Earnings Call Transcript - CRESY Q4 2020

Santiago Donato, Investor Relations Officer

Good afternoon, everyone. I'm Santiago Donato, Investor Relations Officer of Cresud, and I welcome you to the Fiscal Year 2020 Results Conference Call. First of all, I would like to remind you that 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 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 'raise hand.' 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

Thank you very much. Good afternoon, everybody. Welcome to our fiscal year. We are finishing our balance sheet of 2020, June 2020 results. First of all, I hope everyone is safe and well in this rare and special occasion of the COVID-19 pandemic. We are closing the balance sheet on Page number 2, and we can see that the adjusted EBITDA we are achieving is ARS33.4 billion, which is 21% higher than last year’s numbers. Something to remark is related to agriculture; the agri-business adjusted EBITDA for the year is at 31.3% higher than last year's numbers, adjusted for inflation. We have a record planted area for the entire history of the group, measuring 264,000 hectares across four countries. The debris represents a 6.5% increase compared to last year's plantation areas. In relation to the agri-business, we observe that one of the key issues in the balance sheet is that we sold 6% of the stake in BrasilAgro, which represented $15.6 million for us. Apart from that, during the period, BrasilAgro merged with Agrifirma, a company created in Brazil to replicate our strategy, which ultimately decided to exit the business and allowed us the option of merging through shares; we compensated them with shares and added 29,000 hectares of farmland in Brazil in the Bahia region to our portfolio. This year, we had normal operations in the region since agribusiness is considered an essential activity. When we look at the net results of the year, we can observe ARS20 billion compared to a loss of almost ARS41 billion last year. If we examine the net results attributable to the controlling company, we see a gain of ARS3.9 billion compared to a loss of nearly ARS27 billion last year. There were some sales, which I will discuss later. In BrasilAgro, the rest of the regions did not sell, accounting for ARS84 million in BrasilAgro. In terms of urban business and investments abroad, we had shopping malls and hotels that suffered considerably during the last quarter, beginning March 20, with the onset of COVID-19, when we shut down all shopping centers and hotels. So, we are likely to see the main effects in the last quarter of this year and the first quarter of next year. The office net segment maintained normal operations, and we conducted several sales during the last quarter of last year and the first quarter of 2021, representing $145 million, which we considered a smart decision to sell, cancel debt, and start new construction, although it is now cheaper to do so. In Israel, we have been negotiating with IDBD holders, as the Tel Aviv District Court ordered the opening of a liquidation procedure against IDBD. We are analyzing the resolution and evaluating our course of action for the future. We will provide more details later. Moving to the next page, we can see that for the year, we began with a total surface area of 731,000 hectares, including owned and long-term concession areas, while executing some small sales. The small sales conducted in Brazil were minor in hectares. This illustrates how minimal our actions were amidst the merger with Agrifirma and the acquisition of Serra Grande in May, which was for 4,500 hectares. So, we did grow during the year. We achieved our highest production level while selling less than we bought, growing 4% compared to last year's figures. Regarding the merger with Agrifirma, we demonstrated that there are firms closely associated with Chaparral and Jatoba, which we have been selling in recent years. In Jatoba, we have not begun sales yet, but the majority still belongs to us. Merging these assets in the same Bahia neighborhood gives us more synergies as we do not need to hire additional personnel to operate this. There has been a dilution in general and administrative costs. We proceeded with the merger on a net asset value basis, considering BrasilAgro at ARS31.5 per share. We issued shares for this purpose, and due to this issuance, Cresud diluted a bit since after the merger and the sale I mentioned previously, our ownership in the company decreased from 43% to 33.6%. So, this is the first transaction of its kind in our history, issuing shares, and we believe we will continue to pursue this strategy in Brazil because it's a beneficial way to grow and achieve synergies for the company. If we proceed to the next page, Page number 5, we can see the four small sales, all of which were conducted in Brazil. The profits are illustrated in the yellow portion, and the majority of the sales realized gains, showing that the book value is quite low. The total surface area of the sales, net of areas, adds up to 2.4 thousand hectares of arable land sold for significant gains. The total comprises sales of $19 million against a cost of $2 million. This indicates the kind of internal rate of return we are achieving in reals and dollars, as we see improvements by 15% or 20% in reals and 5% to 15% in dollars, due in part to variations in Brazil affecting our dollar-based returns. Meanwhile, the Company has also acquired another asset known as Serra Grande, an area comprising 4,500 hectares, with 2,900 set to be developed. From this, we are not only gaining new land but also rental capabilities. This acquisition included 5,700 hectares of rental land for 12 years in the real estate sector. This elucidates our decision regarding the Brazilian transaction in the state of Maranhao. Moving to the next page, we can observe the evolution in the planted area, reaching a record size of 264,000 hectares across the main two countries, Argentina and Brazil, followed by Bolivia and Paraguay, marking a 6.5% increase compared to last year. Soybeans account for more than half at 51%, corn for 24%, and sugarcane represents 11%, which is significant, given the considerable investments in sugarcane. This year, the Company experienced substantial growth in real estate and operations. The combined results of both segments led to a performance that resulted in a record EBITDA. Now, I will introduce Mr. Carlos Blousson, who will provide more detailed information.

