Earnings Call Transcript - IRS Q1 2020

Operator, Operator

Good morning, everyone, and welcome to IRSA’s First Quarter 2020 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 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 this time, further instructions will be given. 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 notes in the Company's earnings section release regarding forward-looking statements. I would now turn the call over to Mr. Alejandro Elsztain, II-Vice President. Please go ahead, sir.

Alejandro Elsztain, II-Vice President

Hello. Good morning. We are beginning our presentation of the first quarter of fiscal year 2020, and we can begin on Page number 2. We can see the main event for the quarter. We are achieving a gain of ARS 11 billion. That is a 21% comparison increase to last year's numbers. That was mainly explained by the results from the loss of control that we had in the deconsolidation of Gav-Yam that we're going to show you later. That deconsolidation gives us one effective result, and that is the majority of the explanation. In the net gain attributable to IRSA, we are achieving ARS 3.3 billion. When we divide the adjusted EBITDA, we can see that the adjusted EBITDA for the period was ARS 5.3 billion. That is a 28% increase compared to last year's numbers. We divided, as always, the Argentinian side from the Israel side. Comparing the Argentinian side, we see that we are achieving ARS 1.4 billion. That is a small drop compared to last year’s numbers, always adjusted by inflation, so a drop of 8%, and mainly driven by lower results from the shopping malls, a small reduction in shopping sales adjusted for inflation, but an increase mainly in the office buildings that we are going to see on the next page. And on the Israel side, we see an ARS 3.8 billion gain that is a 51% increase compared to last year’s numbers. In this case, it's due to the positive effect of IFRS 16 in the sales of Cellcom. So that we are going to see a little later. We can see a small comparison in Argentina related to our Argentine Business Center. I will introduce to Daniel Elsztain to do that, please.

Daniel Elsztain, Vice President

Thank you, Alejandro. Good morning, everyone. On Page number 3, we see the Argentinian figures. On the top of the page, we start with the shopping center numbers. Adjusted EBITDA for this quarter is ARS 1.1 billion, a 14.5% decrease compared to last year, adjusted for inflation. Our tenants' sales show a drop of 5.1%, but this is really a recovery from previous quarters. We're coming from levels of reductions of 14% to 15%. This is mainly the consumption recovery, driven by government incentives to consumption in the Ahora 12 and Ahora 18 programs that were launched a few months ago, and we see that trend in consumption that is really trying to achieve numbers closer to inflation. In terms of our GLA, we see a small reduction. This is because of the finalizing of the concession of the Buenos Aires Design. It has dropped now, and the total stock is 332,000 square meters of GLA. We're going to see a small increase by incorporating a small growth in existing shopping centers in the near future. In terms of occupancy, we are running at 94.3%. This is a reduction of 4 points compared to last year, mainly explained by the exit of Walmart in our Dot shopping center. This space is being occupied. We have already signed contracts for about 12% to 13% of this space, and we're going to keep doing the leasing on this big space. It's a very good location, being on the first floor of the shopping center, but it's going to take us time to make the construction and to sign with all the tenants. In the office segment, we see a big gain of 62% compared to last year on the adjusted EBITDA, achieving ARS 424 million. This is mainly driven by two factors. One is all the dollar-denominated rent in the case of the offices, and we see that it's very stable at $26.6 million per square meter per month. And also because we increased our portfolio with the opening of the Zetta Building that opened in May of this year, now the total portfolio grew by 39%, achieving a total GLA of 116,000 square meters. Real square meters, there's no loss factor; nothing that is real occupied space on our buildings. In terms of occupancy, we see a reduction of 5 points. This is mainly because of one large class building where we have lost a few tenants and it has been a challenge to recover that occupancy in the Class A segment. We are running with high occupancy and stability in pricing. We're going to launch a program to see how to occupy this specific building that was running at a low occupancy level. In the case of hotels, we see the EBITDA achieving ARS 94 million. This is a reduction of 33% compared to last year's numbers. This is mainly driven by the deflagging of one of our hotels. Remember, we have the Sheraton Libertador; now it's only the Libertador, there were some disruptions in all the systems, the reserve systems for the hotel. So we have seen some disruption. We predicted that this could happen. We have experienced some technicalities, but we are now running with better occupancy than in previous quarters. In terms of rate, we see a small drop from $199 to $167, an 11%. Again, this is mainly explained by the deflagging and also a small decrease in rates in the other hotels as well, but this is a very small effect. In terms of the rooms, we have four more rooms because we converted some large spaces into more rooms, but this is a small effect. And in terms of occupancy, we see that we went down from 64.5% to 61.6% overall, and this is mainly due to the process of the Sheraton Libertador into Libertador, but we did see some reduction also in the other two hotels, but not significantly. And finally, on the sales and development segment, we see a reduction. We experience a loss, mainly because we are allocating all the costs and we have seen very small sales in this segment, resulting in a loss of ARS 75 million compared to last year’s loss of ARS 47 million, where we had a few more sales last year. So now on Page 5, we go back to the Israel Business Center to Alejandro.

