Cresud SACIF y A (CRESY) 2009 Q2 法說會逐字稿

Good morning. My name is Cristelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cresud Earnings Release, Second Quarter, Fiscal Year 2009 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 session. (Operator Instructions)

I would now like to turn the call over to your host, Mr. Alejandro Elsztain, CEO; Mr. Gabriel Blasi, CFO; and Mr. David Perednik, CAO. Please go ahead.

Good morning, everybody. We are going to talk about the first half of 2009 that finished the 30 of December. We are going to see many changes in our balance sheet and later, David Perednik, our Chief Administration Officer, will explain deeper, because of our balance sheet today is reflecting the 54% of the ownership of IRSA. So, we have consolidated income statements but for one quarter, so he will explain a little later about the changes of this.

About the results explanation, we were very effective about the exchange rates applied in IRSA stock and debt and different valuations in the valuation of [consolidation] and financial assets and held by [Banca Caramelli], so these we are going to enter deeper later.

About production, we were sowing this year 104,000 hectares, part was leasing and part owned, and we were damaged by a severe drought in Argentina. We have -- many regions, they didn't recover. Some of them received some rain this week. But this drought is affecting the hills of the crops and this in our case that we have a balance between owned and rented. It's going to damage but not a big loss; so we probably are going to be near even. But it is affecting the whole country and this is something that the whole farmers are asking for the President about doing something about taxes.

In the case of IRSA, we had operating losses recorded by our subsidy, our shop, the consumer finance company, but when we see the real estate segment, we were in a very good shape and we were very healthy in all of the lines of business. In the case of the expansion Cresud, apart of doing the job that was due in Argentina this year, began strongly the investment abroad, and we began in Bolivia and Paraguay. We are going to explain what we closed this last balance sheet, and we were buying back our shares. We were near 4.8% of the Company was bought through Cresud.

So, I will introduce Gabriel to talk about some about Argentina.

Good morning, everyone, a quick wrap-up on Argentine financial market situation. As you can see on page three on the upper left graph, foreign exchange reserves from central bank have stabilized as a result of the active policy, managing the foreign exchange rate. But lower peso interest rate, which is an average of market rate, has begun to drop, meaning that the conditions of liquidity in the local market are easing since the end of the year.

The foreign exchange rate has increased its pace of devaluation, meaning that the monetary program of the Banco Central expects a final foreign exchange rate towards the end of the calendar year in the range of 3.9 and the timed deposits, although have had a decreasing pace have begun to recover since the end of the year slightly.

In the page number four, we see a map of Argentina, this is a January picture, where it shows how severe was the drought affecting almost all the country. This is the radar, the -- what is the naranja?

Orange.

The orange and yellow, so shows that almost all the country and the main Pampas were affected. This was talk about the worst of 70 years drought and this will affect the whole quality of Argentine's -- and let's see, let's see wheat. This made like half, from 16 million tons. Argentina harvest; that was finished, 8.4 million tons.

In the case of corn, our forecasts and in the case of soybean, too, our USDA estimates and the drop, they are waiting for it. It's 35% in corn and 5% in soybeans. But in soybeans it's 5% comparing last year, but with an increase of hectares, so that shows -- you know that hectares went from wheat and corn to soybeans. So increasing the hectares, there is a big drop in -- and this is an estimate. There are some analysts talking about less production for the whole country.

So the combination this year is very bad for the Argentine economy. When you combine crop prices, too, you see that these farmers sown their hectares at high input costs and they are harvesting at lower crop prices, combining with less yields. So, the combination will be damaging a lot of farmers of Argentina.

If we move to page five, we can see our breakdown of hectares. We now are running over 900,000 hectares on the region. When you see in the right we have international, we have 160,000 hectares through [BrasilAgro], 12,000 hectares in Bolivia and 21,000 hectares in Paraguay.

In the case of Paraguay, as you probably remember, we have a part of this an option to purchase 50,000 hectares more and we are going to run the farm -- a 50-50 farm, so it will be -- in the first step would be a 42,000 hectares, because our partner would bring the same 21,000 like we and with the option the same. So the total farm will be 142,000 hectares of farm in Paraguay. That shows a big number of hectares that we're going to run in the whole region.

We see here the breakdown of activities in crops and this, so maybe you can do it by yourself. If we move to page six, please, Gabriel?

Okay. Regarding the production statistics, please remember that because of the seasonality of our activity, the figures not always -- the intermediates during the year do not always reflect the full pace of the activity. Regarding hectares and our crop production, we see the very significant growth that Cresud is making. There you can see the 19% growth for the last fiscal year and the comparison of the first six months of the year show a very significant hike to 77%, including Bolivia, without considering there the productive hectares that we already manage in Brazil through BrasilAgro and in Paraguay, as Alejandro has mentioned.

