Cresud SACIF y A (CRESY) 2008 Q2 法說會逐字稿

Good morning. My name is Rich, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cresud First Half Fiscal Year 2008 Earnings Release 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 host, Alejandro Elsztain, Director and CEO. Sir, you may begin your conference.

Good morning, everybody. We are going to talk about the first two quarters of fiscal year 2008. So -- and you can open the presentation, and let's begin in page two. And there is a picture to show what is happening to the world, how the food demand, the meat and oil demand is increasing in the developing countries and regions. And here we see what's happening since 1999 up to now, and the projection for the future, and how the kilocalories per habitant is growing dramatically in emerging markets and regions.

How -- in the right, we can see how a new player -- let's go to below, to the quality. It's increasing, the kilocalories. But let's see what is happening in the quality of the food that the world is increasing, that there are meats and oils and milk and dairy. So what it's improving, it is the quality of life of half of the population of the world; and introducing the cereals or roots or tubers.

And we see in the right top how a new player appeared. But from the commodities today, we are talking about energy and how in the case of the corn, this is in the United States, since few years ago, we see that a big part -- a big portion of the crop is going to fuel. And that is a trend that is increasing dramatically.

And at the end, in the last graph, we see how population is still growing, food is growing, and the habitants are not increasing the hectares for agriculture. So there is a drop in hectares per urban habitant. So that is how it's going to supply the world, and that is probably the main object of (inaudible) that is improving the situation of Cresud.

So we are talking about special [rates] for commodities. Everybody is discussing about that in the world. So, Gabriel, please proceed with the presentation.

Thanks. Moving to page three, as a reflect of what Alejandro has described. The situation in Argentina shows a very strong pattern of growth in the prices of the land on the upper right graph. And it is supported, of course, because of the evolution of the prices of the recent Argentine crops, as you can see from the upper left graph in page three.

At the bottom of the page, we have disclosed the impact of the final prices of the Argentine producers, thanks to the export tax that affects the production of our [crops]. In spite of the impact of the tax, the net price that a producer is receiving has increased since November 2007, since our last call, up to now, 17% on the wheat, 13% on the soybean and 21% on the corn, showing the excellent momentum that the sector had. Back to (inaudible).

Highlights of the first semester, the operating income increased to ARS24 million, boosted by the grain business, in which we increased our production and volume sales. The net income rose ARS14.5 million. We increased volume in milk.

And the big two sales of farms that we made in first semester [explain] part of the profits of the semester, they made 8 and 22 times higher than their book values, and we are going to explain each of the assets that were sold.

In the case of IRSA, we are bringing lower income compared to last year, and that [is mainly explained by] Banco Hipotecario. Of the convertible bonds, they expired in the last quarter. They expired in December -- in November 2008. Today, there are no more convertible bonds or warrants outstanding. And today Cresud, after converting what we have at IRSA in convertible bonds and warrants, Cresud today owns 34% -- and that are December numbers, today it has a little more, 34% at December -- the 30th of December, Cresud owned 34.6% stake of IRSA capital.

In the case of the capital increase, we found a notorious increase in the commodity values that did support our theory of investing more in these activities. So that is impacting profitably in the assets in the farms, and that is something that is pushing us to be thinking and going to the market to increase the capital, to increase our investment, not only in Argentina, but in the rest of the region. So we (inaudible) for later. Gabriel?

Okay, moving to page five, just some comments on the production of the quarter, value and margins of the businesses. If you go to the upper left, we can see a six-month evolution on the physical production. The only crop that was [profitably owned] in this quarter is the wheat with an increase of 12%. We have a decrease in the physical production of beef cattle. This is related to the consolidation process of the feedlot related to the acquisition and beginning to operate in complete regime of the slaughtering plant that Cactus S.A. has acquired with Tyson Foods and our subsidiary. And a 22% increase in the milk production volume.

If we move to the production revenues, 95% of increase in the crops, 22% on beef cattle production and 70% on the milk revenues.

Going to the lower left, the hectares under production on this season have a 19% increase on the crops, on the beef cattle 9% and 57% on the milk business. Showing that the operational side of the business you can see from the lower right graph, the operation business of Cresud is increasing both in volumes and in prices significantly.

Now David is going to comment the income statement.

Hey, good morning to everybody. The net income for the period as of December 31, 2007, decreased 15.1% from ARS17 million last year to ARS14.4 million this year. The sales, they had an increase of 64% from ARS41.4 million last year to ARS68.1 million this year. Our gross profit increased 137% from ARS7.4 million last year to ARS17.5 million this year.

