Cresud SACIF y A (CRESY) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. This is the operator today's conference call. I would like to welcome everyone to the Cresud conference call. At this time, 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, Mr. Alejandro Elsztain, CEO, Mr. Gabriel Blasi, CFO, and Mr. David Perednik, CAO. You may begin your conference.

Thank you very much. Good morning, everybody. We are going to talk about the results of the year that closed June 30, 2006. I will give the first words to Gabriel Blasi.

Good morning, everybody. We are going to make a quick comment on the general outlook of the economy related to our businesses. And after that we are going to discuss the results of the Company and the major events for the fiscal year.

Regarding the growth of Argentina, the country has achieved growth for two consecutive months. It's consistently beating expectancies of most of the economy surveys in the market, and with a projected growth of 8% for the current year.

Going to page three, we can also see that the government, they have consistently maintained their fiscal conservative policy in terms of keeping the surplus since 2002 up to 2006.

Page four, the balance of trade continued to be favorable with exports bigger than imports and growing since 2003 up to 2006, almost doubling the amounts in U.S. dollars.

If we go to page five, we can also find out that Argentina continued to be a major player in the agriculture world production, with an increase in agricultural production. Although in the last year the weather has an impact, the expectancy for the near future, according to the USDA, is continue to grow in this business.

Most significantly for the development of our business, page six, the situation of the beef cattle sector. Well, we can see the evolution of the prices, steer prices per kilogram, where we have a continuing increase related with the international decrease of the inventories, mainly because of the agriculture pushing the development of the cattle-raising business to more marginal areas.

Having said this, we have -– we must take into consideration that Argentina is the biggest consumer of beef cattle, with more than 60 kilograms per year per inhabitant. That is almost 50% more than the United States of America. This explains the strong impact and the intervention of the government in this market that happened during this year.

Going to page seven, we can find out the evolution of the price of the agricultural land, the breeding land and the beef cattle raising land, where we can see that, with similar behaviors in terms of percentages, we can see that the outlook of our business continued to be extremely positive with a potential growth of the price of the land. Not only because of each special type of use of the land, but because of the ability of Cresud of turning the use of the land to a different one.

Going to the year highlights, first of all we have to mention, or remember, Cresud going to a foreign investment. For the first time, Cresud made an investment in Brazil. Remember the IPO we made in the BOVESPA at the beginning of the year of BrasilAgro, where we are going to replicate Cresud business model, together with the other partners in the market.

Also, we have to mention the real estate side of the story. The acquisition of the San Pedro farm, an historical farm of more than 6,000 hectares in the province of Entre Rios. This land is located in one of the most favorable, or important, water reserves in the country. And the sale of El Gualicho, a farm of nearly 6,000 hectares located in the province of Cordoba in the center of the country, which resulted in a profit of almost ARS10m in our books.

We also -– with the acquisition of Agropecuaria Cervera, we get the control over 160,000 hectares of land where we are planning to apply the development of 35,000 hectares for agriculture, which means almost doubling the size of the productive land for the Company.

Also, we continue our plan of development of our main land reserve of Los Pozos in the province of Salta, adding 8,000 new hectares to cattle breeding during the next fiscal year.

Regarding other lines of businesses, in our farm of El Tigre located in the province of La Pampa in the center of the country we increase our milk production by the putting in function of a state-of-the-art dairy facility, increasing 99% of our capability for -– compared with the previous year. We are also planning to continue the expansion of this business line because of the good margins of the activity.

At the end, IRSA are contributing with $23m of --

Pesos.

Of pesos, sorry for that. ARS23m of profit to Cresud’s balance sheet for the current fiscal year.

Now David is going to make a comment on the Company income statement.

Good morning. We are going to comment the discussion about [technical difficulty] year 2006 compared to 2005. With respect to the sales, sales reached ARS112.3m in 2006. That means 43.7% higher than those recorded in the previous year. Higher sales in the rest of the segments partially offset more livestock sales.

With respect of crops, going into the lines, the sales of grains increased 99.6%, from ARS30.9m in 2005 to ARS61.7m in 2006. The 86.2% increase in the volume of sales, from 88,123 tons to 164,000 tons, was accompanied by a 7.2 increase in the price per unit in fiscal year 2006 compared to 2005. The average price per ton sold was ARS376, compared to ARS351 per ton in the prior fiscal year.

The production of grain decreased 28.7%, from 149,000 tons to 106,000 tons in 2006. The explanation of this was, first of all, we are comparing the year 2005 that was a very good productive year with 2006 that was a year that suffered drought in the country. The drought, more or less, approximately, gave us a decrease in the production of 28,000 tons. And the second reason of the decrease in the production was that, due to the land use rotation and the market prospects, the Company decided to change the crop selection compared to last year. So we had some area of less corn and we increased the soybean surface.

With respect to the total surface area, this increased from 36,000 hectares in fiscal year to 37 -– sorry, 2005, to 37 in fiscal year 2006. The leased surface area increased from 16,299 hectares in 2005 to 17,000 hectares in 2006. And the Company's own surface area increased from 19,900 hectares in 2005 to 20,000 hectares in 2006.

