Cresud SACIF y A (CRESY) 2008 Q3 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 Third Quarter 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)

It is now my pleasure to turn the floor over to your host, Gabriel Blasi, CFO and Alejandro Elsztain, Second VP. Sir, you may begin your conference.

Good morning, everybody. Welcome to the Third Quarter Fiscal Year 2008 results. Cresud is today reflecting that its operating income rose 165%, mainly due to the improvements from production and sales of crops, beef and milk.

A part of [the sales] that are a big part of the strategy of Cresud. We sold in these nine months, small part of Los Pozos 9,000 hectares and 2,500 hectares of La Esmeralda (inaudible) farm, with very big results.

In production, as you know, at the 31st of March, we had harvest almost 99% of the wheat, 79% of sunflower, 23% of corn and only 8% of soybeans area. So the big percentage of the crop that is the summer crop, that are soybeans and corn, are not still appearing in our balance sheet. In this period, we were harvesting near 60,000 hectares, a 13% increase to the last year surface.

In the development of land reserves, we finished this year increasing a lot of land development in Los Pozos that we're going to explain later from 38,000 hectares to 62,000 hectares in Los Pozos farm. In the case of Cervera we are transforming big piece of land to agriculture too.

Of BrasilAgro we grew our interest from 7.5%. At the 31 of March, we had 11.04% and we are still buying with the proceeds we raised in the capital issue in the capital follow-on that we closed at the end of March of this year.

BrasilAgro is today with eight properties and we are passing 140,000 hectares. From those, only 19% are in production and the rest is transformed, it is in the process of being transformed for production in next fiscal years; in many of them, not in only one. It will need three to four years more to transform all of that.

And probably you know that during March, near the end of March, we issued 180 million shares that we offered; all of them were subscribed. That prove again the big support that we are receiving from the community of investors in the world. So please, Gabriel, let's go to your presentation.

Thank you, Alejandro. Moving to page three, prior to analyzing the Company's evolution, we would like to make a comment on the general situation. You can see there on the upper left the graph, what means the impact on the fiscal revenues?

With the proposed change in the export taxes scheme as the government has (inaudible) in the last days. Meaning that with the new tax export framework, the total collection will go to $11.4 million, meaning that the marginal impact compared to the prior scheme is around $1 billion, which means 1.2% of fiscal revenues, which [stays clear] that the impact of the measure from the side of the government is not very significant at all.

If you move to the upper right graph according to Estudio Broda, what would be the impact if this situation continued to move forward without a quick resolution? On the previous scenario, the agricultural exports means $35 billion in total.

Thanks to the lookout, it is an estimation that the agricultural producers are keeping in the range of 20% to 30% of production in the worst case scenario of the evolution of the present situation.

On the moderate scenario, that means that the drop in agricultural export will go from $35 billion to $31 billion, with an impact on the fiscal revenues of $1.2 billion.

But on the pessimistic scenario, the total exports for agricultural sector is estimated by Estudio Broda in $26 billion with a drop in the fiscal revenues of $3.4 billion, which at the end affects marginally the income of the Argentine state by this means.

If we go to the lower left from the production side, if we analyze the price evolutions with the different tax schemes that we have in the last three quarters, meaning that the last changes fortunately have taken place more or less in the same dates that we finalize our quarters. So it's a similarity that means both [parties].

On the wheat, the net result in price for Argentine producers has been 11% increase since November up to May. On the soybean, as a percent situation, it's a minus 7% up to May. And on the corn, 21% of positive price evolution. That gives you some additional color on the general impact on the crop production for the Argentine producer.

In page four, we would like to show you where are the hectares of the Company and how they are -- if they are under production or land reserves. We see here that the Company today is controlling 666,000 hectares.

From those, 67%, 443,000 hectares are owned land. 61,000 hectares are short-term leases that are for agriculture or beef, both leases that we make annually. And 162,000 hectares are leased land and they're concession for 50 years in province of Salta.

