Earnings Call Transcript - CRESY Q2 2022

Santiago Donato, Investor Relations Officer

Good afternoon, everyone. I'm Santiago Donato, Investor Relations Officer of Cresud, and I welcome you to the second quarter of fiscal year 2022 results conference call. First of all, I would like to remind you that both audio and a slide show 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. 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 afternoon, everyone. We are starting our second quarter of 2022 and can directly look at the main highlights from the first six months on Page #2. We are currently facing unique climate conditions that are primarily influencing prices. Although we have extensive plantations in the region, some areas are experiencing more rain than others. However, we are benefiting from significantly improved margins compared to last year, largely due to rising commodity prices, despite also facing higher production costs. In terms of real estate activity over the past six months, there has been substantial liquidity in Brazil, with two sales of farms that I will detail later, which were highly profitable in the Brazilian market. The agribusiness segment has shown remarkable performance this semester, especially in grains, sugarcane, and farm sales. We are achieving record EBITDA numbers for the agribusiness segment compared to the past 30 years, with considerable contributions from various areas of the region, showing near net-zero negative figures. We have also eliminated the loss-making packing plant, leading to overall industry gains this year. The net gains for this quarter can mainly be attributed to two factors: agriculture, which I will elaborate on later, and our investments in IRSA, particularly the revaluation of Costa Urbana that was approved at the end of 2021. After more than 20 years of waiting, we received approval to develop this land near our office in Buenos Aires. Additionally, there was significant progress in the Urban segment, including a merger between IRSA and IRSA Commercial Properties approved in December, which reduced Cresud's stake from 62% to around 54%. Moving to Page #3, we observe Cresud’s current structure post-merger, detailing our business lines. On the left, we own and lease cattle on our farms in Argentina entirely. We hold 39.4% of BrasilAgro, which operates farms in Brazil, Bolivia, and Paraguay. We own 50.1% of FyO, our agricultural services companies. FyO is a leading broker providing services to farmers and expanding operations into Brazil. Agrofy serves as our agricultural marketplace and is gaining a global presence, which I will detail later. On the right side, we can see the outcome after the merger, indicating Cresud's 53.7% control over IRSA, which manages rental properties, development, and Banco Hipotecario, handling 30% of shares. Now, moving to Page #4, we see how Cresud is positioned for growth with 0.25 million hectares planted across four countries. Argentina remains the largest producer, but Brazil is rapidly expanding. We are cultivating 119,000, 109,000, 14,000, and 14,000 hectares in each of these countries, with soybeans making up 44% of our crops, followed by corn at 27%, and sugarcane at 10%. While we don't own sugarcane factories, we have extensive plantations mainly in Brazil and are considering further expansion into Bolivia, leveraging BrasilAgro's expertise. On Page #5, we examine the soybean and corn stock consumption trends, which have tightened recently, as prices began to decline following production recovery in South America, particularly in Brazil, Argentina, Paraguay, and Bolivia. However, climate impacts have led to a decrease of about 20 to 30 million tons, primarily due to droughts in southern Brazil and Argentina's corn belt. Our plantation areas are not directly affected, and while it’s too early to predict our situation accurately, we believe Cresud and BrasilAgro are better off than others in the region. Current yield forecasts for the new season in the United States will influence price rebounds, and we expect to benefit from upcoming harvests between March and June or September that include late corn. On Page #6, we review two transactions finalized this quarter concerning our farms. One deal involved swapping a third of a farm for shares instead of cash, leading to over 40% internal returns in dollars and around BRL 60 million in profits shortly after acquisition. The other farm, Alto Taquari, will be sold in two parts, with 1,500 hectares sold now, and 1,100 hectares to be sold in the 2024 balance sheet. We are currently showing profits from the first sale made on October 21 for the 1,500 hectares, with total costs of BRL 31 million and combined sales exceeding BRL 550 million, highlighting the increase in farm prices. This property in Mato Grosso is where we cultivate sugarcane and rice, purchased for BRL 10,000 per hectare and expected to sell close to BRL 200,000 per hectare. This example signifies the substantial gains from our property transactions in Brazil, with the second profit reflected in future balances. On Page #7, I want to underscore FyO's growth. Starting around 20 years ago, it has transformed from a humble beginning focused on helping farmers enhance margins to the largest broker in the country, handling 6.4 million tons last year and targeting 7 million tons for the next campaign with about $15 million EBITDA. FyO has evolved from a marketplace to a comprehensive broker, now employing nearly 300 individuals, about 75 of whom specialize in technology, establishing itself as the premier digital broker in the country. We've appointed a CEO in Brazil, and in 2022, we plan to launch grain services there as well as expand regionally into Bolivia, Chile, and Paraguay, becoming a crucial service provider for farmers. Additionally, this year, we issued our first bond for $12.3 million, reflecting the market's confidence in FyO with a 0% interest for a two-year term. Next, we will discuss our recent investments, particularly in Agrofy, our e-commerce platform in South America, which competes against Northern hemisphere counterparts. In December, we successfully closed a new funding round attracting both current and new investors, raising $29 million, boosting our company’s valuation to over $100 million, with Cresud holding about 18%. Agrofy is experiencing rapid regional expansion, enhancing transaction capabilities and fintech solutions. Our growth aspirations include entering the Mexican market by 2023 and positioning ourselves as the leading marketplace in the Americas. We have also received investments from Yara and other firms from the United States and Brazil. With that, I'll now invite Matias to share insights about IRSA. Please go ahead, Matias.

