Earnings Call Transcript - CRESY Q2 2020

Operator, Operator

Good afternoon, everyone, and welcome to Cresud's Second Quarter 2020 Results Conference Call. Today's live webcast, 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 issued yesterday are also available for download on the company website. [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 statements. I will now turn the call over to Mr. Alejandro Elsztain, CEO. Please go ahead, sir.

Alejandro Elsztain, CEO

Thank you very much. Good morning, everybody. We are beginning our first six months of 2020. We can begin in Page #2 to see the main events of the six months. We see that the adjusted EBITDA for the period, made in the Agribusiness segment, is ARS2.6 billion, but it's a slight drop compared to last year's numbers, mainly explained by fewer real estate transactions in the first semester and what is expected in the second. In the case of urban Argentina, there is a small drop of 6.6% compared to last year; it's ARS3.4 billion, mainly explained by the adjustment of the inflation results. In the case of shopping centers, the sales were slightly below this adjustment and it is bringing a negative impact. Later, we will see some positive outcomes coming from the office buildings, but overall, it is slightly more negative, resulting in a small negative effect. There is a positive adjusted EBITDA in the case of Israel, explained mainly by the good results from PBC and Cellcom, along with a change in the IFRS of Cellcom. The net result for the six months gives us a positive figure of ARS1.7 billion, compared to a loss last year. If we see the net result attributable to controlling interests in the company, it is a negative ARS4.7 billion compared to ARS6 billion last year. We have a record planted area in the region, achieving almost 270,000 hectares, which is a growth of 9% compared to last year's numbers. In terms of sales, I mentioned that this year, we are below last year's numbers. We had only cases in Brazil, through BrasilAgro, with BRL28.2 billion in sales, and this is only small portions from Jatoba and Alto Taquari, and we are expecting more sales in the second semester. During this semester, we distributed shares amounting to 2.6% of the capital of Cresud. Subsequently, we accomplished two additional things. Cresud sold 6% of its stake in BrasilAgro for $15.6 million in one day auction. On the other side, BrasilAgro merged with Agrifirma, an agriculture company based in Brazil, and we executed that through issuing shares, not paying cash, thus including almost 29,000 hectares of land into the BrasilAgro portfolio. Finally, after selling the 6% and the dilution from Agrifirma, Cresud reduced its stake to 33.6%. We can move to the next page and discuss this merger that we are executing. In the meantime, we are selling some farms in Bahia. We were reducing last year's holdings mainly through the sale of Jatoba. We had the opportunity to include this stake from a previously significant company that was not performing well. We decided to accept the payment in shares, allowing us scale and synergies, and we are not hiring anyone new in the same regions of our farms. This transaction is the issuance of almost 9.5% of the company in new shares. This is not finalized yet; it will conclude very soon. An evolution of this will show the portfolio effect of BrasilAgro's growth from 185,000 hectares to 214,000 hectares. Both parties accepted the transactions done at fair value. This is the first time in the company's history that we have managed to acquire via the issuance of new shares. Moving to the next page, we can see the portfolio of the planted area, reaching a record of 269,000 hectares across four countries, reflecting a 9% growth compared to last year's numbers. In this distribution, soybeans represent 51%, corn 24%, sugar cane 12%, and other crops account for 13%. This area is a combination of owned and leased land in the four countries. The two main countries are Argentina and Brazil, while Bolivia has a small lease agreement as well. Regarding farmland sales, we see an evolution over the last 10 years, and this year, up to now, the first six months shows a small gain. The majority has been gain due to the yield, and since you cannot nearly evaluate the cost of the land we've sold, you can see that the majority of the sales are gains. There are two smaller transactions involving 1,080 hectares, which are relatively minor to the portfolio but yield interesting results of 14% and 20%, or 7% and 13% in dollars following Brazil's significant devaluation. We continue to track buying and selling land. Today, Brazil remains active due to the benefits farmers enjoy from investing their profits from the year into purchasing more land. Now I will introduce Mr. Carlos Blousson, who will explain the commodity business and the world.