We have made a profit on the sale of farms of ARS20.6 million this year compared to none last year. That was a 100% increase. We have sold some hectares, 4,974 hectares from the establishment of Pozos. That gained us a profit of ARS3.2 million, and ARS13.4 million as a consequence of the sale of La Esmeralda, 2,471 hectares.

With respect to the financial results, our net financial expenses were ARS4.3 million for the last -- for the six months ended December 2006 compared to ARS7.3 million in 2007. That was an increase of 67%. And the main variations between both periods were an increase in the interest -- net interest expenses, exchange difference and other financial fee income.

With respect to the income from controlled and related companies, this line had an increase -- decrease of 60.8% from the ARS23 million in 2006 to ARS9 million in 2007. This was mainly driven by a decrease of [three] ARS13 million in (inaudible). Last year, we had ARS20.1 million in the six months ended in December 31, 2006, compared to ARS7.2 million gained in this year.

And also, we had a decrease in the results coming from BrasilAgro of ARS2.4 million, and we have an increase of ARS1.2 million from ARS0.4 million gain in the last -- from Agro-Uranga in last year compared to ARS1.6 million this year.

So, on the same chart, at the end, the total debt of Cresud is ARS215 million. An important comment to say is that, if you look at the financial charges for the period, which have been extremely low, it is likely to expect that due to the change in the market environment, the situation will change for the next quarter. We will increase on the financial charges to the Company's income statement.

To explain a little about what is happening with the portfolio, we have two examples of appreciation that we were able to show in this first half of the year. In the case of Los Pozos, the second sale we made -- the first was the last balance sheet -- but in this balance sheet, we were able to sell 5,000 hectares, and we have still on stock a big portion of the farm; that is 242,000 hectares remaining in the portfolio.

And the book value here that is explained in the presentation in $10 is not correct, it's $7. The purchasing price was $10. But because of the adjustment for inflation and the change of currency we had in the past, the book value of that asset, instead of the $10 that we purchased is in $7. And so, we sold in $225, reaching a book value of $7. That made us to make almost all of the sale as a gain. So the total sale was $1.2 million, and the gain was $1.1 million. So that shows what happened to the assets.

So they changed in this time -- in this project 22 times, but not developed. And what is happening and we are seeing, we began the transformation of this project from no production to cattle. But now, we are in the process of transforming the cattle production to agriculture. So, we began slowly with 1,000 hectares, 2,000 hectares. We are planning to go to 5,000 hectares. So that is changing for a productive hectare, for agriculture hectare, and you saw that the price of (inaudible) in Argentina goes I would say from $2,000 to $15,000.

So the transformation of that property is immense, and so this is a small picture of what -- it will increase the price in 22 times, but we recorded much more than that, the productive part. From that, we have today 62,000 hectares prepared and developed for cattle. Almost all of that is receiving cattle. So the last part has finished very recently. So we are loading with cattle, but we began the transformation of products this time from cattle to agriculture.

In the other case, we bought a farm few years ago, that is 12,000 hectares, and we sold only 2,500 hectares. So a small percent, actually a fifth of the farm. And we sold for near $7 million, a gain of $5.2 million. So, again, 8 times profit compared to the book value.

And again, we think when a farm has -- we can sell parts, we can invest that and we are planning to invest that in other regions because we are seeing the appreciation potential of those. It is much better than this part. So, this shows that in one, we make 8, in other we made a 22, and we think there is a lot of much more room for increased value of our portfolio that today is huge in size.

And next page is page number eight, we show you what we were able to purchase a year and a half of [story] in BrasilAgro. As you know, Cresud has part of BrasilAgro, nearly 7.5% of the shares of BrasilAgro. And in BrasilAgro, we are able to purchase up to eight farms, achieving a size of near 140,000 hectares at December of 2007.

In many provinces, you will see here that we have in Bahia, Goias, Mato Grosso, Mato Gross do Sul, Piaui, and Minas Gerais, we are following the business plan that we planned at the beginning, that you have a crop, sugarcane, cattle and forestry. And we are investing properties in the [four] of the business plan. So we are following exactly what we started at the beginning.

We raised at the beginning R$550 million, and from that, we have committed near half of the IPO proceeds. So the actual purchases were 38,000 hectares and 20,000 hectares, one for cattle and one for forestry. So these are the last two for the last quarter. So BrasilAgro is using the proceeds we have and investing exactly and repeating the model of investing in areas developing, transforming and (inaudible).

So, Gabriel?

Page nine. We have finished during this period with the transformation of all the convertible bonds into equity with the full exercise of the warrants. The process ended with an original issuance of shares of 124 million shares to more than 320 million share.

But in spite of almost multiplying by 3 the amount of shares, the market capital of the Company during the same period has increased almost 9 times. As of yesterday, the price of the share has increased more than 3.4 times, reflecting that the strategy was very appropriate for increasing the value to the shareholders.