Matias Gaivironsky, CFO

Thank you, Alejandro, and good afternoon, everybody. If we look at Page 9, we have two major events during December last year that are significant drivers for the future growth of the company. The first one is the approval of Costa Urbana after 20 years of dealing with the approvals of the project. Finally, the City Congress of Buenos Aires approved the project. Basically, IRSA agreed with the city to donate around two-thirds of the project to develop public spaces, which will include the second-largest park in Buenos Aires. In exchange for this, IRSA will have the rights to develop almost 900,000 square meters of different uses, including residential and commercial. This news is significant for IRSA and is expected to drive company growth over the next decade. The other important event was the merger between IRCP and IRSA, approved by shareholders in December, which has been effective since July 1, 2021. Consequently, the company began presenting a consolidated balance sheet starting December this year. Due to the merger, Cresud's stake in IRSA will reduce from 62.3% to 53.7%. On the operational side, we can see important news regarding shopping malls' real sales. The real sales increased against inflation for the first time in the last three years, increasing by 7.6% during the quarter. This compares to pre-pandemic levels, as last year was heavily affected by the pandemic. We are very happy to see the recovery of shopping malls after COVID, with restrictions now effectively lifted. We still have room to grow regarding traffic and occupancy, but we are observing improvements. On the office side, we saw mixed results. We experienced a decrease in occupancy, while industrial stock slightly decreased. We executed a 'flight to quality' strategy by selling some floors or buildings last year and replaced them with new buildings in Catalina and the Salta building from a couple of years ago. The performance is slightly below last year due to the pandemic, and some companies decided to downsize or relocate. The occupancy decline is also connected to the disposal of properties since the offices sold were fully occupied while the new Della Paolera opening has some vacancies. We sold some floors during the semester in the Della Paolera building for $41.2 million, allowing IRSA to reduce debt from these disposals. Hotels continue to be affected by the pandemic, particularly in Buenos Aires, where tourism restrictions remained in place until November last year. The operations of both hotels were impacted, although the hotels in areas with fewer restrictions performed significantly better. If we move to Page 12, we can see significant gains during this semester, as we are closing with a gain of ARS 38 billion compared to a loss of ARS 4.9 billion last year. Several drivers contributed to this. The first is in Line 6, where we see a change in the fair value generating a gain of ARS 22.9 billion against a gain of ARS 13.6 billion last year. This year's gains are associated with the revaluation of Costa Urbana. After the approval, we reevaluated the land and generated substantial gains. Another crucial factor is in Line 13, the net financial results that generated a gain of ARS 8.3 billion. Lastly, the net income from discontinued operations, including the consolidation last year of Israel’s case for IRSA, generated a loss of ARS 10.1 billion. If we move to Page 13, we can look into the operational side's adjusted EBITDA for agribusiness, which shows impressive results, generating a gain of ARS 12.1 billion against ARS 2.4 billion last year. In the case of farm sales, as Alejandro mentioned, we sold two farms in Brazil that provided substantial gains. For farming, we also experienced better results compared to the previous year. When we analyze by grains, sugarcane, cattle, and agricultural services, we can see significant improvements, especially in grains, driven by our hedge policy. Last year, while prices significantly increased, we hedged part of the production, leading to losses during the previous semester. However, as we harvest, we are seeing positive results now. In sugarcane, we see price improvements in sugar and ethanol, generating very good results of 4.8 compared with 2.4 last year. Conversely, cattle has seen a drop due to price evolution in Argentina. The prices have had to adjust for inflation and have increased less than the rising costs, hence the losses. Additionally, in Line 7, we observe the performance of FyO this year that generated very positive results. In the Urban segment, shopping malls saw significant improvements compared to last year, but last year was severely affected due to pandemic closures. When comparing with pre-pandemic levels, we are still 22% below 2019 or 2020. The offices have decreased by 30% in pesos, remaining flat in dollars, but in pesos, since the valuation was much lower than inflation, we see this 30% drop. Additionally, fewer square meters were produced this year. In conclusion, if we move to Page 14, we can see gains from net financials at ARS 8.3 billion versus a loss of ARS 1.4 billion, primarily relating to net exchange differences in Line 2 as the valuation in Argentina during the semester was only 7% against an inflation rate of 20%. Consequently, we recognize this gain in the next exchange differences. Finally, on Page 15, we've seen changes in our debt structure. We reduced our debt to $400 million, with an amortization schedule balanced over the next three years. We launched a new issuance last Friday that we expect to close on Wednesday. This issuance aims to extend part of the tenure of the debt from two to three years, maturing in 2025, with a focus on a dollar-linked note with a three-year bullet maturity. With that, we finished the formal presentation and now open the line to receive your questions.

