IRSA Inversiones y Representaciones SA (IRS) 2019 Q2 法說會逐字稿

Good morning, everyone, and welcome to the IRSA Second Quarter 2019 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 by clicking the banner webcast link. The following presentation and the earnings release issued on March 1 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 information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject our 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 would 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 to talk about the first half of the year, the 6 months of 2019 balance sheet. And we can see in the Page #2, that this year we are beginning to adjust our balance sheet for inflation. Matias, our CFO, will explain in deep what does that mean. So the real -- the numbers that we are going to show are real numbers, so adjusted by inflation.

And when we talk about that, we can see that the adjusted EBITDA for this 6 months was up to ARP 8.6 billion, is 13 below last year numbers. When we divide between Argentina and Israel, we see that Argentina brought ARP 2.5 billion and Israel brought ARP 6.1 billion.

In Argentina, we can see that the rental properties grew at a pace of 6.2% comparing to last year numbers. And this is because 2 of our activities, the office buildings and the hotels, are very related to dollars, so the valuations surpassed inflation, not in the same in the malls. That was a negative number. But the balance was a positive comparing year-to-year. And related to Israel, we had a 12% growth comparing year-to-year mainly because of the real estate segment that we are going to show you later.

So we've received a net balance, the company had ARP 5.4 billion lost comparing to a gain of last year of ARP 12 billion gain last year -- ARP 12 billion gain. And this is mainly explained by a loss from changes in fair value of the properties. And when we see the attributable to either side, it's ARP 5.3 billion, almost all.

We recently, after the close of the balance sheet, bought the 20% of the stake of Hoteles Argentinos. This is the society running the Sheraton Libertador So today, IRSA runs 100% of the stake and is deciding how to keep working on that hotel. After 20 years of management, we changed and now we are deciding what to do on that property.

So now I will introduce Daniel Elsztain.

Thank you, Alejandro. Good morning, everyone. On Page #3 we can see Argentina's operations on the 2 segments. First, on the top left we can see the shopping malls tenants' sale. On this quarter, we see that the sales went up 23.8% in pesos, but we measure in real terms. It's a decrease of 16%. In -- if we made the combination of 6-month period, this was a reduction of approximately 13% in tenant sales.

When we see the stock of shopping center, we see a small reduction on terms of our GLA. This is mainly explained by -- we gave back the Buenos Aires Design Center. That was a concession from the city of Buenos Aires. So that's the reduction on the GLA.

And in terms of occupancy, the picture shows a big decrease. We were running on 99% for a long time. And it shows now 95%, but this is mainly explained by the shopping Dot, we have Walmart in the ground floor, and Walmart left the shopping center. So this is about 12,600 square meters of GLA that was vacated by Walmart. And now we are working to replace Walmart with small tenants. And it's going to be complete we hope during this fiscal year, the new transformation on the shopping.

If you would have exclude the effect of Walmart or -- in all our portfolio, occupancy would have been 98.7%. Yes, it shows a small decrease in occupancy and explain for what's going on in the country, but it's not as we see here the 95% that we are not used to. We're working on how to replace Walmart, and we also collected a penalty from Walmart, so the cost of not having Walmart is not going to be shown in our balance sheet in this fiscal year.

In terms of the office segment, we can see that occupancy also go. We have a small reduction. We've got -- the picture at the end of December 2018, we see 90% occupancy. But this is mainly explains the new vacancy. We have some expirations on the building and that's because that. And that is in the office -- the Polo Dot office building. So the Dot building at the Polo Dot, and we have demand on this place. So we don't expect to see this occupancy in the future. If you would have exclude the effect of these 2 empty floors, overall, the year, the average would have -- it is 93% approximately.

In terms of stock, we see that by the end of this quarter, we see a small reduction because we sold 1 floor at the Intercontinental building. But we can see also that by the end of this fiscal year our total GLA will grow a lot because we are adding here the Polo Dot office building, the Zeta building, which is 32,000 square meters of new GLA. And by the end of next fiscal year, we also going to incorporate it to handle Della Paolera building at Catalinas. So we're going to have a total GLA of approximately 145,000 square meters, which is a growth of approximately 74% of what we have today.

