Cresud SACIF y A (CRESY) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen. At this time I would like to welcome everyone to the Cresud conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your hosts, Alejandro Elsztain, CEO; Gabrielle Blasi, CFO; and David Perednik, Administrative Officer. You may begin your conference.

Thank you very much and good morning, everybody. We are going to talk about the results for the fiscal year 2005 that ended the 30th of June. We are glad to announce these very great results of 77 million pesos of net income, that is 139% growth from (indiscernible) last year. And this is mainly explained because of all the lines of the Company who achieved good results. When we see the balance sheet (indiscernible) it is a combination of our operations of grain and beef production and mills, has (indiscernible) of the real estate portfolio where Cresud owns 16 farms and buys themselves every year pieces of land, had the portfolio of (indiscernible) and so a combination of all of them this year gave us these results.

When we enter into the operation we see how the grain production was huge, we achieved 140,000 tons of grain, double what we did last year and that was mainly explained by a good year in the weather for Argentina itself and to assume this having (indiscernible) area who achieved 140,000 tons. When we see prices, the prices were not so big comparing last year where had we had the decrease and in the case of beef we have the same sizes in volumes but worst year in the case of costs because of the drought have made us to put more capital in the (indiscernible) instead of having in our (indiscernible) farms but they are cheaper in costs. So the combination of growth in grain and beef and having the new dairy (indiscernible) this year (indiscernible) made a profitable year operationally.

When we talk about beef holding results, this segment gave us a very big profit like 11 million pesos and that was mainly because of the growth of price of the cattle that in Argentina accounts for very low levels. To give you an idea, the (indiscernible) compared to (indiscernible) was near a dollar per kilogram when the (indiscernible) went to (indiscernible) and part of it went to near $0.40 and we began a growth in prices and today we're talking about levels of $0.75 or $0.80 per kilogram. They are still very cheap compared to American prices or international prices, but they are giving us a recovery in our stock and today Cresud own nearly 84,000 tons.

So in the (indiscernible) holding we covered part of what we lost in the operation (indiscernible) against a loss of 3 million (indiscernible) operational (indiscernible). Where we see the bottom of (indiscernible) farms that in the past was one of the main aspects of the Company, only with the sale of two assets we made a profit of 20 million pesos, and that shows the strength of the (indiscernible) value of the Company owned in (indiscernible). These two farms giving us a 600% return in one case and near 200 (indiscernible) in the second shows us what can be the hidden value of the (indiscernible) farms (indiscernible).

You remember we keep them at cost of appreciation; today they represent like 75% of the dollars we paid because of adjusting for inflation, so we'll keep them of course and we show only the gain the day of sale. So with these two sales we may be strengthening the pesos too. (indiscernible) in the case of (indiscernible) because of the (indiscernible) of the convertible bond is (indiscernible) like when we -- the bond (indiscernible) million. From this you can hear today we have on stock 36.6 (indiscernible) one to one.

But we (indiscernible) balance sheet, we have 9 million of these convertible bonds that gave us a very big profit and we'll explain (indiscernible) in the balance sheet. And in the operation of (indiscernible) like 30% of our shares of (indiscernible) we are bringing results from (indiscernible). So with the combination the (indiscernible) are putting the Company in the gain that we are showing in this balance sheet. So I'll give the (indiscernible) to David and he will explain a little deeper in detail.

Good morning. Net income from the Company increased from 32.1 million for fiscal year 2004 to 76 million for fiscal year 2005 showing an increase of 139%. If we go into the sales, sales reached 78.2 million, 3.2% (ph) higher than those recorded in the previous year of 69.6 million. Going into the crops, the sales of grains increased 16.1% from 26 million in fiscal year 2004 to 30.9 million in 2005. Beef cattle, the sale of beef cattle increased by 32.8% from 27.7 million in fiscal year 2004 to 36 million in fiscal year 2005. Milk, the sale of milk increased 8.5% from 3.2 million fiscal year 2004 to 3.5 million fiscal year 2005.

The feed (indiscernible) from this segment declined 70% from 7 million in 2004 to 2.1 million in 2005. This decline was due to the price of corn which led producers to use (indiscernible). In the other lines sales increase by 1.7% from 4.8 million in fiscal year 2004 to 4.9 million in fiscal year 2005 mainly due to the increase in revalue from our affiliated company (indiscernible).

