Earnings Call Transcript - CRESY Q1 2023

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 2023 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. 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 or use the chat. 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 morning, everyone. We are beginning our first quarter results for 2023. The main highlight for this quarter is the strong commodity prices that are still present, and the sustained margins per acre have received some impact due to the cost of inputs and sometimes lower prices of output. But in general, we are still maintaining good margins per hectare for the overall agriculture in South America. The climate is affecting us somewhat. Specifically, the climate mainly is affecting Argentina, not Brazil, Paraguay, or Bolivia. In Argentina, the effect of the climate has been quite strong and we'll show you in the map what the situation is for the country. Related to real estate, this quarter we were able to acquire a farm in Brazil, approximately 11,000 hectares, which comprises about 5,500 acres of arable land. In terms of sales, not in the first quarter but in later periods, we are seeing a lot of movement in the real estate sector. Our service company, FyO, is achieving very good results, with a strong EBITDA this year related to the sales of outputs and the commercialization of inputs, particularly in Argentina but expanding throughout the region. This business is really experiencing significant growth. Regarding the Urban business, we will briefly review some pictures related to IRSA, which had a very good quarter, primarily due to rental properties, especially shopping centers that have been recovering compared to pre-pandemic numbers from 2019. The EBITDA from the Urban and hospitality sectors is also recovering, so both are yielding excellent results. We successfully executed an exchange offer this quarter. We will discuss this later. We have also reinitiated a share buyback program and resumed cash payments recently. Cresud paid dividends to shareholders. Moving on to page number three, we can see two representations of our size compared to last year. Last year we planted 255,000 hectares, and this year we are planting 260,000 hectares. Next year, I believe Brazil will surpass Argentine size because Brazil has acquired new land and rented additional land from cattle production to grain production, but the sizes in Bolivia and Paraguay remain much smaller. We are maintaining this breakdown of crops, with mainly soybeans and corn being the first two, and sugarcane being third. We are observing price volatility. We noted a drop in soybean prices, less so in corn. However, regarding input costs, this year we are facing relevant input costs, particularly fertilizers impacting the cost per hectare, primarily in Brazil more than in Argentina. In both countries, we are seeing margins decreasing due to increasing input costs this year, but we still anticipate reasonable and very good margins for the 260,000 hectares we have planned. Now we can move to page number four, where we can see the drought affecting Argentina. The red areas represent the water situation on arable land, with the majority of the country highlighted. While we did receive some rain recently, it came too late for the winter crops, which were 100% planted and nearly ready for harvest in December. The combination of drought and early frosts in October significantly affected our crops. Analysts are adjusting their expectations for Argentina from the 20 million tons typically harvested down to 10 million, 11 million, or even some projecting below 10 million tons. This represents almost a 50% loss of the plantation, affecting primarily the corn-belt area near Buenos Aires. In our case, we expect less damage because some of our farms received adequate rain. We do not anticipate that drought and frost will cut our yield in half, but it will certainly affect our original budget. The majority of our campaign is focused on 10,000 hectares of winter crops, with the rest being pure summer crops. Most of the yield comes from summer crops, especially soybeans and corn. After yesterday's rain, we saw some recovery in soil humidity, but more rain is still needed to achieve a normal year. There remains some uncertainty regarding yields in the corn-belt. Regarding real estate, the only transaction we completed in the first quarter was the purchase we discussed in Mato Grosso, a farm in which 80% of the crop can double crop; they can produce both corn and cotton. These are very productive and efficient farms located in the north of Mato Grosso. We paid ARS 285 million, divided into a cash payment now, and the second payment will be due next year. It’s all settled, and we just need to transition from cattle to grain production, which will yield a very productive farm in the north of Mato Grosso. The other real estate activity from the quarter was conducted after September 30, so the number will be reflected in the December results. We sold a small area in Paraguay close to 500 hectares from the total area of 863 hectares. We still have about 59,000 hectares remaining. This is a small percentage of our arable area and total area. We successfully sold for $3,000 per hectare of developed agricultural land, which is quite impressive given that we purchased this land for approximately $250 to $300 per hectare and had invested about $1,000 per hectare after preparing the land. Thus, selling at $3,000 yields a very high internal rate of return of close to 28%. This sale marks the beginning of our selling activities in a very comparable farm to Salta, similar to the one we are developing in northern Argentina. We are very pleased to initiate sales in the Chaparral area of Paraguay, indicative of increasing demand. We anticipate significant activity in the real estate market. Now I will introduce Matias Gaivironsky, our CFO.

