Cresud SACIF y A (CRESY) 2007 Q4 法說會逐字稿

Good morning, my name is Ray and I will be your conference operator today. At this time I would like to welcome everyone to the Cresud fiscal year 2007 earnings release conference call.

(OPERATOR INSTRUCTIONS)

It is now my pleasure to turn the call over to your host, Mr. Alejandro Elsztain, CEO. Sir, you may begin your conference.

Good morning, everybody. We are going to talk about the close of the year 2007 and I will introduce Gabriel Blasi that will begin with many macroeconomic situations in Argentina, and I will talk a little later.

Okay good morning, everybody. Going to page two, the country has grown during the last year, almost 9% in the last four years, confirming the very good momentum that the Argentine economy has. Going to page three, we continue to have positive trade of balance and take a position of exports, confirming the competitiveness of the agricultural sector. We had 28% contribution of the agricultural manufacturers, 4% of the total exports of the country in meat and other primary products 14% of the total exports of Argentina.

Going to page four, there we have the reserves, international reserves of the country and the fiscal surplus and current account, which are still positive, although we are in a election year, that are providing the country a solid situation fundamental to make for [nice] potential external shocks. And if we move to page five we also see that the very positive trend in unemployment has continued and inflation, which concludes during last year at 10%, I expect to see in the rate of 10% to 15% for this year.

Regarding the energy situation on page six, this is the situation that currently the market success indicates that the demand goes, as of today, without any type of measure neither taken by the industry or the government, which is not the situation. In that extent, as we have discussed in the year's call, the total impact would be 15% decrease in the sales of the shopping, which is the only related business to the electricity. But on the other the good news is that the government and the company are taking measures to avoid that situation.

Moving to the next page, we continue to be extremely competitive as a country in terms of the productivity. With the figures of 2006 Argentina is the second country productivity for soybean. The third for corn and six for wheat. Regarding the beef cattle prices, Alejandro, you would like to make a comment there on page eight.

In the beef industry there was a year that the government was affecting the market, but after April of this year they decided to move from there and today they gave again the freedom to the market and we see a recovery in prices of the steers, this is a live animal price. And so we regained, to give you an idea, we bought this year in January in the middle of the very bad environment, we were able to purchase the first packing plant with Tyson Foods.

Because we think the beef is an industry that Argentina will export a lot in the future. Today there are restrictions and there are discussions within the government on the domestic consumption, the government wants to keep the product in the country when the exporters want to export as much as they can because prices are very good. And that was the fight between the government and the producers. But having these ARS3 per kilogram but it's like a $1 per kilogram, still is very, very cheap compared to international prices, makes a very profitable business to exporters and that's the reason why Tyson Foods comes to Argentina when we find the best quality beef, probably was the best of the world, having the lowest price. And that's our bid to keep that lines of business in the company and grow in the industry together with Tyson.

So if we go to page nine in the highlights of Cresud, we can talk about the results and we see that the net income of this year, near ARS50 million, a 50% increase comparing last year and that was a combination of all of the lines. When we see operational, we see in crops that the income grew 95% and there was an increasingly exploited area, good production and good prices. So the combination of that gave a very profitable crop business.

In beef and dairy, it was a year that we were able to launch this integration of a packing plant and a feedlot all together. And we are going to explain later, we made a hold company with Tyson Foods, that will exploit the beef industry in Argentina. Apart of that we were able to launch the second dairy facility in La Juanita, so today we are achieving three dairy facilities in the company. We are passing 4,000 cows of milking per -- each per day. So we are becoming, again, one of the five largest dairy producers of Argentina.

In -- so this too explains mainly the activities, the production activities. When we see the real estate, we sold two farms. One is Tapenaga, 21,000 hectares and the other one is Los Pozos that I will explain a little later. And in the side of real estate, but in purchases we were able to buy a big farm of 90,000 acres in Santa Cruz Province, for making sheep. And apart on that we are very active purchasing land in Brazil. We were near purchasing 90,000 hectares of land in Brazil. So we will introduce Mr. David Perednik, our Chief Administration Officer that will explain what is in the balance sheet.

