IRSA Inversiones y Representaciones Sociedad Anónima
Q4 2018 Earnings Call Transcript

Published: 6 Mar 2019

[Operator:]

Good morning everyone. And welcome to IRSA Second Quarter 2019 Results Conference Call. Today's live webcast, both audio and slide show, maybe accessed through the company's Investor Relations Web site at www.irsa.com.ar by clicking on the banner, Webcast Link. The following presentation and the earnings release issued on March 1st are also available for download on the company's Web site. 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, Senior Vice President. Please go ahead, sir.

[Alejandro Elsztain:]

Thank you very much. Good morning, everybody. We are beginning to talk about the first half of the year, the six months of 2019 balance sheet. And we can see in Page Number 2 that this year we are beginning to adjust EBITDA our balance sheet for inflation. Matías, our CFO, will explain in deep what is that mean. So 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 six months was up to ARS8.6 billion is 13 below last year numbers. And when we divide between Argentina and Israel, we see that Argentina growth ARS2.5 billion and Israel growth ARS6.1 billion. In Argentina, we can see that rental properties grew at the pace of 6.2% comparing to last year numbers. And this is because two of our activities, the office buildings and the hotels are well related to dollar, so the valuations surpass inflation, not in the same in the mall that was a negative number but the balance was a positive comparing year-to-year. And related to Israel, we had 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 has ARS5.4 billion loss comparing to a gain of last year, ARS12 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 Israel is ARS5.3 billion almost all. We recently after the close of the balance sheet, both 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.

[Daniel Elsztain:]

Thank you, Alejandro. Good morning, everyone. On Page Number 3, we can see Argentina's operations on the two segments first on the top left we can see the shopping malls and hotels. 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%. And if we make the combination of the six months period, this was a reduction of approximately 13% internal 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. There was a confession from the City of Buenos Aires, so that's the reduction on the on the GLA. And in terms of occupancy, the picture shows a big decrease we were running 99% for long-time and it shows 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 the Walmart, and now we are working to replace Walmart with small tenants, and it's going to be complete we hope during the fiscal year, the new transformation in the shopping. If we would have excluded effect of Walmart or in all our portfolio, occupancy would have been 98.7%. Yes, it shows a small decrease in occupancy and explains what's going on in the country, but it's not as that we see here the 95% that we are not used to. We are 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 so -- it's 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 goes, we have a small reduction with a picture at the end of the December 2018 we see 90% occupancy. But this is mainly explains the new vacancy. We have some expiration on the building and that's because that and that is in the office, the Polo Dot office building, Sociedad Dot buildings at the Polo Dot. And we have demand on this place. So we don’t expect to see this occupancy in the future. If we would have excluded the effect of these two empty floor 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 one 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 are also going to incorporate it to handle Della Paolera building at Catalinas. So we are going to have the total GLA of approximately 145,000 square meters, which is a growth of approximately 74% of what we have today. On Page Number 4, we can see what happened regarding the Catalinas building and the 200 Della Paolera office building. Remember here we did a related party 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 transaction, it was the total transaction for $60 million for a price per square meters of approximately $4,200. And this transaction was -- 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 two companies transact as what they consider what the 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 two years ago, or maybe a little more. The building is on time in terms of construction. We estimate the opening for fiscal year 2020. And we believe that EBITDA will be somewhere between the $10 million and $12 million once the building is complete. On Page Number 5, we can see our hotel segment. As Alejandro mentioned, we acquired 20% stake of Hoteles Argentinos, so we have full ownership on that building through Hoteles Argentinos company. There was a negotiation 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 ADR, the rate went up from $195 to $205, occupancy was used a little bit, but it's more than compensated with the rate. This has been maybe one of the best six months period for this industry in hotels. We can see that the growth in EBITDA is really impressive, it's a 563% growth. We achieved ARS305 million in EBITDA, so this trend continues. So the hotels are stable, are benefitting by the devaluation and inflation, it's not yet catching up as fast as this is devaluation.