The cost of sales increased 32.3% from 45.1 million in fiscal 2004 to 59.7 million in fiscal year 2005. (indiscernible) the cost of grains increased from 15.4 million to 21.3 million and is due mainly to a larger sales volume and a larger opening store. The cost of the beef cattle increased by 55.7% from 21.1 million in fiscal 2004 to 32.8 million in 2005 and this was due to lower volume of meet sales and also for a higher quantity of beef cattle finished in the (indiscernible). The cost of sales of milk increased 60% from 1.3 million to 2.1 million. The cost of the feed load fell 70% from 6.2 to 1.9 million for the same reasons of the decrease in the sale and cost of others increased 39% from 1.1 million to 1.6 million due to the higher cost related to (indiscernible).

Gross profit decreased to 18.5 million in fiscal year 2005 compared to 24.5 million profit in 2004. The expenses increased from 4.9 million to 6.6 million and (indiscernible) increased 36.7% from 5.7 million to 7.3 million in 2005. Results from sales of these assets, as Alejandro mentioned before, the gain on the sale of (indiscernible) amounted to 20 million due to the sale of two farms, (indiscernible) and San Enrique. The cattle inventory holding gains amounted to 11.6 million compared to 2.2 million and operating income amounted 36.3 million compared to 17.8 million.

And the financial results showed an increase of -- sorry, a gain of 63.8 million compared to a loss of $20,000 in fiscal year 2004. The gain was due to a gain of 68.7 million on the sale of (indiscernible) corporate bonds, a gain of $800,000 on traded shares and securities, a loss of 3 million resulting from exchange rate differences and a loss of 1.6 million attributable to the financial transaction tax.

Income on equity investments increased from 26.7 million to 28.1 million. In other income and expenses we had a loss of 5.1 million compared to a loss of 0.4 million due to donations of 1.9 million. And the affect of the net worth tax on shareholders at the shareholders' agreement of October of 2004 decided that the Company was paying these taxes from the shareholders. And income tax increased from 8.6 million in 2004 to 37 million in fiscal year 2005, mainly due to sale of the corporate bonds of (indiscernible).

Regarding some additional financial detail, (indiscernible) continues with its low levels. The short-term debt of 50 million pesos was reduced after closing the statement to 5 million pesos. And regarding the convertible notes, they have exercised almost $10 million of convertible notes. But this getting to the Company (indiscernible) $11.6 million of cash to exercise (indiscernible). Outstanding of convertible notes is likely over $40 million and the (indiscernible) a similar amount at 38.7 million of shares were issued.

To finalize this presentation I would ask (indiscernible) in the Internet Company (indiscernible) our share of those companies we own 70%. We grew a lot. We are transforming to be one of the largest brokers in the outlook (ph) market -- in the grain market. We are achieving levels of 300,000 tons of brokerage ties and that Company is achieving slowly the breakeven point and is becoming the largest broker in the Argentina market of brokers of grain.

When we talk about -- we bought three new farms with the proceeds of the sales of last year and the convertible bond sales. We bought a farm in La Pampa, 200 hectares; we paid $1,500 per hectare. We bought a 6,000 hectare farm in (indiscernible) province. And (indiscernible) is near Buenos Aries; it's a farm that is 300 kilometers from Buenos Aires. It's a property that was owned by a traditional family since 1846. With a (indiscernible) in size and a lake and we got these two properties because (indiscernible) capacity we are adding to the portfolio more than 6,000 hectares of (indiscernible) because it was important to us to our portfolio (indiscernible).

We are planning to add more land soon. We are trying to achieve a big piece of land in Argentina, too. We were able to buy a small piece of La Dana (ph) farm. La Dana is a farm that had near 1,000 hectares, but we bought 70 hectares north and we made a good size for the near future of a neighborhood. So we bought a part of a farm that was not ours that was in the middle of our property and we made a very good profit (indiscernible). So we bought a lot. We (indiscernible) in this quarter of 2005/2006 we began the sale of properties with the sale of (indiscernible) that is a property that was sold in $5.7 million and that is a leaving us a result of $3.5 million for the next balance sheet. So that is for 2005/2006.

So what we expect again is a combination of all these elements giving us good profits for the next balance sheet. We are planting in a good situation all our (indiscernible) is today in good shape and we are beginning our (indiscernible) in the farms. The cattle raising is going well and so we expect to have a very good year and apart from that we are beginning to think and (indiscernible) launching a project in Brazil to repeat this (indiscernible) operating and selling in our neighbor Brazil. So we invite you to ask questions. Thank you very much.

(OPERATOR INSTRUCTIONS). Michael Orloff (ph), Burlington (ph).