We move to next page, only to remember that we have already approved by the assembly and filed for the new capital issuance. This capital issuance is up to 180 million shares. The rights offering is going to be conducted according to Argentine law, giving to all the shareholders throughout the world the possibility of exercising their preference, accretion rights.

And also as part of the transaction, they are going to receive warrants, which would require approximately 1.78 shares to get a coupon for having the right to have sales to their warrant. Those -- the warrants will give one warrant for one share; and that warrant entitled to issue one third of the future share, meaning that for the ADS, one ADS is going to receive 10 warrants; and those 10 warrants give rights for -- receive 3.33 future shares, ordinary shares, or one third of an ADS.

We are in the process of defining the warrant features like the strike price, the exercise period and the frequency. On the listing these warrants are going to be detachable and negotiable. So the rest of the information will be released to the market as of -- with the recommendations of our financial advisors.

We can invite investors to ask questions, if you want. Conference call is complete. Can you ask for questions?

(OPERATOR INSTRUCTIONS) Your first question from Hernan Romero of Altima Partners.

Good morning, Gabriel and Alejandro. Apologies if you covered this earlier, but I'd just like to get a sense of why the gain from controlled and related companies declined so much year-on-year, especially (inaudible) results were stronger? I guess, it's Hipotecario, but I would like to understand why.

Hernan, just for the benefit of most of the audience, that was presented on the IRSA call that you can get from the website. But just to give you a very clear explanation, the reason of the decrease in the results of Banco Hipotecario, which mainly explained the non-operation or poor result of IRSA, although we have an excellent operational result, was due to the financial turmoil that affect also the financial market in Argentina.

In the last two quarters of last year since the subprime crisis, we have like not a liquidity event, but a significant -- significant increase in the local interest rate. That has been reversed during the month of January with the rate coming back to a more -- the more common values. And on the other hand, the bank has begun to recover those results in the new period.

Understood, thanks.

(OPERATOR INSTRUCTIONS)

Your next question comes from Ravi Jain of HSBC.

Good morning. Go on -- just on the results first, I just had a question that we sold two portions of farms this year, one about 8 times and one 22 times. Just wanted to have an idea of whether the remaining portions of these farms would also be of similar value, and also about the other farms that Cresud has?

I am not quite sure of how we understood your question. Let me repeat. What you are asking is, the -- this difference between the book value and the market value on the property that we sold is equal to [the same situation] for the rest of the portfolio?

That's right.

The gap is huge. You saw that -- we have two examples. In one case, it's 8 times. In other case, it's 22 times. So you would have a different, very different, maybe let's see -- La Adela farm. La Adela farm is the farm that we have at the hour, an hour from Buenos Aires city. 1,000 hectares, book value, $2,000. Book value to date, [they are reflected at] $2,000. This is a neighborhood that will be sold by square meter. So, in that case, maybe the market value of that will be not 10 times, it will be 50 times. We have cases of 3 times. We have cases of 20 times. So it's very, very diverse.

We bought a lot of properties, and each of them have different valuation. And we didn't finish the transformation, as I explained before. And in many cases, we bought without activity. We transformed the first activity, but we are going to a second activity of putting a dairy that is changing more the value. So the portfolio gain is huge, and what we showed is a very small sample.

On the other hand, as you may know or just to illustrate the question, our Argentina, in Argentina regulations, we do not make a price of our evaluation on the property. So, okay?

Great. Thanks a lot.

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

If there are no further questions, we are going to close. First, saying that we are really very glad to be sitting on the portfolio like Cresud has, on a strategy that Cresud was following the last ten years, where we thought that this would happen to the region, and to have the talent of being purchased assets everywhere in Argentina, in Brazil and maybe in the rest of the region, if we finish finally these capitalizations to invest in rest of Latin America, in the same idea from farming areas, put in production, investing for the state-of-the-art, taking that [deal] in the meantime and selling lately.

So, to have those assets in a world that has a scarcity of food, and there are few regions of the world that can be developed for making food, for a world that needs more food, and is increasing its way of living. So we are glad to be introducing food and energy to a world that needs and to be seated in this huge portfolio of assets in the whole region.

So, thank you very much for the patience, and let's talk next quarter, where almost all the harvest comes. Up to now, the operational doesn't bring almost nothing of the crop of the growth that is corn and soybeans. That comes in the third and in the fourth quarters. So, up to now, we showed small examples of what Cresud has in its book value. So, thank you very much and have a good day. Bye.

Thank you. This concludes today's Cresud first half fiscal year 2008 earnings release conference call. You may now disconnect.