[Alejandro Elsztain:]

If we see in the Page Number 6, we can see the main events for the six months in Israel. And in IDB, we kept selling some stakes that we were forced by the law, the 5% in August and 4.5% in January. Today, the current stake of IDB related to Clal is 25.3% and the economic rates are almost 55. We can see the evolution on the market cap of the company related to the book that this column 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 gap, DIC situation, in this semester we sold another stake of Shufersal before we have sold before the last year. But in this period we sold 7.5% of the company for ARS416 million. Today, we are keeping still 26% of the company in DIC level. From other side, we were acquiring shares from PBC, up to the 30th December, we bought 3% but we kept buying later, increasing the stakes in December 67% of the company. In Elron, we bought shares too and we went to almost 60% of the shares of the company, an indicator fell from a little bit smaller so a stake of almost 44% of the company. From the other side, we were buying back shares. We approved this repurchase shares plan upto ARS150 million, and we are remaining closing capital up to no less than 10%. We repurchased shares up to ARS9 million up to December, but we kept buying later. So the company is doing that plan. From the dividend distribution, we did ILS100 million through 60 in kind and 40 in cash, so the companies are moving. And if you can see in the next page, in Page Number 7, how is the current corporate structure and the IDB and DIC level, we are working to reduce again one more layer, because of concentration lower restriction. So we need to before the end of December of this year, to decrease one layer in DIC level and we are working on that too. And we can see in the next page, Page Number 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 of the map of the Israel, the points showing is their officer, commercial, industrial and the contractual, 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 is 97% plus in the United States real estate that represent between Tivoli and the headquarters and the HSBC building in 5th 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 building logistic and office building, like the ToHa building, 57,000 square meter that they are finished, open now, now there the office are moved 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 leased, it's today 94% occupied. And so we are running eight projects represented, having a 94,000 square meters of construction in Israel today, and planning to do much more for next 2019. So, now I will introduce Mr. Matías Gaivironsky.

[Matías 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 six months period. So the bank is trying to implement an strategy to preserve cash and long-term deposits. The environment of interest -- the high interest rates in Argentina makes the bank to preserve the liquidity. If we see the evolution in the price share, we can see a drop from that previous year. So our stakes reduced from last year from $328 million to the current market value of $153 million. If we see the results to IRSA, the bank generated a loss of ARS79 million compared with a gain of ARS309 during last year. Basically, this is the implementation of IFRS9 that makes the bank to increase the provision for doubtful accounts. If we see the balance sheet that the rest of the bank and the Banco Hipotecario present to the Central Bank and according to the Central Bank rules that the bank generated much profits than the year-ago, but if we implement the IFRS9 that is only for reporting purposes to IRSA that generate a loss; so the rest of the bank 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 have 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 usher. For comparison effects, 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 the inflation from 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 asset; so basically, the hotel, 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 main assets of the company and the investment property of Argentina that represent 17% of our assets. When we recognize value, and 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 different 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 at fair value in the previous quarters and this quarter as well. But when we measure the impact of inflation the difference go to this line. 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 monitory liabilities, so that it doesn't -- we don't have to adjust by inflation but the shareholders' equity, yes, and that generate a weak impact in our financial statements. We also updated -- uploaded in our Web site an explanation of the main effects of the inflation adjustment, so you have there more details. 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 ARS6.1 billion compared with a gain of ARS10.8 billion last year. When we see the stock, I mentioned the net income from continuing operations. Now, the net income is ARS5.4 billion against ARS12.1 billion gain. When we see the part that we told to our shareholders is a loss of ARS5.3 billion against a gain of ARS9.8 billion. So the breakdown is here and 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 would 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 6.2 and against a gain of 8.4 in the previous year, SG&A growth by 29%. When we sum them the line number two and the line number five that you can see that some in the bottom of the page, we will see an increase of 1% against the inflation. So basically, here we have the separation of some concepts that before were impacted in the cost line and now is in the SG&A cost. But some of the two is we are growing and the same line that 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 this following page. In the Israeli business segments, basically to compare with the previous year, you need to first adjust or understand how much was the devaluation, the real devaluation between the peso and the shekel that was 17%; so all figures of the previous year were adjusted by inflation to current currency; so we're already adjusted by 47%. So to compare what you see a 21% that is higher than the real devaluation. And if you see costs increasing by more than 17% is the real growth or real decrease. So basically in Israel, we see better gross profit, and we have change in the fair values that were bigger last year. And then the other important effect is the line nine, the net financial results that was ARS7.3 billion last year against ARS4.8 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 number 11 that is the current tax, we see a drop from 486 to 112. So going to Page Number 17, here we can see the main effects in our adjusted EBITDA that reflects the performance on the operational side citing each of the segments. So we can see a drop in shopping malls basically generated by lower consumption levels in Argentina, offices that increased by 46%. So our rents are in dollars. The dollar, the devaluation between the two periods is 100%. So the rest is the inflation assessment, so we increased by 46%. The hotels that we have much better performance this semester, sales and development that basically we don't sell anything in this semester or minor sales against some sales during the last year by [indiscernible] and another Beruti units of residential real estate. And in Israel we see a better performance in real estate, telecommunications but it's lagging in sale, the real devaluation basically, because of the competitive environment there. And the other that last year we have some sales there, and again 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 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 dominated that. In the Israeli part, we can see a drop in the interest payment. Although, here we have an increase by 11% in pesos term, remember that the devaluation was 17%. So our figures this quarter are lower than in shekels terms than the last year. And the other important effect that was mainly impacted last year was a 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 ARS737 million, mainly ARS736 million against ARS62 million this year. Finally, if we move to Page 18, we can see in our debt amortization scale. So we have a payment this year, by the end of this year of $205 million 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:]