On the upper right, the degree of completion of the winter crops, meaning that on soybean we have already completed 62% under this period, on the corn, 65% and on the sorghum, 31%. The dairy production continues to evolve favorably. Where you see the 19% growth compare the last fiscal year, '08 against '07, with 25% increase in the amount of liters reaching 20,000 liters. And in the case of the first six months of this year compared with the previous one, we have an increase of 6% on liters produced and 10% on the dairy production regarding the amount of dairy cows.

On the beef cattle production, as a result of the situation of the sector as a general explanation, we have a decrease of 4% on last year and for the first six months of the year 11%. And in the amounts of tons of weight, we have a decrease of 11% and 51% in the period in comparison, mainly explained by the severe drought that we are suffering.

If we move to the next page, David will comment on the income statement of the Company.

Good morning to everybody. As Alejandro has already told you, from this quarter, we are consolidating the income statement from IRSA in a different way than we have done this in the past, because since November of last year, 2008, we have [brought] to 50% holding in Cresud of IRSA shares. So as of December 2008, we began to consolidate IRSA financial statements.

So, when you look at the column that states as of December 31, 2007, you're only looking at Cresud's financial statements. You're looking at six months of Cresud financial statements and IRSA's stake at that moment was only shown in results from related companies. While in the column of the left that states as of December 31, 2008, you are looking at three months. We are consolidating line by line in the second quarter from October to December 2008. You are looking at IRSA figures consolidated line by line with Cresud.

And in the line that states results from interested and related companies, you are looking at IRSA's stake that Cresud had for the first quarter that began in July and ended in September 2007. This is a little bit technical, but accounting wise we had to make big changes in the exposition of our financial statements.

So, let's begin with an explanation. If you look at the final line, last year Cresud had in six months a ARS14.4 million gain and this year, Cresud is having ARS12.29 million. Something that I need to mention is that we are not comparing, therefore, as I mentioned before, we are not comparing equivalent concepts. So, this comparison is a little bit confusing, but this is the way that the law and the accounting principles oblige us to show.

So, we are not going to compare line by line, each column. We're going only to explain what is stated as of December 2008, correct? So, let's begin. With respect to the agricultural results, Cresud has a loss of ARS10 million, because the agricultural production income was ARS31 million in 2008. With respect to Cresud's figures, we can't compare this because this is absolutely Cresud production wise.

So, the ARS31 million compared to ARS35 million, we had a [13] decrease in the income, but we have an increase in the production cost of ARS55.9 million from ARS26 million last year to ARS41 million this year and, therefore, the production result was from ARS9 million last year. Again, we have lost in this year, 2008, for six months ARS10.2 million. I'm going to explain this in detail.

With respect to the crop segment, we have a 3.5% increase in gross profit from our crop segment, from ARS5 million gain in 2007 to ARS5.2 million gain in 2008, mainly due to higher production volume at lower yields due to the drought effect that Alejandro mentioned before. We have a higher harvested area, higher cost of production, but we had also higher sales volume and we had lower commodity prices.

With respect to the beef cattle segments, we had a 161% decrease in the gross profit. We had a loss from ARS5 million gain in 2007 to ARS3 million loss in 2008, and this was due to lower production volumes, mainly due to scarce rainfall in different areas. We had lower costs of production, mainly due to lower production volume. We had lower sales volume and we had a higher beef cattle price.

With respect to the milk segment, we had a 35.5% decrease in the gross profit. We had last year ARS3.1 million gain in 2007, and this was reduced to ARS2 million gain for the six months ended 2008 and this was due to higher production volume, to higher mill prices. But we have also higher cost of production because we had higher feeding costs due to the drought effect and higher prices also in raw materials.

With respect to the other segment, we had a 47% increase in gross profit from ARS4.5 million gain in 2007 to ARS6.6 million gain in 2008. This was mainly due to the brokerage activities of our subsidiaries, Futuros y Opciones, and also to higher services to third parties to lead this.

With respect to the gross profit, we had -- and here you can see that we have a line of Cresud and we have also the line of IRSA. This bringing -- when you see gross profit from real estate business, here we are bringing the result from IRSA in a complete line. So here we have the results from sales and development, ARS13 million; office and others, ARS33.7 million; shopping center, ARS73.8 million; gross profit, hotels, ARS18.7 million; and consumer financiation, ARS39.4 million. That is a total of ARS175 million -- ARS179 million gross profit.