Thank you for your explanations. I read in your report that you are keeping the whole land reserves. Could you please explain in further details what you mean on the reserves? Why is all this land kept as reserved, not put at work? And if you want to start to cultivate on them, what would it mean in terms of cash flows or core investments to transform land reserves into proper cultivated land? Thank you very much.

The largest part of land reserves is in the north of the country in a property that we bought at a very cheap price ten years ago and when we transform that land reserve under production we cleaned that, we grouped on top of that pastures, cattle, (indiscernible), water and we raised cattle on there. The kind of investment we're doing in cleaning a project like that is $200 per hectare more or less in cleaning of pastures and in facilities and, again, $200 plus in cattle. So that $400 is the kind of investment we are expecting to do.

In the future we cleaned in this farm nearly 30,000 hectares. We are planning to do that again, 30,000 new hectares for the next two to three years. So the kind of investment each year is like -- between cattle and cleaning is like $10 to $12 million will be invested in the next two to three years. And apart from that we have land reserves that were transformed and they are still transformed to agriculture like one piece we have in (indiscernible) we cleaning land and we're putting (indiscernible), we're putting agriculture on top of that and the kind of investment per hectare as in $2,000 per hectare.

We are planning to clean $500 more this year so that will be an investment of $1 million more for that project of (indiscernible) to make with (indiscernible) to make commodities for (indiscernible) for Monsanto and Novartis. So the CapEx for that every year changes and depends on the authorizations we receive from the government; they allowed us projects and we respect exactly what the government allows us to do with that.

Thank you.

(OPERATOR INSTRUCTIONS). Michael Orloff, Burlington.

Thank you for the answer to the first question. Actually if I mentioned average buyer prices per hectare, but I saw in your report also that you are (indiscernible) prices. Just in terms of indications could you give me an idea what are the average lease prices to be compared to the buyer prices? And as I am on the line, could you also -- I mean you had a sharp fall in the share price from $17 to $12 currently. Could you comment on that and tell me what in your opinion were the elements leading to these changes? Is it macroeconomics, is it really closer to your Company and how do you see the future? Thank you very much.

The first question I understood, the second no. Can you repeat what is the second question, please?

Sorry. The second question was to get a better idea of what should be in Argentina, our average buy prices for land versus lease prices? Because I see in your report that you are leasing land as well as buying land and you are selling some properties as well as leasing out some properties. I would like to get a feel for the relationship or whatever the -- the measurements of buy price, sell prices versus lease prices for hectares of agriculture in Argentina.

That's good. The price of a hectare depends on the quality of the land, and you know that in Argentina prices change. The more expensive is the corn belt where we raise mainly corn, wheat and soybeans. Where the land price -- I would say that the top fixed prices today are between 6,000 to 8,000 -- I don't say $6,000 per hectare. Where if you want to rent the land like that you will be paying today at $300 per hectare per year of leasing. Sometimes fixed, sometimes like an average or share (indiscernible) where you can share with the owner part of the harvest with him.

So that gives you an idea that the range is between 5% to 6% to the actual price of the land. And in the north changed a lot -- this is agriculture, and in agriculture you have land of $3,000 per hectare and that land of $3,000 may be in the west, not in the corn belt -- a little more west of Buenos Aires province. And here you will find rental of $150 to $200. So you will find a 5% to 7% sales -- a lease price for one campaign.

Right, thank you.

(OPERATOR INSTRUCTIONS). Philip Trek (ph), Thermal (ph) Polish (ph) Partner.

Good morning. My question is related to the cattle business. I'm curious, where is Argentina at in terms of being able to export cattle to the United States markets and can you give me an idea of a time frame of when that could occur?

Argentina in the past was a country that was with foot and mouth disease. And in the year 1998 I think or 1999, I'm not sure, we were declared free of foot and mouth disease. And with that declaration Argentina began to export to everywhere -- every part of the world and began the opening of the American market. In 2001, before the collapse of the (indiscernible), we found a case of foot and mouth and we were declared again with the disease and we closed our markets. We went to near 5% of total production to (indiscernible) so we were near closing all the markets everywhere.

2002 we began to reopen slowly markets. Today Argentina has opened the majority of the markets from Russia (ph), Brazil, from Chile, not the U.S. We are expecting the U.S. to be open in 2006 and there is a key factor that we can see if Cargill last year bought a slaughter company in Argentina and became a packing company in Argentina. These days we will see the investment of (indiscernible) that is the largest packing company in Brazil that bought the largest exporter of beef in Argentina. And we are beginning to see a lot of rumors about the opening of the American market. So we expect that to happen in 2006 and that is a very big opportunity to Argentine beef.

