Earnings Call Transcript - CRESY Q1 2022

Santiago Donato, Investor Relations Officer

Good morning, everyone. I'm Santiago Donato, Investor Relations Officer of Cresud, and I welcome you to the first quarter of fiscal year 2022 Results Conference Call. First of all, I would like to remind you that both audio and slideshow can 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. Before we begin, I would like to remind you that this call is being recorded, and the 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

Good morning, everyone. We are beginning our first quarter of this year with a new campaign for Cresud, and we are planting in very good conditions in the region, similar in size to last year's, and we are going to show you a little later about the four countries and the size of plantation. This year, we are budgeting and seeing better prices than last year and higher margins compared to last year, having bigger input costs in some areas like fertilizers. However, margins, when comparing this year to last year, are a little higher. We related to the real estate business. Remember that we have three lines of businesses: one is the production side and the yields on production, the second is real estate and the third services in agriculture. Regarding the real estate in the first quarter, we have news only in Brazil. In this quarter, we have no news in Argentina and the rest of the countries. There have been a lot of sales and a lot of liquidity in Brazil regarding the real estate business. About our segment through IRSA, the urban segment is recovering significantly. This quarter, everything was open. We saw the shopping centers opening, and hotels beginning to open and receiving a lot of local tourism. There is a significant recovery, and we're going to see much better numbers in real estate. Their occupation is something, but compared to last year’s numbers, they are much better. Related to the quarter of production, we were driven by the sugar cane activity. This activity has yielded much better results, mainly due to the frosts that contributed to significant increases in sugar cane prices combined with rising oil prices. This combination led to a substantial jump in the prices of ethanol and sugarcane. Our plantations were situated in regions that were not affected by production issues, thus contributing to a good quarter as well. Regarding the oil effect on our balance sheet, we see a net gain primarily explained by gross profit, financial results, and income tax. There is also a lot related to the fair value of IRSA investment properties. We experienced a net gain of close to ARS 2 billion attributable to controlling shareholders. So, this is the main explanation of the quarter. I will introduce Carlos Blousson.

Carlos Blousson, Executive

Okay. Thank you, Alejandro. Moving to Slide #3 about the speculated area. As we can see in the graph, this fiscal year 2022 will be at the top of the ranking for the third consecutive year. The area we are planting now is 262,000 hectares, distributed across the four countries you can see in the graph, similar to last year, 14,000 in Paraguay, 14,000 in Bolivia, 111,000 in Brazil, and 123,000 in Argentina. The breakdown of crops this year remains similar to the last three years: 46% soybean, 27% corn, 9% sugarcane, 3% wheat, and others producing 8% for a total of the production. Moving to the next page about farming activity and agricultural outlook. In the graph to the left about stock consumptions, soybean and corn stocks remain globally low, with soybean at 27.7% and corn at 25.4%. In the United States, the graphic shows that the stocks in the United States are even lower than in the rest of the world, with soybean at about 7.3% and corn at 10.1%, respectively. These stock consumptions relate to commodity prices. We can see observed in the graph how prices previously soared, breaking records in June 2021, with soybean at 64% and corn at 113%. However, over the following five months, there was a moderate correction in prices, dropping 17% in soybean and 33% in corn. Currently, regional positions show prices similar to budget levels, with soybean at 56% and corn at 51%. Regarding climate conditions, soybean processes have improved compared to last season. The forecast is showing neutral conditions as the year progresses. In November 2021, total soybean is 23%; Bolivia 64%; Brazil 40%; Argentina 2%. The total for corn is 13%; Bolivia 99%; Brazil 30%; Argentina 12%. In wheat, we have 100% of the planting as we are just starting to have favorable conditions. Thank you, everybody.

