Cresud SACIF y A (CRESY) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, my name is Natasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cresud Conference Call.

[OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to your host, Gabriel Blasi, CFO; and David Perednik, CAO. You may begin.

Good morning to everybody and we are starting our conference call for second quarter fiscal year 2007 for Cresud. As you know, the country has continued growing steadily, 49% growth over the last [19] quarters.

Going to page three, our balance of trade continued to show a very healthy momentum. Exports in the country have grown 15%, excluding [soybean]. Half of that has been balance of trade and the other half has been [inaudible]. Composition of real exports of you can read from the chart on the right side is roughly 30% manufactures, that's mainly cars, agricultural manufacture is 30%, other primary products is 14%, [the growth] 7%, and fuel and energy 18%.

Regarding the internal situation, unemployment evolution has decreased very significantly 8.7% is the figure the government has [charted]. Adjusting that, we've got employment subsidy, that here goes up to 10%, but shows a very, very healthy recovery since 2002, [inaudible] and this is reflected, of course, in the level of expenditure and in the level-- and in consumption. Inflation, which has been -- has peaked the last year present a figure in the range of 10% to 2007 and our expectancies for this year are in the same area.

Moving to page five, the outlook for our production is very, very positive, both in terms of pricing and in terms of supply and demand. The wheat, the worldwide production and consumption as you see there shows the gap that sustained a price differential, same situation with the corn plus as you can see prices are not on [maximums] although they have been recovering very steadily. In fact, if you compare the price of the soft commodity, again hard commodities like metal or oil, the difference is bigger again.

Page six, total grain production in Argentina is showing a constant increase of the production in the country. This year, the expectancy for the growth is very significant, both in prices and in volumes. As I mentioned, that would be some 30% of the total exports of the country, roughly [70%] of that is cereal and the growth expectancy for this year is in the range of 50%.

On the beef cattle sector, you can see in page seven, on the left graph, that although the measures that took place last year affected the prices of this year, locally during the year, the prices have been -- have begun to recover, and that's mainly because of the two other graphs. You can see there that the consumption per capita is very, very high. It is the highest in the world, in the area of 62 kilograms per capita for last year. Historical maximum has been in the range 75 and you see also in the last graph, that the world consumption and the population is increasing. On the other hand, the [stocks] on a worldwide work base for [still] production are decreasing because our country is pushing the cattle production to more marginal areas.

Going to page eight, the year is beginning to show a very positive curve for the land value in the country and that's also for every type of land, on the corn belt zone, agriculture and beef cattle zone, on the breeding zone, means that today on the corn belt zone, a premium hectare will be costing in the range of $8000 or more.

A highlight for the period, the net profit for the second quarter of the fiscal year has been ASR17 million, which have completely -- we are going to show later the structure of the transaction, a joint venture we got with Tyson Foods and Cactus Feeders from the United States, commencing the first livestock vertically integrated project in the country.

IRSA has a very significant impact to our result, ASR20 million for the period with excellent perspectives for its activity.

The Company on [inaudible] paid a cash dividend of ASR5.5 million, or [24 pesos] per ADR -- sorry, cents per ADR for 2006. And as of December 2006, 100% of our total surface has been harvested, specifically the wheat. And the other crops have a very, very good perspective, although -- and we have not yet harvested and it's important to address that we are not going to provide any outlook on this year, as the present day is heavily [raining] and this may affect marginally the final figures regarding the crop production.

Now, David is going to give us an outlook on the income statement of the Company for the period.

Good morning, this is David Perednik. In page ten, we see the P&L of -- compared of Cresud. We have a diminish of 28.7% in our income -- net income for the period, ASR17 million compared to ASR23.8 million in 2005. I will explain the different segment lines of our business.

Going into the grain production result, in the grain production result, we have in 2006, a loss of ASR1.4 million compared to ASR0.02 million loss. The production income was ASR6.6 million in 2006 corresponding to 16,900 tons of wheat and 2,600 tons of corn compared to ASR4.3 million in 2005, corresponding to 14,300 tons of wheat and 2,300 tons of corn. It's important to highlight the fact that due to the seasonality of our activity, by December 2006, 100% of the wheat surface area has been harvested.

