Earnings Call Transcript - CRESY Q3 2020

Unidentified Company Representative, Investor Relations Officer

Good afternoon, everyone. I’m [indiscernible], Investor Relations officer of Cresud. And I welcome you to the Third Quarter 2020 Results Conference Call. As you know, today’s live webcast will be held in a new format through Zoom. Nevertheless, both audio and a 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. 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

Good afternoon, everybody. Welcome to the third quarter 2020 results. This is a special conference call, you know the difficult times that we are experiencing, and I hope that everyone is well and safe. As you know, Cresud as a business is operating relatively normally, being an asset that is essential in Argentina and all over the world. Not the same in other segments. We can see that in the European segments we have suffered in lockdown since March 20 in the case of Argentina, as the shopping centers were closed and hotels were closed. We are going to see that the main results of this lockdown will affect the fourth quarter because it is only 10 days of the third quarter. In Israel, the lockdown and the quarantine created different situations. Some companies like the supermarkets, such as Shufersal and Mehadrin, were in essential activities. They are working or better yet, sometimes surpassing the results of the past. Some of the others were affected but to a much lower extent because of the short-term quarantine in Israel. Later, we are going to see the results in detail, but we are going to explain our loss of ARS 7.4 billion for the nine months compared to ARS 14.5 billion last year. The adjusted EBITDA reached ARS 26.6 billion, which represents a 41% increase from last year. The EBITDA from agribusiness increased almost 45%. This is mainly due to higher productivity in the operations of agriculture, particularly rice and sugar cane. In the urban segments, there was a small decrease of 2.7% compared to last year, with the main decrease coming from shopping centers and hotels. In the case of Israel, there was an increase in EBITDA; we will see that later. So, let’s move to the next page. Page 2. Here, we can begin speaking about the main effect that we had in Brasilagro through a real estate acquisition that we did through shares. We were fortunate to begin to do this mechanism for the first time in our history. We began to buy assets through shares - sorry, this is the first time that we do an acquisition through issuing shares. There was a company that failed in the past; it was a big company that was trying to copy the model of Brasilagro. But after many failures, they sold the majority of the remaining shares to us, and we issued shares to pay them. This is a package of 29,000 acres of total surface for mainly making grains and cattle. That will be a dilution of cost G&A in the operation. Because we can see in the picture that they are neighbors of our existing Chaparral and Jatobá farms. So, with this and using fair value, we calculated the net asset value of 31 of the share of Brasilagro to make the merger. We made a dilution that represents eight and some percent of the shares. With this dilution, we now have more shares of Brasilagro, growing in size now; it is a company with a portfolio of 214,000 acres. So, there was an increase in the number of shares, as you can see here on the graph. On one side, we had this dilution of 8.5% almost due to the emission for making the merger. On the other side, we recently sold 6% in a vertical market. So Cresud, after these two events, went from 43% to 33.6%. On that sale, we raised almost $16 million that we have on the balance sheet of Cresud today. So this is a new vehicle through shares, and I’m very happy about it. I think this is the first of many because this is giving liquidity to people who want to leave their business and wanna remain in a much more active vehicle like Brasilagro. If we move to the next page, we can see a purchase that we did recently; we completed a normal acquisition of 4,500 acres in Brazil, a BRL 25 million purchase. This is for grain; I need to clarify that the payment is per hectare, not millions. We paid an initial BRL 11 million. And what is very good for us is that we are not only buying the land; we are leasing a big portion of land, 5,700 hectares adjacent to it. So here you see the graph; this is the part that is undeveloped, and the adjacent is the development area. They granted us the rental for many years; plus, they offered us a fixed payment option to buy. We like this a lot because the day we sell, it is not going to be just our developed piece but a combination of our piece plus the rented area with the option that they gave us for 12 years. The combination of the two makes it an attractive business to do in the region of PIAUÍ. If we move to the next page, we can see the evolution of the year that we are finishing. Next quarter, we will finish the campaign; this is our historical record of planting area. We grew 9% year-to-year to 271,000 hectares, combining the four countries: Argentina, Brazil, Bolivia, and Paraguay. The breakdown of soybean is the major crop, followed by corn, with significant contributions from sugarcane. In total, we are running 885,000 hectares between Cresud and Brasilagro. This year, we did see a lot of liquidity in Brazil. They are having a very good year; the devaluation is helping a lot to normal farmers who know their crops. They found the real went from four to 5.70. Today, we are seeing some reduction in devaluation, but still good yields and good prices. The thriving devaluations have made many gains, and the Brazilians are actively participating in the real estate arena. We see up to the third quarter only $11 million of small sales; but these show more than 10 times the book value. This is the kind of gains we are seeing. We are selling small to the retail market, making huge gains from the $11 million book value of one. This is kind of what we envisioned at the beginning for Brasilagro: to buy huge pieces, finance small sales, make money and buy again. So we are showcasing much of the real estate evolution year-on-year in Brazil, not in the remaining part. We want to have the rest. We are trying, but we are thinking that Brasilagro is going to find more because of the liquidity of that market this year. So if we move to the next page, we are going to begin the explanation of Carlos Blousson, our manager for Argentina and Bolivia, who will explain some details about the commodities' prices in the market.