Carlos Blousson, CFO

Good morning, everybody. Thanks, Alejandro. Let's move to Page #6 regarding farming, commodity prices, and global stocks. As shown in the graph, the prices have remained at a low level. The reasons are as follows: considering the supply, the condition of the crops in South America is good, generating incremental levels of stocks. Let's now look at the fact that the stock-related trade for soybeans remains high due to delays in exports caused by the tardiness in reaching an agreement with China. Regarding demand, despite the Phase 1 agreement signed last January between the United States and China, delays have continued, and we must wait for the impact of coronavirus on the Chinese economy and the overall demand for goods. Currently, prices remain stagnant. Concerning soybean stock consumption ratio, you may observe a decrease in the world ratio, except for the United States, due to the reasons mentioned earlier. Turning to corn, we see a decrease in the corn stock consumption ratio globally, again with the exception of the United States, primarily because of export delays as Brazil and the rest of South America become more competitive. The reason is that China is imposing a surplus import tax on American crops and not on Brazilian and Latin American ones. As illustrated in the top of the right graph, FOB soybean prices in Brazil and Argentina are more competitive compared to those in the United States, primarily due to the delay in the agreement between the U.S. and China regarding import tax reductions. In the current hedge campaign for 2019-2020, the current hedge level is 73% in soybeans over budget price. For corn, the original level is 65%. We remain 4% over budget in soybeans and 9% for corn. It is evident that this high hedging occurred because we anticipated a decrease in our use of electricity for sales, particularly in Argentina, as we foresee a shift in the export tax. We will provide further details later on. Now, let's move to the following page, discussing the good outlook for farming activity in FY 2020. As illustrated at the top of the graphic, the weather patterns in South America have been normal, but we require rain to continue at this pace for the next 45 days to refine the volume estimation accurately. The forecast anticipates continued rainfall. Pertaining to the evolution of the exchange rate, we see that the devaluation rate has escalated over the last six months, demonstrating 5% in Brazil and a striking 41% in Argentina, allowing for improved competitiveness in the export sector. The next page outlines a surge in crop export taxes in Argentina. The Macri administration regulated reductions in export taxes. Since December 2019, the new government has reversed this by raising them to levels reminiscent of those when they were in power prior. Notably, for soybeans, the new export tax has risen to 30%, with congressional approval for an additional 3%. Due to this change, we can reach today’s tax rate akin to the rates when they were last in office. For corn, the new taxes have increased to 12%, with congress giving approval for an extra 3%. This may rise to 50%. Fortunately, the new rates are lower than those existing when they were previously in power. In terms of wheat, the increase is to 12% with a similar additional allowance of 3% authorized by Congress for a maximum of 50%. The situation indicates that the increment will not be alarmingly high compared to previous policies. On the next page, I want to discuss our investment in Agrofy. Agrofy, a pioneering e-commerce company, is 22.25% owned by Cresud and 1.89% by BrasilAgro, and its business model continues to grow. The latest data indicates that the capital round raised $23 million, where Cresud subscribed $2 million, and BrasilAgro, $1 million. The company is currently valued at $53 million. Regarding KPI performance, as shown on the right of the graphic, monthly visits to the site have surged by 139% compared to December 2018, while monthly contacts have increased by 92%, along with revenues in dollars that have risen by 106%. Agrofy currently operates in seven countries. We plan to lead the Latin American market in the next three years and aim to expand our presence to nine countries, incorporating Colombia and Mexico this year. Thank you, everybody. Matias?