Good morning. Going into the Income Statement for June 30, 2007 the net income for the period increased 50% from ARS32.9 million to ARS49.3 million in 2007. If we go to the Production line, we have increased 57% our production from ARS65 million to ARS102.8 million and the production results increased 446% fro, ARS4.9 million to ARS26.8 million.

Going into the segment lines, if we go into the production income, the Grains increased 95.7% from ARS37 million in 2006 to ARS2.4 million in 2007. Production volumes increased 64% from 106,000 tons in 2006 to 175,000 tons in fiscal year 2007.

The production increase resulting from an increase of 29.7% of the surface in production. The total surface produced increased from 37,000 hectares in 2006 to 49,000 hectares in 2007. During the current year average global yields of grain were 23.4% higher of those of the previous year. And higher production income had a positive impact in line with the actual average price that increased of 19.2% in commodities.

With respect to the cattle, beef cattle production decreased 4.8% from ARS20.5 million in 2006 to ARS19.5 million in 2007. And the production volumes increased slightly, 1.1% from 9,800 tons in 2006 to 9,900 tons in 2007.

Going into the Milk segment, the milk production income increased 38.8% from ARS7.9 million in 2006 to ARS10.9 million in fiscal year 2007. The production volume increased 14% from 14.6 million liters to 16.7 million liters and this increase was mainly due to the higher price per liter produced, higher production volume of the milk and improvement in the efficiency level of daily production of milk per cow. We have started production in the new milking facility of La Juanita Farm increasing its capacity to 1,800 cows per day.

Moving to the Sales line, sales were ARS110.3 million. That is 1.8% lower than the previous year. Going into each segment, the Grains, the sale of grains decreased 13.4% from ARS61.7 million in 2006 to ARS53.4 million in 2007. This decrease of 24% in the sales volume was compensated by higher average price per ton of 14%. The lower sales volume was due to a lower amount of tons of stock at the beginning of this year for 61,000 tons.

Going into the Sales of Cattle, Beef Cattle sales decreased 5.2% from ARS33.7 million in fiscal year 2006 to ARS32 million in 2007. The sales volume decreased from 14,700 tons to 13,300 tons, where the sales price increased from ARS2.28 per kilo to ARS2.40 per kilo in 2007.

Milk, the milk sales increased 23% from ARS7.9 million in 2006 to ARS9.7 million in 2007, mainly due to the increase of 14% in production volume, an increase of 7.9% in the mean price. The feedlot sales increased 14% from ARS2.7 million in 2006 to ARS3.1 million in 2007.

The gross profit as result of the above issues, the gross income increased 103.7% from ARS18.7 million to ARS38.1 million. The selling expenses decreased slightly by 1.8% from ARS10.1 million to ARS10 million in 2007. Administrative expenses increased 43.8% from ARS11.6 million in 2006 to ARS16.6 in 2007.

Net gains on the sale of farms increased from ARS9.9 million in 2006 to ARS22.3 million in 2007, a 125% increase. We have sold 20,800 hectares of Tapenaga Farm that gave us an income of US$5 million approximately and we have sold 14,500 hectares of Los Pozos Farm that generated approximately an income of US$2 million.

Operating income as I have already mentioned increased in 2006 from ARS11 million to ARS38 million, that's an increase of 242%. The net financial result generated an income of ARS12.4 million in 2006 compared to a loss of ARS10.5 million in 2007. That's mainly due to -- we have a gain last year of ARS14.9 million due to the sale of convertible notes.

We have higher interest rate, sorry, higher interest paid of ARS5.1 million loss as a cost of higher financial charges. And we have -- [that's] in 2006 and in 2007 the finance charges arise from an income of ARS1.1 million derived from financial operations and income -- a net income of ARS.2 million in the interest of convertible notes. A loss of ARS10 million generated by the interest on debt and also a loss of ARS1.9 million generated by [debit] tax and ARS1.9 million derived from exchange difference.

With respect to the line of Income from Related Companies, we have an increase of 81.6% from an income of ARS22.1 million in 2006 to an income of ARS40.2 million in 2007. Mainly due to our share in Imsa, the positive result which increased from ARS23.3 million in 2006 to ARS33.1 million in 2007 and also to a ARS4.2 million in income owing from BrasilAgro our related company in Brazil. And also, to the income of ARS3.2 million in the holding of shares of the company Agro Uranga.

