Earnings Call Transcript - CRESY Q3 2025

Santiago Donato, Investor Relations Officer

Good afternoon, everyone. I'm Santiago Donato, Investor Relations Officer of Cresud, and I welcome you to the third quarter of fiscal year 2025 results conference call. First of all, I would like to remind you that a replay of this webinar, the presentation and the earnings release will be available on our website at www.cresud.com.ar. 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.

Alejandro Elsztain, CEO

Good afternoon, everyone. Let's start on Page #2, where we will discuss the key events for the third quarter of this year. I believe we are in a positive campaign, larger than last year, with an expanded planted area. This growth is primarily due to increased listings in Argentina and Brazil, and we anticipate continued growth in leasing for the upcoming year as well. Concerning climate, there was generally favorable weather in the region, although the northern parts of Argentina and Paraguay did not receive sufficient rainfall. Both Paraguay and northern Argentina experienced drought during the summer, affecting yields for summer crops. In contrast, the weather was mostly favorable elsewhere. Regarding commodity prices and input costs, we are currently seeing stable prices, particularly in soybean, with some recovery in corn, which I will elaborate on later. Input costs remained steady, but we expect a decrease in costs for the next campaign. A significant development for Argentina has been the removal of capital controls, which has narrowed the previous $2 gap, and we anticipate this will positively impact future results for Argentina. As for BrasilAgro, we are experiencing strong productive results, particularly in sugarcane, which is performing better in terms of yield and prices compared to last year. However, while we are seeing improved results in corn, the performance for soybeans and cotton has been weaker. In real estate, we saw only minimal sales in Los Pozos and Alto Taquari in Brazil during the first quarter, but we are hopeful for some sales before the year ends. Moving to Page #3, we review the changes in planted areas; Argentina still has the largest area while Brazil continues to grow, especially in leasing, followed by Bolivia and Paraguay. The breakdown is 50% for soybean, 24% for corn, and 9% for sugarcane. Sugarcane has become increasingly important in terms of yields and results, with 27,000 hectares being cultivated. On Page #4, we can see the recovery in commodity inputs and cost adjustments. Current soybean prices are comparable to pre-COVID levels but lower when adjusted for inflation, indicating a decline from over 11 to around 10 now. However, we have noticed an early rebound in soybean prices recently. The recent trade developments between China and the U.S. are certainly impacting commodity prices for two main reasons. The reduction of tariffs from China to 10% is making Chicago trading more pertinent again, which we are witnessing today. The high bases in South America are also decreasing with the rising prices in Chicago, leading to increased trading tied to U.S. markets. Overall, the recent events are expected to influence oil prices—closely correlated with commodities—likely normalizing after a reduction in anticipated global oil sales, although this might lead to a slower commodity price rebound in South America compared to past trends. In corn, we have observed a rebound this year, resulting in improved yield and margin due to an increase of 28% from last year. Overall, the commodities environment seems better this campaign. Moving on to Page #5, we address the evolution of capital controls and foreign exchange convergence, a vital change for Argentina. If we discuss export taxes and dollar caps, the latter is particularly significant. The government recently indicated that the gap is nearing zero, currently around 2-3%, with the official dollar aligning closely with the blue-chip currency. It's noteworthy that when the U.S. price for soybeans was $500, Argentine farmers were receiving 170. Now, they will receive around 270 at a projected price of 290. The current gap stands at 36%, with export taxes reflecting that situation, so this is highly significant for commodity prices and land values in Argentina. On Page #6, we look at climate conditions. Argentina is in good shape for winter planting, with notable recovery in soil moisture across all corn fields, despite past droughts and irregular rains that impacted yields in northern areas and Paraguay. Harvesting is underway, with Argentina at 38%, Bolivia at 78%, and Paraguay at only 12%. We are anticipating significant losses, particularly in those two areas, affecting soybeans and corn. Forecasting suggests decreased yields for these crops, indicating the agricultural season is not as robust as initially expected; however, the remainder appears nearly normal. We anticipate a typical agricultural year, with excellent prospects for sugarcane, moderate for corn, but less favorable for soybeans and cotton. Wheat is concluding, and this year's campaign was weaker than last year's. On the next page, we present growth expectations for yields across the region, forecasting a year-over-year increase of 23%, particularly significant between Argentina and its neighbors. This reflects a recovery towards normal climate conditions and improved sugarcane yields and prices. As we assess operational changes, we see promising signs for sugarcane and mixed performance in other crops. Itemized predictions show Argentina anticipating a 2% increase, Brazil a decrease of 1% for soybeans, a significant drop in Bolivia, and minimal growth in Paraguay after a poor last year. For corn, we predict a 14% increase in Argentina, 1% growth in Brazil, no growth in Bolivia, and positive results in Paraguay. There is a mixed outlook for agriculture this year, but the overall trend is upward. The cattle industry is performing exceptionally well, which is encouraging news for Argentina. We estimate close to 60,000 heads, generating a projected margin of $7 million with nearly 7 million kilograms produced. This sector is expanding, with prices rising from their lowest points compared to the rest of the region, now matching those in Uruguay and outselling Brazil and Paraguay. We are enhancing margins in the cattle business through increased volumes, improved efficiency, and greater productivity, mainly in Argentina and now in Paraguay as well. Regarding our service division, FyO, we forecast over 7 million tons for the year, holding a market share of 6.7% in Argentina and generating substantial EBITDA. Despite challenges, our company remains a leader in advisory, credit, and consultancy services, firmly established as the largest broker in Argentina. The Brazilian division has begun yielding positive outcomes, surpassing last year’s figures in the first half of the year, thereby affirming its growth trajectory in Argentina while establishing new prospects in Brazil. After providing an overview of Argentina, I will now turn the call over to Matias Gaivironsky to discuss the IRSA investment, in which Cresud owns a 55% stake.