Alejandro Elsztain, CEO

When we go to the next page, we can see what happened with farmland sales. The two operational transactions done in Brazil were not reflected on the balance sheet because we are putting transactions that surpassed some level of payment and possession, and that was not accomplished on the 30th of September in either case. The first transaction was in Rio do Meio, completed in September. The area sold was 2,900 hectares, which we purchased for BRL40 million and sold for BRL430 million in nominal sales. Remember that in Brazil, we sell in installments related to bags of soybeans. So when we put the gain, we did have that nominal value to the present value, and we calculated the internal rate of return, giving us in the first case an internal rate in real of 56% and in dollars 40%. This was a significant gain from the first quarter transaction. The second transaction was done in October '21, still not recognized and will probably be recognized on the 31st of December. Here, we sold a productive area of 2,700 hectares for a total of BRL589 million. This is greater than the first IPO the company did. A brief look at the price per hectare depends on the present value in nominal value, which is BRL30,000 or more, $40,000 or $30,000 more in present or nominal value. This gives us a revaluation of the land in Brazil, and the transaction will be recognized in two steps. The first step involves more than half of 1,500 hectares of productive area in the first tranche, and the second tranche would be about 1,100 hectares in 2024. This is a big transaction, providing significant gains for this year and into 2024. The internal rate of return from this farm, which we bought in 2007, gives us around 20% in reals or 12% in dollars; a significant gain. We find a farm with a 3% return, we sell it and reinvest in another area or activity—overall, a strong first quarter with activities in Brazil still not reflected in our balance sheet. We can move now to Page 6. We would like to mention some of the work our agricultural services are doing every quarter. In this page, we reflect on FyO and Agrofy. FyO, where Cresud owns 50.1%. Let's see the commercialization status: this company became the leading entity in the country in commercializing grains, inputs, futures and options, and services. This year, it surpassed 6.4%, and we can see the breakdown of our participation on core wheat and soybeans. This company surpassed the competition by more than 2 million tons, leading to significant gains. We see EBT evolution, achieving close to $15 million in record performance, coming from close to breakeven five or six years ago. This company is becoming very relevant to Cresud. To give you an idea, this firm, which has close to 0 debt, raised $12.3 million at a 0 interest rate through the local capital market in two years. This will be for investments in fixed assets and working capital. The company employs more workers this year than Cresud. FyO has close to 300 employees, while Cresud agriculture in Argentina is at similar levels. This company provides pure services to farmers from inputs to exports for commodities and specialties. FyO is growing not only in Argentina but is beginning its expansion in the region. Regarding other areas, we can see the evolution of Agrofy, where Cresud's stake is 20%. Agrofy is expanding into Argentina, Uruguay, Brazil, Bolivia, Paraguay, Chile, and Colombia. They are growing revenues, achieving an 87% growth last year, marking the first transactions for farmers in digital e-commerce for the agriculture business. This has become a leading marketplace in the region with annual visits of 31 million participants and a significant amount of monthly contracts. They recently finished a capital raise to expand its mission. These two are growing significantly in the whole region, leading to better results for Cresud through these entities. I will now introduce Mr. Matias Gaivironsky.