Carlos Blousson, Director of Operations

Thank you, Alejandro. Good evening, everybody. Let's move to Slide number 7 focusing on farming, commodity prices, and global stocks. In the graph at the top right, we can see that prices maintained a low trend, but after the conclusion of the fiscal year, over the last two months, prices have increased considerably by about 12% to 14% in corn and soybeans. The reasons for this are multifaceted, including supply, the production of crops in South America performing well in general, and an increase in global stocks as production in real estate also appears promising. We must also note that the stocks in the United States began to decline due to a rise in demand post-pandemic, partially attributable to agreements with China and other states coming to fruition. Regarding the soybean stocks-to-consumption ratio, we can see in the graph that a decrease in the world’s ratio occurred, primarily due to high demand in China before the pandemic. Conversely, talking about corn, we observe that the corn stock-to-consumption ratio globally has increased, especially in the United States, which is on track to achieve the second record-high production of about 340 million tons this campaign, especially with decreased usage for corn in ethanol production, impacted by lower oil prices worldwide due to the pandemic. We appreciate that the FOB soybean price in Brazil remains more competitive compared to that of the United States and Argentina. There are two main reasons for the delay; firstly, there was a delay in agreements with the United States, while demand from Argentina was specifically directed towards the Brazilian market. Secondly, the fluctuation in the Brazilian currency offered favorable prices, allowing Brazilian farmers to achieve good selling prices. Now, let's move on to the next page, Slide number 8, which details the successful productivity results for the 2020 campaign. As shown in the graph, a record yield was attained, reflecting the combination of good working conditions and record planting areas. Overall, we witnessed a record yield of 828,000 tons, a 2% increase compared to the previous year, with performance metrics of 6.1 tons per hectare for corn and 2.7 tons for soybeans. Sugarcane production also reached a record high, achieving a 2.4 million ton increase, representing a 12.1% improvement for the year, particularly in Brazil. Finally, despite a 20% reduction in Argentina's cattle stock, meat production remained stable, delivering a profitable output from our stock. Moving to Slide number 9, we address the impact of COVID-19 on agribusiness, classified as an essential activity during the pandemic. Cresud adopted various protocols, including security and hygiene measures to control farm assets, minimizing farm visits, reducing transport usage, and implementing teleworking strategies. Transitioning to meatpacking facilities, we achieved a record volume of slaughtering canals last year, totaling 116,000 heads due to our investments in plant facilities and the growth in export businesses. This translated to a 66% increase in kilograms and 39% in value, predominantly including markets like China, along with optimization strategies for the Kosher business targeting Israel and the U.S. markets. This activity allowed us to achieve our first positive EBITDA of $1.5 million after the previous five years of losses. Shifting to agriculture, both our companies are solid with competitive offerings. Our brokerage service for futures and options has continued to grow in the local market, achieving a corn trade exceeding 5 million tons, capturing a market share of 5.3% in corn, 3% in wheat, and 3.7% in soybeans, positioning ourselves as the leading grain broker in Argentina. Additionally, our e-commerce platform, Agrofy, continues to expand, achieving 41 million annual visits and over 1.2 million contacts, attaining year-on-year growth of over 100%. Revenue from this segment also surged by 43%, totaling $2.6 million, with ongoing expansion plans in LATAM. Thank you, everybody. I will hand over to Matias.

