Cresud SACIF y A (CRESY) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cresud conference call. My name is Alsa and I will be your conference facilitator today. 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 host, Mr. Alejandro Elsztain, CEO. Sir, you may begin.

Good morning, ladies and gentlemen. We are beginning today the discussion of the second-quarter fiscal year 2006 results, and we're trying to innovate and to try to do some new technology to discuss about that. So please, Gabriel, if we begin the Cresud presentation.

Thank you. Good morning to everybody. I think that you already have access to the Webcast presentation. We're going to make a few comments on general outlook for Argentina and the market [credit on for] Cresud; after that David Perednik is going to comment on the Company's results.

Going to Argentina, page 2, the country has grown the 12th quarter in a row almost 9%, comparing the variable situation of the economy in general. Also the capital inflows have recovered what is reflected in the general value of all the assets in the country.

Going to page 3, exports have grown significantly from 2003, 2004, 2005; 2005 without [no] price effect. This is, the export growth for last year has been not affected by price increases like in the two previous years, but it is pure volume play.

On the balance of trade, the country continued to show a very positive balance of trade with a good outlook, as you know.

On page 4, some information, international information relevant for our market. Latin American exports to China continued to grow, mainly in Brazil, Chile, and Argentina. This is Argentina today; we are almost 10% of our export goes to China. This providing, as you see on the other graph, providing a very strong flow to the prices of the Argentine raw materials and at the same time to the [real asset] link to the production of those commodities.

International production and consumption of wheat, corn, and soybean continues to grow in both aspects, in the production and the consumption, showing on page 5 the impact as a reflect of the general international view on the real estate, affecting very positively the prices of (inaudible) land.

Looking at [that spread] of 30 years, you can see almost tripling the value of the productive land in the country. Now David is going to make the comments on the main results of the Company for the future.

Good morning. We are going to comment six months compared year 2005. December 31, December of 2005, compared to December 31, 2004.

With respect to the net sales, we had an increase of 55% from 35.2 million to 54.7 million in last year. With respect to operating income, we had a 107.8% increase from 7 million pesos to 14.6 million pesos. In the last line, net income of the period, we had an increase of 150% from 9.5 million in 2004 to 23.9 million in 2005.

Going into the sales lines, with respect to the crops, the grain sales increased by 155 -- 158%, sorry. In 2005, grain sales amounted to 28.9 million, compared to 11.2 million in 2004. This increase translates in a larger grain sales volume from 31.9 million tons -- sorry; from 31,000 to 906 tons in 2004 to 86,347 tons in 2005.

With respect to the wheat yield, we had a very good yield of 3.9 tons (sic), an 18% increase over our budget. But we don't expect that the same yield will be sustained in our other crops, soybeans and corn, due to fewer rain levels that we are having.

With respect to the beef cattle sales, beef cattle sales decreased 7.6%. In 2005 sales of beef cattle reached 17.3 million; by 2004, we had 18.7 million. This decrease in the sales -- this decrease is due to the decrease in the sales volume by 2005 in comparison to last year. We sold 7,700 tons in 2005 compared to 8,953 tons in 2004.

With respect to the milk sales, milk sales were increased by 173%. Milk sales amounted to 4.3 million pesos in 2005, compared to 1.6 million pesos in 2004.

With respect to be the feedlot, we had a decrease in the earnings -- in the sales, sorry, from 1.4 to 1.1 million pesos. This decrease was due to the decrease in occupation levels during 2005 in comparison to 2004 (indiscernible) from 13,800 average head that we had in 2005 compared to 17,200 in 2004.

With respect to our costs, in the costs we had the costs increased by 107%. We had 23.6 million in 2005 compared to 11.4 million in 2004. This increase is mainly due to higher sales volume in 2005 compared to 2004.

With respect to the beef cattle costs, the beef cattle cost of sales decreased by 0.6%. With respect to the milk cost of sales, the milk cost of sales increased by 162% due to higher direct cost of production, the consequence of the opening of the new to milking facility, El Tigre. The direct cost of production increased during the [present] period from pesos 0.26 per liter in 2004 to pesos 0.29 per liter in 2005.

Selling expenses were almost constant, up a percentage over the sales in crops 13.5 in 2005, compared to 2004 in 13.7. In beef cattle 2.7 in 2005, compared to 3.2 in 2004.

The administration costs increased from 3.1 in 2004 to 4.4 in 2005, a 40%, basically due to increasing fees and payment for services and salaries and wages.

In farm sales and acquisitions, we had sold in July [25] El Gualicho establishment of 5,727 hectares; and the sales price agreed was 5.7 million and generated a profit of 9.9 million pesos.

The beef results were 2.1 million pesos in 2005, compared to 6.2 million pesos in 2004, a 66 decrease in the comparison.

Financial results, we had generated by assets an increase of 456% from 5 million pesos to 28.9; and generated by liabilities an increase of 62% from 7.3 million pesos to 12 million pesos. Basically, the results that were generated by our assets came from the exchange that we had of [either] converting notes for the shares that we bought from a company called Agropecuaria Cervera that gave us a 14.9 million pesos profit.

