Cresud SACIF y A (CRESY) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Nelson and I will be your conference facilitator today. 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]. Thank you. It is now my pleasure to turn the floor over to your hosts, Alejandro Elsztain, who is the CEO, Gabriel Blasi, who is the CFO, and David Perednik, who is the CAO. Gentlemen, you may begin your conference.

Good morning to everybody. Unfortunately Alejandro is not available. He is traveling in the country. We are going to make a quick review on the general situation of the business of Cresud and the economy of Argentina, and after that we are going to refer specifically to the BrasilAgro investment.

Argentina has been growing for the last [14] months with a budgeted increase of GDP of 7.5%. Also the capital inflows have recovered and the pace of growth is showing a very good behavior.

On page three we can address that a significant fiscal surplus has been already achieved, 4.9b for the period, 15% higher than the same period of the previous year and in a figure bigger than the inflation.

On page four we can see the evolution of the balance of trade with a surplus of 2.3b, an increase of [16%] on the exports compared with the previous year.

Page five we can see the term of consumption and production of the biggest production of Cresud, which allows us to keep positive in the outlook of the prices of the Company production. Also, if we consider specifically the situation of the cattle business throughout the world, we can see that in the same way as in Argentina, the head of cattle, the world stocks of beef has been reducing significantly for the last 10 years.

On the other hand, on page seven we can see that Argentina is still the country with the biggest consumption of meat per capita in the world, today ranging almost 75 kilos per inhabitant and compared with the rest of the world with a significant gap.

Going to the Company result for the period, David is going to comment on Cresud’s income statement. Thank you.

Good morning. This is David Perednik.

With respect to the net income, our net income decreased 62% from ARS62m to ARS23.3m. Net sales increased 38.7% -- sorry, 37.9% from ARS49.8m to ARS68.7m, while our gross income increased 51.9% from ARS12.3m to ARS18.8m in our fiscal year -– sorry, in the fiscal year of nine months close at March 31, 2006.

With respect to the grains margin, the grains margin increased from ARS3.2m to ARS9m. That means 179%. The grain sales increased 111%. In March 2006 the grain sales amounted ARS31.6m, while in the 2005 year they reached ARS15m. This increase translates in larger grain sales volume from 45,500 tons to 94,900 tons in March 2006.

With respect to the beef cattle, the beef cattle margin decreased from ARS4.9m to ARS4.3m. That means 13%. Beef cattle sales decreased 7.7%. The sales as of March 2006 in the case of beef cattle reached ARS25m compared to ARS27m in the year 2005. This decrease is attributable to a 17% decrease in the sales volume in comparison to last year. That means 10,800 tons to 13,000 tons in 2005.

With respect to the milk margin, it increased from ARS1.1m to ARS2.5m. That means 121%. This was due to a larger production level and an increase in the milk sales line of 5.9m liters. We sold 10.8m [sic - see documentation] liters in March 2006 compared to 4.9m liters in March 2005. Also it was accompanied by a 19% increase in the price during the present period. With the beginning of activities now, our new milking facility El Tigre allows increase this almost 6m liters in the production of the line of milk margin.

We’ll [stay back] to the cattle holding result. The cattle holding result of March 2006 reached ARS2.3m profit compared to ARS9.3m last year. If we see the sales of farms, in July 2005 we sold El Gualicho establishment that generated ARS9.9m compared to last year 2005. In August 2004 we sold the farm [Yakul 2] that gave us a profit of ARS7.6m.

With respect to the financial results, the net financial result provided a profit of ARS15m in 2006 compared to a profit of ARS64m last year. And this -- the result of 2006 was generated mainly due to the change of IRSA’s convertible notes for [inaudible] shares that generated ARS14.8m, whilst last year the main profit was due to the sale of also convertible notes of IRSA that generated [ARS58.7m].

With respect to the result in controlled -- related companies, IRSA, that we are controlling 22.6%, gained ARS10.1m at March 2006 compared to ARS19.9m in March 2005. And Agro-Uranga gave us ARS1.3m compared to ARS1.4m of last year.