Matias Gaivironsky, CFO

Thank you, Alejandro. Good morning, everybody. Moving on to Page 6, we have a brief breakdown of our investment in IRSA. We can see a strong recovery in the EBITDA of rentals. We are now reaching pre-pandemic levels after three years of adversity due to the pandemic. As you know, last year we began operating 100% of our malls again, and recovery has been evident quarter after quarter. Currently, we’re surpassing numbers from 2019, and we are pleased with this recovery. Furthermore, in our hotels, we are observing excellent results, primarily driven by our hotel in Llao Llao and two others in Buenos Aires, which still have potential for recovery as tourism in Argentina continues to grow. We're witnessing improved figures but recognize there's still room for growth. We executed one transaction involving the disposal of a floor in the 200 Della Paolera building, which sold for $10,600 per square meter, totaling $12.6 million, and we are primarily using the proceeds to pay down debt. We saw an impressive reduction in IRSA's debt, going from $755 million two years ago to current levels of $307 million. Transitioning to our financial statement breakdown for this quarter, we need to account for the macroeconomic factors impacting our financials, particularly concerning FX and inflation. This year, inflation accelerated to levels of 22% in the last quarter compared with 9% in the preceding year. The valuation reflects an 18% increase this year against the inflation rate of 22%. This translates to a 4% appreciation of pesos versus last year's devaluation of 3% against an inflation rate of 9%, resulting in a real appreciation of 6%. These factors have impacted our dollar-denominated debt when we report results; hence, we are recognizing a rearward gain because of this. Conversely, when we assess assets in peso terms, we will recognize a loss in real terms. Moving to page 9, we can examine what occurred with our adjusted EBITDA in the business. We see a reduction; however, the first quarter is not the most representative during the year. This variability impacts whether we have a stock of grains or production levels during the quarter. The decline appears to stem from our sugarcane output. We see improvement in grains, but we are unable to record this season's performance yet. Notably, last year's higher prices for ethanol and sugar were impacted by lower production this year, attributed primarily to adverse weather in Brazil, accompanied by increasing costs as Alejandro mentioned. In the cattle sector, the situation is related to our holding activity; the results from our stock increased but lagged behind inflation, which is why we have recognized a loss in real terms. This effectively explains the drop in adjusted EBITDA. Now, reviewing our operating income, which includes IRSA, we encountered a decrease of 12.4%. This figure excludes the fair value of investment properties themselves. During the quarter, we reported a loss of ARS 6.6 billion. From a dollar valuation perspective, it remains stable, roughly in line with June of this year. The losses stemmed from the peso's devaluation, where inflation exceeded the devaluation. Regarding net financial results, we also observed ARS 6.3 billion this quarter. The components include, first, what occurred with FX, which generated a gain of ARS 4.5 billion this year, compared to ARS 8.7 billion the previous year. Remember, last year’s real appreciation was more pronounced than this year. Additionally, we have seen a reduction in net interest from ARS 4.6 billion last year to ARS 3 billion this year, related to the de-leveraging of our consolidated net debt. Furthermore, an important effect is the inflation adjustment on Line 1; due to escalating inflation, we recognize higher figures on this line. Thus, our bottom line for the quarter was a net result of ARS 5.2 billion. Compared to last year, our attributable results to controlling interest stand at ARS 3.5 billion. In regard to dividends, during the fiscal year and in the last quarter, Cresud received $40.1 million mainly from Brasilagro and some from FyO. Following the quarter, we are set to receive another $24.5 million from Brasilagro. Moreover, IRSA has distributed dividends for the first time in the last year, with the previous issuing being in shares of IRCP. This time, IRSA is providing dividends in cash amounting to $7.8 million, while Cresud is also initiating its dividend distribution. Last Friday, we began the distribution process for ARS 3.1 billion, resulting in a dividend yield of 3%. ADR shareholders can expect their payment within the next 10 days. To conclude, the debt situation remains manageable, with a slight reduction in concurrent net debt to $389.6 million. While there are some debt maturities this year, there are no impending amortizations due. Referencing our recent webcast, we conducted a successful exchange offer for our $113 million note due in February, achieving a high acceptance rate of 7%. So, the debt situation for next year looks favorable for Cresud. Finally, on page 15, we observed our capital structure activity, where we completed a share repurchase plan, buying ARS 1 billion worth of Cresud shares, representing about 1% of the company. We’ve also initiated a dividend distribution of ARS 3.1 billion, which commenced last Friday. The ADR shareholder payments will be processed in approximately 10 days. With this, I conclude our formal presentation and will now open the floor for your questions.

