Cresud Inc Q2 FY2023 Earnings Call

Good morning everyone. I'm Santiago Donato, Investor Relations Officer of Cresud, and I welcome you to the Second Quarter 2023 Results Conference Call. First of all, I would like to remind you that both audio and slideshow may be accessed through the company's Investor Relations website at www.cresud.com.ar by clicking on the banner webcast link. The following presentation and the earnings release are also available for download on the company website. After management remarks, there will be a question-and-answer session for analysts and investors. If you want to make a question, please click the button labeled to raise hand or use the chat. Before we begin, I would like to remind you that this call is being recorded under 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 statements. I will now turn the call over to Mr. Alejandro Elsztain, CEO. Please go ahead, sir.

Good morning everyone. Today we are presenting our second-quarter 2023 results. We will start on page 2, discussing the key highlights for the first half of the year. We have achieved a record planted area in the region and have begun including in our performance the farms we own and lease to third parties. This means we sometimes rent out our own funds to develop clients for sales or to share production risks in the area. Next, we will see that we are approaching 290,000 hectares in total land, combining leased and planted areas. Regarding the company's progress, conditions vary by country and crop. Generally, while there are sustainable commodity prices, growing crops have been impacted, particularly in Brazil and Argentina, where margins are affected. We expect good commodity prices, but higher growing costs are consuming a significant portion of those margins compared to last year. Matías will later explain some of the lower margins for the first semester, which is less crucial for several crops, as most significant effects will be seen in the third and fourth quarters. The climate has heavily impacted Argentina, particularly due to drought, which has not significantly affected Brazil or Bolivia and Paraguay. Fortunately, the impact on our farms was less severe, and we will share our map and farm locations shortly. Brasilagro has had good rainfall results, so we anticipate positive outcomes for corn and soybeans, although sugarcane has been primarily affected. When we review our balance sheet, we see significantly lower results from sugarcane this year compared to last year, when prices were high and yields were good. The adjustments have negatively influenced our EBITDA this year. In real estate, last year’s first semester benefited from robust sales in Brazil, while this year has seen only a couple of small sales, which I will discuss later. Thus, the key challenges in agriculture stem from sugarcane and real estate. Concerning IRSA, we have increased our shareholding from nearly 54% to about 57% in this semester, and IRSA has delivered strong results recently, with EBITDA rebounding significantly and the company showing impressive leverage. We will provide more details on this later. We are also receiving dividends from BrasilAgro, IRSA, and FyO, and we expect increased dividends in the future, as all subsidiaries are in great condition. We have been actively buying back shares and paying dividends this semester, which we will detail shortly. Now, let's move to page 3. Here we see the trend in soybean and corn prices. There has been a recent rebound affecting commodity prices; however, they have not surpassed last year's levels. Current crop prices are close to our budgeted expectations, but we do not anticipate the same gains as last year. Although corn prices are increasing, they do not reflect Argentina's losses; Brazil's gains have compensated for the lost output in Argentina. Our regional balance remains favorable despite challenges in Argentina, due to the extensive area planted in Brazil, ensuring that there is no shortage of grains in the coming campaign. On the map displayed, you can see the 38,000 acres owned by Cresud and BrasilAgro, which we are currently leasing to third parties. In Argentina, we are diversifying our production and engaging clients for future leases. Ultimately, we expect to grow our total planted area to around 300,000 hectares across all four countries, both owned and leased. Moving to page 4, we depict the drought's impact in Argentina, with areas depicted in red showing significant growth. Back in December, the drought was widespread, but as depicted in yellow, our owned and leased farms have mostly been less affected. The majority of our crops are located in regions where the drought's impact has been minimal. Current forecasts for Argentina suggest a decline in production, but our areas remain relatively unaffected, allowing us to remain optimistic for the upcoming campaign. We expect a decline of about 10% in soybeans and 5% in corn; however, it is too early to finalize these estimates. Our regions need ongoing rain, but we maintain a hopeful outlook for both Argentina's and Brazil's campaigns, as conditions have improved significantly. On page 5, we see that soybean planting is nearly complete, while corn has experienced some delays; however, in Brazil, the planting is progressing well. The anticipated planting cycle is expected to continue in Paraguay, allowing us to maximize opportunities. We do not foresee significant negative impacts on crop harvesting in the region. To summarize, real estate activity was limited this semester with only two small sales completed in the first quarter. However, we are optimistic about the second half of the year as we expect increased real estate activity, especially in Brazil, where liquidity is high, and some movements are occurring in Argentina. Although the first half lacked major activities, we are confident about the marketing opportunities this year. I will now turn the floor over to Matías Gaivironsky, our CFO. Please go ahead, Matías.