On Page #4, we can see what happened regarding the Catalinas building and the 200 Della Paolera office building. Remember here, we did a related project sale. IRSA sold to IRSA Commercial Properties, the balance of the building that we were not able to do when we first did the first construction, there was a total construction for $60 million for a price per square meters of approximately $4,200. And this transaction was at -- the previous transaction were approved by the audit committee and assessed by independent brokers that were feeding information and letting the audit committees of the 2 companies transact at what they consider was a fair value.

So as of today, the current ownership is, 87% of the building belongs to IRSA Commercial Properties and 13% to Globant that bought from us long -- like, 2 years ago or maybe a little more.

The building, it's on time in terms of construction. We estimate the opening for fiscal year 2020. And we believe that EBITDA will be somewhere between $10 million and $12 million once the building is complete.

On Page #5, we can see our hotel segments. As Alejandra mentioned, we acquired 20% stake of Hoteles Argentinos, so we have full ownership on that building through Hoteles Argentinos company. That was an acquisition for $1.15 million to acquire the 20%.

And if you see on the right bottom part of the page, we see that the book value as now we are showing the numbers adjusted by inflation, we see a big growth from $5.9 million to $25.4 million. But this is still well below the fair market value of our position in this hotel.

Looking at the AVR, the rate went up, went from now $195 to $205. And occupancy was reduced a little bit, but it's more than compensated with the rate. This has been maybe one of the best 6-month period for this industry and hotels. We can see that the growth in EBITDA is really impressive, it's a 563% growth. We achieved ARP 305 million in EBITDA. So we -- this trend continues. So the hotels are stable, are benefiting by the devaluation, and inflation is not yet catching up as fast as this devaluation.

If we see in the Page #6, we can see the main events for the 6 months in Israel. And in IDB, we kept selling some stakes that were forced by the law, the 5% in August and 4.5% in January. Today, the current stake of IDB related to Clal is 25%, 25.3%. And the economic rights are almost 55%. We can see the evolution on the market cap of the company related to the book, the discount is bigger and today we have the effect of that drop in the quarter. So that affected the results of IDB and finally the results of IRSA.

And if we can see the right part of the graph, DIC situation. In this semester, we sold another stake of Shufersal. Before we have sold before the last year, but in the period we sold 7.5% of the company for ILS 416 million. Today, we are keeping still 26% of the company in our -- in DIC level. From other side, we're acquiring shares of PBC. Up to the 30th of December , we bought 3%, but we kept buying later, increasing the stake up to, in December, 67% of the company. In Elron, we bought share, too, and we went to almost 60% of the shares of the company. And in the case of Cellcom, a little bit smaller, so a stake of almost 44% of the company.

From the other side we were buying back shares. We approve this repurchase shares plan up to ILS 120 million. And we are remaining closing capital up to no less than 10%. And we repurchased shares up to ILS 9 million, up to December, but we kept buying later, so the company is doing that plan.

From the dividend distribution, we did ILS 100 million through ILS 60 million in kind and ILS 40 million in cash, so the companies are moving.

And if we can see in the next page, in Page #7, how is the current corporate structure on the IDB and DIC level, we are working to reduce again 1 more layer because of concentration law restrictions. So we need to before the end of December of this year to decrease 1 layer in DIC level. And we're working on that too.

And we can see in the next page, Page #8, some of the assets of the real estate, our main activity in IRSA that we run through PBC and Gav-Yam, that we have 67% and 51% of the shares. So we can see here the brands, the locations on the map of Israel, the points showing if they are office, commercial, industrial, under construction, residential, reserves. So you can see that in the central region of the country, we have a lot of property. The total property, not including Shufersal, but only including PBC and Gav-Yam, represent 1.2 million square meters of rental properties in Israel. Our proved land reserve, 670,000 square meters, we are looking for more land reserve, of more rights to more -- but this is the approved land reserve. Occupancy in Israel, 97%, plus the -- in the United States real estate that represents between Tivoli and the headquarters and the HSBC building in Fifth Avenue in New York, having a 42,000 square meters of rental. So this is the rental properties through PBC and Gav-Yam.

We can see in next page some of the samples of the buildings under construction. We see buildings logistic and office buildings like the ToHa building, a 57,000 square meters, that they are finished, opened now. Now they are -- the office are move, and we are moving our office to this building, too. This is a half-and-half building with Amot we finished. And it's fully let. It's today 94% occupied. And so we are running 8 projects, representing 194,000 square meters of construction in Israel today, and planning to do much more for next 2019.

