IRSA Inversiones y Representaciones SA (IRS) 2018 Q3 法說會逐字稿

Good morning, everyone, and welcome to IRSA's Third Quarter 2018 Results Conference Call. Today is live webcast. Both audio and slideshow may be accessed through the company's investor relations website at www.irsa.com.ar by clicking on the banner webcast link. The following presentation and the earnings release issued yesterday 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 to Mr. Alejandro Elsztain, Second Vice President. Please go ahead, sir.

Thank you very much. Good morning, everybody. We are beginning our [third quarter 2019] conference call, and if we can see, in the Page #2, we can see the main event for the first 9 months of the period. We can see that the net income that we reached through the 9 months was ARS 11.3 billion, 74% better than last year. Attributable to IRSA, it is [ARS 9.4 billion contrary to ARS 3.8 billion] of last year. And in the division of Argentina and Israel, Argentina Business Center brought a gain of ARS 12.9 billion, and this is mainly explained because of the change the fair value of investment properties in IRSA commercial properties and a part of that, higher results in Lipstick & Banco Hipotecario, our mortgage bank.

In the case of Israel Business Center, we brought a loss of ARS 1.6 billion, and this is mainly explained by a one -- a fact that there is one special effect that was a debt exchange that we did at DIC level, and some -- that was offset by the sale of small subsidiaries in Israel. But the rent -- the business of Israel is working well, but this [definitely] changed, that was very successful, made a loss in the balance sheet of IRSA.

In the case of the adjusted EBITDA, we achieved -- we reached ARS 10 billion, comparing -- this is 35% higher than last year numbers, and this is the conclusion of the 2 businesses.

In the case of Argentine Business Center, the rental grew 19% comparing last year numbers, occupancy of shopping, 98.6%; 91% of the office buildings; and [72%] very good results at the level of hotels, and this is the -- bringing much better EBITDA than last year. In the case of sales and developments, we had higher comparing to last year, because of the sale of Beruti, Maip? and Baicom, 3 lots, all rental properties that IRSA had. And in the case of IRSA, in January, we had forced, through 2 quarters, to sell an additional 10% of [CLAL] shares and with those, again, with new swaps, transactions and today, our stake is below 35%, it's 34.9%.

So I will now introduce to Daniel Elsztain.

Good morning, everyone. On Page #3, we can start with the operations of (inaudible). The main segments on the left side, the rental operating pillars. The shopping malls' sales grew 24% during this 9-month period compared to last year, and occupancy increased to 98.6%. We have been running with very good occupancy on the shopping centers, and everything looks like we're going to [keep this end].

The average rent on the office segment is [$26.5] per month per square meter. While occupancy was reduced to 91%, we had a higher occupancy. This is mainly explained by the incorporation of a new building that we acquired last year, the Philips Building. This building came to the portfolio with low occupancies, somewhere between -- in the mid-60s. So the incorporation -- [68%, sorry, exactly]. So the incorporation of this building reduced our occupancy. The rest meant, it's very stable.

Regarding the CapEx for (inaudible) fiscal year, we had, on February of 2018, we acquired 60% -- actually, IRSA Commercial Properties acquired 60% of La Arena. La Arena is a stadium. It's called the DirecTV Arena. It's a stadium for events, sport events and small conventions. It's located in the north part of the city. This was a total investment of [USD 4.2 million]. This is below construction cost that we came into this investment.

Also, on March, IRSA Commercial Properties acquired a plot of land in the city of La Plata. La Plata is the fifth largest city in terms of population, and there were no shopping centers. We are working with the city to get the approval for a mixed-use project of approximately 100,000 square meters.

And during this quarter also, we advanced the development of an expansion of shopping malls. And with the development of the Polo Dot office park, adjacent to the Dot shopping center, and it's on time, and we are expecting to let the tenants come by the beginning of the next fiscal year to work in the -- in this space, to get ready for occupancy.

On some financial statements. On the bottom of the page, we can see the adjusted EBITDA by segment. On the shopping mall segment, we achieved ARS 2,040 million. This is a growth of 19% on the segment of offices. We also grew almost 20%, 19.6%. And we achieved ARS 275 million during these 9 months compared to the previous one.

Looking at net-net income, we see an exponential growth of almost 400%. This is basically explained, and like Alejandro said, by the change on the fair value of our properties with the 2 impacts. The tax reform that was impacting, reducing the tax in the future, so we have to make that calculation, and also the depreciation of the (inaudible) peso, okay, in terms of dollars.