Thank you, Alejandro. Good morning everyone. Moving to Page 7, we see some results from our investment in IRSA. It's worth noting that during the quarter, or semester, we purchased shares in the market, increasing our stake to 56.7%, which is an increase of about 2.3%. Key highlights for IRSA during the semester include strong operational and financial results with EBITDA levels surpassing pre-pandemic levels and improved margins compared to last year. The newest building developed by IRSA is fully occupied, and the hotels are generating record EBITDA. Additionally, IRSA issued new notes in the local market last quarter, resolving issues related to debt, Central Bank restrictions, and dollar shortages. However, IRSA now faces increased risk regarding its debt, and we have initiated a deleverage process that began in 2020. Turning to Page 9 to assess some semester results, we need to consider inflation and devaluation impacts. Inflation was 43% while devaluation reached 41%, resulting in a real peso appreciation of 1% during the semester and 11% last year. This will affect liabilities, generating gains on dollar-denominated liabilities but losses on assets valued in dollar terms. On Page 10, we note a decrease in adjusted EBITDA in our agricultural business, primarily driven by a drop in sugarcane performance, from ARS 9.3 billion last year to ARS 800 million this year. Last year's sugar prices were exceptionally high, resulting in record gains, while this year prices have decreased, compounded by unfavorable weather conditions in Brazil. Grain revenues also fell from ARS 1.9 billion to ARS 220 million, indicating that this is still not the most favorable time of the year for these results. Last year was strong, and we acknowledge the challenges we've faced this year. In capital activities, inflation effects have kept prices relatively stable in pesos. However, when expressed in real terms, this results in losses. Our agricultural brand and services saw gains due to increased fund sizes for third-party rentals, resulting in a significant rise from ARS 1.8 billion to ARS 4 billion over the year. Looking at Page 11, we observe a consolidated operating income decline of 44.3%, excluding fair value adjustments mainly linked to our investment in IRSA. On the right side of the page, we see a shift from a gain of ARS 44.7 billion last year to a loss of ARS 28.8 billion this year, reflecting valuation changes in our investment properties. On Page 12, net financial results indicated a gain of ARS 8.8 billion this semester, compared to ARS 16.2 billion last year. It's important to highlight the slight reduction in net interest, but when we aggregate net interest with net foreign exchange results, we see gains. The significant reduction compared to last year relates to our consolidated deleverage process. Overall, the net result for this semester is a gain of ARS 19.2 billion, down from ARS 74 billion last year, primarily due to fair value declines in investment property. We can see on the next page dividends collected from our subsidiaries amounted to $40 million during fiscal year 2022, with additional dividends of $34.8 million this semester, including $7.8 million from IRSA, $24.5 million from Brasilagro, and $2.5 million from FyO. Additionally, Cresud distributed a cash dividend yield of about 3%, translating to roughly $10 million distributed in November. On Page 14, we observe the debt amortization schedule for Cresud. Last year presented challenges in refinancing $113 million, which was successfully navigated with around 90% acceptance in the exchange offer. Remaining is a small payment of $14.7 million expected in the next phase, which we anticipate will be manageable. In December, we issued a $38.2 million linked note set to mature in 2026, involving amortizations in months 36, 42, and a final payment thereafter, at a zero interest rate, which has helped lower our dollar-denominated debt costs. On a consolidated level, there has been a significant reduction in net debt since 2020, decreasing from nearly $1.2 billion to $680 million, with a more diversified expiration profile in the upcoming years. We're pleased with this trend. Regarding our share buyback program, we've sanctioned a buyback of ARS 4 billion, and to date, we've executed around 32% of this, repurchasing about 1% of the company’s shares with an investment of ARS 1.3 billion. We plan to continue with this initiative. With that, we conclude the formal presentation and open the floor for your questions. Thank you very much.

Thank you. Well, we conclude the presentation. And now it's time for the Q&A session. We're going to take the questions in the orders we receive them. First question, do you expect farmland sales in Argentina for the next semester of this year 2023 and also in the region?

Yes, we are noticing some interest in farms from neighbors or individuals looking to expand, likely because they are not very satisfied with keeping their money in banks or other assets. There is some activity in Argentina, though it's not as liquid as the rest of the region. I'm optimistic about Argentina, but I'm even more optimistic about Brazil. In Brazil, instead of individuals facing tax liabilities on earnings, farmers can directly invest in new farmland to avoid taxes. The liquidity in Brazil is strong. So, while I expect activity in both countries, I'm significantly more positive about Brazil than Argentina for the next semester.

Next question, do you think the drought in Argentina will have an impact on commodity prices?

Sounds like, the effect of the drought made the prices to keep still that, if Argentina would have the normal 50 million tons or more, would be different. But the 35 more or less that the market is expecting, sounds like the market accepted, and because of volumes of Brazil the market's not to operate and we are not seeing the rebound – should rebound of the price. Like last year, we saw that when ARS 30 million disappeared in the region. Today they are not ARS 30 million disappearing, maybe it could be an effect on the mill because of Argentina industrializing majority of the soybean and Brazil not and selling directly as a mill. So maybe it could be a deficit on that – in the flower of soybeans. And yes, that could result in positive prices on that, because of the low volume on the part for soybean. Yes. Here we have many questions from our investors, if we can explain the reasons for the significant tax credit in the P&L in the latest quarter results?