With respect to the beef cattle line of business, the sales of beef cattle decreased 8.5%, from ARS36.8m in 2005 to ARS33.7m in 2006. The 17% decrease in the volume of sales was offset by a 10.3% increase in the price per ton sold. The volume of sales decreased from 17,700 tons to 14,700 tons, while the sale price increased from ARS2.07 per kilogram in 2005 to ARS2.28 per kilogram in 2006.

Average cattle [stores] decreased from 96,000 head in fiscal year 2005 to 91,500 head in 2006. And the total production of beef cattle decreased by 8% from 10,657 tons in fiscal 2005 to 9,800 tons in 2006. This decline was caused by the drought mainly that affected the supply of grazing land where we produce meat at a lower price.

The number of our owned hectares using the production of beef cattle decreased from 126,800 hectares in 2005 to 97,300 hectares in 2006. This decrease was caused by the sale of Nacurutu and El Gualicho farmlands, partially offset by the acquisition of San Pedro farmland.

Going into the milk line of business, sales of milk increased 127.9%, from ARS3.5m in 2005 to ARS7.9m in 2006. Due to a 99.5% rise in production volume, 7.3m liters were produced in 2005 and 14.6m liters were produced in 2006, mainly from the incorporation of our milk parlor in El Tigre farm and, in a lesser extent, by changing the feed system as a consequence of the drought. Prices level increased by 14.2%, from ARS474 -– sorry, per thousand liters of milk, to ARS541 per thousand liters in 2006.

Going to the feed lot, the revenue from this segment increased 27.8%, from ARS2.1m in 2005 to ARS2.7m in 2006.

In the others line, the sales were increased by 30.7%, from ARS4.9m in 2005 to ARS6.4m 2006, mainly due to a greater level of revenue from third party -– the third parties’ revenues and leases of farms, and an increase in revenues from our affiliated company, Futuros y Opciones.com.

As a result of the factors mentioned, the gross profit amounted to ARS20m in 2006, compared to ARS18.5m in 2005.

Going to the selling expenses, those increased from ARS6.6m in 2005 to ARS10.1m in 2006. The selling expenses in agricultural activities represented 85.8% of total selling expenses. In cattle raising activities, 10.2, and the remaining 3.9 corresponds to other activities.

Administrative expenses increased 59%, from ARS7.3m in 2005 to ARS11.6m in 2006, mainly due to the change of system that we're working on presently that affected in more or less ARS3m in this year. And also we have a small amount in increase in salaries, social contribution and other expenses.

With respect to the net gain on sale of farms, the result on the sale of fixed assets amounted to ARS9.9m in 2006, compared to ARS20m that we had in the previous year, 2005. The sales in 2006, we have the sale of El Gualicho that generated an income of ARS9.9m. It was sold at $5.7m. And in 2005 we have the sale of two farms - Nacurutu that produced a gain of ARS7.6m that was sold at $5.6m, and San Enrique farm was -- gave us ARS12.3m gain and the sold price was $5m.

Going into operating income, the operating income amounted to ARS11.1m in 2006, compared to ARS36.3m in 2005. Net financial result amounted to a gain of ARS12.4m in 2006 and a gain of -- a comparative gain of ARS63.8m in 2005. The main difference between both years was mainly due to an increase in the sale of corporate bonds in 2005 compared to the present year, the year finished as of June 2006.

With respect to the income from related companies, this line decreased 21%, from a gain of ARS28.1m in 2005 to a gain of ARS22m in 2006. The 2006 gain was mainly due to the net income of IRSA, which amounted to ARS23.4m, the gain from our interest in [Agro-Uranga] of ARS1.2m and partially from a loss of ARS2.5m from our interest in BrasilAgro.

Income tax expenses decreased from ARS37.8m in last year to ARS5.4m in the present year 2006. And in the end, the net income from the Company decreased from ARS76.8m for 2005 to ARS32.9m for the present year, closed as of June 30, 2006.

Okay. Going to page 10, in general David has already commented the most important aspects of the business overview. Just to mention that, leaving aside the beef cattle which have been affected by other issues, the rest of the business lineup we hope will show a significant growth.

If we go to page 20, you can find EBITDA composition for the fiscal year, where we can comment that our intention is to keep the balance through our [proposed] real estate, EBITDA business and the operating of the farm business. There we can see the participation of each one in the composition.

Page 11, the growth of each of the business lines, comparing one year with the other, where we see the increasing growth of the milk, as we have already discussed, because of the new investment in this sector. The issues of the beef cattle, which have been already established, and the significant growth of the other business lines, averaging more than 40% of growth from one year to the other.

Regarding the use of the land, you can see that the Company has been consistently growing for the last three years in terms of the land applied to business, to operation business. We can see that the growth has gone from 27,000 to 41,000 hectares of productive land, the cattle from 125,000 to 130,000. The hectares used for cattle and the land reserve, which has been increased with significant additions that we are going to discuss later.

