Cresud SACIF y A (CRESY) 2016 Q2 法說會逐字稿

Good morning, everyone and welcome to Cresud's Second Quarter 2016 Results Conference Call. Today's live webcast, both audio and slideshow, may be accessed through Company's investor relations website at www.cresud.com.ar/ir by clicking on the banner teleconference.

The following presentation and the earnings release issued last week are also available for download on the Company website. After management remarks, there will be a question-and-answer session for analysts and investors. At that time, further instructions will be given.

(Operator Instructions)

Before we begin, I would like to remind you that this call is being recorded and that information discussed today may include forward-looking statements regarding the Company's financial and operating performance. All projections are subject to risks and uncertainties and actual results may differ materially. Please refer to the detailed note in the Company's earnings release regarding forward-looking statement.

I will now turn the call over to Mr. Alejandro Elsztain, Chief Executive Officer. Please go ahead, sir.

Thank you very much. Good morning, everybody. We are beginning our conference call of second quarter of 2016. If you go to page number 2, you can see the main highlights of the six months of this balance sheet. On October 11, the Group took control of IDB Development Corporation and we began to start the consolidation of assets and liabilities in the balance sheet of December 31, 2015. The financial consolidated results for the six months, the revenues went to almost ARS1200 million, a 16% growth comparing to last semester of last year. The operating income went to ARS2.2 billion, a 40% increase comparing to last year numbers. The net income went to a loss of almost ARS1.3 million, this is mainly due to the decrease in the stock price of IDBD insurance company Clal and some net financial results that later Matias will explain. To the Cersud shareholders, the loss was ARS777 million comparing to a loss of ARS216 million last year. We have hedged our debt, the hedge was in -- we had a lot dollar denominated debt and (inaudible) we expect devaluation, we made the hedge and we have a positive result of almost ARS1 million, that's the exact gain (inaudible) explain later that compensates the part of the devaluation that came through the consolidated debt (inaudible).

If we move to the number 3, we see the highlights for the other business segment. In here we share the (inaudible) explain what happened at the beginning in these segment. The farming industry is now improving the situation a lot. As you probably know, the government made a lot of measures to help the wheat and it's improving the profitability for our [relations] and this is resulting in some of the very low commodity price environment that the world is suffering, because of the new measures of the government (inaudible) expense and other measures, there is a very much better mood on the agriculture segment in Argentina.

In the case of the climate, we are expecting a Nino campaign with better rainfall levels above the average for the region and this is going to go, we are expecting good condition for the yield of our crop and Carlos will [zoom] a little later. We are expecting to plant almost 185,000 hectares, this is a 14% decrease compared to the last year, partly because of some farms that we sold in Brazil like the Piaui and Cremaq, a reduction of taxes in Brazil too, some lease area that we didn't lease and we increased 8,000 hectares or 9,000 hectares in Argentina's corn crop area, that made the drop of 14% year-to-year in planting area. We are now -- we didn't sell any farm (inaudible) this year, we reduced the development of hectares and we are going to show you how we went to almost 4,000 hectares mainly in Brazil, not in Argentina, not in Paraguay, we are expecting the devaluation effect to (inaudible). This is a very good year in the farming, but lot slower in farmland development and in the sales.

In others, we have a small gain, ARS4.5 million coming from the meat packing that had a loss in the first part of the year. Now, it is changing the environment for this business because devaluation came, now we're selling to the -- we did at ARS9 a dollar, we're selling at ARS15, so that is changing really the situation of the meat packing. FyO is making a good job and the other businesses are making good job too.

When we think about the [urban] properties and agri business, not (inaudible) now, we see positive results coming from (inaudible) rental segment and business development. And this is -- we're going to show you later, came with very good result in the semester. The EBITDA grew 15% reaching almost ARS2 billion and we have a lot of financial losses coming from the investment of IDBD and exchange rate difference due to devaluation. So we're going to show more later in the next page.