So, the gross profit of Cresud total was increased by 814%, from ARS20.7 million to ARS190 million. For respect of the selling expenses, we have ARS76 million loss of costs, selling expenses, and the interest expenses, we have ARS63 million loss or cost. With respect of here we are consolidating line by line the selling expenses from Cresud together with IRSA and all the subsidiaries of IRSA. And the administration effect has happened exactly the same. We are consolidating everything, and in the column at the right, you had only the results from Cresud last year for six months.

With respect to the result from valuation of assets at net realizable value, we have ARS4 million gain for the group, for Cresud and IRSA together, without wholly a result of ARS4 million loss and -- sorry. We have also results from retained interest in securities receivables. This is the consumer finance in [Darja] business that is securitized. It brought us a loss of ARS18.5 million.

So, the operating income in comparison to last year had an increase of ARS43.9 million from ARS22.4 million to ARS32.2 million in December 2008. Financial results, the total was ARS38.5 million. The explanation of financial results, we had a repurchase of IRSA and Alto Palermo commercial papers. We had the financial interest of ARS111 million.

We had financial interests net of ARS43.7 million loss due to our debt. We have foreign exchange difference in exchange due to the depreciation of the peso toward the dollar of ARS28 million, and we had other results of ARS26 million. That means a total financial result net of ARS38.5 million, compared to last year that we had ARS7.3 million in Cresud.

With respect to the results from interest and related companies, we had this year ARS56.7 million loss compared to a profit of ARS9 million. The ARS56 million can be explained by the first quarter of IRSA, ARS33.5 million, because we are bringing the 48% of the first quarter (inaudible) of a loss of IRSA of the first quarter, of ARS70 million, and also the related companies of IRSA.

So, here we have the Banco Hipotecario included -- its loss in the first quarter included in this ARS33.5 million and we also had other related companies of Cresud, like BrasilAgro, [Cartus] and [Agrodanga] coming with a loss of ARS3 million and also the related -- the results from IRSA's companies for the second quarter, Banco Hipotecario, another sale for ARS18.6 million.

With respect to the income tax, we here are having ARS23.3 million loss. This is due to (inaudible) [shop], ARS25 million, to Alto Palermo Centros Comerciales, ARS11.6 million. This is for the first three months. It is bringing us ARS11 million and Cresud for the ARS6 million is having ARS34 million loss, that's the net of ARS23.3 million loss. And with respect to the minority interest, here we are showing the difference that we are having in the minority interest of the first quarter of the different companies of ARS18.9 million with the related companies.

Therefore, net income for the first six months of Cresud is showing a profit of ARS12.3 million. In the low part of the page, you can see the one repurchase that we had in the first semester of this year.

Moving to the next page, page eight, we have the breakdown of the consolidated debt of Cresud, together with the debt of the subsidiaries IRSA and Alto Palermo, meaning that Cresud has a total debt of [$64 million] with short-term debt $25 million, but peso-denominated debt with export financing in pesos at dollar equivalent of $16 million and the farm purchased [senior] note for $22 million. This offsets a cash position of $43 million, meaning that the net debt is $21 million only considering Cresud's stake.

If we put under consideration the breakdown of IRSA's debt, IRSA at $199.40 million of debt with a cash position of $21.55 million, adding a net debt of $177.9 million of debt. It [goes up] a level, the total debt of the Company with the breakdown stated here is $222 million with adding $15 million of the balance of convertible notes not held by IRSA and the cash position of $25 million. The net debt of Parto Palermo is $212 million of debt.

So, by subtracting to the total debt of $500 million cash position from $90 million and repurchase debt of $60 million that means a consolidated net debt of $350 million, considering all the debt in the different [places].

As we talked last year about Cresud's intention of making an international expansion, we finished finally the growth in Bolivia and Paraguay. In the case of Bolivia we signed the purchase agreements for four farms. This will include 12,000 hectares surrounding that four farms located at north-northwest -- or north of Santa Cruz city.

The total investment is $28.9 million. This represents $2,300 per hectare with installments for the future with 2009, 2010, with no interest. So this is a $2,100 per hectare bringing today's value.

So, we understood that purchasing 12,000 hectares of developed land and [loosely] developed. This is a mature agricultural land. We double crop almost all. From the 12,000, we are going to make 10,000 hectares under double crop production. This is mainly soybeans and corn with a very high yield. It is a region that it rains 1,800 millimeters and very stable climate conditions. We think we are going to harvest a huge amount of crop at a very high operational income.