Okay. On page 11 - thank you, David - if we can just make a good mop up on the business overview, the results having already been described by David.

The crop sales, as you see there, have a very significant increase of more then 100% with an average price higher then the previous year, from $313 to $353. The stock of the crop is 41,729 tons, almost 18,000 tons of wheat, 7,600 tons of corn and 8,000 tons of soybean. We have a significant profit of ARS9m compared with the previous period of a loss of ARS3m on the crop sales for the previous period.

The total surface that Cresud is exploiting today is 30,000 hectares. 17,000 hectares are rented and we have increased our surface in 1,000 hectares. We’re in the process of increasing the rented surface and the space devoted to agriculture, mainly by the development of the new land.

On the beef cattle sales, with a stock of 2,073 [sic - see documentation] head of cattle we are putting into use almost 130,000 hectares of land for that.

And, as already David has addressed, it is important to show the evolution of the milk production, with a significant increase on the gross profit due to the putting in function of the dairy farm in El Tigre. Page 12 is the province of La Pampa. Remember this is the most modern dairy farm in the country.

Going to the financial situation of the Company, Cresud has gone through a very significant debt reduction through the exercise of the convertible notes. 15m of convertible bonds have been exercised from the total outstanding of 50m, leaving the present stocks of convertible notes outstanding in 30 -- $49m [sic - see documentation]. And the warrants outstanding are $38m but with a compromise already funded of converting 5.8m warrants in the next June, meaning that is going to be reduced to almost 32m of warrants outstanding.

If we jump to page 15, we can see there what would be the present consolidated debt for Cresud, considering the exercise of all the warrants. And remember that all the options [obeyed] in the convertible notes are maturing November next year. And with the exercise of all that options, the cash that is going to be pulled into the Company, $46m, giving a net cash position of [$0.23m] and with the cashing of all the debt.

To fund the Brazilian investment, the Company will engage in a transaction -- a finance transaction of $8m with Credit Suisse for a term of 30 months at the interest of LIBOR plus 375 basis points. This debt is secured by IRSA’a convertible bonds in the range of $10m. You must take into consideration, when you consider the term and why the Company decided to get this debt, the present regulation in Argentina that doesn’t allow us to take debt in –- appoint debt in tenures less than 2.5 years. And then that the situation that we have already described, this is the parts that are going to report into the Company in the next 12 months.

We would like to take some advantage of your time to describe briefly the BrasilAgro transaction and the BrasilAgro rationale. As you know, the Company, together with a group of Brazilian partners led by Mr. Elie Horn, Chairman and CEO of Cyrela, which is the biggest real estate Company in Brazil with an net worth in the range of $2.5m, and Tarpon Investimentos which is also a well-known asset management firm of Brazil. The Company put together an investment to create BrasilAgro with the same business model that’s Cresud replicating what Cresud has done successfully in Argentina.

Through the counseling of its consulting period, Cresud has been able to put this transaction together, establishing a [land life] in the Brazilian capital markets by launching for the second time, and for the first time for a real economic company, a start-up in the Stock Exchange in the BOVESPA, the most -- the highest standard of listing in an [agro] country.

Why did we go to Brazil, just to make it [inaudible] to you? The reason mainly Brazil is the most competitive country in terms of the agriculture. It’s almost in the position one to third in every ranking of production of exports related to agriculture. A third of Brazilian GDP came from agriculture. Also a third of the labor force came from the agriculture. 42% of its exports are related to agriculture.

On the other hand, as you can see from the graph in that page, the map shows you the huge -- this arbitrage in terms of the land prices that comes to Brazil, giving us a huge opportunity for development of our real estate business due to its low cost of the farmland, having excellent conditions to the development of the agriculture and the technology [doesn’t come full] to production.