The results generated by total 2006-2007 comparing harvesting anyway will be obtained in the next quarter. We have only the impact of the wheat in this quarter. Grain sales decreased 54.2% in 2006. The grain sales amounted to ASR13.2 million compared to ASR28.9 million in 2005. This decrease was due to lower initial stock of grain that we had in June 2006 compared to June 2005. So, we sold less production.

With respect to the beef cattle, the beef cattle production result represented ASR2.8 million profit in 2006 compared to ASR2.3 million profit in 2005. The beef cattle production income represented ASR11.1 million in 2006 corresponding to 5,200 tons of beef and ASR10.4 million in 2005, corresponding to 4,532 tons of beef.

The higher production income responded to an increase of 14.7% in beef cattle production volume between both periods. This increase was mainly due to higher grass offer, as consequences -- as a consequence of more rain that benefits the beef cattle fattening in the north zone and also in the comparison last year, and remember you that we suffered a drought also in December 2005 that we are not having the this year. The cost of production in 2006, was of ASR8.2 million compared to ASR8.1 million pesos in 2005.

With respect to the sales, sales of beef cattle decreased 10.8%. By 2006, sales of beef cattle reached ASR15.4 million and it compares to ASR17.2 million in 2005. This decrease is attributable mainly to a 14.1 decrease in the sales volume because we sold 6,696 tons in 2006 compared to 7,792 tons in 2005 and due to an increase in the average sales price, we sold at -- the cattle at ASR2.3 per kilo in 2005 compared to ASR2.2 per kilo in 2005.

With respect to the milk, the milk result of production as of 2006 was ASR1.9 million compared to ASR1.98 million profit in 2005. The earnings from production and sales in 2006 was ASR5.4 million corresponding to 8.9 million liters compared to ASR4.2 million in 2005. The higher earnings corresponds to 13.1 increase in milk sales and production volume and also a slightly 4.8% decrease in milk price from ASR0.54 per liter to ASR0.52 per liter. Milking cow average [inaudible] is approximately 3326 heads compared -- in 2006 compared to 2949 heads in 2005.

With respect to the cattle holding results, we had a ASR1.47 million profit as a consequence of an increase in the price in 2006. And with respect -- and this is compared to ASR2.1 million profit that we had last year. With respect to the grain and raw material valuation adjustments to the net realization value, we had amounted ASR3.4 million in 2006 compared to ASR2 million profit in 2005 due to an increase in the prices of the commodities.

Administrative expenses have been affected in 2006, we had ASR8.5 million compared to ASR4.4 million. These have been affected by the implementation of the SAP and a new vertical system that we are applying in [pursuit] to all our lands and also the central administration. And also we are applying the certification of Sarb-Ox 404 items that we have to comply -- we have to finish the comply in 2008, but we have different auditing firmsthat are helping out in the preparation of all the information that we have to present. And this cost, we are accounting them as we are paying them. So, we are not taking accruals because this is -- it is having a taxation benefit and we expect that this is going to affect only this quarter. We believe, with respect to the implementation of SAP and we believe that this is going to be -- we are going to have less administration cost when we see the whole picture of the year.

With respect to our farm sales and acquisition, we are not having any operations in this semester compared to the sale of ASR9.9 million last year from the farm El Gualicho. With respect to the financial results, we are having, if we see, a [whole] line ASR4.3 million loss compared to ASR15.8 million gain and this can be explained by an operation of sale of convertible notes last year of almost ASR50 million earning the profit that we had. The interest in -- with respect to the loans that we are having now is ASR4.4 million that we are paying compared to last year ASR800,000 that we collected net from [our stock and bonds].

With respect of our expenses as concerns our losses in 2006, we had a provision of ASR0.87 million compared to ASR0.89 million in 2005. If we go to the line of results coming from controlled and related companies, we are having in 2006, AST22.9 million compared to ASR7.5 million last year. From the 22.9, ASR20 million are coming from our position IRSA, we are having a direct participation of 25.9% and BrasilAgro is our investment in the Brazilian company -- agricultural Brazilian company is giving us ASR2.4 million. We have there 7.3% of participation. We also have received ASR0.4 million for our participation in Agro-Uranga where we have 35.7%.

The income tax is giving us a positive gain because we are having a negative result from the operations, we are having a deferred tax that is accumulating the line of the income tax and we are having a 28.7 decrease in the final line as I have already mentioned of the income from ASR17 million this year compared to ASR23.8 million last year.