Thank you. The floor is now open for questions [Operator Instructions]. And our first question comes from Gordon Lee with BTG. Please go ahead. Mr. Gordon, your line is open.

[Gordon Lee:]

I have three questions actually two are on Argentina and one on Israel. On Argentina, on the acquisition of all of Libertador. Is that something that you would describe as opportunistic, or is hotel something that strategically you would like to have more exposure to, going forward? The second question on Argentina for Matías 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 timeframe 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 review. Would you say that the sector exposure that you have is our 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 of in addition to further deleverage, or in order to further deleverage the balance sheet? Thank you.

[Alejandro Elsztain:]

So we start with the Argentina and on the hotels. So yes, it’s an opportunistic acquisition. Remember that overall in our portfolio, the t hotels represent a very little part of our portfolio. So with it we saw this an 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 that the things were going on and the management on the hotel. So this really for us is trigger to start doing things differently and we are working on the projects 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 others. So that's the short answer for your question on opportunity.

[Matías Gaivironsky:]

Gordon, regarding the second part of the questions, this is established by the rule. So if any country surpass 100% according to -- 100% accumulated during the last three year, you to adjust for inflation. So Argentina surpassed that this year, destination is probably for the next two years. Its 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 rule and we will fulfill the rules.

[Daniel Elsztain:]

And related to third question, you know that Israel is under the process selling Israir. The airline company is today in the process of being sold, so this today under negotiation. And the rest, in general, we don’t speak about what we are doing. We probably and you know that we like very 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:]

[Operator Instructions] And our next question comes from Jorel Guilloty with Morgan Stanley. Please go ahead.

[Jorel Guilloty:]

I'm 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 really finance. How much do you think you'd be paying for that debt?

[Matías Gaivironsky:]

So we are defining the plan. If we see our track record, we always have majority of 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 see -- we don't know exactly terms and conditions of how much or part of the debt we will cancel and what part we will refinance. So we will analyze that in the coming quarters.

[Jorel Guilloty:]

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

[Daniel Elsztain:]

We have seen a decrease on sales as we show here, but I wouldn't call that a -- I 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 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 of 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 salary in the consumption, in the shopping center. But this is very new for the last few days that we saw the sales in our shopping centers. And remember also we were coming from very high numbers in terms of consumption. There was a like 10, 12 years where consumption was really promoted. And now we see this trend. But I don't think it's because people want, again, it's because this is what the reality of the power of consumption.

[Jorel Guilloty:]

I guess what I was trying to ask, if you're seeing more consumption in certain type of stores, have you seen more low ticket goods being bought, if you're seeing perhaps even 10 and 20 more towards omni-channel route, where they're discounting online and people are buying. And so anything of that front that's what I'm trying to understand.

[Daniel Elsztain:]

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 entertaining remains, I mean really sustained their sales; and now 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. 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 Property's call, we are really working on giving solutions to omnichannelity. So to give our tenants the ability to sell in different ways in the Internet or in stores things that they do not have in the store, or in any other ways 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 and also are giving stake and relevance in the country as everywhere else.

[Operator:]

[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.

[Alejandro Elsztain:]

Yes, we keep the construction of the buildings, achieving almost this size 0.5 million square meters in Argentina. And this is an integral moment for reconstruction, because the evaluation is making cheaper cost of construction, and occupying the buildings, changing in the pace that we need to change. And recently with the company IRSA began to buy more shares of IRSA Commercial Properties. Today, it is achieving almost 82%, so we bought almost at 1% of the shares and 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.

[Operator:]

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