If you go to the next page, we can also look at some other drivers that we have in this business. From the total space available for agriculture, Brazil has almost 390m hectares of viable land. 90m of that has yet to be exploited and this is not including any rain forest. This is specifically land which is able to be used for the development of the agriculture.

As we have already discussed, the general climactic factors for the development of the agriculture are wonderful. We have plenty of land and also there are very significant projects of development of infrastructure, which would have a direct impact on the prices of the land and on the reliability of the production to the biggest or the nearest ports. Just to have a consideration, those ports are much favorably located then Argentinean ports to export the production.

If you go to the other page, you can see there the option that was included in the BrasilAgro transaction. This is an option for the acquisition of in the range of 50,000 hectares of land. We are in the process of finishing the divisions of this property and establishing, because of the result of the new divisions, the final shape of the potential transaction.

If we go to the next page, you will find there the rationale on the strategy of BrasilAgro, which has four main pillars. The first one is the real estate approach in a similar way as Cresud. This is changing the price or the value of the land by changing use. This is, in general terms, buying massive pieces of land and changing its value because of changing the use or applying technology, and after development of the production selling the land.

The other important approach is portfolio strategy, which will explain also the critical mass we need for the developing of this project. This is obtaining diversification of production, diversification of the climate risk through looking for different regions and also by approaching different business lines. As we are going to see from the size of each one of these investment projects, we need -- it was important to achieve a massive volume for developing the strategy, because if not we were not going to be able to develop a diversification suitable to the project.

The third pillar of this strategy is the development of the state of the art agriculture, in which Cresud has a very extensive experience and we’ll have the opportunity to provide that knowledge to the project. And, on the other hand, prudent management practices that are going to be provided to BrasilAgro.

Next pages you have the rationale of each one of the four business lines of BrasilAgro, which are mainly directed to the sugar cane project, which consists in acquiring certain land and use that land for the production of sugar cane. You have to take into consideration that today already developed hectares of land for the sugar cane production in Brazil at a cost of $12,000. But we have already find land which is very, very suitable for this production at a price [five times] less than that.

And we expect to achieve that land for this production with a different approach for the ethanol producer industry you’ve seen at the mills, the ethanol mills. What they do in general is they establish a mill and they begin to buy the production for [inaudible] uses. What we intend to do here, and we have already talked with several partners to develop this, is to bring up the partner to a new region and put a massive piece of land for the mill to be installed there, achieving from the beginning the critical mass for the development of the project.

You must take into consideration that 50% of the Brazilian fleet of gas is available for [flex fuel]. And the consumption of ethanol for the gas is increasing significantly on a yearly basis. Also, as far as this general situation with the oil prices keeps on moving, we have significant expectances in the way this industry is going to develop.

The other project is a more traditional project for the Argentinean standard. It’s the soy and corn cotton project, which means to identify suitable land for this production and develop that land with the state of the art practice of production.

The forestry project is to consist, for instance, just to give you an idea, companies like [Caja de Valores], which are planning to increase their production of mineral with value added, have a significant increase in the consumption of [inaudible]. To provide us with -- our plan is to make long-term arrangements and seeding massive areas of land to provide wood for this use, for instance, on the pulp and paper segment where Brazil is extremely competitive, because of the time that it takes to have a harvest. Compared with another hemisphere, the time in which harvest can be done in Brazil is almost a third.

And the last project, which is more aggressive in terms of its [appeal] and its risk is to buy marginal land to develop the livestock project there. For that project, we have to buy a significant amount of land with short pieces of land usage. We have to keep a significant amount of land reserved. And we must take into consideration that Brazil is the number one exporter of beef cattle in the world for the development of this business.

Now we are going to refer to the structure of the transaction, and the general characteristics of the company.

When we go to Cresud when we are [rationing] the project, we have already explained that the group of Brazilian partners, together with the Argentinean partners, are defined in the BrasilAgro prospectus as founders of the company. As founders, these investors have got, as remunerations for their initiative, warrants - two series of warrants with different objectives.

