of ARS 44 million. If we exclude that effect, the adjusted EBITDA would have grown 23.7% on these first 6 months of the year, achieving a total of ARS 192 million.

On the bottom side of the page, we can -- I'm sorry, on the net income, the net income in pesos also went from ARS 2 billion to ARS 11.5 billion, in the case here basically is explained by the 2 results, the change in the fair value of the investment properties due to the impact of the change of the reduction on the tax. The tax was reduced from 35% to 30% on the next year, and it's going to keep going down to 25% in further years. So that effect produced again a onetime gain that we are showing on this fiscal year. And second -- the second effect is because of the devaluation of the peso, as we show some properties in dollars, is a gain for us, and will be explained later by Matias.

In the CapEx on the left side, bottom of the page, we can see the expansion that we have now under construction. Alto Comahue, these movie theaters are now in construction, it's almost 50% in progress, will be opened before the end of this year. [Alto Dechanere] was a small expansion on a piece of land that we bought from Walmart. We finalized our work and now the tenants are building their own installation, will be open, during this quarter maybe, the stores will be open. In the case of Alto Palermo, the expansion of our flagship shopping, is soon to restart. And we want to have everything under control and exactly the days because we don't want to affect in anything that is not necessary on the day-by-day activity of the shopping. In the case of Alto Rosario, because of the inauguration of ZARA, we have to move some tenants, and we are adding new GLA to the shopping center that is about to start. The construction of ZARA is underway. They will open April, May. But the new GLA will be maybe for next fiscal year. And in the case of Mendoza Plaza is the expansion of Sodimac, which is The Home Depot of Argentina, and also an expansion of Falabella. The 2 constructions will start very, very soon. All these projects that are short-term expansions will add approximately 25,000 square meters of new GLA in our shopping centers.

In the case of the offices, at the bottom, we have the development of the Polo Dot that is under -- really being -- the construction is very fast and coming soon. It's almost 50% done. We expect to get the tenants in the building working by the first or the starting of the second quarter of the next fiscal year. And in the case of Catalinas, the construction is now above ground. And it says that almost 9%, but now we can see the progress of the -- every floor. Every few weeks, we're going see the construction going up. And under -- both constructions are on time and on budget.

We can see on Page #4 some images of the construction of the Catalinas project, and it's going to be ready for fiscal year 2020 and approximately investment of ARS 1.8 billion.

And now we can see some figures of Banco Hipotecario. Matias Gaivironsky, our CFO, will speak about it.

Good afternoon, everybody. So going to Page 5, we can see our figures on Banco Hipotecario. Remember that we have a stake of around 30% in Banco Hipotecario. We can see this semester very good results when we compare with the previous one. There was a gain of ARS 410 million against ARS 38 million in the previous year.

And we have a very good impact in the shares of Banco Hipotecario. You can see on the right the evolution of the share from 4.71 last year to 16.95 yesterday. So our stake in Banco Hipotecario today, worth $387 million, again, $174 million, that was the valuation in the previous year. This, in terms of price per share, represents around $6 for our shares.

Going to Page 6, we have the main event on IDB. As Alejandro mentioned, one important development was the acquisition through Dolphin of the remaining stake of IDB. So to date, Dolphin control 100% of the shares of IDB. There was a transaction that was a payment of $33.7 million and debt cancellation on the remaining intercompany loan that we used to have between IRSA and some of the IRSA vehicles and IFISA, so today, there is no intercompany loan in any of the structure.

Concentration law, there was also a good, important development. We have been working during the last year to solve a delinquency on the concentration law in Israel. Finally, we find a structure where we transfer all the DIC shares to a new vehicle, Dolphin Israel, that is controlled 100% by Dolphin. So it's belonged 100% to Dolphin. And Dolphin has an intercompany loan with IDB, so there was no -- only a small payment, but there was no cash payment. So it's all financed by an intercompany loan that is not recoursed to IRSA. So the only guarantee on that intercompany loan is the shares of DIC. I will show the structure, the final structure on Page 7, but let's wait 1 minute.