Also we had exchange difference on our assets due to the higher exchange rate of the U.S. dollar towards the peso of 8.7 million pesos; and the interest on the converting notes we had in collection of 4.4 million pesos.

On the liabilities side, we had also paid 4.4 million pesos on the converting notes issued by the company; exchange difference on our liability of 6.6 million pesos; and interest that we have paid for banking loans of 1 million pesos. Total interest, million pesos for 2005.

With respect of results from related companies, we had received [7.15] million pesos for the shares that we had on [IRSA], 21.13%, compared to 13.9 million pesos for the same shares in 2004 -- or the same company, sorry. At Uranga we had a result of a 0.36 million pesos in 2005 compared to 0.46 million pesos in 2004.

The income tax was increased by 129% from 5 million pesos to 11.7 million pesos.

Thank you, David. On page 8 [is there] a comment of the EBITDA evolution of Cresud. Sorry; there is a typo on the title. It is only fiscal year 2004 and 2005. Except for the cattle business, all the rest of the business lines showed improvement.

In the case of the cattle business, the decrease is caused because last year's results were very, very high in terms of [holding] results, due to the huge growth in the prices of the cattle. This year, the price increases have been lower than that. At the same time, lower rain levels are affecting marginality production.

But as you see there on the graph, the rest of the business lines have behaved consistently, including an almost 10 million peso result of EBITDA of the sales of one farm that we're going to comment immediately.

Page 9, including some significant information that most of you already know.

Page 10, just a general business overview. The evolution of the crop sales from -- compared 2004 and 2005 the six months of the year. Of the crop sales you have an increase of 171%. The beef cattle sales, as I mentioned, a slight decrease of 13% due to the rougher climate as I already commented.

The milk sales with an important increase of 123% mainly due to the page 11, where as you can see the project that we have already put into production. That is a new dairy farm, a state-of-the-art dairy farm, which allows us to increase approximately 36,000 liters our daily production capacity, with an investment of $1.3 million.

Page 12. The last two deals that we make regarding the real estate business, with showing the sale of El Gualicho already in the Province of Cordoba. This farm has already been signed a deal with a profitability of 151% of results from [carrying] the book value of the property.

We also acquired the San Pedro farm, located in the province of Entre Rios. You can see on the next page, page 13, the main characteristics of this beautiful farm, located in Uruguay, in the location of Uruguay near the Gualeguaychu River. Total surface of slightly higher than 6,000 hectares with important subterranean freshwater reserves.

It is a property of 160 years old. It is -- [these has that age] and has a significant tourist appealing. We are considering the possibility of making a development in this area. Although it will not be significant in terms of its size, with 30 certainly exclusive rooms, there is a big possibility that we start up that business line too. The total investment in this historical farm has been $16 million.

As a general comment on the convertible situation, the outstanding of comfortable notes for Cresud is $37 million from the original 50 million issuance under warrants outstanding of 40 million.

Going to page 15, the outstanding shares, we remember the original position of 124.3 million of outstanding shares at the beginning of these bonds. Today we have an outstanding shares position as of December of 169.1 million of shares. The fully diluted situation, assuming the total conversion of the warrants and the Convertible Bonds, goes to 321.2 million of shares.

As Gabriel was mentioning, what we were doing last balance sheet was -- in part was selling properties like we did in El Gualicho. I think that is a good example of what [addition] value we have in our stock. One farm that was holding [16] million and the book value was 6, so we can have examples of three times or sometimes 10 ten times what we purchased. You know that they are not reflecting in balance sheet; we're keeping at [cost-plus-plus] indexation of 120%, so we're not replacing the real value of our asset.

At the same time we were selling the property of El Gualicho, we bought San Pedro this year. This is a property, I'd say, like a museum. If you see the furniture of that place, it is from an old president and an old former governor of the province of Argentina.

We are planning to make in that probably a place that investors could be visiting us in the future. We are refurbishing and putting on [place] exactly what it's story. To give you an idea, this is -- the furniture is brought from Europe, and so it is something that I would recommend when you come to visit.

It is for us a miracle to buy a property that was never sold. It was 160 years in the same family, and we had the chance of purchasing that, and only for the value for the farm. We are not paying the house; and the house is huge. It has 200 hectares of parks and trees prepared for a castle. So imagine what is that. So we purchased only for the price for the land.

Apart from that, we had the chance of purchasing a company that was bought with Convertible Bonds that gave us part of the results of this year. The purchase of that was a Society that includes 160,000 hectares in the province of Salta. This is a very close property to Los Pozos and is the largest project that was able to purchase in Argentina.

That will add to the Company more than 30,000 hectares more of agriculture when we develop that. That is more than doubling our [labter] capacity, and we purchased that for less than $60 a hectare. This is a leasing for [55] years, and we think that development of that will change remarkably the numbers of production of the grain mainly; and after that the beef, because it can do both, grain production and capital production.