The first series of warrants is a stock-based remuneration, meaning that the founders get 20% of the shares outstanding of the company. We are going to see later which -- what does it mean in terms of ownership of the company, or probable ownership, on a fully diluted basis.

This meaning that, for the 15-year terms, this is the exercise period of this warrant, Cresud has the ability, together with its partners, to get a 20% additional of BrasilAgro Holdings at the IPO price adjusted by IPCA, which is the inflation index. And [we’ll leverage] with the -- another capital injection that may occur in the future.

Also, the warrant has an anti-dilution protection, meaning that in the event of dilution of capital that’s issued, then the [right] amount of shares is going to be adjusted to reflect always the 20%.

To get these warrants, the founders must comply with two conditions. The first one is that 80% of the initial investment is -- in BrasilAgro is kept for the first three years. And, having complied with that, a third of the warrant is going to be freed or released by -- this is one-third the first year, the second third the second year, and the third third in the third year.

These warrants, after the completion of that period, are free to be sold, to be transferable within founders, and after the vesting can be sold or exercised anymore. In the event that in the future any additional capital increase is made below the IPO price, the preemptive rights are granted to the minority shareholders.

The second series of warrants is related to a provision that is pretty common under the Brazilian normal kind of ruling. In the event that any shareholder other than the founders achieves a 20% stake of BrasilAgro, they must make a mandatory tender to the rest of the shareholders of the company at 150% of the higher of the three valuations that I’ve already mentioned.

The first one is that [in the opinion] economic valuation. The second one is the original IPO price, adjusted by IPCA. And the third one is the last capitalization that may occur.

In that event, the founders are granted an additional 20% of shares available in warrants. But these warrants only are available in the case of this mandatory offer takes place. The exercise price of these warrants is at the price of the mandatory tender offer, meaning that there is no economic impact for the founders, but allowing them to increase their stake in the case that anybody wants to make a mandatory offer to the rest of the shareholders.

These warrants are one-timers and non-transferable, only they are transferable to the founders. Also they have anti-dilution protection.

BrasilAgro has also, in a similar way than Cresud, a management consulting contract together with a firm made by Parana Consultora de Investimentos, which is a venture -- partnership between Consultores Asset Management and Tarpon, which will provide investments and investors in agricultural properties expertise, technical assistance, M&A, hedging and other capital markets, for instance, advise service.

He’s going to be compensated with a 1% of the paid in capital adjusted by IPCA on a yearly base, excluding capitalized profit. This is in a similar way to the private equity funds. This is going to be the fee that the consulting firm is achieving by putting together the transaction. But this agreement can be terminated at any moment with a [inaudible] with a management fee in the range of $2m, to be established in reais because of legal constraints.

Regarding the governance of the company, going to the next page, there you have the bulk of position of BrasilAgro, where you find the first six directors, which are related to the founders. Find in there Alejanro Elsztain, who is also the CEO of Cresud and the Chairman of the Board for the next two years for BrasilAgro. That position, under our shareholders’ agreement together with our Brazilian partner, is going to be shared two years, each one of the partners.

Elie Horn, who is also a director of the company, Mr. Eduardo Elsztain too. Ricardo Frank Semler from Tarpon and Jose Carlos Reis de Magalhaes from Tarpon too, together with Saul Zang, Vice Chairman of IRSA Cresud and Alto Palermo.

The other -- we are very happy also to share our Board with very prominent members of the Brazilian business community. As independent directors we have Mr. Luiz Murat, who is the CFO and IR of Sadia. Sadia is the biggest food producer of Brazil. Also Mario Alves Barbosa Neto, who is the CEO of Bunge Brasil, and also CEO -- worldwide CEO of Bunge Fertilizers. And Ivoncy Ioschpe, who is also Chairman of the Board of Iochpe-Maxion, a [value] builder of Brazil, and also very related to the logistics business in the country. Giving a very strong Board, with a high standard of governance as the normal [inaudible] ruling establishes.