If we go to the total land under production that today we are running 283,000 hectares, we can see that 46% is beef, 130,000 hectares; 21%, 60,000 hectares of crop; 32%, 90,000 hectares of sheep; and 1%, near 4,000 hectares of milk.

When we see the total owned farms and we split (inaudible), we see that from 443,000 hectares we have owned production today 220,000 hectares, near half. Land on development that is going to be on production over the next year or the next two years, it's 34,000 hectares, almost 5%. And we have still in the Company 200,000 hectares, 45% of the total surface of owned land.

And in the long-term lease, in the case of Cervera, the big farm in Salta, that is 160,000 hectares of pre-paid lease. We have 140,000 of land reserves, 86%. Near 13,000 hectares of land under development that we are entering to production next year. Land under production that we have this year on the balance sheet was 4,000 hectares.

And we are renting to third parties in a fixed payment 5,000 hectares, 3%. This long-term lease is a 33-years plus 29 years period contract that we have in the province of Salta.

So, this to give you an idea of sizes of the Company, it's increasing every year at a pace of flows that you're going to see in a page a little later. If we move to page five, we can see there the outcome of the total production volumes for the period, for the first nine months of 2008.

Meaning that in sunflower, we have an increase of 54%; [wheat] 27%; and a decrease in the corn and the soybean, 20% and 70%.

But to have the proper consideration for this, you might consider the lower, the left graph, where you can see the harvest evolution, meaning that the lower production volumes are explained because up to now, if you compare the situation to the prior year, we have harvested a smaller percentage of the crop.

That is very clear seeing in the corn and the soybean where we still have to grow 77% and 82% and to harvest 77% and 82% of the total harvest. A different situation in (inaudible); we have already harvested 79% of the sunflower and 99% of the wheat.

Regarding the hectares and their production for the season, as Alejandro has showed, we continue to increase our surfaces; 13% in the growth of [crops], 52,000 to 59,000 hectares. On the beef cattle, we increased 9% of the surface. And milk in this past a very good growing business, 57% of increase.

Regarding the production of revenues, on the crops, we had an 18% increase, this is most affected by price. The [situation] of the beef cattle with a 17.8% increase. And in the milk growth 81% we have a very significant increase not by price but mainly because of efficiency in production and the better cost. I would include the amount of cows.

Moving to page six, a quick wrap-up of the income statement of the Company and the debt. We would like to stress that the production revenues increased by 26%, the profit by 15%, sales 89%.

It is important to address that we started in the period with a higher stock of crops; meaning that explains the big sales increase and the profit with our total gross profit increase of 47.8%, showing the excellent momentum that the business has.

On the other hand, as Alejandro will comment, we made a profit of $20 million in the sale segment and -- that is pesos, sorry, not dollars. And the operating result has increased so 165% to the ARS33 million of total.

Going on to the financial results, you see there a significant increase. The reason for that was the very high level of debt that the Company beared prior to the follow-on, the rights offerings that we completed in the period. When we finalized the period we had total debt of $56 million as you can see over there, and the impact of that debt is included there.

Also in the financial results we have an ARS8 million impact which is due to the fact that between the period when we issued the capital [and we reduced] the capital increased to the end of the period the peso had a strong revaluation. And that affected the financial result at least $8 million, which are mainly the effect of this accounting effect of the capital increase which is held in U.S. dollars.

Regarding the impact of [concerning] companies, this is the result of IRSA, which although it has been affected by Banco Hipotecario evolution, it still gives a good support to Cresud's results.

Regarding the offering, we can see that, the income statement breakdown, as I have already explained, the impact on the financial results and the administration costs which have increased mainly by effect of the impact of inflation.

If we go to the debt; the total debt of $57 million in the lower right is offset today by the cash of $223 million which are result of the capital increase that the Company made. We are working on restructuring the debt of the Company in a more suitable way today, taking advantage of the very strong cash position that the Company has; working to reduce the financial impact of it, which by the way, if you consider the total size of the Company, the Company can because we are completely levered.