Alejandro Elsztain, II-Vice President

Related to some news of the quarter in Israel, in September, the company Board of Directors approved the appointment of Eran Saar as IDB and DIC CEO. This is very good news. He's an Israeli, very well prepared, running holding companies in Israel. The other important aspect of the company was the Concentration Law Resolution. As you remember, we required to reduce one more layer, and we had DIC, the other companies, and the last one, Mehadrin, Gav-Yam, and Ispro. For that, we needed to reduce one of those layers. In the case of Ispro, which was 100% owned by us, we bought the public debt and now we have 100% of the bonds ourselves. It's private too. In the case of Gav-Yam, the disposal of 16.7% of the shares made that we have 51% reduced to 34.9%. With that, we are consolidating and losing control of the company. Finally, we need to address Madryn, where we are running with 45.6% of the shares and we are currently discussing what to do before the end of December 2019 to solve the situation regarding the third layer of companies. On the next page, we can see what we did with Gav-Yam, with a much higher price, showing the recovery of the share price over the last six years, with an evolution of 135% going to the highest price of the share, and we sold these two stakes during that time. This allowed us to significantly increase the liquidity of the company to more than ILS 680 million, which is almost $200 million. The gain we achieved for our balance sheet in IRSA was again of ARS 15 billion. We have now an approximate stake of 35%. This is the resolution we needed for the concentration law. I will now introduce Matias Gaivironsky, our CFO.

Matias Gaivironsky, CFO

Thank you, Alejandro. Good morning, everybody. Moving to Page 6, another important news about the Israeli business segment related to Clal. Under the scenario in Israel, we are forced to reduce our stake in the company. You can see the evolution that up to May this year, we avoided selling the shares in the market by doing SWAP transactions. Now we are compelled to sell the shares. We started in June and commented in the last annual report that we had already sold some of the shares. After this, in September, we closed two additional transactions. One was related to the options of the two private buyers that bought 10% of the shares. They had the option to buy 3% more, and they proceeded with that. The company was also able to sell shares against bonds of IDB. So we executed this swap or exchange between shares and bonds, effectively selling shares of Clal at 90% book value. We believe this was a good move instead of selling shares directly in the market. After this, on November 7, we provided an option to an individual named Eyal Lapidot, the former CEO of the Main Insurance Company of Israel, who purchased 5% of the shares. The company arranged to give him a loan to buy the shares. Now we control 30% of the shares, with 15% coming through swaps and 15% as a direct stake held in trust via a trustee. Moving to the next page, we can see the evolution of the adjusted EBITDA by segment. It's important to note that now in real estate, we deconsolidate Gav-Yam, so we only recognize results from the PBC transactions. Here, we see that in previous results, these were significantly lower because a large portion of the rental income came from Gav-Yam. Henceforth, we will recognize results only under the equity method, and we don't consolidate anything anymore. In the real estate segment, we can see an increase of 3% in dollar terms while the telecommunication sector has increased by about 55%. Here, in telecommunications, an important new rule, IFRS 16, established that all the rents on leases are now recognized as amortization. Therefore, in the EBITDA, we exclude these. As a result, the results are much higher than the previous year. Other costs are mostly attributed to corporate costs, which decreased from $8.6 million to $0.3 million. Last year, we had some disposals in this line. Finally, regarding the debt of IDB, an important point was the commitment of IRSA due to the financial condition of IDBD, which decided to invest an additional ILS 70 million made in September, with an additional 140 million to be deployed by 2020 and 2021, subject to certain conditions. This is a new commitment from IRSA. We deployed ILS 70 million already, and the rest will occur next year. To summarize, in the debt amortization scale, we note that the net debt reduced to 555. Until the end of the year, we have $137 million in amortization with cash of $150, but most of that cash is involved in collateral for the swap transactions of Clal. We have the means to service the debt; however, we will try to manage it more efficiently. Regarding DIC, we can see that the company's cash position covers amortization until 2022, so there is no pressure at all at the DIC level. On Page 10, we review the financial statements we closed in September. As Alejandro mentioned, the net income of the company was ARS 10.983 billion against ARS 9 billion last year. When we break down to identify the main impacts, we've covered all operational aspects through the adjusted EBITDA for each segment. Now I will focus on the remaining lines. The net income from discontinuing operations was ARS 15.1 billion, relating to the deconsolidation of Gav-Yam. According to accounting rules, when deconsolidating an asset, we must value the stake at fair value, which accounts for an initial one-time effect. From that point, we will begin to recognize results under the equity method. Another significant impact is in the net financial results, reflected in the next slide. The net financial result from the Argentina business segment came in at minus ARS 8.4 billion compared to ARS 9.2 billion from last year. This impact is mainly related to the exchange rate. Last year, we experienced evaluations of 43%, while this year it was 36%. This affects all our dollar-denominated debt. In the Israeli business segment, a key factor is the line concerning the fair value of financial assets related to the valuation of Clal—a pivotal component since we value Clal at market value.As seen in the graph on the bottom right, last year we had positive growth in the first quarter of 34%, while this quarter produced negative growth of 14%. This is reflected in the result of ARS 7.4 billion last year versus a loss of ARS 2.4 billion this year. Moving to Page 12, we provide a breakdown of the debt amortization scale and present what we achieved during this quarter: we issued a new bond of $85.2 million maturing in November next year, and another series of $45 million denominated in Chilean pesos, both of which expire in August next year. An additional note regarding our payment of the IRSA note on September 9: the company promptly handled the payment of a $135 million note that was due that day, and the Central Bank imposed new capital controls in Argentina that week. Before this, the movement of dollars from Argentina abroad was problem-free. Now, with capital controls, permission from the Central Bank is required. Practically, after the payment, the dollars are stuck in Argentina, as certain investors must seek permission from the Central Bank to move that money abroad. The only way to transfer money from Argentina abroad now is to pay the market cost, which is around 6%. However, individual Argentinians can receive dollars without problems. The company is trying to assist all investors with operational issues. Initially, it was complicated since some custodians needed to open accounts, and we are helping with this process to make it easier. Unfortunately, this situation is beyond our control and is dependent on regulations from Argentina. Lastly, we will see the breakdown of our notes; included at the bottom right are the outstanding bonds at IRCP and IRSA, which relate only to the Argentinian law. Thus far, there have been no issues with the New York law bonds; they can transfer and pay abroad without difficulty. However, the addresses for payments on Argentine law bonds are within Argentina. For this reason, we ensure our obligations within Argentina, as the Central Bank does not allow international transfers. The outstanding bonds are at IRCP, totaling 140 expiring in September, and the November bonds along with Chilean peso bonds at IRSA that expire in August; the outstanding amount is 226 while IRCP has 360 notes. With that, we conclude the presentation. Now, we open the line to receive your questions.