Yes. There is – we have been assessing our results, our tax results by inflation in the last quarters, and we took a very conservative approach in our balance sheet recognizing all the losses in the previous quarters. There was a new decision under the Supreme Court that allows the companies to account for inflation in the tax balance sheet. So since that was exactly what we have been doing, we decided to reverse the effect of the tax in this semester that generated an important gain. Now we have support via Supreme Court decision. That is the reason why we had the loss in this semester.

Here – there is a question here regarding provision of the lawsuit that increased in the second quarter. What do you expect of that ruling? And if there can be any other related lawsuits going forward?

Okay. This is related to IRSA's investment in Israel. That was – that we explained that during the webcast of IRSA. There was – there is a new claim that IRSA received a couple of weeks ago. It is basically a plan for ILS 140 million. The company decided to create a new provision no matter on all the legal defenses that we believe that the chances are very high. But the company decided to be conservative and create a provision of 50% of that. That is the provision in this semester. And going forward, no we don't expect more claims from our investment in Israel.

Regarding the significant increase in fair value losses on investment properties in the second quarter, we can discuss the reasons and outlook moving forward. Some aspects have been addressed already, but what are your expectations for the top line in the upcoming quarters?

It is also connected to our investment in IRSA; it does not come directly from Cresud on its own. It's important to understand the procedure involved. We assess the value of the shopping malls using our discounted cash flow model, while we value offices and land through market comparables. For the comparables, we are employing a low chip swap to convert dollars to pesos, whereas the DCF model utilizes official rates. When evaluating properties in dollar terms, the valuations remain consistent; they don't change. However, when converting to pesos, you must consider the impact of inflation and devaluation. Typically, when the peso appreciates, it leads to gains, which was the case last year, resulting in significant gains. This year is different. Upon examining the new chip swap, we found that converting to pesos yields a value lower than the inflation rate, leading to a loss in that regard.

To more financials for Matías, any guidance on dividend and share repurchase going forward? Also, your targets of leverage pursued going forward.

Regarding buybacks, we have an approved program for ARS 4 billion, and we have executed ARS 1.3 billion so far. We will continue to implement the plan in the future. As for dividends, we prefer not to provide guidance since that decision is made at the shareholders' meeting. Currently, there is no proposal for the upcoming meeting, so I can't comment on any decisions in the next few months. On the leverage front, we are observing positive deleveraging on a consolidated basis, which is great because it increases our free cash flow available for future projects. For CRESUD, the guidance remains consistent with our previous estimates, and I anticipate we will maintain the same level of leverage for the year.

Question related to farm and real estate, what would be your average market price of agricultural land projectors, crops and Catlin Argentina and Brazil, outlook and bank prices going forward? And would you be looking to increase monetization of your agricultural land? There is an average for each region has a different price and Brazil is calling impact of soybeans in Argentina. The nomination is , there was a big rebound on the prices on the banks in Brazil mainly and that region followed the trend of the United States and the appreciation of the last. In the case of Argentina because of intervention of the government adding taxes on exports and because of the dollars that follow the trade of U.S. didn't happen in Argentina. So there is a lot of liquidity in the farms in Brazil, really an activity that I've never seen and a lot of businesses of other partners to increase their stake. So they like to be increasing their operations. They do through buying and paying in installments. They don't buy and pay in cash; they normally do pay 20%, 35% and the rest is 23 years in many installments for the future in South Sweden. In the case of Argentina, land humidity was less this last year; because of the two effects I said. Today the prices of the land are much cheaper and there is not this following American or Brazilian prices. I imagine the appreciation of the land in Argentina will come because of probably the next government reducing the cap on the dollar and reducing the taxes on exports. I imagine more measures related to farmers. We are seeing the existing government improving the farmers' situation by giving some special dollars to farmers that enable taxes that they can fix their soils. Therefore, I am optimistic on the price of land in Argentina, and the price of the Brazilian farms is liquid and attractive comparing to the past. There are realizations for the U.S. here for sure. There are realizations and maybe this year are more realizations where there is so much field price for the last and sometimes we bought that, I don't know, 10 times lower than today's price or much more than that. Brasilagro in Brazil, so this buying when no one is buying, I'm setting with everyone is fine and giving the community, to the farm, to the company which gets to revise in another region, later with the opportunity up. Yes, for sure this is what will happen.

I don't see any more questions. I'll give one more minute for any additional inquiries. You can use the chat to raise your hand. Yes, we will post a replay this afternoon on the website, so you can watch it again. There is a question about whether we are going to start with the repurchase program. Yes, we have started some daily buybacks as we have done before. With this, we conclude the presentation and the Q&A session. Thank you very much for your participation. I will now turn it back to Alejandro Elsztain, CEO, for his closing remarks.

I would like to finish, we are in the first half of the year. We talked about the grades coming in the second semester, in this case expecting the real estate much more happy, in a few moments, and very deleveraged. Now, there are much better results, operational results in IRSA too, the rental property too. So in the case of services through feel, it's really a big engine for Cresud too and we are seeing big results and accepting the expansion of Brazil, that will give us more and more EBITDA for the company too. So optimistic on the second semester. Thank you very much, and have a very good day.