If we go to page seven, we can see what we are developing in Los Pozos farm. Today, we have a holding of 242,000 hectares. After the two sales, we may be [206,000, 207,000. From those, we are going to arrive to 63,000 hectares on production.

This year we had 38,000 hectares, but we are including 23,000 new hectares that are going to be finished this period to be full loaded with cattle. We are expecting that this 60,000 hectares, a little more, can be loading for near 80,000 heads of cattle. So the load on those hectares can support all this, it's absolutely amazing; more than a head per hectare.

Where we see about the agriculture production this year we are finishing -- from the 38,000 hectares, we have 1500 hectares of agriculture, making corn, sorghum, and soybeans.

And to give you an idea, we harvest three tons of soybeans per hectare in many of these, but they are giving us a very good result. So imagine, a hectare that was purchased for $10, we have invested like $500 to make it agricultural and it's yielding three tons of soybeans, what kind of price can be achieving that land in the north of Argentina?

In the case of Cervera, the other big farm in Salta, we are expecting to put 17,500 hectares under production at the end of this year, so they are going to be included next campaign on production.

And here we see that we are projecting with these increases in beef and in grain, for next campaign, here we are talking about 73,000 hectares of agriculture. But we are going to grow in leases too, so this will be part for what you are going to pass 80,000 hectares of crop. We are going to 150,000 or more hectares for cattle. And we are keeping 90,000, but maybe we can be buying more assets in Patagonia like we did in the past.

As you probably know, we recently bought a small farm, 1,000 hectares, that is a neighbor of a farm we had worked a few years ago, El Invierno farm. Now we are adding 1,000 acres more that we paid $1.3 million to increase the size of that farm too.

As you probably know, the Company issued this capital issue because of the intention of going to the rest of Latin America. We think that Latin America has the ability of being the supplier for food for the whole world.

On page 8, we can see the mark where it shows where are the regions and the abundance of fresh water in excess of population in Latin America compared to the rest of the world. Plus temperature, plus land for agriculture of quality of agriculture.

And we see how South America has a big percentage of the water of the world. Here we see that we have 26% of the water of the world, but 6% of the population of the world. Combine to that, we see that Asia, that is a country that has -- it's a region that has 36% of the water of the world, but 60% of population of the world.

So, that combination of plenty of water and land and climate will allow South America to be feeding to the rest of the regions the soybeans and the cereals that the regions need.

And that is why we raised this $280 million, mainly dedicated to invest in this region. So, if we go to page nine, we show you where our intentions were to invest.

Brazil, through BrasilAgro, to increase our strategy. We had 7%, today we have 11% and we're still buying because we think we would like to increase that participation on that company. And this Company can be buying big pieces of land. And we are buying and we are actively buying more pieces of land.

In Brazil to buy a farm of 50,000 hectares is something normal and that's what we are doing, keeping our strategy of four main activities, that are forestry, sugarcane, grains and cotton, and beef cattle. So, 1% of the increase of capital is going to BrasilAgro.

The other three new countries that we are going to invest and we expect to do that very soon are Bolivia, Paraguay, and Uruguay. Bolivia and Paraguay mainly dedicated to soybean, corn and beef; and Uruguay mainly dedicated to milk production.

And in the case of Argentina, we're expecting to make mainly rotation of the portfolio. As you probably know our stock of farms has much more value than the one that is reflected in the balance sheet because we keep them at cost of acquisition and the price increase of the land was incredibly high.

We have shown that in the balance sheet, where selling only 7,000 hectares we made a gain of near ARS20 million. That is like -- the cost of those activities we were selling for 7-point-something-million dollars and the gain was like 6-and-something.

So, near only $1 million of cost, that shows you an idea of how many times the gain we're making in that. So, probably in Argentina we're going to rotate the portfolio and going to develop more new areas and leaving again the ones that we have developed in the past.

In the case of BrasilAgro, to give you an idea that the Company is still small in operation but became big in size. We are able to purchase in a year-and-a-half period 144,000 hectares, but from those almost 108,000 hectares are going to be on production. But not this year, this year is still small.