If we go to the next page, we can find out our investment in Brazil. Just as a reminder, we established this company BrasilAgro together with our former partners in IRSA and Brazil Realty in Brazil, Mr. Elie Horn. [His] investment with the local investment bank called Tarpon, together with Cresud from the partners of BrasilAgro, and the placement was very successful. As you can see from the next page, page 14, we went to the market and we issued a share total of $290m from giving an [unsatisfied] demand of $166m.

Just for a note, you can see there on the right bottom graph that half of the investors were investors that have already contacted or known Cresud, 36% were investors provided by the bank that launched the transaction. And 14% of the investment was done by the founders who have the ability and the exercise of the warrant that formed part of the transaction of [technical difficulty] this consideration up to 32% of the company and under certain circumstances that can be also right up to 45% of the total shares.

BrasilAgro has outstanding two options for land on page 15. Those two options are in the process of due diligence. One is for 32,000 hectares in the state of Piaui and the other is 2,000 already developed hectares in the state of Goias.

If we go to the next page, page 16, just the result what David has already discussed with you regarding the real estate business, where you can find out the selling of El Gualicho with the profit of ARS10m and the acquisition of San Pedro, historical farm located in the province of Entre Rios.

Regarding another significant acquisition is the deal that we made for Agropecuaria Cervera, which allows us to take control of 160,000 hectares. Remember that we paid for this property an equivalent of $9.2m by giving $3.6m of credit value of convertible notes of IRSA and a consideration of $700,000 in cash. This addition will allow the Company to increase 35,000 hectares of agricultural land, meaning that we are able to double our current agricultural area. This year we are going to add 5,000 hectares to our yearly plan.

On page 18, here you have the real picture of our dairy facility in El Tigre, with an investment of $1.3m. We put in -- at work the most modern facility -- dairy facility in the country, which allows us to increase our productive capability in 20,000 liters a day for the operation for 2,000 cows.

Going to the financials, the financial situation of the Company, if we go to the debt situation of Cresud, today Cresud has a debt of almost $32m. But at the same time we have in cash $8.4m in U.S. dollars and ARS1.4m in pesos, giving a net situation of nearly $20m of debt, which matches our investment in BrasilAgro.

Regarding the convertible notes outstanding, from the original $50m, today the outstanding is $25m. And the warrants outstanding, $25.8m, meaning that [those warrants] are still going to be billed to the Company.

We were explaining what we were doing and what happened to our balance sheet. I think that was a bad year in operational [part] and we suffered a drought that affected a big part of the yields of the Company. But we showed, compared to last year, less sales of farms. And we had worst holding results in cattle and we add to the balance sheet the pre-operational expenses for the IPO BrasilAgro.

So, when you combine all these factors, we see our worst balance sheet. But in the underlying we can say we have a much better group of assets. Why? Because the land still was appreciated year to year. We can be talking about, to give you an example, as you probably remember we bought two, three years ago the El Tigre farm that we paid for that $1,100 per hectare, and today the market tops about $3,000, $4,000 per hectare in that old property, 8,000 hectares.

So, to give you an idea, the world and a lot of foreign investors and local investors are very few buyers and the country is receiving that flow. And it’s something that is affecting the world’s market of commodities, that is the commodities are beginning to be diesel or bio-diesel or ethanol or something, and that demand is something very new. As you probably know, the corn is now in the U.S. increasing a lot in production, but where you see demand, you see a new factor that it’s the production for oil that will come from the commodities. And that will bring 55m tons for consumption in the U.S. for making this ethanol.

And that is something that is not affecting much now the price because of this huge harvest that this year the U.S. is having. But what we’re seeing is both the combination of demand of food, [EMEA] and [China] still growing [a big base], plus the new demand that America is putting for oil production. That is not affecting up to now the prices and we don’t see that rebound. And if we see the comparison of coal to commodities, it’s the largest gap of the story, or one of the largest. We see from 30 years ago this is the largest by far the [inaudible] that compares oil price to commodities and commodities of grains of the land.

So what we’re saying is our underlying asset is very valuable. We change a lot of our asset price but we keep it in book value. Remember every year we keep the book value of the assets; on the day we sell we show. But the reality is what Cresud owns today is a real big portfolio of good assets.

And so we expect for next balance sheet better results in the operational. We are increasing the size of operational, increasing the size of milking, increasing the size of agriculture. This year, we are going to 52,000 hectares of agriculture, a big growth comparing last year. And grow again in beef cattle production, because we’re increasing the size of Los Pozos project for operation. So the combination of all of that makes us to be very positive in the perspective of the Company.

So we thank you very much and we wait for the questions.

[OPERATOR INSTRUCTIONS]. Sir, there appear to be no questions.

Okay. Thank you very much, gentlemen. Let’s see you in next quarter. Thank you very much and have a good day.

This concludes today’s conference. You may now disconnect.