Alejandro Elsztain, CEO

If we move to the next page, we can review news in our Argentina business segment, specifically regarding our stake in IRSA. In shopping malls, we see a recovery after 18 months, although we have registered decreases against inflation affecting tenant sales. Past inflation reached 3.6%, while this quarter reflects 0.4%. This improvement is likely attributable to the promotions offered via credit cards which allow consumers to pay in installments without interest. We will monitor if this is a sustainable trend or merely a three-month spike in improvement. Occupancy remains at levels of 95% in the malls and in AAA offices, at 97.1%, maintaining rent stable at $26.9 per square meter. We are completing the development of the Della Paolera building; we have started delivering units, and we plan to have it fully ready by the end of this fiscal year. Everything regarding commercialization is in good shape. Good news has surfaced in this segment. Hotels experienced lower sales in this quarter due to the shift from one of our hotels from being a Sheraton to our own brand. While this resulted in lower sales, other hotels remain in good operational condition. Concerning land reserves, we conducted barter agreements during the semester. One deal in Abasto involved exchanging land near one of our shopping centers for a designated space we had held for some time. We signed this contract with our developer; in return, we anticipate receiving approximately $4.5 million in square meters. We also made arrangements in Caballito for a large plot of land that we own, and we have begun to execute some swaps. We initiated this with a plot of 11,400 square meters, also receiving apartments as part of that exchange. Furthermore, we have ample land remaining for similar arrangements in the future. Regarding the financial and international aspects, Banco Hipotecario experienced some losses this semester due to impairments on government notes and financial instruments, along with some doubtful accounts. Looking at the international segment, we expect the disposal of Condor to be settled this quarter. Turning to our activities in the Israeli business sector, we finished this semester with the adoption of the Concentration Law. As a result, we disposed shares of Gav-Yam, hence losing control over those shares. We privatized the debt of Ispro and subsequently distributed shares of Mehadrin as a dividend. Following this, we are now compliant with the law. Another significant update from Israel is concerning Clal, where we sold shares, resulting in our direct stake being at 8.5%. In conjunction with these swaps, we are hovering around 16%. The last point is when we analyze the financial statements on Page 13. We had a complex semester with multiple extraordinary effects that I will attempt to clarify. If we start with Line 17, the company wrapped up the semester with a gain of almost ARS1.7 billion in stark contrast to a loss of ARS8.6 billion last semester. When analyzing the attributable net result to our controlling shareholders, we observe a negative outcome of ARS4.7 billion against a loss of ARS6 billion last year. Upon diving into these effects, there are several key points. First, there was a change in fair value noted in Line 6 concerning the Argentine business segment, where we witnessed a gain of ARS3.8 billion compared to a loss of ARS9.6 billion last year. The second effect arises in the financial lines, where net financial results in Line 13 presented ARS19.3 billion this semester versus ARS11.5 billion last year, which I will elaborate on in subsequent pages. Another effect appears in Line 14 regarding income tax, where we have recorded a loss of ARS3.1 billion compared to a gain last year of ARS3.4 billion. This is largely tied to recognizing the fair value of our properties; it refers to deferred tax and is not a cash effect. Moreover, we have initiated the implementation of inflation adjustments in our tax balance sheet, which also contributes to the loss during this year. Moving to the following page, on Page 14, we can dissect the adjusted EBITDA by segment. Here we observe a stellar performance within agriculture. Setting aside farmland sales, which last year included the gain from Jatoba, we recorded ARS1.5 billion last year against minor recognition this year. The remaining segments indicate our results nearly doubled in operations within farming compared to the previous year and adjusted for inflation. We note improved performance in grains, sugarcane, and cattle, with a reduction in losses and flat results from agriculture and rental services. The remaining categories, including the mid-packing facility and our brokerage firm, are slightly above inflation, partly attributed to the mid-parking facility. In field operations, we achieved favorable results; however, part of this was recognized in the financial records rather than in adjusted EBITDA. In urban segments, shopping malls continue to lag against inflation; this semester reflects a drop of almost 19% from the previous year. This is primarily associated with stronger revenue performance not exceeding the minimum rent. Should sales continue trending positively, we expect this line to improve. Notably, in office segments, we obtained considerably better results with a 38.1% increase, which relates to a new building recently operational. Our agreement values are in dollars, hence positively affecting our results. Meanwhile, hotels experienced a decline of 29%, attributed to the aforementioned deflagging of Sheraton coupled with extraordinary income last year. In real estate, the Israeli business segment shows a 26.8% increase, which primarily relates to cost reduction efforts under the influence of the shekel to peso devaluation, currently at 13.5%. The remaining improvements are linked to cost reductions. Regarding telecommunications, the increase is attributed to IFRS 16 implementation—some costs now recorded as amortizations instead of being included here. Lastly, as we arrive at Page 15, examining the net financial results reveals varied impacts across the different business segments. In Argentina, we witnessed the influence of devaluation: this semester yielded a 41% depreciation rate. However, when analyzed in real terms, it was 13% against 30% last year but, in real terms, just 3%. Thus, this effect directly impacted our dollar-denominated debt and is reflected on Line 2 as net exchange differences, revealing lower results from both Cresud and IRSA. In the Israeli segment, considerable ramifications relate to Clal shares, which experienced a 15% drop during the semester, contrasting with a gain of 3% last year. Consequently, this resulted in a negative outcome of ARS2.8 billion compared to a gain of ARS57 million from the previous year. On the positive side, in Israel, we achieved a gain of ARS2 billion associated with the buyback of VAC bonds, thereby generating profits. Most of the described effects are non-cash-related. The principal concerns lie with operational sides. I have endeavored to simplify the main impacts affecting our net income this semester. As we reach the final page discussing the debt profile, our overall debt remains stable at $443 million. We included the debt amortization scale as of December. Following that, in January, we issued a new bond. There were three series of new bonds amounting to $51 million. Additionally, we completed the sale of 6% of BrasilAgro shares, generating $15.6 million in cash. These two transactions will influence the upcoming quarter, as they are already impacting January's figures, though they are not represented in this slide. With this, we conclude the formal presentation. Now we open the line for your questions.

Operator, Operator

Thank you. This concludes today's presentation. You may disconnect your lines at this time, and have a nice day.