We are -- in agriculture like this on 20,000 hectares and part of pastures that are not using up to now because we have no cattle, so the Company, it needs to transform to the activities that we purchased [for]. They are the four main activities that I told you before.

The committed purchases plus the CapEx that we have to make the next year passes the 80% of the IPO proceeds. But, the Company still has a lot of cash in its pocket, the Company's still with R$340 million in its pockets today.

Recently we were able to purchase new and a new farm of 4,000 hectares adjacent to Nova Buriti farm, a farm that was prepared for forestation and we are increasing a little in size.

And we began this year, we began to harvest this first year of harvest. And something that was amazing, and we were not expecting this in our projection, was the new area that we developed this year was harvesting 40-something bags.

But the average of the Company was finished at 47 bags with a lot of new area. In our business plan the new area was budgeted 30 or 35 sacks, bags; and instead of that we are near achieving much more of that.

So, because of that we are making as fast as we can the transformation of this 108,000 hectares of land for BrasilAgro. We have a lot of farms on the pipeline, the Company intends to buy much more land in Brazil.

Going to page 11, we would like to make a quick remark on the transaction that we did in the period. As you probably know on March 2008, the Company raised $288 million in equity, an increase of 56% in the outstanding shares, which is going to provide additional liquidity and additional visibility to our business.

This transaction was extremely successful. We are very happy with the support we see [by] our shareholders. It's important to address the issue that it's the first time that a rights offering is concurrently done according to the Argentine law and to the American law.

And really although we started a transaction that would allow (inaudible) an open market round with left over, the transaction was finished at the first stage with the direct acquisition by the rights by the persisting shareholders of the Company, giving a very clear picture of the support that our business strategy has.

The use of proceeds of the transaction is going to be two-thirds of them to agriculture, to the plan that Alejandro has mentioned, mainly the expansion in Latin America. The Company would be able to invest up to one-third of the next proceeds in additional investment in IRSA and working capital in the range of $40 million.

Concurrently with the issuance of 180 million shares, the Company issued warrants. The warrant was a way to avoid going to the market with a significant discount as we really think that the price of the market due to the general environment of Argentine assets would not necessarily reflect the current value of the Company.

The warrants terms are shares per warrant 0.33 common shares per warrant. We had a strike price of $1.68 per future share and expiration in 2015. The warrants are already listed in Buenos Aires Stock Exchange, and we are in the process of completing the listing in NASDAQ for their negotiation on a [separate base]. They can be detached immediately.

The subscription price for the offering has been $16 per ADS, ASR5.528 per common share, which has really showed in spite of the general situation that we continue to have a very significant support from all of the shareholder community. With that, we invite you to make questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Francisco Schumacher of Raymond James. Please go ahead.

Hi. Congratulations on the results, just I wanted to ask, you mentioned that 90,000 hectares are being used for sheep production and still we don't see any results, so I'm asking what is the current stock of sheep in that farm?

The second question is which were the percentage harvested by March 31st of last year to compare with this year, if you have that data available?

And also, to develop the Agro Cervera land, what is the investment cost that you need for crop production per hectare?

On the sheep question, we are in the process of assessing our estimates regarding production, that's why I will not care to be -- to give us some additional time to really provide you with a figure, because this is the first time that the Company is intending that type of production, so I would really be -- I would not like to be misleading.

Our expectation, not the [word that] we have on [this] is for the time being, we think that we can double the amount of sheep that it was in the farm when we acquired the farm; that is what we are assessing that. Once we have that assessed, we will provide an outlook on the future development of this farm.

On the Cervera transformation and the hectares that needs to be transformed, it's for grain, we are calculating around $500 a hectare; and in the case of beef, when you transform for this you are at a level of $200 per hectare.

Okay, and the current stock of sheep? You don't have that information?

Yes, but I think that today's stock is near 18,000 heads or something like that, near 20,000 heads of sheep in that farm. That was included in the purchase, so the total purchase was near $3 million, $2.5 million with some cattle. So it was less than $3 million, the total investment in there.