Also, as part of the management of the company, we have Ivo Alves da Cunha, who is the former CEO and Chairman of Gafisa. Gafisa is one of the three biggest real estate companies in Brazil. And Ivo has a very extensive experience in the development of agriculture business in the country. He has been the -- in charge of the biggest [cattle] farm in the country. Also he has experience in running sugar mills and in sugar cane production.

Pedro de Andrade Faria, who is managing partner in Tarpon, presently is CFO and IR of BrasilAgro. And Gustavo Javier Lopez, who was Planning Manger of Cresud, has been hired by BrasilAgro as COO, thus completing the present management -- senior management team for the company.

On the next page we have the general picture of how the corporate ownership of the company is established, meaning that a significant amount of the company is floating in the market. And I will ask you to go to the following page, where you can find the situation -- the present situation -- or the fully diluted situation through the exercise of all the warrants that we have already discussed.

There you have Cresud as a related party. As related parties we have to consider two vehicles related to Cresud which have directed investments, mainly belonging to some Cresud directors and some Cresud managers who have put their own money in the project.

These founders -- these related people have given Cresud their voting power, meaning that they have invested their money. Cresud has allowed them to receive also as remuneration for their investment warrants in the same extent as the rest of the founders and, in exchange, has received their votes that are consolidated as [all] for -- under Cresud umbrella.

The Brazilian partners include the vehicles belonging to Tarpon, and Mr. Elie Horn on a personal basis. For Cresud, as of today, the voting power in the company is 8 -- almost 9%, 8.92%. And with the potential exercise of the warrant and after the dilution that lands on 2.17%. And with the second stage of warrants, but remember that this only takes place in the event of a mandatory offer, that lands to 23%.

But as we have a shareholders’ agreement together with our Brazilian partners, our -- as we work together with them, the total voting power of the founders’ group slides up to 45%. In case of a mandatory offer, at 32% on the [inaudible] warrant exercised, meaning that Cresud, with an investment of nearly $20m, has achieved to get a significant degree of influence in the company.

BrasilAgro has issued 584,222 shares and the total dilution after the issuance of the first series of warrants is going to be 730,280 shares. The deal was extremely successful. We really consider that the bank was very happy with the transaction, with a total unsatisfied demand of BRL322m, meaning that $160m were in excess of this.

And the total investors in the company -- remember that this was placed - if you go to the next page - this was placed in the United States only for 35% because it was a private -- it was offered only to 35 investors, because it was a private placement. Also it was offered in Europe. And in Brazil it was offered but with a limitation for the resale tranche, because of the type of transaction.

Remember that the company is basically a business plan with a very strong sponsorship. And so the [DVM] puts a constraint to be sure that the general public didn’t get to the transaction, but that only qualified investors were able to acquire the shares. That’s why the share price was pretty high for the Brazilian standard, BRL1,000, and also that the minimum investment that an individual was able to make was BRL100,000.

Finally, as you can see there, we get a final allocation of $282m, meaning that from the original transaction of $200m, we used our [inaudible] at the bank, exercised the reissue, the complete reissue, sliding up the total issuance to -- from $200m up to $282.8m.

The origin of the investor is 14% are related to Latin America as the founders, 13% with other origins, 31% European and 42 -- 31% European and 42% American. We also have 36% with what we call the [Cresud] investors. This is investors that already know Cresud and are among our shareholders; 14% founders and 50% of new investors who have knowledge of the Company and of our Brazilian project.

Having said that, we are open to Q&A. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Your first question comes from [Michael Holme] of [Altima].

Good afternoon, I guess, for you guys in Argentina. I had a question regarding production levels and sales of Cresud. And when I look at the -- your level of sales, they seem to be very different to your actual production levels. Sales in the first -- sales in the quarter were much higher than production. I am trying to understand if this is sustainable or not sustainable. In particular, your sales volumes were considerably higher than the ’05 period. So I’d like to get your views on that. Thank you.