Matias Gaivironsky, Director of Commercial Properties

Thank you, Carlos. Good afternoon, everybody. Moving to Page 12, we have a succinct summary of the performance of our operations in commercial properties across the years. In shopping malls, we have suffered significant setbacks due to lockdowns in Argentina. Our malls have been closed since March 20 in the city of Buenos Aires, with only one shopping center remaining open, while some malls in the interior regions have reopened under strict protocols and safety measures. Currently, our stock remains stable at 332,000 square meters, with a slight decrease in occupancy down to 93.2%. Our retail sales have significantly dropped because of the lockdown, decreasing by 92.9% during the quarter and 25.9% during the year. On the office building front, we continue normal operations with regular rent collection, but there has been a slight increase in vacancies in the premium market spaces above 200 square meters in Buenos Aires due to pandemic-related delays. However, our redevelopment construction is currently 95% complete and expected to finish this year or at the beginning of next year. The work has progressed well, with 61% already signed for commercialization, which indicates an encouraging occupancy when operations commence. All hotels were also significantly impacted by the pandemic, with closures since March 20 resulting in negligible occupancy rates. Transitioning to Page 13, we address our investments in Israel. As Alejandro mentioned, we encountered a negative court resolution in Tel Aviv while negotiating with bondholders of the three series of bonds from IDBD. The company has entered into negative NAV territory due to a decrease in share prices of the underlying assets, exacerbated by financial challenges faced in making payments throughout the year. Essentially, we need to sell certain assets, which include an airline company and a shopping project in Las Vegas, but the pandemic made these sales impossible. In this context, the court has recently initiated a liquidation proceeding against IDBD, appointing liquidators and interim receivers for the pledged shares of DAC and CLAL to preserve bondholders' rights. This recent development demands that we reassess our strategy alongside local and international advisors. It is crucial to highlight that we have already valued our investment in IDBD at zero in our financial statements, meaning it has no further impact on our financial results. Given the developments as of June and the numbers we will present going forward, we consolidated our investments on an accounting basis both in Cresud and IRSA. However, moving forward, we may have to consolidate our investments differently due to this latest order. If we jump to Page 15, we can observe the fiscal year-end numbers presented last Friday. We are concluding the fiscal year with a net income reaching ARS20 billion in fiscal year 2020, compared to a loss of ARS40.7 billion last year attributable to our controlling interest. The net income achieved was ARS3.9 billion against the previous year's loss of ARS26.7 billion, amounting to almost ARS8 billion. In the agribusiness sector, we see results across the board, particularly the lines with extraordinary performances, illustrated by the first line, relating to fair value changes that positively contributed ARS33.2 billion in the Argentina business segment, contrasting with a loss of ARS38.6 billion last year. This largely reflects the valuation of our investment properties at IRSA level and IRSA commercial properties, evaluating our commercial offices and land bank based on fair value. This valuation is supported by significant sales of assets at values aligned with these evaluations. Another crucial factor impacting our results is the line denoting net financial results we will detail further in the next pages, including lines pertaining to associates and joint ventures, which reflect our results concerning the Lipstick building, where we have decided not to pay any further ground lease, consolidating these improvements into our bottom line. Transitioning to Page 16, we can view more detailed results from our business activities. We achieved impressive results in agribusiness, with most lines showing positive outcomes. According to previously shared insights from Carlos and Alejandro, we reached record highs in surface area, prices, and yields in grain and sugarcane lines, helping substantially improve our performance versus the previous year. Urban segment results showed declines in shopping malls due to the pandemic, while office performance remained robust in real terms. Our revenues are reported in dollars, and we also have one new building under operation; hotels experienced significant downturns due to the pandemic, with no major impacts on developments. Finally, if we review Page 17, we can breakdown our net financial results, where the main impact comes from currency fluctuations. This year exhibited higher valuations relative to inflation, particularly affecting line number three. This fiscal year recorded a loss of ARS3.9 billion at the Cresud level and a loss of ARS6.5 billion at the IRSA level compared to last year's performance during appreciation in real terms of the peso. In our Israeli business segment, effects remained clouded as we have consistently been adjusting share values in response to market price declines over the years. Lastly, on Page 18, we quantify our debt breakdown, revealing a very active quarter for Cresud. We issued debt in the local market, primarily in dollar-linked notes for $83 million in June, followed by an additional $25 million at a fixed rate of 2% for three years, assisting us in canceling debt at a low interest cost for the Company. Notably, we are preparing to cancel the debt expiring in November, evident in line two, which amounts to $73.6 million set to expire then. A new central bank regulation compels companies to refinance principal maturities maturing from October through March 2021, allowing refinancing for only up to 40% and compelling utilization of the official exchange rate for dollar purchases to settle principal debts. This regulation has affected our operations, and we must propose a refinancing plan to the central bank for the remaining 60% of the debt, typically with an average lifespan of two years. We are actively working on that and aim to reach an agreement with our creditors. With this, we will finish the formal presentation and now open the floor for your questions.