Carlos Blousson, Manager Argentina and Bolivia

Good evening, everybody, and thank you, Alejandro. We will continue with the presentation. Just moving to Slide 7 about farming, commodity prices, and stock levels. You can see in the graph, the prices follow low trends. The reasons are due to the following to consider supply and demand. Considering the supply, the performance of crop production in South America is generally very good. There is an increment in global stocks. Notably, the stocks in the United States, especially in soybeans, are still high because of delays in exports and tardiness in the agreements with China regarding demand. Despite the phase one agreement that has been signed between the United States and China, overall exports continue to be delayed due to impacts of the global Coronavirus outbreak over the last three months resulting in logistical issues. Regarding the soybean stock consumption ratio, we observe a decrease where demand overtakes supply. Talking about corn, we see the corn consumption ratio increase particularly in the United States, as they are expecting a great record campaign this year. The state is anticipating production to achieve the record of 340 million tons. This coincides with the reduction in corn use for ethanol production affected by the decrease in global oil prices due to the pandemic. We appreciate that the soybean prices in Brazil are more competitive than in the United States and Argentina, primarily due to delays in the agreement from the United States and China, as well as Brazil's national currency depreciation. Finally, concerning the original heads' campaign, the current budget levels are 78% for soybean and 89% for corn. This indicates a 4% over the budget in soybean and a 2% in corn. It is clear that these hits are significant due to our expectations that the market was going down, particularly in 2019. Let’s go to the next slide. Slide 8 presents good farming prospects for the 2020 campaign. As you can see in the top of the graphic, the evolution in South America was normal. However, as stated, areas in Argentina and Bolivia have faced heavy drought during the natural growing season. Despite this, we can observe that evolution percentages have increased in the last three months, with a 30% increase in Brazil and an 8% increase in Argentina, along with improvements in the competitiveness of the export sector. The harvest progress for soybean stands at 97%, and for corn at 26%. We are harvesting corn now in Brazil and Argentina in the coming months. Let’s move to the next page, which details the Covid-19 protocols that Agribusiness is implementing as essential activities used by Cresud and its farms. This includes security and hygiene protocols, farm access control, suspension of farm visits, reduced transport usage, and changes in work methods. Teleworking has been implemented in different positions and functions. Let’s move to the next page.

Matias Gaivironsky, Manager

Good afternoon, everybody. Now when we move into the investment in IRSA, we see different results. The COVID situation will impact the company after March 20. As of March 31, the impact was limited, but after that, the impact will be much more significant since the operations have been in lockdown since March 20. Until March 31, the stock of shopping malls remained stable, and the occupancy also remained stable. However, tenant sales suffered a decline of 12.9% compared to inflation, which is a concerning trend. Yet, before the COVID impact, that figure was positive. We had some positive news recently: we opened one of our malls in Salta and another in Mendoza. Just two days ago, there was administrative regulation concerning the opening in Santa Fe, so we expect to open there soon. Regarding the offices, as of March 31, there was an increase in the stock, and we are working to finish the development of a new building in the Catalina area. The occupancy was slightly down to 93.9%, but nothing significant. Rental incomes remain stable. We have normal operations following COVID. Collections are okay, and our buildings are operational, although many companies are on home office; the offices are still open and providing services. As I mentioned, the Della Paolera 200 building, which we are developing, was halted because of the virus, but we are about 95% done. We expect to finish development in around 60 days. There has been good progress in commercialization, with 61.5% of agreements already leased, which is very encouraging. In the hotel segment, there has been no major updates up to March. The occupancy has dipped slightly due to two reasons: one being the reflag of one of our hotels, which used to fly under the Sheraton brand but is now under our own brand, and also because some days in March operations were affected by the virus. So now, let's move to the next page, and Alejandro will continue.

Alejandro Elsztain, CEO

About the Israel Business Center, we can see a brief summary of what each company is experiencing during these days of Coronavirus. In the real estate segments, GAVYAM and ISPRO are operating normally in office and logistics without significant impact, while in the malls, almost half of the tenants are considered essential. The remaining 50% are not essential, but they have had a very short closing time and have reopened. Thus, the effect on rent retail in Israel has been much smaller than in Argentina. Regarding Shufersal, it stands out as one of the winners during the Coronavirus period, given that they operate 358 stores in Israel, including supermarkets and pharmacies, which have increased their sales significantly while online sales escalated to 14% of total sales. The own brand has represented 25% of total sales during this period, which is a remarkable trend. The record sales are expected to continue into the second quarter. Mehadrin, responsible for fruit and vegetable sales, like citrics, avocados, and dates, has also managed to maintain normal operations. We were able to meet peak demands and send our products to Europe at higher prices. However, this year produced lower supply volumes, which is typical of off years, yet we were compensated with excellent pricing. Cellcom, the telecommunications company, has seen a moderate decline in revenues due to decreased roaming and device sales, while labor costs have been cut significantly under new management. As for ELRON, this investment company focusing on early-stage companies and specialized in medical equipment, cybersecurity and IT has seen little impact. This company continues to research and launch new projects. This information is intended to give you an overview of the impact on our Israel business centers. Now let’s move to the next page to discuss the financial results, and Matias will explain some details.