Okay. Good morning, Michael. Well, regarding -- I would say that we have a general intention in terms of increasing our production. Mainly this shift, especially when we are not referring to our annual result and we are making cuts within the fiscal period, this can be related to the way we manage our inventory. This is by speeding up the process of selling some of our stock. On the other hand, related to the price evolution we foresee in the market.

As a general picture, yes, our production is bigger and we are in that trend. In this case, we speed up the process of selling the production because we think that, because of our view in terms of the price evolution, it was more favorable.

Okay. Thank you.

You’re welcome.

Thank you. [OPERATOR INSTRUCTIONS]. Your next question comes from Ben Laidler of UBS.

Hi. Just on the structure of the BrasilAgro deal, I am just wondering what the thinking was to carve out Cresud management from Cresud the Company and have two separate vehicles going into the deal, and why management couldn’t have been incorporated into the deal through Cresud.

Okay. Thank you. Well, this deal had very specific issues. The first one is [inaudible]. It was very complicated to get the investment from the managers through Cresud, because that would have posed a lot of issues in how to get that investment from the managers. Which at the end it was like going to the market and buying BrasilAgro shares through Cresud, and channel that directly to that investment without arising a lot of issues locally, like the remuneration package of the managers. You know that we don’t have any stock option plan currently. So it was much clearer to direct that investment on a separate way, but assuring that Cresud is getting the controls on that investment.

At the end, the result that once the managers get alignment to the objectives is that they were allowed to invest directly through this vehicle and having also the opportunity to be awarded with warrants, which at the end are going to have a strong value as far as the investment succeeds, in the same way like the Company does.

But as counterparty of this, what Cresud gets is that Cresud gets the control on that vote without putting the money. If we -- we really had a lot of discussion on this. And it would have been very difficult to generate a way of channeling that investment directly through Cresud, considering that it is a private investment from the managers and that the funds were provided by them.

Okay. And if I could just ask a follow-up question, a slightly different question, I see you’ve extended the expiration date on the Alto Palermo convertibles and warrants. I just wondered whether there had been any thinking about doing that at either the IRSA or the Cresud level.

Okay. Thank you. Well, the first thing is that when -- we have not discussed the situation of our subsidiaries. But, as you can guess from the financial statement of both IRSA and Alto Palermo -- and also in Cresud, leaving aside that we have to get the [inaudible] financing [inaudible]. But, as a general pattern, the debt situation of the Group is getting more -- greatly reduced almost on a daily base.

In the specific case of Alto Palermo, because of the market cash generation of the company, it is very difficult to -- and because of the market conditions, it was the best way to have a good debt. And the cheapest way to do that without incurring a significant expense on a transaction was to extend the tenures of these bonds.

You must take into consideration that, for getting that, 100% of the holders of the bonds must agree. It is true that a significant part of those bonds are held by IRSA and by its Chilean partner, Parque Arauco. But, first of all, 100% of the holders of the bond must agree with that.

And that allows us to get Alto Palermo with a good debt situation, because if not -- if we reduce that debt the company would have a very inefficient financial structure, meaning that we would not have any debt at all, with a huge impact in terms of the taxations of the results of the company. That’s why we thought that way was very suitable and very appropriate way to maximize the objectives of all the parties involved in the transaction.

Okay. That’s great. Thank you.

Thank you. Your next question is a follow up coming from Michael Holme of Altima.

This is more related to IRSA. I noticed in your cash flow statement you had some receipts from the sale of a telecom business for about $1.7m. I’d like to understand what that was about, and if you could provide some more information on that? Thank you.

Yes, Michael. That -- we sold an Internet project that we decided not to continue running because it was not related to our core businesses. And it was a good opportunity, and that’s why we gave that decision. It was like a -- I am trying to find out the correct word for this. It’s similar to an Internet provider, what we sold.

Okay. Thank you.

Thank you. There appear to be no further questions at this time.

Okay. Thank you very much.

Thank you. This does conclude today’s Cresud conference call. You may now disconnect and have a wonderful day.