With respect to the management fees, we have an increase from ARS3.8 million to ARS5.5 million. The income tax shows also an increase from ARS5.4 million to ARS8.4 million. And in the end the net income, as I have already mentioned increased 50% from ARS32.9 million last year to ARS49.4 million in 2007.

Thank you. Going to page 11, on the business overview we can see how the price and [productive] environment affects positively our crop production. In the case of wheat, a variation of 24% of the list production in 2007. In the case of corn, an increase of 156% going up to 8,000 tons of production. In sunflower, a slight decrease of 7% in the range of 7,000 tons. Soybean increased the production 43% to 61,000 tons. Production in others is a marginal increase to 9,000 tons of production.

In the case of beef cattle sales a reduction of 10%, this is a environment -- price environment to 13,000 head of cattle. And the milk sales were increased 14% reaching 16,000 liters.

Going to page 12 we don't see a significant change in the land mix for the company. We have increase on the productive area and also a significant increase on what is stated here as land reserve. Although I must mention that that increase is not really completely devoted to land reserve as it is the net result of the buy and sell of property of the company. Alejandro is later going to describe the property that we have acquired in the South area of the country, to see the future outlook of that property too. And you can see, as always, the political information regarding the most relevant [topics] of the company at the end of the (inaudible).

If you turn to page 13 and we talk about Cactus Argentina, Cactus Argentina is what we expected in the past to be our dreams for the beef. When we entered into this [packing] with the feedlot company, with Cactus [establish] a partnership with our American partner 50/50. At that time we expected to have a company that had a packing plant. That took us a lot of time, like nine years, to bring the international players.

And this year we were able to purchase and to make this partnership where Cresud owns 24%, Cactus Feeders owns 24% and Tyson Foods, the largest beef producer -- not producer, packing plant in the United States and probably in the world, decided to make it's first launch abroad the United States, [not only in] Canada. A part of Canada went to Argentina with us to make this new company. The company intends to have big lots like the one we had. Now we are in the plan of making a new one, a new feedlot and we bought one packing plant in one province in the Western Province of La Pampa and we began to export to the world and to sell to the domestic market. It's the first integration of Cresud, this done with what we think is the best player of the world and we think this is a company that will grow a lot in the future. So we have the first packing plant and the intention of the company is to become the big player on the food processing in Argentina.

When we go to the page 14 we see the new dairy facility we made in La Juanita Farm that will generate an increase of 14% in our milk production, increased last year, but only working two months because it opened in April. So this will be working the whole year in 2007, 2008. So we are passing the 4,000 cows for the -- we are producing milk in two farms, in La Juanita and El Tigre. In El Tigre we have only one facility and in La Juanita we have today, two. So we are passing 4,000 cows. And we became one of the largest dairy producers of the country again. We invested for that, US$1.1 million for the new facility.

In the realization of appreciated hectares we made only a small piece and last year we were able to rotate some of our portfolio and in the case of Los Pozos, we were the whole life of the company talking about, the business of purchasing land reserve, transforming to production and selling later. And in the case of Los Pozos, we were able to sell 14,500 of uncleared land, so not developed. The undeveloped, the land that we purchased in the past at $10 and because of adjustment for inflation went to $7 million of book value per hectare, we sold at $115 per hectare, so we made almost all of the $2.2 million sale and we made a sale of $2 million. That shows what we [stocked] a lot in the past.

The area of Argentina for cattle was growing to the North. The crop was growing in the South and replaced a flat (inaudible - background noise) was North, Northwest and Northeast. And we were very active of purchasing land in the Northwest and this is the first example, but this is small, this is 5% of the property, something like 5% of the property. But we purchased for $2.6 million in the past and we sold only this for $2.2 million.

And not only that, we have a lot of demand today on that region, the price that we are talking about today passes $200 or more for the undeveloped, the developed is passing $700 or more. So we were very active in the past and now the market is accepting that that is the region to grow when you see the number of heads that you can put in a hectare is probably the most profitable area to put cattle in the country. So this is the kind of investment that Cresud continues to make and this is the first sale we made, and shows that we have near zero in our book but a lot of hidden value in our reality.