If you go to page number 4, we see main measures of Argentine government after the change of government; this is very important. Look at what was the soybeans. Soybeans was at 14% in 2002; that went to 35% in November. In March of 2008, they tried to increase and that come to a (inaudible) so canceled the 43% back to the network and mobile, they want to put mobile factories, they went to 35% and the government -- the new government came and made a decrease of price of selling soybeans from 35% to 30%, now look at what happened in the corn and wheat, from 20 to 0 -- 23 to 0 in the wheat and in the wheat too, in the meat factories (inaudible) 15 to 0 and three export markets for meat. So a big number of measures going to be our businesses. And this is changing, we're going to take the rotation of Argentina, we are going to plant more corn (technical difficulty)

So now I think we lost Alejandro on the line, so we will pass through page 5. I introduce Carlos Blousson, General Manager of Argentina & Bolivia to continue with the presentation.

(inaudible) farm land sales, let us move to page number 5, the planted area, the last year decreased [14%] because the balance to sales and developed area reduced. In developed area, in the last year, we developed 4,4000 hectares in Brazil. The farm sales is for total is ARS133.8 million and the result $72.1 million.

If we move to page number 6, let's go to slide number 6, we're talking about the production forecast on the global stocks. In Argentina's forecast, the soybean productions for current campaign reaching about 57 million tons, a little bit below than the last campaign. With regard to corn, production is stagnant at 26 million tons for current campaign, a number which has been similar for the last three campaigns.

We'll go to the Brazil, the soybean production in Brazil continued its upward trend and it reached 4% rise to 100 million tons. Corn production decreased 4% due to the suffering in the decreased area, reaching 82 million tons. Regarding to the campaign 2016, 2017 in United States, the soybean planting area is expected to keep up the same level as well as corn because of the price relationships. Both soybean and corn in the United States keep on their high production levels, reaching 107 million tons and 345 million tons respectively. As a coincidence of these good productions both in soybean and corn, we can see on this slide how our stocks in the grain increased during the last three campaign. In terms of soybean, the global stock grew from 22% to 28% and the corn global stock increased from 15% to 22%.

If you move to the next slide number 7, these very positive global stock reflects directly on these low prices. The graph shows how soybean prices almost equaled at 2010, a year when the stock levels were also as high as today. We can see something similar happening with corn, where the low pricing of 2010 are similar to today's price. In the last year, the soybean price decreased 14.5% and the corn, 19.6%.

If we go to the slide 8, we can see good weather condition in the region, allowing the positive start during the summer. Going forward, the season is above average, we are having the effect of Nino. You can see in the map Argentina presents good weather conditions in general, particularly good in the north, east and the west of the country. In Brazil, even though the rain season will start delayed, the rain went back to the average levels, allowing normal soybean and corn productions.

In the last month we have finished planting the total area of soybean in the region at 100% and 89% of corn. And we are finishing in this month a total of the corn planting. The estimated grain production is 877,000 tons and 207,000 tons of sugarcane. The crop breakdown is 50% soybean, 27% corn, 11% sugarcane and the rest percent other products.

Cattle production in Argentina reached 4,000 tons. This production has been similar for the last three years. There was also an increase in the number of heads to 73,000 heads. Milk production reached 9.9 million liters per year with less daily milking cows to 200 heads and an increase in the milking production cows a day to 4.8 liters per day due to an increase in the productivity.

Thank you everybody. Now, Matias, your time.