Regarding the debt, IDB still have access to the local capital market and issued a new series of bonds. We issued a Series 14 for ILS 357 million at 5.3% fixed, maturing 2022. DIC also tapped the market at 4.7% -- 4.8% interest rate, long-term, maturing 2026. Then we issued ILS 762 million. And most of the operational companies also tapped the local market, refinancing all the short-term debt or most of the short-term debt of the companies and extending at a fixed rate in the long term.

Regarding Clal, finally, there is no more exclusivity for the offer that we received from Huabang Financial Holdings. So today, we still have the mandate with JPMorgan to find a buyer, but there is no more exclusivity with that company. We also sold 5% more of the shares through a new swap transaction, so we still maintain the economic value of all the original position, but effectively, today, we have 39% of the company.

Regarding Israir, remember that we announced at a couple of quarters ago an agreement with El Al to merge the companies. Now the antitrust authority, we received an exception of -- from the antitrust, so now we are evaluating the course of action. The company is performing better than before, Israir, so we don't anticipate a major negative impact on the company, but we are trying to find a solution from -- for this subsection.

Regarding Eurocom Communications Limited, that is the main shareholder of the telecommunications company in Israel, Bezeq, DIC did a binding offer for that company in a process of bankruptcy of Eurocom. The offer that we submitted matured yesterday, and we didn't renew the offer. So today, there is no more binding offer from our side.

Going to Page 7. So finally, this is the structure that we have today and the new structure according to the concentration law. So now you can see here in the graph that DIC is not longer below IDB, so it's a sister company of IDB. There is an intercompany loan through -- between Dolphin and IDB for the balance of this transaction, but this is the new structure. So Dolphin control 76.6% of DIC and 100% of IDB. And as you can see, IRSA control 98.7% of Dolphin.

So we have, for the next -- we need to fulfill a new step of the concentration law before the end of 2019. So until the end of the next year, we have time to find a solution for the next step.

Going to Page 8, here we have a quick summary on the main subsidiaries, the operational subsidiaries of IDB and of DIC. So starting with the real estate company, PBC, where IRSA has an indirect stake of 48.7%, we can see good occupancy rates. Price of the share is increasing when you compare with the previous year, 31%. We issued debt in the local market recently, ILS 496 million at 3.95%, maturing 2029. In Gav-Yam, the same, the shares increased by 39%, occupancy very high, 99%. The company is in a development of 2 important projects, Tozeret Haaretz and cyber park in Be'er Sheva. So everything is in good pace. The company recently received an upgrade in the rating of the company from AA- to AA, so very good performance.

In Page 9, we can see in Shufersal the same shares increased by 77% compared with the previous year, very good results. We keep improving in the private level. Sales now is around 21% of our revenues compared with 19% last year. We took advantage of the evolution of prices. We sold 3.2% of the shares of Shufersal, with a gain of ILS 85 million. The online revenues keep growing. Today, we achieved 11.1% compared with 8.6%, previous year. And regarding the new pharm transaction we completed, so today, we have 32 active branches. And also, we are in a process of negotiation -- or we already negotiated a new credit card for the supermarket, and we received 120,000 users since January, so good -- very good results in all the line.

In Cellcom also, you can see a positive evolution on the share, 28%. The company keep improving its 4 (sic) [triple] play, providing more offer on the TV services, so no other major events here.

And finally when you go to Page 10, you can see that we keep working and decreasing the debt of the main -- of the 2 holdings. And you can see that the evolution in IDBD, that we keep reducing our total debt around ILS 2.3 billion since we started our investment in Israel.

Going to Page 12, we can see our main results. So starting with the Argentina Business Center, as Daniel mentioned, rental segment increased by 18.4%. Here, we have an effect in the offices that affect a little the ratio. In shopping centers, that is the main business line, we grew around 23%. So we are happy with the results. Sales and developments, this quarter, we sold a little more on this semester, a little more than the previous year. We sold -- we received some units in Beruti. That is a residential project in front of Alto Palermo that we started the commercialization, so generated better results than the previous year.

Regarding our Israeli Business Segment in Page 13, you can see in each of the operational companies, PBC, Shufersal and Cellcom, an improvement. This is information in pesos term. Remember, we have a devaluation between the shekel and the peso when you compare this semester with the previous semester of 21%. So to compare apples with apples, we should deduct 21% from these figures. But all that -- the trend is positive in most of -- on almost all the lines in the subsidiaries of IDB and DIC.