The case of Tapenaga is different. Tapenaga is a -- it's in the Northeast, 31,000 acres that we purchased in the past for near $100 per hectare and today we could triple or more than triple our price of purchase. And we decided that the room for growth of this region was not too big. Production is [here], to give you an idea of comparison here we are talking about an (inaudible) that reaches 20 to 30 kilograms per hectare, where in Los Pozos when you clean you make more than 100 kilograms per hectare. And Los Pozos, in the future, can become home to agriculture something that Tapenaga cannot. That was a decision of selling the property of Tapenaga, that was not very profitable operational to invest again in another region.

In the case of acquisitions, we were able to purchase in Argentina 90,000 hectares in the South of Argentina. Up to now we couldn't buy in Patagonia, this time we bought in Santa Cruz, 90,000 hectares dedicated to ewe production and sheep production. Today it has 15,000 heads and will be loaded with more than that. We have to pay a position on this farm, and we paid for that $2.4 million. We think we have a lot of room for appreciation and to increase the operation of this farm. We can increase productivity of the grass and we can make a very big real estate gain again, so that was the idea of why to purchase this farm.

In the case of BrasilAgro we were very, very active purchasing farms and we see in page 17 that we began to purchase farms with the proceeds of the IPO that we made in May of 2006. From this R$550 million we committed purchases for near R$190 million so we began, and let's see in page 18, the first six farms we were able to buy. We bought from soybeans, cotton, all for grain, for sugarcane and now we are in the process of purchasing for cattle and for forestry.

So we are following our business plan and we were able to close these deals so we were -- we think that in Brazil the prices are very, very attractive. We are buying land from $500 or less to $1,000 or $3,000 and we think that there is a lot of room to purchase big pieces in there. That's something that is not so easy in Argentina, to buy these sizes of productive land, not the sheep land that we bought in Argentina but to buy for agriculture or for dairy. In Argentina it's much harder and much more expensive. That's the reason why we are buying so actively there. And we expect to keep this [reason] in Brazil too. We have the money in the pocket so we are going to keep that close in the purchasing there too.

When we see the debt description in page 19, we see that Cresud today has a total debt of $39.2 million. Part of that is pesos, but this is only [rated] in dollars and these are the interest rates we are paying in the prefinancing they are 6%, short-term debt near 8% and long-term we have LIBOR plus 375 basis points. We have in cash, in the company, like $30 million so we have a net debt of $17 million or $16.4 million in the company.

On page 20 we see the evolution of the shares and we can see that it's almost all converted, the existing shares at June were 309 million shares and the full dilution will be 321 million shares in November of this year, so it's almost done. And the market cap of the company went from the time of the convertible bond in $64 million and today we have $627 million. So there are only a few convertibles (inaudible) on the market, we have $3 million to [enter] to the company. So with that the company is finishing its project that was made in 2002. And so the shares increased 149% and the price has increased 282% from ARS5 to nearly ARS19.5 that was the 5th of August of 2007.

What we expect for this year, we expect to grow more. If we talk about cattle we are going to add the part that we developed in Los Pozos Farm. We are achieving 60,000 hectares of developed land from the 260,000 hectares of total farm. From that we sold 14, so we have a big piece of land to develop. But part of that developed will enter into production that will replace Tapenaga project that was sold last year.

In the case of Grains we are going to lease more land from last year. We are going to transform more land from project of [Cerveda], at least we think. We are going to increase our size for grain too, we are growing very big for next year.

In Milk, we have finished in April the new dairy so we will grow in dairy too. So operational this year we'll have more production for the company. In the case of BrasilAgro, we intend to keep buying. And now we are beginning to think, and starting the rest of the region, to purchase in the rest of South America where we think there are lots of opportunities. So Cresud is going to not only go to Brazil, so probably for the rest of the South American region.