Matias Gaivironsky, Manager

Thank you, Alejandro. Let's move to Page 14, where we see our nine-month financial statements. We finished the period with a loss of ARS 7.4 billion compared to a loss of ARS 14.5 billion last year. The result attributable to our controlling interest is almost unchanged at ARS 10.2 billion against ARS 10.1 billion. Looking at the main components of this result, beginning with the operating income, we see very good results in the agriculture segment, with ARS 4.4 billion compared to ARS 1.7 billion. I will provide more details on the following page. In the Argentina business center, operating income also performed well at ARS 7.2 billion, significantly better than a loss of ARS 3.2 billion last year, which was primarily due to changes in fair value. Last year, we experienced significant impairments of ARS 8.8 billion in our investment properties, while this year we gained ARS 2.2 billion. In the Israeli business segment, we experienced a loss of ARS 377 million against a gain of ARS 2.4 billion, mainly due to the change in fair value; this year, we recorded ARS 2.6 billion against a gain of ARS 386 million, largely linked to our HSBC building in Manhattan. Another significant difference during the nine-month period appeared in line 13: net financial results, which I will explain in the next page. Finally, in line 16, net income from discontinued operations marks a substantial gain this year attributed to the consolidation of Gabion, a subsidiary of PVC in Israel, from which we sold shares. Now we need to evaluate the operations at equity, without holding control. Moving to more detailed operations, we see that in adjusted EBITDA by segment, we have achieved excellent results across the board, especially in farmland sales. We performed considerably better than last year up to March, but as Alejandro noted, we have excellent deals to report as well. The farming sector performed well with 49% growth on last year's results, reflecting a combination of factors, including significant closing stock compared to previous years and more promising stock at favorable prices. We expect closing results by June, as we conclude our harvest. Sugarcane also showed improved performance and pricing, with cattle prices surpassing last year. All lines are generating positive contributions to agriculture. In the urban segment, particularly in shopping malls, we observed an adjusted EBITDA decrease of 16.6% against inflation. This was prior to the full impacts of the changing virus situation. The next quarter will likely be worse than this one as we navigate this ongoing challenge. In the office segment, however, we successfully maintained or improved upon last year's levels, owing to a new building with dollar-denominated contracts yielding good results. In the hotels, we experienced a decrease, which correlates to the deflagging of one of our hotels that saw lower revenues, alongside last year's one-off insurance collection reflected in the 2019 numbers. For Israeli real estate, performance overall improved due to the 13% real devaluation, impacting the analysis moving year-to-year. Though there are slight drops in telecommunications due to the effects from implementing IFRS-16, which we must account for in our operating line items. The other key developments can be seen on Page 16, which shows consolidated net financial results. We faced multiple effects—one in the IDB and DIC or Israel segment, which reflected the decline in CLAL shares, dropping significantly from 3% the previous year to 51%. Although we hold fewer shares now, the drop was substantial, leading us to recognize considerable losses from ARS 1.9 billion to ARS 9.2 billion. Another significant impact involved the devaluation of the Argentine peso, seeing 50.8% last year but a real effect of 23.3% against 26% this year, affecting our net exchange differences as well. Additionally, our net interest losses increased due to the devaluation impact, and the costs of new lines we secured this year were higher than last year's because of the volatility in Argentina. Lastly, regarding our debt structure, I want to highlight a subsequent event: on June 9th, we issued a new series of debt amounting to $83 million in annual bonds at a competitive cost of 3.5%, maturing in December 2021. This issuance has significantly improved our liquidity and flexibility for servicing our outstanding debts. With that, we conclude the formal presentation, and now we will open the floor to questions.

Operator, Operator

No questions. Well, we conclude our Q&A session. I will now turn the call back to Mr. Alejandro Elsztain for any final remarks.

Alejandro Elsztain, CEO

To finalize, we are about to finish the annual balance sheet next quarter. In agriculture, we are concluding our harvest, still tending towards the core, and beginning sugarcane harvest, which remains essential and uncontaminated. The concerns for the next campaign primarily relate to taxes and exports, which did not significantly affect us last year but are expected to have a more notable impact this time since these measures are fully implemented. Regarding real estate, we expect to continue acquiring bigger pieces while selling smaller ones, which is a strategy we aim to maintain moving forward. In urban segments, the Northern Hemisphere has started reopening, and the Southern Hemisphere is beginning to follow. We hope soon to see many shopping centers reopening, followed by hotels and exhibition centers. This delay may weigh on the next quarter's results; however, we are optimistic that once they reopen, consumer engagement and rental incomes would recover. We observe positive signs in some of our Northern Hemisphere properties. We will continue constructing and developing, ensuring that the company maintains its productivity. So, I want to thank you, and I look forward to seeing you next quarter for the annual report. Thank you very much, and I hope next time we can all be closer together without the pandemic impacting our region. Thank you very much.

Operator, Operator

Goodbye.