Operator, Operator

Thank you. The floor is now open for questions. Our first question today will come from Gordon Lee with BTG. Please go ahead.

Gordon Lee, Analyst

Hi, good morning. Thank you very much for the call. One quick question, more on the strategic side. Considering the new scenario in Argentina and setting aside the restructuring or reorganization of the Israeli business to comply with the holding company regulations, I was wondering if you look at either the Argentine business unit, the Israeli business unit, or even the portfolio at the commercial properties level, if there’s anything you think might be worth sort of monetizing or simplifying the structure at this point, again, given the new scenario in Argentina. Thank you.

Alejandro Elsztain, II-Vice President

Every time we find that an asset is well valued, you see us realizing mutual transactions. For example, there is a transaction that we are currently completing in PBC in Israel, which is a shopping center where we owned 50%. We are in the process of selling this asset since it is a low cap rate. We do not have any strategic position in retail in Israel. We've decided to sell and are in the closing process. This will generate a lot of liquidity for the company as we aim to focus on assets we believe have a more strategic value. We are doing this throughout the group, and whenever we find assets with low cap rates, we sell, whether in Cresud, BrasilAgro, or other real estate, through PBC, Gav-Yam, and so forth. This is indeed our strategy; and you will see many examples of us executing these initiatives.

Gordon Lee, Analyst

Perfect. Thank you very much.

Operator, Operator

At this time, there are no further questions in the question queue, and this will conclude the question-and-answer session. I would now like to turn the floor back to Mr. Alejandro Elsztain for any closing remarks. Please go ahead.

Alejandro Elsztain, II-Vice President

This is our activity: to keep developing new buildings, and we have the chance in a company where we do not have control, but we are still participating in Gav-Yam. That company was able to purchase a new site in a beautiful area, competing with other players to establish new, highly demanded buildings in Jerusalem. I forgot to mention at the beginning of the presentation about the dividend that was approved a few weeks ago at the assembly. In the case of IRSA, the board approved to pay a dividend representing 1.85% of the shares of IRSA Commercial Properties, thereby providing more liquidity to that company again. This initiative will be executed in a few days around mid-November. The company continues to do what we know best: to buy when no one is buying and to sell when cap rates are very low. Thank you very much, and have a very good day. Goodbye.

Operator, Operator

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