So now I will introduce Mr. Matias Gaivironsky.

Thank you, Alejandro. Good morning, everybody. So moving to Page 10. Here we have our participation in Banco Hipotecario. We control 30% of the shares of Banco Hipotecario. Here we can see the main events for the fiscal or for the 6 months period. So the bank is trying to implement a strategy to preserve cash on long-term deposits. The environment of interest -- the high interest rate in Argentina makes the banks to preserve a -- the liquidity. If we see the evolution in the price share, we can see a drop from the previous year. So our stake reduced from last year of -- from $328 million to the current market value of $153 million.

If we see the results 2 years, the bank generated a loss of ARS 79 million compared with a gain of ARS 309 million during last year. Basically, this is the implementation of IFRS 9 that makes the banks to increase the provision for doubtful accounts. If we see the balance sheet, the rest of the banks and the Banco Hipotecario present to the central bank and according to central bank rules, the bank generated much profit than the year ago. But if we implemented the IFRS 9, that is only for reporting purposes to IRSA, that generate a loss. So the rest of the banks and the rule for the rest of the banks, when they present to central bank, they don't have to implement yet this rule.

So moving to Page 12, I will try to explain the main implication of the adjustment for inflation that we started in this quarter. So basically all the figures from Argentina, we need to adjust for inflation. The numbers in Israel and the numbers from our operations abroad in United States, we don't have to adjust.

For comparison effect, we expressed all the 2019 number to constant currency, so it means that the 2019 were adjusted first for inflation, if apply, and then by 47%, that was inflation from December 2018 to December -- sorry, in December 2017 to December 2018.

Page 13, we can see some of the effects in Argentina. So first of all, remember that all our investment properties were valued at fair value. So we don't need to adjust for inflation, only we need to adjust when we have historical value that is our other assets, so basically the hotels, the properties for sale and some intangibles and the land that we have for residential real estate. So that means only 1% of our assets, the rest are the Israeli assets that are the main assets of the company and the investment properties of Argentina that represents 17% of our assets. When we recognize value in this semester, we have the big impact on the value of investment properties adjusted by inflation. We need to separate the results. First, the inflation will go to the line of inflation adjustment. And the difference goes to the investment properties' results. So we will see that we have a big drop in this line. It means that we already adjusted by -- at fair value in previous quarters and this quarter as well, but when we measure the impact of inflation, the difference goes to these lines.

If we go to Page 14, we can see the effects on the rest of our balance sheet, the liabilities and our shareholders' equity. The liabilities, most of our liabilities are monetary liabilities, so that it doesn't -- we don't have to adjust by inflation. But the shareholders' equity, yes. And that generate a big impact in our financial statements.

We also updated, uploaded in on our website an explanation of the main effects of the inflation adjustment. So you have there more details that -- if you have any doubt, you can call us later to understand the effects. So from now on, we will talk always with constant currency. So that means that when you compare the previous years that were adjusted by inflation, so now you can see the real -- when we see variations, we will see variations in real currency.

So our net income this year, as Alejandro mentioned, posted a loss of ARS 6.1 billion compared with a gain ARS 10.8 billion last year. When we see the part that you were told -- sorry, I mentioned the net income from continuing operations, not the net income. So the net income is ARS 5.4 billion against ARS 12.1 billion gain. When we see the part that we told to our shareholders, it's ARS 5.3 billion against -- a loss of ARS 5.3 billion against a gain of ARS 9.8 billion.

So the breakdown here and then the main explanations of the different segments. So I will separate into Argentina business segment and Israel business center. So first of all, in Argentina, we can see better revenues that I will explain in the next page. The cost decreased 10%. Then the important or the main line is the number 4, the change in the fair value that we can see a negative result of ARS 6.2 billion against a gain of ARS 8.4 billion in the previous year.

SG&A grow by 29%. When we summed the line number 2 and the line number 5 that you can see that sum bottom of the page, we will see an increase of 1% against inflation. So basically here we have a separation of some concept that before were impacted in the cost line are now is in the SG&A cost, so -- but the sum of the two is we are growing and the same line than inflation in our cost. And then the other important effect for the Argentina business segment is the net financial results that this semester we have a big devaluation that I will show in the following pages.