Matias Gaivironsky, Executive

Thank you, Alejandro. Good morning, everyone. If we move to Page 7, we can see the different performance of our segments on the urban side through our participation in IRSA. We are pleased to announce that for the first time in the last 1.5 years, we are running without restrictions— all pandemic restrictions have been cleared by the government. Now we can operate normally. After the pandemic's impact, we have an occupancy rate of almost 90%. Excluding the effect of Falabella leaving the country, we have an occupancy rate of 94.3%. The occupancy is growing quarter-by-quarter, so we anticipate better numbers going forward. When we look at real sales, comparing with last year when the operation was closed, we see an extraordinary number, 322% up from last year. However, compared to pre-pandemic levels, we see a decrease of 10.7%. We hope to see better numbers moving forward. In terms of our offices, we have maintained the same size of the portfolio with 114,000 square meters after selling some properties and the inauguration of the Catalinas building last December. The occupancy level is at 78.9%. The average rent per square meter remains stable at $25 per square meter. We see that companies are returning to the offices with a hybrid model, but our operations never closed in the office portfolio. After the closing of the quarter, we announced a new sale of some floors in the 261 Della Paolera building. We sold three floors for $32 million, and all proceeds have already been collected. We are using that money to reduce the company’s leverage. Regarding the hotels, the borders of Argentina opened for foreigners in November. The hotels in Buenos Aires were significantly affected by this situation, but in the southern part of the country, the operation in Llao Llao is performing well. We hope to see recovery in Buenos Aires moving forward. A significant announcement on the IRSA side was the proposed merger between IRSA Commercial Properties and IRSA, announced in September. We have called for the shareholders' meeting scheduled for December 22. If the merger is approved, Cresud will reduce its stake in IRSA from 62% to 54%. This is due to the issuance of shares for minority shareholders of IRSA commercial properties, thus providing them shares in IRSA. Going to our balance sheet and the results of the quarter on Page 9, we can see we finished the quarter with a gain of ARS 2.8 billion compared to ARS 11.4 billion last year attributable to our controlling interest, which is ARS 2 billion against ARS 4.4 billion last year. We have various drivers affecting these numbers. Looking at agribusiness results, they are consistent with the previous year, finishing with an operating income of almost ARS 2.3 billion, matching the same number as last year, and we will see more details on the next page. In the urban business, we are showing a loss of ARS 4.6 billion against an important gain of ARS 35.1 billion last year. This is related to changes in fair value; last year, we posted a gain of ARS 36 billion while this year we recorded a loss of ARS 6.4 billion. This relates to macroeconomic drivers in Argentina. We value our properties primarily in dollar terms, similar to the previous quarter, but when converted into pesos and compared with inflation, there was 9% inflation during the quarter, while the devaluation of the official exchange rate was only 3% or 7% considering the blue-chip swap. These effects produced losses in peso terms on our balance sheet. Moving to the next page, Page 10, we see the breakdown of adjusted EBITDA by segment, with very good results in the agribusiness sector. The main difference from the previous year was from the sugarcane line, primarily related to better prices and production. After adjusting for inflation, we achieved a much better gain compared to last year. In the other lines, we remained similar to the previous year as the first quarter is not the most relevant for grains, so we expect to see better results going forward. In the cattle segment, inflation has affected prices set lower than inflation, leading to a loss recognised here. However, after the quarter's end, we are seeing price increases, so recovery is possible in upcoming quarters. The results for FyO, as Alejandro mentioned, were pretty good. We continue to increase the EBITDA of that segment. Regarding farmland sales, all disposals Alejandro mentioned will likely be recognised in the balance sheet in the next quarter. Some will be in steps, but we anticipate improvement going forward. Last year, we had gains related to receivables for farms sold paid in bags of soybean. The increase in prices contributed to this recognition, which did not occur this quarter. In the urban segment, we are faced with a challenging comparison. Last year, operations in malls were closed; hence, we can see last year's loss against recovery with almost normal operations this year concerning revenue. Some concessions are expected, but as we head forward, these should fade. We are now operating under a complete normal cycle. In our office portfolio, we see stable results, driven by an increase in square meters because of the Della Paolera and from sales of two buildings. In hotels, we are starting to see positive numbers again with sales and development during the quarter, though there were no significant transactions. On Page 11, we observe the other important effect on our financial statements. We recorded a positive net financial result of ARS 3 billion compared to a loss of ARS 3.9 billion last year. The main reason is the foreign exchange situation. The prior year, we faced 0.4% devaluation in real terms or 8.1% nominal devaluation. This quarter, we experienced a nominal devaluation of 3.2% and a 5.6% real appreciation. This gave rise to recognizing gains across several exchange differences. Lastly, on Page 12, we have a breakdown on the debt amortization schedule, which remained stable compared to the previous quarter. During the quarter, we issued around $60 million in the local market through two different transactions related to Central Bank regulations that obligate companies to refinance part of the debt in order to buy dollars. We executed a very successful transaction in July 2021, and in September 2021, we issued $41.8 million to refinance a bond expiring in December at a 3.5% interest rate maturing in September 2024. Last week, we announced plans related to our bond, which expired in December 2021. The $53.6 million will be called, canceling all amounts this week to reduce our exposure to dollars and leverage. With this, we conclude the formal presentation.

Santiago Donato, Investor Relations Officer

If there are no questions, we will conclude this presentation and turn back to Mr. Alejandro Elsztain, CEO, for his closing remarks.

Alejandro Elsztain, CEO

Thank you, Santi. We are beginning a very good season, with large scale regionally, having capital available for purchasing more land in the region after the capital increases last year. We see growth potential. Therefore, we believe it's a very good momentum for agriculture in the region. Prices are in much better conditions than in the past, and margins are significantly higher. Anticipating a very good season overall, combined with real estate having closed two significant transactions in the first quarter, provides a very positive outlook for the annual results of the agriculture business regionally. In terms of services, the two cases of FyO and Agrofy possess capital and a capable group. Agrofy has a team of over 300 employees as well. Thus, we are tasked with developing that e-commerce cross-regionally. We are indeed optimistic regarding the numbers for '21 and '22. I would like to thank everyone and wish you all a very good week. Thank you very much.