Santiago Donato, Investor Relations Officer

At this time, we'll do the Q&A session. Here we have the first question regarding margins. Do you expect changes in margins for this campaign as costs are rising alongside prices? Moreover, is there an expectation for a differentiated margin for soybeans this campaign as compared to the end of the last campaign?

Alejandro Elsztain, CEO

Regarding costs, yes, there was a significant increase in fertilizers and herbicides; these costs have increased over 30% in dollar terms in some cases. Therefore, yes, as is typical after the price increase of soybeans and corn, input companies have been raising their prices and reducing their own margins. We expect good prices for the year as well. Consequently, while we anticipate some decrease in margins, it will largely depend on yields. If Argentina manages to maintain its yields, margins may be better than worse, particularly considering the previous year's significant yield drop. However, Brazil will likely experience substantial effects on margins, as input costs have surged without a corresponding rise in output prices. Despite this combination leading to lower margins, we are still observing record-level margins for farmers globally. Everyone anticipates slightly lower margins, but they remain very attractive. Regarding soybean and other crop prices, farmers are waiting. They noticed a substantial increase in the dollar for Argentina the government provided in September, prompting them to sell a significant portion of their soybeans. The remaining stock is around nine million tons; it’s likely the government will announce another soybean dollar scheme for selling the remainder to bolster reserves. This expectation applies to other crops as well.

Santiago Donato, Investor Relations Officer

Here's another question on the financial front regarding bond maturities in November. Do you have the means to pay, and what plans are in place for the remaining $14 million holdout from the exchange?

Matias Gaivironsky, CFO

Fortunately, the Central Bank hasn't altered the rules. When we issued that note, we were required to refinance in 2020. At that time, the Central Bank stipulated that they would only sell 40% of the dollars, and the remaining required refinancing in the market. We managed that quite successfully in 2020, and currently, during the amortization process, the Central Bank has sold the required dollars; we are currently making payments on the note without issue. We are unsure if the Central Bank will revise its regulations in the future, which is beyond our control. However, I can confirm we are making the payments as scheduled, and we believe we can cover the remaining small amount owed to holdouts using funds raised in the local market in dollars.

Santiago Donato, Investor Relations Officer

There is a question related to the previous one. Did the last official measure offering to sell soy at ARS 200 FX have a significant impact on Cresud's results, or was it marginal?

Alejandro Elsztain, CEO

Yes, there was about a $2 million gain from that initiative due to holding a small stock and the revaluation of that stock, which positively impacted us. Additionally, our service company reported positive effects as well, so yes, the overall impact was favorable.

Santiago Donato, Investor Relations Officer

One more question: do you plan to pursue further share buybacks and continue paying dividends going forward? If so, do you have any targets?

Matias Gaivironsky, CFO

We prefer not to set specific targets here. Decisions about dividends depend on the company's debt situation and our capital expenditure plans for the year. However, to provide some guidance, over the past years, whenever we found ourselves in a position to pay dividends, we did so. Cresud has been generating dividends from IRSA, Brasilagro, and FyO, meaning we should be positioned to continue paying. As for buybacks, we also prefer not to anticipate those; should we engage in any, we will issue formal notifications.

Santiago Donato, Investor Relations Officer

Okay. Are there any additional questions? You can use either the chat or the raise hand feature. If there are no more questions, we will conclude the first quarter results and the Q&A. I now turn it back to Alejandro Elsztain, CEO, for his closing remarks.

Alejandro Elsztain, CEO

In closing this quarter, I would like to emphasize that we are expanding significantly across South America, especially at the pace of acquiring and renting new farms, particularly in Brazil, with intentions of doing the same in other countries. Barring adverse climate conditions, we believe the operational numbers will be strong. In real estate, we are seeing rising prices with increased demand and interest, indicating a shift from selling larger parcels to smaller ones in installments. This reflects Cresud’s evolution from bulk buying to smaller sales, and we plan to maintain this strategy. I am very optimistic about the upcoming year. Thank you, everyone, and we'll see you with the December figures. Have a great day. Goodbye.