One other question, you mentioned -- I believe you mentioned an investment in some land in Brazil at the very end of the call and I'm sorry I missed it. Can you repeat that end of it or did I not hear correctly?

Yes, we are planning to launch and to invest part of Cresud's assets in Brazil to diversify our investment in the region. We've seen that Brazil is a huge country, it's a huge (indiscernible) area, it's a lot of times of Argentina's size and has a lot of land to be put in production. We think Cresud can do that so it may be soon you will see Cresud launching there.

Can you compare prices in Brazil relative to Argentina in terms of agricultural properties versus properties to raise cattle on?

I think Brazil is a country that has comparable like Argentina the corn belt, but it's a region South of Brazil in there corn belt where they have land and their sugarcane production that is $10,000 per hectare, that is a lot. And I think there is going to be opportunity. But I think the rest of the country, the whole northern part from the west to the east, from (indiscernible) to (indiscernible), is a region where you can be buying land and agriculture at $1,000 per hectare clean. So we think that is the kind of opportunity to buy agriculture in land and the build of land (indiscernible) and you will achieve (indiscernible) compared to Argentina and the price of less than $1,000 per hectare. So that is the kind of opportunity we're going to look for.

Thank you very much.

Jim Meyer (ph), South Haven (ph) Investments.

Just a quick question regarding have you ever looked at doing an appraisal of your land holdings? Because many companies that are like you do that. And also similarly, with your commercial real estate portfolio in IRSA, is there anything published or historically available regarding the values of your investment properties?

Yes, we have research made by analysts in the case of (indiscernible), the ones we did last month, its report and they make their own appraisals. We don't do that. We think it's something we (indiscernible) now, but analysts in the case of (indiscernible) that they make their own appraisal of our assets.

Okay, thank you.

If you want (indiscernible) companies in Argentina that sometimes investors want to have an idea because today (indiscernible) the real value -- real net asset value of our assets. So we did that. The investors, they went to brokers of Argentina land and they asked them to give a short idea and they have the land that (indiscernible) owns because (indiscernible) balance sheet (indiscernible). The brokers of Argentina, they know perfectly well (indiscernible), so what they do, they sometimes go and (indiscernible) but I can give you their names if you want to send me (indiscernible) and they give the idea of what for them (indiscernible) of the assets.

Michael Orloff, Burlington.

You were mentioning the lines of sugar, but you were mentioning the fact that now in Brazil you can buy land for $2,000 a hectare versus 6,000 to 8,000 in Argentina. On the one hand the case is clear. There's a lot of upside here. But the question I would like to ask you is that for this value to go up it needs the land to be put at play. So the question is how are you going to be coping with the managerial issue and aren't you stretching out too much geographically versus capacity maybe?

And the question I also have to get your existing land, current land performing better by more investment but at least focusing more on what you have. I'm not criticizing at all, I'm just asking the question for the sake of the argument for the discussion -- where is there more value to get? Increasing the production -- productivity of what you already have or spreading out over gigantic territories which would take you all over the Southern American continent?

(indiscernible) our plans in Argentina, there is expansion and you will see that the Argentinean group is going to (indiscernible), transforming more land and putting our new farms that we are buying under our take of the added production. And the Argentinean team will be focused on (indiscernible) and production on this. In the Brazil case, those who are expecting to do a project with a local partner, with a local team will be advised of our group from (indiscernible).

But the thing that will be working in Brazil will be with Brazilians, with local partners to put their own money and the investment like what should we do. And the general manager of these (indiscernible) that we are planning believe change is going to be the Brazilian guys. So we are going to use our expertise and our managing story to try to make the learning curve faster and make it profitable, but not refocusing what we did in Argentina.

All right.

(indiscernible) of purchasing opportunities, buying marginal, transforming and selling when the (indiscernible).

(OPERATOR INSTRUCTIONS). There appear to be no further questions at is time.

What I will finally talk about is we are talking about the gap of price between assets in the northern hemisphere to the southern hemisphere. There is a gap of prices between undeveloped to the developed and there is a gap of taxes in the region comparing to the southeast and the north. I thing Cresud had sold the last two years the ability of making a gain in those gaps, performing land, putting in the state-of-the-art, selling to a new client that has its property in the production. And maybe we are going to see (indiscernible) a subsidy (indiscernible) in the north. That's the reason why we think this investment in the agriculture region is so good. So thank you very much, gentlemen. And we'll see you next quarter. Bye.

This concludes today's Cresud conference call. You may now disconnect.