Santiago Donato, Investor Relations Officer

We have the first questions. Will you continue to sell farms in Argentina, Brazil, or other parts of the region?

Alejandro Elsztain, CEO

Yes. We are expecting a lot of movement. Argentina is beginning to have some people visiting farms, interested in buying some farms. This is probably something that is returning; not solid yet, but certainly in Brazil, liquidity is present. The campaign is going to be very positive for the two countries, granting good margins for those who can harvest. Farmers in general are looking to buy more, mainly in Brazil due to tax benefits. This trend is likely to continue, and we are anticipating active second-semester real estate activity as well. In farming, those in areas with normal yields or slightly less yield with existing market prices are getting great margins. Currently, up to December, we have not shown the majority of the gain from soybeans and corn that will become apparent in the second and third quarters. The situation for farmers in the region is genuinely positive, so we expect a lot of activity driven by this favorable environment, and we appreciate having the scale this year, which brings very good margins across the four countries.

Santiago Donato, Investor Relations Officer

Next question is, how are you affected on your issued bonds regarding the Central Bank capital restrictions?

Matias Gaivironsky, CFO

The rule states that issuance in dollars allows companies to pay only up to 40% and requires companies to refinance the rest. Regarding Cresud, our next bond is due in February 2023. Therefore, we do not face issues this year with the payments. Similarly, for IRSA, international bonds expiring in March 2023 are not causing complications for commitments this year.

Santiago Donato, Investor Relations Officer

There is here another question. Why are you canceling the notes that are under technical value?

Alejandro Elsztain, CEO

If I understood well the question, I don't know why the trading value of the bond is as it is. I lack clarity on secondary market dynamics and what drives those assessments.

Santiago Donato, Investor Relations Officer

In that case, you can call me, Fernando, if you have any further questions about the notes; you can contact me directly. Here, there is another question related to the timing of the Costa Urbana development project.

Alejandro Elsztain, CEO

Yes. We just had the conference call of IRSA a couple of hours ago and it is recorded on our website. You can hear the entire presentation there. I will add that the development process will take time; it’s a big project at 70 hectares. It will not be developed in a year, and full development would likely take more than ten years. We had been focused on getting the necessary approvals through December, and our team is now diligently working on defining the next steps. There likely won't be any major capital expenditures in the next two years for that project.

Santiago Donato, Investor Relations Officer

If there are no more questions, we conclude the Q&A session. I will now turn back to Alejandro Elsztain, CEO, for his closing remarks.

Alejandro Elsztain, CEO

I just want to share my happiness over the first six months, with good numbers across all segments, having the cash and resources to expand the business. We are anticipating the second harvests of corn, soybeans, and the rest of the crops. I am also pleased with the merger in IRSA and the subsequent approvals. We expect to maintain the company’s growth trajectory as it has been progressing. Thank you to everyone for sharing Cresud's story with us. Thank you very much, and have a very good day.