In the Israeli business segment, basically, to compare with the previous year, you need to first assess or understand how much was the devaluation, the real devaluation between the peso and the shekel. That was 17%. So all the figures of the previous year were adjusted by inflation to current currency. So we're already adjusted by 47%. So to compare when you see it at 21%, that is higher than the real devaluation. And if you see cost increasing by more than 17%, it's a real growth or real decrease. So basically in Israel we see better gross profit than we have change in the fair value that were bigger last year. And then the other important effect is the line 9, the net financial results, that was ARS 7.3 billion last year against ARS 4.8 billion this year.

The other important effect is in the income tax, both in -- mainly in Argentina. Last year we have the implementation or the change in the tax treatment of Argentina that decreased the income tax for the companies from 35% to 25%. That generated a big gain from our deferred taxes.

If we see the line #11, that is the current tax, we see a drop from ARS 486 million to ARS 112 million.

So going to Page #17. Here, we can see the main effects in our adjusted EBITDA that reflects the performance on operational side in each of the segments. So we can see a drop in shopping malls, basically, generated by lower consumption levels in Argentina. Offices that increase by 46%. So our rents are in dollars, the dollar devaluation between the two periods is 100%. So the rest is the inflation adjustment. So we increased by 46%. The hotels that we have had a much better performance this semester. Based on development and basically we don't sell anything in this semester, minor sales against some sales during the last year by (inaudible) unit of residential real estate. And in Israel, we see a better performance in real estate, telecommunications that is lagging in the real devaluation basically, because of the competitive environment there. And the other that last year we have some sales there against this year.

Page 16, we can see the financial results. In Argentina, we have the devaluation. You can see here devaluation of last year was only 12% in the first semester against a 30% devaluation this semester from 28.85% to 37.5%. So that generated bigger net foreign exchange losses and bigger net interest losses since our debt is mostly dollar-denominated debt. In the Israeli port, we can see a drop in the interest payments. Although here we have an increase by 11% in pesos terms, remember that the devaluation was 17%, so our figures this quarter are lower than the -- in shekel terms than the last year. And the other important effect that was mainly impacted last year was the change or the swap in DIC debt that generated a loss last year. And also lower results from the fluctuation of the Clal shares that last year increased by 4.3%. And then adjusted by inflation is the ARS 737 million, basic -- mainly the ARS 737 million against ARS 52 million this year.

Finally, if we move to Page 18, we can see our debt amortization scale. So we have a payment this year -- by the end of this year of ARS 205 million, that the company -- sorry, dollars, that the company is working on that, so to refinance this amortization.

So with this we finish with the formal presentation.

Now we open the line for your questions.

(Operator Instructions) And your first question comes from Gordon Lee with BTG.

Yes. Hello, sorry, can you hear me?

Yes.

Okay, perfect. Thank you. Sorry about that. I have 3 questions actually. Two on Argentina and 1 on Israel. On Argentina, on the acquisition of Libertador, is that something that you would describe as opportunistic? Or is hotel something that strategically you'd like to have more exposure to going forward? The second question on Argentina for, Matias, really is, could you remind us what the threshold for inflation is below which you would have the option of going back to nominal accounting and if that were to happen, would you do that immediately or is there a certain time frame for you to make that adjustment. And then the question on Israel was, with the exception of the situation with Clal where obviously we know that you're having to divest for regulatory reasons, would you say that the sector exposures that you have is -- are exposures that you would like to remain with over the long run? Or are there still sectors that you would like to or that you would be open to disposing off in addition to further deleverage -- or in order to further deleverage the balance sheet?

Gordon, thanks for the question. We start with Argentina and on the hotels. So yes, it's an opportunistic acquisition. Remember that overall in our portfolio the hotels represent a very, very little part of our portfolio. So we saw this opportunity to acquire the 20% stake at very low prices and also to consolidate the ownership on that building and really now we can decide on the future of that asset. On top of that, this trigger, as we knew that we had to make some changes. We were not happy in the way the things were going on in the management on the hotel, so this really for us a trigger to start doing things differently. And we are working now on the process how to do that. We're going to take 60 days now to decide how to manage the future on this specific asset and this may be contagious for the others. So that is the short answer for your question on opportunistic.