Matias Gaivironsky, IRSA Representative

Thank you, Alejandro. Good afternoon, everybody. If we review the results of IRSA during this nine-month period, we achieved a profit of ARS 35 billion compared with a loss last year. If you remember, during the first six months, IRSA posted losses, but in this quarter, we have reversed these losses into profits. Major news coming out of our mall segment shows, for the first time in the year, an increase in tenant sales. We saw a 13.4% increase in our tenant sales compared to the previous year, although still below the accumulated nine months at 4.6% under last year, it indicates a positive trend towards recovery. Concerning our office portfolio, we maintained 100% occupancy at similar pricing levels to last year. However, we did see a drop in the hotel segment due to the new macroeconomic conditions in Argentina and pricing challenges. Our hotel occupancy has been impacted by reduced inflows of tourism to the country. As for our transactions, we're pleased with the progress of the commercialization efforts. We've signed around 11 transactions, including 2 cash sales and 9 swap agreements where IRSA will receive square meters in the future. IRSA has also made headlines related to debt; we tapped the international capital market by issuing a new note set to mature in 2035. When we analyze the evolution of rental adjusted EBITDA, it reveals an increase compared to the previous year, especially in the shopping mall segment where we have achieved record highs in dollars for the last decade. Now regarding the financial results of Cresud. First, it’s important to stand the figures, especially when we compare figures driven by dollars, as is often the case with Cresud, adjusted for inflation. When we express last year’s pesos in economic terms, it really inflates those numbers, making it look like a dollar currently compares to 1,800 versus the present 1,000. When we convert the pesos, we notice a 70% increase in pesos compared to last year figures. Additionally, both the evolution of the dollar and appreciation of the peso — in the official exchange rate and the blue chip swap will impact how we value investment properties at fair value. If we turn to Page 13, we will observe the line detailing the operating results of Cresud, which show an 83% drop in profits. Part of this is explained by the earlier context regarding the dollar — we are expressing last year’s dollars in inflation-adjusted pesos. The drop attributable to FyO saw figures vary from ARS 29.8 billion to a loss of ARS 19.9 billion this year. This is largely due to seasonality; last year we benefited from special dollars for farmers, encouraging advanced sales of grains. The brokerage activity of FyO, which last year was considerably more prominent, has diluted. Nevertheless, as Alejandro has pointed out, FyO is expected to show positive performances in the upcoming quarters. Comparing the net income line of FyO also appears to be favorable since part of the revenues are recognized below the operational line. Regarding grains, also we had a drop compared to last year, moving from ARS 21.6 billion to a loss of ARS 5.4 billion this year. Again, Alejandro explained how productivity will prove to be beneficial in comparison to last year, reversing some results impacted by stock valuation. We also project a year-on-year positive trend for the sugarcane line, which has shown higher prices and productivity, despite higher costs. The same goes for cattle; we experienced a 24% increase in production this year compared to last year and prices have significantly exceeded inflation. In terms of the fair value of our investment properties, we recently faced losses, albeit lesser than last year’s losses. This represents a non-cash effect. If we analyze property values in dollar terms, we maintain similar values for offices, land banks, and see higher numbers in shopping malls. However, when adjusted for inflation and converting last year’s numbers into the current ones, it illustrates the cause of our recorded losses. Lastly, the net financial line reflects a positive number of ARS 86.5 billion compared with ARS 145 billion last year. This results from the net FX gain due to peso appreciation, leading to profits when converting dollar-denominated debts into pesos, as well as fair value adjustments of our financial assets. Considering all these factors, we close the nine-month period with a profit of ARS 57.9 million compared to a loss of ARS 39.9 billion last year. Concerning debt, there are no major updates here. The net debt stands at approximately $300 million. Please note that when you said gross debt, it is $349 million; this is the net debt figure. The upcoming debt amortization schedule is laid out for the succeeding years. Notably, our credit rating saw an upgrade to AAA for both Cresud and IRSA in February. With this, we conclude the formal presentation, and now we open the line for questions.