Operator, Operator

Well, this is the time for the Q&A session. [Operator Instructions] [Asus Ganing] wants to do a question. Please go ahead.

Unidentified Analyst, Analyst

What is the total amount of the net investment in IDBD and DIC that's been written down to zero in U.S. dollars, please?

Matias Gaivironsky, Director of Commercial Properties

Sorry. I'm not sure that I heard your question. The question was about if our investment in IDBD was written down to zero in dollar terms, that was the question?

Unidentified Analyst, Analyst

What was the total amount of the investment that was written down to zero?

Matias Gaivironsky, Director of Commercial Properties

That our investment has accrued since 2012. So this last quarter, after the court's resolution, the investment that was written down was around $20 million in our financial statements, recorded in the last quarter. Previously, we experienced various losses that align with the consolidation of our results regarding the valuation of CLAL and the CLAL shares that we have to account for.

Unidentified Analyst, Analyst

Okay, and one follow-up please. Does Cresud have any interest in the [Elsztain] project with Yamana Gold?

Matias Gaivironsky, Director of Commercial Properties

No, no. That is under the ownership of our chairman and is not related at all to Cresud.

Santiago Donato, Investor Relations Officer

Any other questions? If there are no more questions, we conclude the session. At this time, I would like to turn back to Mr. Alejandro Elsztain, CEO, for any closing remarks.

Alejandro Elsztain, CEO

We are closing a very special year for agribusiness, which is really essential and shows the strength and the rebound we are witnessing over the last two months regarding prices, making the business landscape for agribusiness more interesting. In Brazil, we are seeing significant interest; farmers are concluding a rewarding campaign with impressive yields and prices, yielding substantial gains while reinvesting in land, also allowing them to save on taxes. Thus, we anticipate a very active real estate campaign in Brazil moving forward. Moreover, we expect some positive movement from agribusiness across the rest of the region as well. Our companies in the service sector continue to grow, and we promote further expansion in the region. We are bullish on these prospects too. In terms of our urban segment, we are hopeful for the reopening; presently, we are awaiting the reopening of numerous shops, especially in Buenos Aires and the greater Buenos Aires area, alongside hotels. This year has been unique for us. Lastly, concerning our investment in Israel, we are analyzing what our resources afford us. We are aiming for a fruitful 2021, and we appreciate everyone's support and engagement with the Company. We wish you all a safe and prosperous day, and a better year ahead for 2021. Thank you very much, and have a good afternoon. Bye.