Gordon, regarding the second part of the question. This is established by the rule. So if any country surpass 100% according to IFR -- 100% accumulated during the last 3 years, you have to adjust for inflation. So Argentina surpass that this year. The estimation is that probably for the next 2 years accumulated inflation in Argentina will be higher than 100%. So that will be established by the rule. When we will be below 100%, then there won't be an obligation to assess. Remember that before it was not an option that basically was forbidden by the CMB, the local SEC to adjust balance sheets by inflation. So that is according to a rule, and we will fulfill the rule.

And related the third question, you know that Israel is under the process of selling Israir, the airline company is today in the process of being sold. So this today on the negotiation. And the rest in general we don't speak about what we are doing. We probably -- you know that we like very much the real estate portfolio and that -- it's a very important element for the strategy of IRSA. And the rest are all under consideration.

(Operator Instructions) And our next question comes from Jorel Guilloty with Morgan Stanley.

Sorry if I missed this earlier, but what is the plan for the debt that is coming due in September this year? You have nearly $200 million in bonds that are maturing. So I was curious to see how you were thinking about dealing with that. And also if you were to refinance, how much you think you would be paying for that debt?

Thank you, Jorel. So we are defining the plan. If we see our track record, we always have majority our debt in capital markets. But also the company has strong relation with all the banking system, so we are analyzing different options or a combination of the two to refinance. And it's not defined yet because we don't know exactly terms and conditions, how much or what part of the debt we will cancel and what part we will refinance. So we will analyze that in the coming quarters.

And I have a second question, if I may. So focusing on the shopping malls, I was just curious to know if you've generally seen some change in consumption patterns within your malls over the past 3 years. I mean, you've obviously needed to do a change in your balance sheet due to high inflation. I was wondering if you're seeing if your consumers -- the consumers of your malls have in any way changed the way they're shopping in your malls due to high inflation as well. Any color that you can provide would be helpful as well.

Thank you, Jorel. Yes, we have seen a decrease on sales, as we show here. But I wouldn't call that a pattern. I could -- would call that a reality of the power of consumption of the people in the country. Remember that because of the tariffs went up and the salaries didn't go up as much, the power of consumption of the public in general really was reduced. And that is mainly the big explanation of reduction in the consumption in the people. I don't believe people don't want to spend more money in shopping centers. I think that's the reality of what they are facing. And just you to have an idea of, I don't know if this is too fast, but now the salaries are going up a little bit, I think we're starting to see the last few days the new salaries in the consumption in the shopping centers, but this is very new for the last few days that we saw the sales in our shopping centers. And we -- remember also we were coming from very high numbers in terms of consumption. There was a room like 10, 12 years where consumption was really promoted. And now we see the churn, but I don't think it's because people want. Again, it's because this is what's the reality of the power of consumption.

Yes, I guess, what I was trying to ask if you're seeing more consumption in certain of type of stores. If you're seeing more low tickets goods being brought? If you're seeing perhaps even tenants going more towards an omnichannel route where they're discounting online and people buying in store? Like, anything of that sort? That's what I'm trying to understand.

Okay, okay. Wonderful. So yes, we see different trends. For example, first of all, consumption on clothing is the one we have seen a small reduction. Food and entertainment remains, I mean, really sustained itself. And we see that the trend of those categories going up. And we also see that for example our premium outlet shopping centers are going up, okay? So this is -- people want to spend money, so they are looking for opportunities. Also, as you mentioned, all the categories on the Internet are growing. But they are not growing as much as they were in the past because they also suffer the same consumption problems that we see in the country. And as we mentioned in the IRSA Commercial Properties' call, we are really working on giving solutions to omnichannelity to give our tenants the ability to sell in different ways in the Internet or in store, things that they do not have in the store or any other way that we are looking for to give the ability to our customers to buy in different ways. So yes, we're trying to explore those things, also are giving -- taking relevance in the country as everywhere else.

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

Yes. We keep the construction of the buildings, achieving almost the size of 0.5 million square meters in Argentina. And this is a good moment for reconstruction because devaluation is making cheaper cost of construction, and occupying the buildings, changing in the place that we need to change. And recently, we -- the company, IRSA, began to buy more shares of IRSA Commercial Properties. Today, it's achieving almost 82%. So we bought almost 1% of the shares. The company is using its liquidity to buy more shares, too.

So we thank everybody, and let's see next quarter. Thank you very much, and have a very good day. Bye.

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