We are budgeting very, very high margin per hectare on double crop, so if that's the case that we had in our business plan and to make a big profit, a very [thick] operational profit in Bolivia region. We bought up to now developed and we are now researching for more land in Bolivia region. But up to now we only just closed this 12,000 hectares in the best corn and soybeans area of Bolivia.

In the case of Paraguay, we were able to purchase a farm of 21,000 hectares at $250 per hectare. And we made a partnership with 50-50 with Carlos Cosado, so we are going to run a 42,000 hectares farm together with them. Cresud is the management company and we charged Cosado for running that transformation too.

So we are going to make agriculture and capital on that farm and we have a -- I'm sorry, an option to acquire an additional 100,000 hectares. This 42,000 partnership has an option to purchase at [$350] in a five years period so we have that option to increase the sales in Paraguay through this Carlos Cosado partnership.

We are going to begin the transformation of that land this 2009, so this is very recent. It was signed at the end of January, first days of February.

So, at that, we began this international expansion and the results of this in the case of Bolivia we're going to see -- at the last quarter, we are going to begin to see the harvest. We have planted in Bolivia 9,000 hectares of soybeans and 1,500 hectares of corn that are going to be reflected at the end of this balance sheet that they are in very good shape.

To give you an idea, we are forecasting to make like seven tons of maize per hectare, where we're budgeting to 5.5. So, it's having very good results, rains a lot, and so this will be a very productive area. In the case of Paraguay, it's transformational.

We see pictures of the farms we purchased in Bolivia on page 10. These are four pictures of the land, all developed and our crops, so we can see that this is an existing farm.

In the page 11, we see about BrasilAgro's situation. Today was the presentation and maybe you can go to the web to enter more details about how BrasilAgro is going. This are their 158,000 hectares of land that BrasilAgro is running. I was yesterday there and the sugarcane is growing and the crop is passing the budget. Our regions are passing the budget in yields, so the company is spending a very good year.

We began production, and today we are running like 22,000 hectares of sown area. We are growing sugarcane, too, so the companies had a big transformation. Cresud today is near 15% of the shares of BrasilAgro. The Company today has consolidated assets about BRL700 million. We have still on cash in the Company and in main banks BRL270 million on cash and short-term investments.

We have still to pay farms of BRL58 million. Generally in Brazil, you pay in installments. And we have been financing with subsidy money that Brazil reached, [BRL35] million, levels of 8% or 9% fixed, so very, very low rates in reals. So, this is a short description, and maybe you can enter to the web and see what was the presentation of BrasilAgro.

Okay, regarding the completion of the plan that Alejandro was mentioning of our cash, we have been increasing the stake in IRSA and we are discussing our stake reached 54.01% of the company and there you have the description. As of June 13, Cresud has 42% of the company. It increased to 5.62% during the first quarter of year '09, 6.25% during the second quarter and that's the way we achieved the 54.01% of IRSA, as I stated. And that brought the consequence of consolidation of the financial statements, as [David] has explained to us.

Moving to page 13, as many other companies in the Argentine stock exchange and companies listed from Argentina, listed in the United States, Cresud has established a buyback program of shares according to the local regulations and to the SEC regulations. The rationale of that and it starts from the price of the share considering the asset value of the Company and its potential. The program establishes up to ARS82 million, meaning up to 30 million of common shares with a range price between ARS1 and ARS3.50.

Argentina, in the period under consideration, since we started the program last year to now, is the 10% of capital stock buyback limited as it is through local regulation it used to have. And we extended 70 trading days according to [CSV finding] of January 9th appeal to finalize this program. Since September last year, as of February 11 of this year, we have made a cumulative investment of $16.8 million, acquiring 4.84% of the interest of the Company as part of this program.

We were talking about (inaudible). I invite to investors to make questions. Please, operator.

(Operator Instructions)

Your first question comes from the line of Francisco Schumacher with Raymond James.

Hi, good afternoon, everybody. It's Francisco Schumacher. My question is I see you made an acquisition in Lujan of around $3 million, and what is your plans for that plot of land? Probably real estate development. And the other question is regarding the future buybacks of Cresud, IRSA bonds. Should you have any excess cash, where will you prefer allocating that, that excess cash? And if you have further cash to use at this moment?

About the first question, we were able to purchase a beautiful piece that it's very near of La Adela farm, and it's in the region of Lujan. And this is on the highway, has 900 meters of highway so in front of the highway in the Altopista Oeste -- Access Oeste. And this will now be sown by the farmer of [La Adela], the farm in Lujan, but at the end will be a neighborhood.