Thank you, Carlos. Good morning, everybody. So going to page 9, we have here our investment in IRSA, the urban properties and investments. Remember that Cresud has a stake of 63.4% in IRSA as of December 31, 2015. So the main highlights for IRSA, we have strong results from the rental segment, revenues grew by 25%, EBITDA grew by 15% to ARS2.0 billion. We sold investment properties during the semester for ARS808 million. And the main subsidiaries of IRSA, the first one, IRSA Commercial Properties, we have 95.22%; shopping center tenant sales grew 39.5%, that is 32% same-store sales, occupancy remain very high 99%; EBITDA grew by 36.4%; EBITDA margin maintaining very good levels in 78.7%. In the offices, rents remain stable in dollars, but in pesos, increased significantly because of the devaluation. Occupancy decreased a little, 94% that is because we received two floors from an oil company that canceled the contract. EBITDA grew by 309%. Remember that here we compare the first quarter of the year -- the previous year that haven't result from the offices that we transferred later from IRSA to IRSA Commercial Properties and the margin remained stable at 77.6%. Then we have our investment -- the IRSA investment in IDB, the 49% investment in IDB that we took control effectively of the company in October 2015. So since that date we will start to consolidate IDB results in IRSA, and a consequence, Cresud will consolidate IDB [actual] in our financial statement.

After the acquisition of the shares from our previous partner, if these acquired shares and will start to appoint new management on the operational -- on the holding companies and directors at the subsidiaries level, so we'll start to make managerial changes in IDB. Regarding Banco Hipotecario, our stake of 29.9%, we have a very good gain this semester against a previous semester. So the gain increased by 141% to ARS169.8 million.

So going to page 11, I will try to explain changes in our accounting. Since this quarter, we release the presentation that is in our website explaining the main effects on the consolidation of IDB, but basically what we will try to maintain an exposure in our financial statement only segment recognition that we will maintain isolated effects that we have until now from IDB. So you will keep looking the segment information that was in the last year -- in the last year's in our financial statement and we will have IRSA as a separate information.

So something important, we start to consolidate assets and liabilities since this quarter. So all the debt and assets of IDB now are consolidated in our balance sheet, but we will start to recognize results only from March this year. So we will present our next quarter probably around May 11, and that moment we will start to show results from IDB in different segments.

And we will use also a gap on the information, IDB has different rules in IRSA, so they have more time to present financial statement in IRSA that's here in Argentina. And due to that we will maintain a gap of three months on the information. So on March, we will use December figure from IDB and we will have to analyze subsequent events and analyze if we have to give in fact of those events in the quarter that we will present.

So going to page 12, something that we changed is the exposure of the segment. So we have defined new segment information. We will maintain two main lines, the agriculture business, with all the disclosure that we used to have and the urban properties and investment, that is basically our investment in IRSA. And IRSA will have a breakdown between the business center in Argentina and the business center in Israel.

So going to page 13, this is how it looks. Since the next quarter, we will have the segment information that agribusiness will maintain grain, sugarcane, cattle, dairy and leases and agriculture services, our industrial and others. And in the urban properties, we'll have the business segment of Argentina that we'll maintain shopping centers, offices, sale and development, hotel, international, and financials and others. Then Israel, that is breakdown between real estate, supermarket, agrochemicals, telecommunication and insurance and others. So the idea is to try to isolate the effects from IDB from our results of our financial statements to try to simplify the impact.

IDB, if you go to page 14, represent on a consolidated basis, a very important part of our assets and liabilities, it's very important to mention that the debt of IDB has not recourse at all to IRSA or to Cresud, so it's only the accounting of that debt on a consolidated basis, but the debt of Cresud and IRSA standalone remain in a very conservative level. And here you can see that assets represent, of IDB represents 8 times what we have in Cresud and 11 times what we have in liabilities, 8 times on Cresud. So our suggestion to value the Company will remain to do the NAV of the Company; the sum of the parts and valuing different segments with different approaches, and IDB will recommend to value not according to the financial segment, probably according to the sum of the part (inaudible) of the different subsidiaries and IRSA and Cresud remain the same that was before.

So going to the page 15, here we have the breakdown of our operating income. By the end of this semester, farmland sales decreased. We haven't sold any farm this semester against the previous semester that we sold 24,000 hectares in Paraguay that generated a positive result. In this semester, we haven't sold anything.