Okay. Thank you very much.

You're welcome.

Thank you. (OPERATOR INSTRUCTIONS). Our next question comes from [Arasio Delpino] of DKR Oasis. Please go ahead.

Hello, guys. I have two questions. First of all, I want to understand what sort of logistic problems you have faced, given this strike in Argentina? Are you -- have you been able to transport all your production to silos?

Have you been able to deliver to the main consumer centers? That's the first question and if you can give me details of other problems you have faced and what has happened so far up until today.

And the other question I have is you about ARS715 million, ARS714 million in your balance sheet as of the end of the quarter. I just wonder, how are you planning to spend this? What sort of time frame should we expect that you would be investing in other farms, other shareholding structures?

And should we expect a significant, let's say half of this by the end of the year? Should we expect a third of this by the end of the year as a cash position because you'll be investing in assets?

With respect of the strike, the Company is keeping all the harvest mainly in the farms with silos and so there is no problem at all.

Apart of that there was a very good season for harvesting, so we were actively harvesting and we are near finishing, we are just finishing very soon. And there was no problem because we kept the part that we didn't send to the ports in the farms, so that can be stored for more than a year, and the strike we expect not to be lasting more, because we understand that -- we see that the government and the sector will understand that this is a factor that is very vital to the economy and the food.

This is country that is unique in the world where we have 30-something million of habitants, and the kind of hectares that we have, we have 30 millions of hectares of agriculture. So we have the largest [branch] of exports of the world.

So in the operational we didn't have any trouble. In the net sales we are going to take the sales in the balance sheet or [re-stock] in the balance sheet, so that is not affecting at all the operational results. That will be very positive and the last quarter will be the most positive, because comes the more valuable part of the crop, so -- and we were harvesting very good because of the harvest time.

We don't need cash, we have a lot of cash because we raised the IPO, we don't need to sell. We understand that the sector is going to enter to a contract with the government. [We will arrive] to that. But the Company can wait for that. The beef and the milk, it's every day, it's normal now. We are selling every day normally, there's no problem at all.

Okay, so going back to the second part is how much money do you plan to invest in 2008? What sort of cash position should we expect by the end of the year?

And just a follow-up on the follow-up; because of the problems in Argentina, have you seen a significant impact on the valuation of new transactions you may be studying in your pipeline?

Because now the upside in Argentina is capped by the government so maybe land in Bolivia or in other countries, Uruguay, Brazil become much more interesting because there is no such as cap.

Going -- I will try to answer the first part of the question. Regarding the first part of the question, probably we are going to be investing by the end of the year half of the proceeds of the transaction.

We will have the ability, if the situation goes longer and some of our investments delay for any reason, we would be able to put the [lid] of the Company to zero.

So, really if it [bodes until risk] the issue that the only, I will say, big source of dollars that you can keep in dollars according to the foreign exchange regulation in the country is the capital inception, as this is not debt we are not obliged to turn these dollars into pesos.

And this is very important as we are planning to invest the biggest part of this money outside Argentina. As you have heard, two-thirds of the proceeds are going to be invested outside Argentina.

Regarding the second part of the question. I would like to stress the issue that this is not the first time that Argentina has this tax export. Historically, if you go like fifty years in a row, this is something that comes and goes according to the political environment, according to the [political] ideology of the government.

Leaving aside that, if you look at the last 30 years, the price [turn] for the land in Argentina as we know is going up. The reason is very simple, as Alejandro explained, when you go -- there are three main regions in the world which have the ability to produce with almost nothing on top of that.

One is Ukraine, the other is Iowa in the United States and the other is the [patri] in Argentina.

So really, as far as this world environment continues as it is, it is very unlikely that you will see significant drop in the prices of the land in Argentina. I don't know, Alejandro, if you would like to make additional comment on this.

No, that's all.

Very soon -- imagine that the farms are making a huge gain, cash generation, with these tax retentions, and you are going to see in our balance sheet in the fourth quarter, if you calculate that you have the rumor of the tax, that we are discounting, so it's very [soon] that the foreigners are coming.