So now we move to next page with Matias Gaivironsky, I will -- sorry, on Page #4, we can see the development of, also a building that we are -- now we have under progress. The Catalinas building, an iconic office building in the city of Buenos Aires. We are close to 11% in terms of construction. The ownership of this building is: 41% belongs to IRSA, 46% belongs to IRSA Commercial Properties, and this was the most efficient way that we've found to [seal in the pact]. And also, 13% of the building was sold a year ago to one of the biggest, if not the biggest, IT companies in the country, Globant, that they decided they were going to have their headquarters in this building. We expect that this 35,000 square meters of GLA will be ready for the fiscal year 2020.

So now yes, Matias Gaivironsky, our CFO, for Page #5.

Thank you, Daniel, and good morning, everybody. So going to Page 5, we have our investment in Banco Hipotecario. Remember that we control 30% of the shares of the bank. When we compare results this year, we have a much better performance. The gain that we recognize from Banco Hipotecario increased from ARS 48 million last year to ARS 554 million this year, mainly explained by the improvement in the operational results and also, the increase in the present value of the financial assets.

Also, the bank approved a dividend payment, a cash dividend, for ARP 200 million that was paid during April and also approved the shareholders meeting, approved capital increase of up to USD 900 million (sic) [900 million shares] that the bank is working to strengthen the capital structure of the bank.

When we analyze the value to IRSA, our stake in Banco Hipotecario today worth [$274 million]. That's almost [ARS 400 million] a couple months ago and now with the environment of volatility in Argentina, decreased to this level.

Going to Page 6. Here, we have summary of the main events of our investment in IDB. Basically, on the operational side, and I will show results in the next pages. We have a good performance in all the operational companies. And at the holding level, we are -- continue strengthening the financial solvency of the 2 holdings. IDB today has a liquidity of [ILS 1.2 billion], and we have the liquidity to fulfill all the commitments and the debt amortization up to -- at the end of 2019. So no concern from the short-term liquidity of the company. Also, increasing the LTV of the company to -- or decreasing, sorry, the leverage, today, we have according to book value -- sorry, to market value of the investment, LTV of 77%; in DIC, 59%. Remember that these figures were much higher a couple of years ago. When we analyze the use of the debt, today, IDB is performing -- the bonds are trading at [5.6%], DIC at [4.6%], so showing an improvement in the risk of the company. Also reflected in the rating of the company, IDB today increased the rating to BBB from CCC and DIC to BBB+ from BBB-.

Regarding Clal. We did another swap transaction, so we are forced to sell 5% of the shares every quarter. So we are maintaining the economic rights of the shares of -- and to comply with the regulations. So today, our stake in Clal is 34%, and we have the economic rights up to 55%.

Regarding Israir. You know that the transaction -- that they merged, that we are trying to achieve between Israir and El Al was objected by the antitrust authority. So we are appealing the measure. But it's not certainty what will happen.

Regarding Concentration Law. We are working towards the-- to fulfill the law that we are forced to before the end of 2019. So between this year and next year we have to reduce one more layer. So we are working in order to fulfill that.

So now when we go to our financial numbers in Page 8. In the first slide, we include at the level of the adjusted EBITDA, what is the a performance of the different segments. So starting with Argentina business segment, we can see in the 9 months, that shopping malls are growing at 19%, offices at 25% and hotels at 5%, that are the main segments. In the 3 months' period, so the period that goes from December to March, we see a [deceleration] in the growth in shopping and offices that is mainly related to one-shot effect in expenses that we believe that at the end of the year, we will be more in line with inflation, leaving aside those effects.

In the Israel Business segment, here we include information in pesos. So this is -- to analyze this, we have to consider the [devaluation] between, or the depreciation between the shekel and the peso, that during the 9-month period was 22% and during the 3-month period was 24%. So when you've -- when you see the evolution, you have to consider that effect. So -- but you can see that all the segments are growing at good pace, so that shows the strength of the operational subsidiaries. So that is -- are generating positive adjusted EBITDA.

When you go to Page 9. So to analyze our financial results, we divide between the Argentina Business Segment and the Israel Business Segment. So Argentina generate a net income of ARS 12.8 billion against ARS 2.2 billion last year. The main effect here is, the first one is the change in the fair value of our investment properties. Remember that during December, we recognized an important gain related to the change in the tax regime of Argentina, that the government reduced the income tax from 35% to 25% since 2021. So we recognize that important gain regarding that. So you can see in the line of change in fair value that we increased from ARS 2 billion last year to ARS 11.4 billion this year. Then you can see other important number is the SG&A line. That, as I mentioned, grew a little ahead of inflation, that is more related to one-shot effect, mainly salaries and severance and some amortization of the new system of the real estate. And the other important effect is the results from associates and JVs that here we have the Banco Hipotecario results. That's how we are growing from [ARS 201 million] to [ARS 785 million]. Most of the results came from Banco Hipotecario.