So finally, when you go to Page 14 and you see the gross profit growing 22.8%, it's quite similar numbers in Israel and in Argentina, the evolution. Israel grew by 22.6 and Argentina, 23.7.

So the other important effect that we have this semester was the revaluation of our investment properties. As Daniel mentioned, there is a change in the tax regime in Argentina. So basically, the tax income for corporates reduced from 35% to 30% this year and starting 2021, to 25%. So that generated an important impact in the valuation of our investment properties because we are valuing the shopping centers with a DCF model. And we changed the tax rate on capital gains on -- sorry, on income tax from the cash flow, so that generated a very important result. You can see the blue bar is Argentina and the gray is Israel, so most of the improvement came from Argentina.

So finally, the operating income grew by 158%, explained by the mentions that we just comment.

And in Page 15, we can see the rest of the drivers. The net financial results decreased, will have a further loss this semester compared with the previous one, ARS 6.2 billion against ARS 2.6 billion in the previous year. Main -- the main explanation here is regarding the refinancing in Israel that DIC did the exchange in the bonds that generated a negative impact of ARS 2.2 billion that we commented in the previous quarter. And also, there was a much important appreciation of Clal shares in the previous year compared with this year. So today, we have lower results that came from Clal or the Clal shares evolution. In Argentina, we have a higher devaluation in this semester, so that affected all our dollar-denominated debt. But some were compensated by better results, financial results but were not. So we have an impact on the devaluation.

Regarding the income tax, we can see a gain this year compared with the previous year. The reason is the same of investment properties. When we value the investment properties, we generate automatically a deferred tax, so it used to be 35% of the value of our investment property. Today, it's 25%. So we are changing this 10% over the stock of all the investment properties, and that generates a gain in this semester.

So finally, we finished with a net income of ARS 10.8 billion against ARS 6.8 billion, previous year. ARS 8.9 billion is attributable to our shareholders, and ARS 1.9 billion is the controlling interest.

Going to Page 16, we have the debt of the company. There is no impact. Remember that in this quarter, we paid the dividends at IRSA level, so we paid a high dividend. And also, we acquired a stake of IFISA by using $33 million. But since we sold some shares of IRSA Commercial Properties, the net debt of the company remain stable, even decreasing a little when you compare with the previous quarter.

So with this, we finished the presentation. Now we open to receive your questions.

(Operator Instructions) And we have a question from Jorel Guilloty of Morgan Stanley.

I actually have just one question and it's on IDBD and DIC. In the presentation, you pointed out that the leverage levels have declined materially for both, ILS 2 billion and ILS 6 billion each over the past few years. What I wanted to get a sense of is if you're comfortable at current leverage levels for these companies, and if not, what is your target for debt?

Jorel, we have been improving significantly the leverage of both companies since we entered both. I will say that probably almost all of our investment in the companies were to reduce the debt. Now the company, for instance in IDB, they started to sell shares of Clal that have automatically an improvement in the leverage because you will use that stake to cancel debt. So in terms of ratios, depend on the valuation. On Clal, we are valuing all our stake at market value. Market value is significantly lower than book value. So if we use book value to calculate the leverage, I will say that we are in normal ratios. If we calculate that at the book value -- the market value, sorry, we are slight higher than what we expect to be. So that is the question mark over there. We have some other assets that we can dispose, so that could generate a decrease in the leverage. Regarding DIC, I think the company has a normal ratio and a lot of tools to manage the financial situation of the company. So it's totally normal. So we, in terms of needs of the company, we don't see any need from the company in the short term. In fact, they have the cash to manage all the short-term amortizations and up to the end of 2019 in the case of IDB and in the case of DIC, much longer. So we don't anticipate any need from the companies.

And in our other side, the company today is running a total of ILS 7.5 billion on the hands of the IDB group. So the cash position of that group is very strong today in all of the levels, so subsidiaries included.

(Operator Instructions) This concludes the question-and-answer section. At this time, I would like to turn the floor back to Mr. Alejandro Elsztain for any closing remarks.

Just to thank everybody to the conference, and we hope to have a second semester so good. The companies are growing, developing everywhere, so keeping the track we are expecting in the past. 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.