There is a lot of competition in the purchase of farms in Argentina. That's why, for us, in our model of transforming land we are going to be more active in other regions where the gap of prices is more attractive.

We are buying land in other countries, as it's much cheaper and that is why Cresud intends to grow in other countries like Bolivia or Paraguay, where there it's much more cheaper than in Argentina. In Argentina, this problem with the government is not affecting at all up to now the land buys, the land price.

Okay. Sorry, but one last questions. Can we get comparison between the infrastructure you see in the investments BrasilAgro has made and the infrastructure you have in a significant number of your farms, especially in northern Argentina?

Can you repeat please?

Well, what I am trying to understand is the difference in your price per hectare that has been observed in your transactions and in transactions of BrasilAgro. I just want to understand if you have a good understanding of the investments of BrasilAgro, given that it's only a small investment within your whole Company.

I just want to understand. What is the infrastructure, on average that is available to your farms in Argentina in comparison to the farms that BrasilAgro is buying? Are we talking about land in the middle of nowhere that needs to be somehow, we have to open a road, we have to open a railroad, and in Argentina you already have that in place? Can you make some sort of comparison?

Yes. It's not a problem of roads generally. There are farms that is, but I would say that's not a roads development.

In our case in Argentina, it is taking the forestry and putting directly [also] beef. If we'd go to beef, you put the pasture, you plant the pasture. And if you go to agriculture you turn it directly to make agriculture.

But in the case of Argentina you don't correct at all and you don't fertilize. Because the soil is neutral, it's not acid like Brazil; and you don't need to fertilize because it has a lot of organical material.

I'm an agronomist, and I look for that in every farm we purchase. We calculate very much what is the kind of quality the land still has to correct it?

In the case of Brazil, the transformation; it's cheaper in the forestry, because we're buying mainly cerrados. The cerrados are areas that they have very small trees, and there are bushes, but they are like savannas. There the main investment is the correction and the fertilization that we have not here.

So, to give you an idea, in Brazil we are making an investment like $1,000 for mainly for those corrections, where here we're making $500 for a transformation of the land in the north of Argentina.

What I think, and what I would add to your question and broadly link to the Company's strategy is that what is really different from each country in the portfolio we are in is mainly the cost equation.

We would like to think that Brazil as the [buffer] of the system because it has more availability of land. But as Alejandro has explained, it is the one that requires, not the biggest investment in the land, but the bigger investment in the production itself.

Although the final result might be similar, in Argentina you will be cost much more money on the land itself than on the production, because you don't require [original fee].

In the rest of the countries in Latin America, you might find some intermediate situation where you have some areas, like in Bolivia, with double crop for soybean for instance, as in some areas of Brazil too.

But as the Company -- as you can see from the strategy of BrasilAgro and the strategy of Cresud, we do not buy a central area; or if we do that it is because we think or we find out that there is a shift in the type of production or the techniques applied to production that will improve significantly the yield of the land, vis-a-vis its value.

That's the key strategy of the Company. We do not have, for instance, a single hectare in the Argentine [corridor] where the price by the hectare is $14,000 or in the core area of the [Tecos Apollo Tehuchate production] where the hectare will cost $12,000.

We go to more marginal areas and add value through the knowledge that the Company has in the treatment of the land and in the production techniques.

All right, thank you very much.

Thank you. There appears to be no further questions at this time. I would like to turn the floor back to management for any closing comments.

Thank you very much for your questions. We are very optimistic because we received a big confidence from our investors after the follow-on, after the capital increase, that allows us to increase the stake that Cresud will have in the agricultural sector in the region. We think we are going to show very good purchase, very soon.

And so we are going to add more assets to the portfolio, and so we think that this region will yield benefit because of what's happening in the need of food and all to the world. So, thank you very much, and let's talk the last quarter that is the end of this fiscal year. Have a good day. Thank you very much.

Thank you. This concludes today's Cresud Third Quarter 2008 Earnings Release Conference Call. You may now disconnect and have a great weekend.