In the farming, we see here a positive impact on the changes in Argentina from the government, the reduction in tax imports and the devaluation generate very good results for the industry. We used to have stocks of grains in our portfolio so that generate very important holding results and also the decrease in the export tax generate better prices in the product. So we recognize these gains changing from the last year of a loss of ARS109 million in the grain segment to gain of ARS71 million in this segment. The same is for the beef cattle. The holding result generate a positive result increasing to ARS37.8 million in this semester.

And then the other segments that include our industrial, the agriculture, rentals, and the services decreased from [ARS13.5 million] to [ARS4.5 million]. We have better results on our operations in FyO, that's mainly the holding results on the storage. Lower rents than the year before, we used to have some farms that we sold that in the previous year generated positive results on the rental side that now we sold, so we don't have [rental] in our portfolio. And the meat packing that generate a decrease during the previous -- comparing the previous year with this year, so probably this after December will generate much better results than what we have during the first semester. Remember, the devaluation was in the last days of December.

So going to page 16, here you have the breakdown of the urban properties and investment operating income. Strong result from the rental segment, 47% increase, 21% increase in sales and development and a decrease by 52% in financial and others. That here mainly we have a commercial reserve of Madison building that we sold in the last year that generated a positive result last year, that we don't have this year. So that is the main explanation of the 52% decrease.

If you go through page 17, here the rest of the explanation on the net income side, so we started with an increase in the operating income from ARS1.5 billion to ARS2.1 billion. Then we have the decrease in the lower loss in the associates and joint ventures from ARS674 million of the last year to ARS400 million this year. Here we recognize until September, IDB, remember that IDB we will start to consolidate since September. So until September we'll recognize IDB at market values, so all the fluctuation in the decrease of the shares of IDB went to this line in the previous year and this year. And since now, we will consolidate, so, we'll have a different accounting treatment.

Then the other important effect or the main effect of this semester is the debt financial results with a loss of almost ARS3 billion. So here you have the breakdown of these ARS3 billion in the bottom left of the page. The main effects on the net financial results were the net FX losses that we lost ARS1.1 billion. In the bottom right, you have the main breakdown of these. So we have a devaluation on the semester for 43%, basically it was the exchange rate from ARS9 to ARS13, that generate FX losses for ARS2.5 billion. We have to mark-to-market all our dollar denominated debt in pesos. You've seen the last exchange rate at the end of the semester. And remember that we are not recognizing any gain on the assets. Most of our assets are dollar denominated assets that we still have in our books at book value. So we are not recognizing any gain and we are recognizing all the losses on the debt side. So that generated ARS2.5 billion pesos of losses, then our liquidity in dollar terms generate a positive result of almost ARS400 million. Also we were able to hedge part of our dollar debt in the local market that generate a gain of almost ARS1 billion in this semester. Something important, that is all the FX losses are not cash basis. So we are recognizing the loss in the debt that mature in the next year. But these hedge is a cash FX, so we'll receive this ARS1 billion of cash in our financial -- in our books that generate and net FX losses, the total FX -- on the FX losses is ARS1.1 billion.

So going back to the left part of the slide, this is the ARS1.1 billion, the first driver. The second driver is a loss of Clal, a subsidiary of IDB, that we have to recognize as a subsequent event after the end of September, the decrease in the price of the shares because there was a process of disposal of Clal in Israel that was canceled and the share decreased significantly. We have been discussing offers at the level of around ILS4.8 billion and to give you an idea, the price of the share today in the market cap is ILS2.4 billion, half of the offer and we already recognized all that loss in our financial statement. Other -- fair value of other financial assets generate a loss of ARS70 million. All the net financial cost that is the interest rate, net on the gain on the interest, that is ARS231.7 million. Also here we have an effect on the devaluation because we are paying the interest at a more higher exchange rate and change in valuation method for IDB and the tender offers that generate a loss of ARS389 million.

So going to page 18, here we include that breakdown of Cresud standalone debt. So this is all include Cresud, total debt in dollar is $313.3 million and we have cash and cash equivalents of $32 million, that give us a net debt of $281.2 million of net debt with an amortization scale that these different years, between this year and 2020.