Regarding net financial results. Here, we have a higher loss compared with the previous year. [ARS 651 million], last year to 200 -- [ARS 2.1 billion] this year. That is mainly related to the evolution of the exchange rate. I will show in the next page a breakdown of this result.

So finally, we have the income tax that is increasing from a loss of ARS 1 billion last year to [ARS 732 million] this year. The current tax, that is the tax that we pay every year, is positive this year, it's related to the exchange rate, that it's generating losses. So we reduce our cash payment this year. And also, in the deferred tax we are recognizing a gain because of the change in the tax rate from [35% to 25%] that generated a positive result.

In the Israel Business segment, you can see on the operational side that we are growing the operating income ARS 5.2 billion against ARS 3.1 billion last year, a 69% increase. That the only -- not ordinary result is in the line of other net operating results that you can see, a loss last year is [ARS 168 million] and a gain of [ARS 609 million]. Here, we have a disposition of one asset, a minor company that was in -- under Elron, and also a claim that the company won and recognized a positive result. The other part is the evolution of the business that I showed in the previous page. We are growing in the EBITDA of all the companies. So that are generating good results. And finally, the line of net financial results that decreased from a loss of ARS 1.7 billion last year to a loss of ARS 6.2 billion this year that I will show in the next page, the breakdown of that. So with that, we finish with a net income negative of ARS 1.5 billion -- ARS 1.6 billion against ARS 4.3 billion last year.

So going to Page 10 that we can see the breakdown of net financial results. As I mentioned in the Argentina Business segment, you have in the bottom left of the page, the evolution of the exchange rate. This year was the devaluation of 21.2% against 2.3% last year. So we -- all our dollar-denominated debt is generating losses. And you can see in the line of net foreign exchange losses from ARS 186 million, loss of -- ARS 2.2 billion lost. And then you have a compensation because of our liquidity that are generating positive results from ARS 186 billion last year to ARS 1.1 billion this year. And on the side of the Israeli Business segment, we have here 2 main effects. When we see the line of net interest expenses, we are growing a little, but it's more related to the valuation between the shekel and the peso. If we see that figures in shekels, we are reducing the tax burden of the company, and [we are] -- and the important effect is in the line of DIC debt exchange. As Alejandro mentioned last quarter, in December we, or in September we did attract a debt swap that we extended general of the certain debt of DIC that generated a loss of ARS 2.2 billion. And also, the other important effect is regarding Clal. We recognized the value of our investment in Clal at market value. So the fluctuation of the price of the shares will generate losses or gains every quarter. In the bottom right, you can see the evolution of Clal shares that during in the last 9-month period, [big] shares increased 46.8% that generate a very positive result that you have inside the ARS 2.1 billion that you can see in 9 months of 2007 and -- 2017, sorry. And in this year, we -- the shares increased by 7%, so generate lower results compared with the previous year.

So those are the main effects that explain our financial statements. And regarding the debt in Page 11, we can see here that the debt amortization schedule of the company. We remain with a debt of around USD 342 million as of March, and the net amortization is scheduled that we have debt that mature next year. So we will -- we are starting to work in different alternative to refinance the 2019.

So with this, we finish the presentation. So now operator, we are ready to open the line for Q&A.

(Operator Instructions) And at this time, I am showing no questions. So I would like to turn the floor back to Mr. Alejandro Elsztain for any closing marks.

Just to finalize the presentation, we are in the middle of a construction period of the whole rental companies in Argentina, a construction period on the rental companies in Israel. The subsidiaries are working very well. And so we keep the pace of growth. We are surpassing the 2 million square meters on the rental between the 3 countries, Argentina, Israel and the United States. So we expect to close our balance sheet next quarter, and we expect very good results too, on the same page, up to down. So only to make an adjustment, there was a comment about the increase of capital of Banco Hipotecario, and...

Yes, there was a mistake in the presentation. So we said that the capital increase is USD 900 million. It's 900 million shares. So when you -- we analyze the price of the shares, it's more in line of USD 500 million, up to USD 500 million. So the bank haven't decided yet the size of the transaction or the capital increase or the moment. But there was a mistake in the presentation that we want to correct.

Saying that, have a very good day. Thank you very much for the conference, and we see you next quarter at the end of the balance sheet. Thank you very much.

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