Finally, Cresud now, when we see that in the Cordoba it is not very attractive to be purchasing, and that is the reason we were buying in La Pampa Province. We bought El Tigre there, and after that El Invierno.

We bought in Entre Rios; that is [a Pampa] Province but it's not the Cordoba. To give you an idea, we paid less than $3,000 per hectare; and where the Cordoba is at $7,000. We are trying to move to regions that are not developed.

The same is the one we purchased the society to develop in the North. We got the idea in our mind when we were starting, and we are very near of launching the project of [Prefilaro]. Why Brazil? Brazil is the largest country in the region, has a lot of room to grow, a lot of land to be redeveloped. Huge pieces of land.

In Argentina we bought this 160,000; this is not normal. But in general, the size of [our] farms are 5,000 or -- that is a big farm. In Brazil, we can [buy] 50,000 fields in a day easily.

The situation for farmers is very complicated today. They have a very bad exchange rate; they have high interest rates; they have bad commodity prices. So the combination of the three is pushing us to make an investment in a company that we're launching probably very soon with a local player, a Brazilian player -- that is Elie Horn -- that will probably follow us in this investment in Brazil.

To purchase, I repeat, the strategy of Cresud that in Argentina is to purchase land, develop it, and after that selling. So combining both the production part of the business and the real estate.

So this is a project that will need money from Cresud. We are preparing to be investing for there; and [are surrounding] $50 million, something like that.

We are now in the process of the approvals of the market. We are planning to go to a limited company in Brasilia, where we have been waiting for the comments of the regulatory system of Brazil, the [normalcado]. So this is probably something that we will be in the highlight very, very soon.

Finally, to finalize, we think that Cresud has -- we are -- it is going to close a good year. In the production it is suffering a little drought, that the region is suffering, Argentina is suffering. That it's affecting a little -- not affecting the wheat, but it will a little in some of the rest of the commodities.

In the real estate we [have begun] positive and have a lot of possibility of selling more properties, or one property to give a little more results. Probably with very low activities, because we are still developing Los Pozos. We're beginning to develop the new farm. We are putting the new farms we bought in production this year, like San Pedro and El Invierno. So you are going to see reflected our operational growing, too.

So thank you very much, and we will wait for your questions.

(OPERATOR INSTRUCTIONS) [Hernan Romero] with Altima Partners.

If you could give us an update on the [atosa] outbreak; I guess with respect to results of the local investigation on the expense of the outbreak; update on market closures to Argentine imports; and your view with respect to the price.

On February this year, as you know, 70 cows were found infected with foot and mouth disease in one farm in North Corrientes; this is in the east of Argentina, in the border with -- northeast in the border with Brazil and close to the border with Paraguay, too.

[Secenata], which is the Argentina authority for agriculture and food quality, ordered the killing of 3,000 cows, that is roughly with a market value 1.8 million pesos, in that region in order to prevent other outbreaks of the same disease.

This has already occurred. The [surge] has been completely controlled. Although many countries decided to close their beef cattle trade with Argentina after the Corrientes outbreak was controlled, some markets like Russia and European Union decided to reopen imports from Argentina excluding the Province of Corrientes exclusively.

This is, the rest of the country continues open to most of the markets. Only as an exception to this rule I will mention Chile and Israel. It is important to mention that Cresud has no beef cattle in Corrientes, and all our cattle is vaccinated against the disease.

In terms of the impact in the market, the whole price impact would be in the range of 5%. In terms of the exports. the total reduction will be -- it is calculated in the range of 20%. But as you remember, the Argentine exports increased 30% compared to the previous year, so the net effect will be probably only a 10% increase.

Hernan Romero Thank you.

[Melvin Hess], a private investor.

I just was wondering if you had to take out loans or how you're going to finance your new acquisitions. And if you feel the stock is cheap compared to its value, if there's any plans to buy back shares.

Regarding your first question, we are planning to get some debt. You must had in consideration that we have pending for up to November 2007 the exercise of all the convertibles and the warrants attached, which as you can see on page 14, are very deep in the money. Almost 100%.

That means that there is still a significant amount of cash to be built into the Company as a result of the exercise of the warrants. At the same time, the exchange of the convertible notes into equity will also affect very significantly the (indiscernible) payment of interest the Cresud has.

Having said that, what we are going to do probably is to take some medium-term loans. Medium-term is our standard. This is up to three-year payouts at most. Probably part of that will be related [too for finance] export, which has a rate in the range of less than 6% in dollars. And the rest will be at a rate of less than 10% or 9% (indiscernible) dollar as total cost. That will be the way we are going to finance our operations for the next two years.

Regarding your second question, well, of course we cannot discuss on the value of our shares. We think that there is a significant amount of value in the business of the Company, in the [propers] of the Company, and that that value [unveils] in each time the Company makes some operation. We have not considered buying back shares.

Thank you very much.

(OPERATOR INSTRUCTIONS) There appear to be no further questions. I will turn the floor back over to you for any further or closing remarks.

Okay, thank you very much. Gentlemen, we will next talk next quarter. Thank you very much and have a good day. Bye.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and a wonderful day.