So with this we finish the presentation. Now we open to receive your questions. Operator?

Thank you. (Operator Instructions). Federico Rey, Raymond James.

I have some general questions. The first one is related to the changes in the export tax scheme. My question is, do you expect to incentivize some businesses over others, based on these changes. For example, favoring cattle over crop or doing some change in the mix?

Secondly, if you expect or how you expect the prices of land in Argentina to evolve following the increase in the profitability in the farming sector? And finally, how do you expect the El Nino phenomenon to affect your weather condition, specifically in the areas where you are operating? Thank you.

Considering the breakdown of activities, yes the measures the government are giving, we take (inaudible) some of them in advance and we decide to plant more corn. We expected that effect, so we are beginning to plant more corn than expected because the margin today of the corn, after taking all the taxes is improving much these margins, so. And I see the whole country is going to change for that. The cereals of the country were decreasing in the last decade, now the country it is going to improve and that is very good for the whole country because this is going to rotate greater -- the land and this is carrying the land's long-term value. So I think this is not only Cresud doing in Argentina, that we did in (inaudible) that the whole country is going to improve more is cereals than in oils that were soybeans and sunflower.

In the capital business too, the capital business is improving a lot the profitability, so there is a retention coming into the country and we are not thinking in changing a lot, we have 75,000 hectares; we are not thinking on improving a lot on that, but the country, I think is entering in a retention period, where majority tries to buy or to stay with the cattle on the farm because it makes a bigger margin comparing to other products. About the second, maybe Carlos you can help?

About price of the land? We think we expect the prices to start to grow, but we think also that is slowly because the market started to open and depend what's the price and foreign investors can. On the second, about the effects El Nino, particularly on Cresud, the effect is very positive, because there are very good rains in the northwest of the country and so that Cresud have 30% of the production in this area, in our farms in the Pozos and (inaudible).

Rodrigo Mugaburu.

Hi. This is Rodrigo Mugaburu from Morgan Stanley. Follow-up on the land. Given that the trend should be that land prices start to move up, given the improvements, how should we think on the farm sales strategy from Cresud? Should we expect no farm sales in 2016, trying to achieve higher sale prices a little bit later on or would you continue to expect normal sales during this year? I mean calendar year or would be the end of the year 2016 year for Cresud or 2016 full fiscal year?

I think it will depend in each country; the situation is not the same in each of the countries we are operating. We expect to have more liquid market in Argentina because of the improvements coming. So probably this will bring more investors, foreigners and local to be more integrated in the agri business in Argentina. So that could be bringing more liquidity results of farms in Argentina. For the rest of the region, now we are -- I expect to have some pressure on the balance sheet of the year, but I can't -- that we never speak about things that we didn't achieve when we close. So up to now we couldn't close, Argentina today has a much better environment. The others are not changing too much, but I think we are going to see some sales on our next semester too.

This concludes the question-and-answer session. At this time, I'd like to turn the floor back over to Mr. Alejandro Elsztain for any closing remarks.

I think that we have -- the change of government changing the climate for the agri business in Argentina. In the rest of the region, devaluation will stop pushing for the Company in the case of Brazil and made profitable with the job of (inaudible) because now we are starting a very good condition of climate through the United States and later to Brazil and to Argentina for many years. So that made a big drop on prices of the commodities and noted the growth in the Asian area. So this combination is making a special situation, now we have a better climate in Argentina after the new measures and we are going to keep thinking on what to buy and what to sell and that's what we do every time. Now we are discussing exactly what to buy and what to sell in the region. But the combination of Argentine situation made us much more optimistic because really the situation changed a lot.

So let's see next quarter. Now comes the summer campaign, we are [pleased] because the (inaudible) are very good and the area our activities are good, so we expect very good results in the farms. And in the year (inaudible) financials, we think that we have good news for the next quarter too.

So thank you very much and have a very good day.

Thank you. This does conclude today's presentation. You may now disconnect your line and have a nice day.