In the page 11, we have the volume of sales that I have already mentioned, but anyway this is the breakdown of the stock and the sales that we had as of December 2006 compared to 2005. We had sold 15,000 -- 15,200 tons of wheat compared to 6,200 tons. In corn, we have sold 4,100 compared to 49,300. And sunflower was also 179 tons compared to 1,810 tons. In soybean, we have sold 11,445 tons compared to 25,500 tons. And this is totaling 31,200 tons in this year compared to 86,300 tons last year. In beef cattle, we have sold 14% less. This is coming from a sale of 6. -- almost 7,000 tons compared to 7,700 tons last year. On milk sales, we sold 13% more due to high production in our farms and 8. -- almost 9,000 liters this year compared to 7,800 liters last year.

Thank you. Going to page 12, just to make [inaudible] there are no significant changes on the use of land. There you have the share of each business unit, 70% continues to be land reserve, almost 1% for milk, 20% cattle, [70]% crop and 18% leased to third parties. And also you can see the improvement in terms of the increase in the hectares per business unit showing a slight decrease in the land reserve due to the process of getting land reserve to production.

Going to next page, page 13, there you have the structure -- final structure of the deal that we closed with Cactus and Tyson Foods. Tyson is the leading cattle beef processing industry in the United States and one of the biggest in the world. Cactus Feeders is the leading company in the feedlot operation and the largest player in this market in the world. Remember that Cactus Argentina was a joint venture established originally 50% by Cresud and Cactus for developing the feedlot process, feedlot business margin, [seeing that] we run the biggest feedlot business in the country.

What we did here was we geta minority participation with the appearance of Tyson Foods and the final holdings are as follows; 52% Tyson Foods, 24% of Cresud, and 24% of Cactus Feeders. With this company structure Cactus Argentina, we have production capacity of 25,000 heads of cattle and 170 hectares [inaudible]San Luis, the company acquired Exportaciones Agroindustriales Argentina, a slaughterhouse that's situated in the province of La Pampa. La Pampa is next to the province of San Luis, so Cactus Argentina is just in the middle of Argentina, and this [plant] will allow -- and have already a clear for exporting to European markets and other location markets, and will allow us to bring [inaudible] operation in this industry, from the producer to the exporting capacity. Although Cresud gets a minority holding on the company, due to the shareholders agreement has certain rights and a special [inaudible] us to have a good control of our interest on this business.

And going to next page, these are investments we made on dairy -- on the dairy business in the farm La Juanita. This is the second new milking facility that we are constructing. Remember, the last one was in El Tigre. This is a different type of facility. The other one was [round type] of facility. [inaudible] the capacity of 48 cows at a time, 1,200 cows per day, with a total investment of $1 million, will allow us to increase 24,000 liters of milk daily, plus the [inaudible] that El Tigre has, meaning that we have a significant increase in this business, which is showing a very good outlook as of now.

On the next page, page 15, we see the prices evolution for our main production. We are going to harvest 14,000 hectares of corn in the second half of 2007, 22,400 hectares of soybean during the same period. There you have the increment in price.

And going to the next page on BrasilAgro, although I would advise you to refer to BrasilAgro's site for further information, as a company, BrasilAgro has already invested [20%] of their proceeds in the acquisition of three different farms and add one farm more in this period, totalizing an area of 2400 hectares. The other one is 32000 hectares and original of 2000 hectares. All of those are for agricultural activities [inaudible].

Going to the financial debt of Cresud, we have a debt of approximately $34 million plus the convertibles. The convertibles have maturity [inaudible] they are going to be converted and also the warrants attached to them. This debt is mainly in the -- is going to the Brazil investment, and it is likely that we may make some type of restructuring of the debt with getting some longer term instruments during this year or in the beginning of next year.

On the share situation, you can see in page eleven, as of December, the total amount of shares is 235 million shares outstanding. On a fully diluted basis, once all the conversion takes place and the warrants are exercised, that is going to go up to 321 million shares, meaning that that is going to take place before November 2007, and of course, with the [inaudible] finalization of the outstanding of the convertible note.

On the following page, the convertible issuance and the shares of the Company, although there's strong dilution have shown a growth of almost 260% in price there.