So in this case, it's that their long-term investments at making neighborhoods, in the meantime doing agriculture is that Cresud decided to purchase at very cheap price per square meter. It's like we near bought at a near-farming price. This will be our -- at the end will be a neighborhood, so you see the price. This is 400 and some hectares, so this is 20,000 hectares for $20 something per hectares, so it's near agriculture price what will be a development for this.

What was the second question, sorry?

Yes, it has two parts. One if you still have excess cash so as to continue buying back shares of Cresud, IRSA and repurchasing bonds of IRSA and APSA? And in the future if you have excess cash, where do you prefer to allocate that cash -- in repurchase of bonds, repurchase of shares, or buying shares of IRSA or what would you do?

Well, first of all, you know that according to Argentina regulations there are strict considerations to put in place a buyback program, meaning that first of all, we intend to continue with our program as far as the prevailing conditions are as today. Once we finish the completion of that program it will depend on the market condition in that moment. If the conditions required by the local regulations are still there, it might be a possibility. But really it will be premature to establish that today.

Regarding the buyback of bonds, it's an investment opportunity. Meaning that in this very difficult environment regarding financial investment, it took the risk under consideration. A risk that Cresud knows very well and makes a lot of sense to put the money on that, as you have seen from the balance sheet the effect that David has explained. And the same consideration, it's difficult to say if we would continue to do that in the future.

Okay, thank you very much.

Your next question comes from the line of Pedro Herrera with HSBC.

Good morning, gentlemen. I have a couple of quick questions. Are you intending to increase your stake in BrasilAgro under current conditions, one? And two is regarding the valuation of the land in Argentina in general, how have you seen prices fluctuate? What do you see it going forward, based on current conditions?

And if you did not do any transactions this last quarter, do you -- what you see out there, has there been depreciation on the value of the land based on transactions of other players, or is it relatively stable?

About the first question about BrasilAgro, maybe yes, maybe. We are very happy about our investment in Brazil and we think that BrasilAgro is a great opportunity, so maybe yes, we bought. You remember, we bought seven at the beginning. We bought eight more after that and maybe there is possibility we can buy more.

And about Argentine market, about real estate, I think the real estate business in general in agriculture is affected by the volatility of prices of crops. Farmers, they have an inertia of prices, so it takes time to adjust price of the land to the reality of the crop. And with the volatility that will exist probably many farmers are waiting for a recovery on crops, so that makes them not to sell.

I would say that it's very tough, this real estate market in the whole region and because of this farmers trying to keep their price at the top when it was at 16, the soybeans. It went to eight but rebounded to 10 and everybody's still talking about crops. A part of that, in the case of Argentina, they are not in debt. So the farmer tries to keep those prices and probably sophisticated investors are trying to buy cheaper and they don't find.

So, I think the market is quieter, and probably if that -- what the forecast will be depends on the crop prices. If there was a rebound and we'll go back again to big prices, I think farmers would keep the prices high at the farms. If this stays at 10 or below that, probably they will have to adjust but you need someone to push that farmer to sell. If not, he keeps waiting and seeing. So I think that's the reason why we were not very active, because of that situation.

Thank you.

(Operator Instructions)

Presenters, there are no more questions. Do you have any closing remarks?

Yes. First, we would like to invite shareholders, investors, if they want to see the webcast about the IRSA results to go more deep in each of the lines, because we are going to try to focus in the case of Cresud more in the agriculture part. And the IRSA, you can enter through the web and hear what we said before about that company.

We -- in the case of IRSA, we are on top of the best portfolio of real estate in Argentina that it's keeping the rental very strongly, is suffering this year the volatility of the financial market. But still the big business of the Company is very firm and it's finishing buildings and having very rental good results.

In the case of the agriculture, we explained about how the [deep] strategy of going into regions and how successful we launched this Bolivian and Paraguayan, plus the increase of Brazilian stake. And we think this possibility of having land in many regions, reducing the risk of droughts, reducing having a portfolio of owned land, not planting only third parties giving us this strength at bad times that more leveraged companies suffer more. We -- instead of that, we have our own assets. Mainly, this is our main activity and we look for that appreciation.

And you probably know that our assets are very, very cheap. They keep the cost of acquisition, and many of them we show that they make 35 times. So we have a very big hidden gain that it doesn't reflect never only the day we sell, and that is the strategy of Cresud.

So, we are going to see what the harvest comes, the third and the fourth quarter that we think we are optimistic that the results in the operation won't be very high, but the Company will be showing how strong the assets they are. So, thank you very much for the conference call and have a very good day. Thank you.

This concludes today's Cresud Earnings Release Second Quarter Fiscal Year 2009 Conference Call. You may now disconnect.