Santiago Donato, Investor Relations Officer

Well, now it is time for the Q&A session. Yes, we have the first question regarding dividends; are you planning to distribute dividends this exercise?

Matias Gaivironsky, IRSA Representative

The decision will be taken in October. Our shareholders' meeting will occur in October, and we need to submit the proposal around September. So it's not decided yet. I can't comment any more on that.

Santiago Donato, Investor Relations Officer

Here is a question regarding the sub-transactions at IRSA. Can we provide a bit more context on how it works? And what motivates swaps instead of developing?

Matias Gaivironsky, IRSA Representative

We entered into all the details regarding Ramblas in the IRSA webcast. If you're looking for a deeper analysis on that matter, it’s public on our IRSA website. Regarding the motivation, to provide clarity, it’s to expedite the project. We provide land to the developers; the development will proceed with the construction and pay us in square meters in the future. This model allows us to expedite development without requiring our own investment. This is the fundamental philosophy driving this strategy. For more detailed information, feel free to reach out to Santi for additional information.

Santiago Donato, Investor Relations Officer

Certainly. There is a question about Cresud's long-term intention with its investment in IRSA.

Alejandro Elsztain, CEO

As a controlling shareholder, we are not envisioning any substantial changes at this time. However, I cannot predict exactly what lies ahead.

Matias Gaivironsky, IRSA Representative

We have increased our investments in IRSA, particularly during the capital increase in 2021, and we have made additional market acquisitions. We believe that the position we hold offers some synergies between our agricultural activities and IRSA's operations, providing protection for both sides.

Alejandro Elsztain, CEO

Currently, the urban environment has improved, while yields in agri-business are under pressure due to price drops. A rebound is likely, but the timing is uncertain. Regardless, it’s our largest asset in terms of size, making it relevant for Cresud. At the moment, we’re not considering any significant changes.

Santiago Donato, Investor Relations Officer

There's another question regarding the negative results for FyO. Could we delve deeper into that, and what do we expect for Cresud's dividend policy for the years ahead?

Alejandro Elsztain, CEO

Regarding FyO's EBITDA, the performance is solid, which Matias will clarify further. However, the core managerial focus has been on maintaining healthy EBITDA figures. To give some numbers, we expect a $15 million EBITDA for the year, indicating that the company is indeed in good shape and surpassing 7 million tons is impressive. It stands out as the largest broker in the nation, offering services not just for outputs but for inputs, fertilizers, and herbicides. The company is designed to assist farmers post-production, helping them navigate futures markets both domestically and internationally. Thus, FyO is serving as a crucial support system for farmers on a much larger scale than Cresud. While our presence was significant initially, today it must be noted that it has diminished comparatively. In Brazil, however, we are trying to replicate the model, and though we're not yet reaching the 1 million ton mark, we anticipate surpassing it.