And finally, page 20, we have the outstanding of convertible notes as of today, only $20 million. There was a very significant portion of that held by the concerning entities of Cresud and [inaudible] and $23 million of warrants outstanding that are going to be converted , as I already mentioned, so now November [2007]. Now we'll have some minutes available for Q&, if you want to make some.

Thank you. [OPERATOR INSTRUCTIONS] Your first question comes from [Daniel Herr] of David A. Noyes and Company.

Hello, everyone and looking forward to the second half of this year. My question is, what do you see agricultural land values and cattle land values doing in the last few months in Argentina?

Well, the land although is in -- and we don't have significant investment activity there, we are finding us some prospects that may bring us some type of new deals, for the near short rum. And we think there have not been significant developments in terms of price evolution, especially related to the commodity prices. We can say that probably, the price of the best land has a [inaudible] price. We saw the increment in the commodity prices. However, price is a significant part of that increment.

On the marginal -- on the more marginal area, this is more difficult to say because it is very related to the type of production that you make and that's specifically one of the -- one of the capacities of the Cresud, which is typically is the ability to change the land to a different type of use. But I would say that you see on the graph we created in the presentation that those significant developments have taken place in this end and every type of land has. I don't disagree with the price appreciation of the commodity market continuing their uptrend.

On the other hand, we must take in consideration that, thanks to the excellent growth that the company is going to have during the next months, and this meaning both in volume and in prices probably, the situation of the sector will be very strong for the financial side, and we are speaking especially of the small producer. So, it is more likely that they are tending to add additional pieces of land to their properties as they are able to because they do not have a very significant debt. So, I think that the is a risk for a downturn in this is really very, very small.

Just as a follow-up, do you see purchasing any more marginal land for conversion to farm land?

Yes, as I mentioned, although I cannot at this stage disclose exactly the type of properties, we are prospecting a couple of opportunities that take place I think in the recent months that may bring us additional acquisitions, I would say, before the year- end.

Thank you very much.

Thank you. Your next question comes from Ben Laidler of UBS.

Hi, good afternoon. Would you just maybe talk a little bit about the marginal land, the conversions and the CapEx you are putting in there, what you expect of it here next year in terms of CapEx, but also in terms of exactly how much land you are converting and converting it from what use?

Good morning, Ben, good afternoon. Regarding the typical model of development of land in the areas of [inaudible], there are 4000 hectares for [inaudible]. We know that roughly the investment required for this is $200 per hectare for clearing the land, putting the pastures, and the water facilities and another $200 for the cattle, this is roughly on average, of course, depending on the type of land and depending on the type of work they require. But, that I would say, up to now, that doesn't represent [inaudible]. Currently, we have developed 36,000 hectares of that property and our plans are on track and we continue to develop in that.

And having said this, we are also [inaudible] that we do not want to get a very, very significant leverage of Cresud. Our total debt and our intention in terms of capital structure is that Cresud is not going to get leveraged -- the leverage for the company will be established mainly on the operational and not on the real estate kind of[ treatment] of the structure. We don't want to do that. On the other hand, because of the [retention ]business, this is a business of long yield, of [reality] capital structure, which has not yet fairly significant leverage although our asset structure will allow us to do so.

Having said this, I will say that the best capital structure situation regarding this [may] establish the pace or the speed that we are going to get to the development of the land. On the other hand, we have some [inaudible] last year this equation by investment in Brazil, which is a long-term investment. Remember that Cresud put there $27 million. And we will need a couple of years to begin to see a significant result from there, although as I said, we [inaudible] are already showing there.

Having said this, we can add that the [inaudible] allocation of about 26,000 hectares, we already have 1,000 hectares of soybean, which means that although it is very marginal, we know that the yields of that are completely different, and that -- meaning that [inaudible] had multiplied by it's size since the last three years. So, if we complete this, but still we have and that means that we are able increase in marginal area, really the cash flow generation of both hectares will be very, very significant. On the other hand, we are intending to increase of our rental of land for diversification of [inaudible] and for increasing our operation -- operating, cash generation without incurring in the acquisition of land with no appreciation value.

That's right. Thank you very much.

Thank you. [OPERATOR INSTRUCTIONS] There are no further questions.

Thank you very much and see you in the next call.

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