So we are optimistic in commodities. Today the commodities are suffering the effect of both the demand grown in the world plus the energy that is keeping back to the industries. And we are taking part of those profits and this year explains when we see the real estate, the operational and our stake of Imsa that considering 25% gave us a very good result. And next year when we are going to convert our warrants we are going to pass 30% of Imsa. So the combination of all of them plus Tyson Foods investment that we made this year, we feel will give us a very, very profitable result for 2008.

So we can invite you to make the questions. So please begin.

(OPERATOR INSTRUCTIONS) Our first question comes from Michael Holme of Altima Partners. Please go ahead.

Good morning, gentlemen. Question, you produced a lot of corn last year and that seemed to be a very good decision given what happened with corn prices. I'm just wondering if this year we should expect you guys to produce maybe less corn and more wheat and I'm just wondering if you intend to use maybe hedging in order to lock in what seems to be very good wheat prices at the time? Thank you.

I have to be careful when I answer this question because you might be becoming a competitor so --. But I'm a public company and we can talk to investors openly, not considering that you are a competitor today in Argentina. I think your investment in Argentina shows how strong is this business and how good is this business and the hedging policy is something that we consider and we are doing. We are hedging part of sunflower mainly and sunflower is a very, very good business.

In corn we make something I don't remember if it is 20% or 30% with the corn production for next year. That grows a lot. We are making a huge crop production and mainly corn, soybeans, like (inaudible), but sunflowers we are producing more than double what we did this year and we are hedging a lot of that because prices are passing ARS1,000 per ton. So we think prices are going to be enough good and that's the reason we decided to grow in hectares for production for this year.

My second question is, your -- the year before, '05 to '06 you had a drought and I'm just wondering that the fact that '05 was a bad year did that have an impact on your last year's results or not really, given inventory levels and things like that?

No, I think didn't affect because almost all was finished, sold, last year so it didn't impact this balance sheet. There is not a big gain from the last campaign to this campaign. This is a very good year because of the combination of all of the factors. It's a good crop, good productivity, good prices, good real estate and good investments like Imsa, we have. So it doesn't reflect nothing, almost nothing from the last year before.

Thank you.

Our next question comes from Pedro Herrera of HSBC. Please go ahead.

I have a couple of questions regarding your -- the valuation on the land. You've obviously been very profitable on the couple of pieces that you have sold in the past year. Are you seeing any pressure on putting the capital back to work? In other words, in other areas where you're looking at to invest do you see prices going up, one question?

The second one is, are you by any chance within your plans for the next year or so any intention of going outside Argentina, in terms of Uruguay and other areas, in addition to your BrazilAgro of course?

Yes, I agree with you that today the Cresud model to purchase land in Argentina is harder in the corn belt. The price in the corn belt probably is $10,000 per hectare and with that yields 3 or 4%, we don't see any attractiveness because you know that our model is to purchase, develop and sell later. So we -- our plan is to keep what the company does, it's to go to other areas, not 200 kilometers from Buenos Aires. To go further like we did in Los Pozos, like we did in Cerveda, like we did in Santa Cruz, like we did in El Tigre.

The El Tigre is an exampl,e in 2003, we bought a farm that it was in La Pampa and in 2004 we bought in [Piernot]. This farm was undercut with production, but we changed and today it's on the crop production and dairy and it's very profitable. This farm today probably changed value from the $1,000 that we paid, probably today worth $3,000 or $4,000 per hectare. One day will be the day to sell it again and to move farther like we did in BrazilAgro, that we are going to Mato Grosso, Piaui, we are going to Mato Grosso North, we are going to Goias or we are going to Bahia.

We move to regions where we think that the development and the change of activities will change dramatically the value of the land. And in Argentina we have to move further and we are going to move to the rest of the region, like you said, in Uruguay, probably Bolivia, probably Paraguay and probably the rest of the regions that we see there is an opportunistic way of purchasing, transforming and gaining again.

Thank you.

(OPERATOR INSTRUCTIONS). There appears to be no further questions at this time. I would like to turn the floor back to Mr. Elsztain for any closing comments.

I think we passed almost all of the details of the company. And we are happy to close a good year. And we expect this sector to be very, very bullish next year again so we expect to keep a very good balance sheet for next, 2008. So let's talk next quarter, third quarter of 2008. Thank you very much and have a very good day. Thank you.

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