Matias Gaivironsky, IRSA Representative

Multiple factors contributed to our recent performance. The first is the need to readjust last year’s results; presenting data dollar-denominated in pesos adjusted for inflation presents a misleading view of the past year's performance. Additionally, last year we benefited from government incentives encouraging farmers to liquidate grains, resulting in higher-than-normal revenues at that time, which is not the case this year. Furthermore, when evaluating FyO's financial statement, we find that sometimes they engage in derivative transactions that can reduce profits seen in operating results, even though these transactions might yield gains in financial lines. Hence, we anticipate increased volume for the year compared to the prior year, coupled with higher prices than before.

Santiago Donato, Investor Relations Officer

We have inquiries regarding farmland pricing in light of ongoing policy changes in Argentina and whether you're witnessing meaningful improvement.

Alejandro Elsztain, CEO

The government's actions regarding agriculture are significant. There are criticisms about the lack of removal of export taxes, though a small reduction did occur. As of June 30, there exists a potential risk of reverting to prior tax policies, going from 26% back up to 33% for soybeans. Nonetheless, the government remains committed to reductions, recognizing the negative impact on agribusiness. This situation indicates optimism regarding land prices in Argentina. Argentina’s correlation with the U.S. corn belt prices remains substantial; in 2012 and 2013, land prices stabilized around $12,000, $13,000, $14,000, and $15,000 per hectare. Currently, we observe discussions around a potential 10% or 20% rebound in Argentine land prices. Consequently, positive adjustments may take time, particularly with the macro-conditions at play. Overall, I am optimistic and believe we will acquire additional farmland in Argentina. Our portfolio remains substantial; we hold the largest land portfolio in Argentina. While we expect reevaluations, we are actively looking to buy new assets in Argentina given this macro situation. In Brazil, we are scouting for opportunities primarily in distressed sales, but high prices for land are prevalent. Therefore, markets must react to crises to yield better opportunities; currently, prices remain elevated.

Santiago Donato, Investor Relations Officer

Regarding potential sales of farms, what would be the capital allocation strategy? Would you use proceeds for buying back shares, reinvesting in new land or paying dividends? Can you provide more color on Cresud's capital allocation?

Alejandro Elsztain, CEO

I know that you're asking regarding allocations. I want to reassure you that we will review all options. We typically consider swapping out mature assets and investing in those we deem to have substantial appreciation opportunities. When it comes to shares, as previously mentioned, any assets considerably undervalued relative to net asset value could prompt buybacks. Each time we plan, we initiate new buyback programs and pursue other properties. Our strategy keeps debt reduction in mind while increasing investments in irrigation projects. In cattle, we aim to rotate our approach more towards feedlot operations, which are more profitable, away from longer-term raising strategies that yield less favorable returns. It's vital to adapt our land management approach to effectively match market needs, meaning we’ll buy based on what’s being left behind and enhance production accordingly, consistently aiming for yields above 10% in terms of combining real estate, operational, and services.

Santiago Donato, Investor Relations Officer

Lastly, how do you plan to manage the $200 million maturity next year? Are you considering tapping into local or international capital markets?

Matias Gaivironsky, IRSA Representative

Over the past six months, we have been capitalizing on favorable liquid conditions in Argentina. New credit lines from banks are assisting in refinancing short-term export debt, which has bolstered our short-term debt portion considerably due to competitive costs. Moving forward, to finance operations, our structure remains a combination of both bank debt and capital markets. However, from our experiences with IRSA, investors typically prefer larger offerings of at least $300 million, whilst Cresud does not require that amount. Therefore, we will likely favor the local market for funding rather than going international. An additional point, regarding the warrant, we have an outstanding warrant expiring in February next year. Cresud's warrant is firmly within the money, and we stand to gain from this asset, estimating around $27 million in inflows at maturity.

Santiago Donato, Investor Relations Officer

Thank you for that clarity. With this, we conclude the presentation and the Q&A session. Thank you for joining. I will now turn back to Alejandro for his closing remarks.

Alejandro Elsztain, CEO

We are anticipating a strong conclusion to the last quarter. We expect rain for soybeans and corn, along with some cotton harvests. Our position across the region in four countries leaves us feeling optimistic for the sector. Following the updates from this weekend, the normalization of trading is of great significance. We require economies to continue to grow, contributing to enhanced food consumption within a growing population. Therefore, we hold a positive outlook for the next quarter and the long term ahead. Thank you very much, and we look forward to seeing you in September or October, closing out the annual balance sheet. Thanks a lot.