Earnings Call Transcript - CRESY Q1 2021

Santiago Donato, Investor Relations Officer

Good afternoon, everyone. I'm Santiago Donato, Investor Relations Officer of Cresud, and I welcome you to the First Quarter of Fiscal Year 2021 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. 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.

Alejandro Elsztain, CEO

Hello. Good afternoon, everybody. We are beginning our first quarter 2021 results in Page number 2. And we can see and begin with the adjusted EBITDA for the quarter that we are achieving ARS5.8 billion, which is 63% higher than last year’s numbers. When we see about the comparison of the two quarters, it's almost the same at the early business level and Matias will explain deeper later. In the urban business, there is an increase of 155% in the urban business comparing year to year, and when we compare the rental segment, it's much lower this year, at 96% compared to last year. It's a big drop; the majority of the last six months, our malls were closed. However, we had a significant increase in the sales of some office buildings that made ARS5 billion in the first quarter in the urban business. About the net results, we are finishing the first quarter with ARS7.5 billion gain, a little smaller than last year's number, and resulting attributed to the controlling company, it's much higher. We are in the positive ARS2.9 billion compared to a loss last year. This first quarter began with a strong recovery in commodity prices, and we will explain deeper with Carlos about what is happening in the market. On the other side, the conditions at the beginning of the company are the best, and we began to see rain, which is helping recovery towards almost normal. The market changed significantly in the last 90 days, and we are going to speak in depth now. Additionally, there were no farm sales in the first quarter. I think this is a market that will move a lot. In this new environment of prices, there is a lot of interest from farmers, mainly in Brazil, due to the devaluation of their currency plus the increasing prices, which is creating a very positive market where they do not pay income tax back when they buy new farms. We are very optimistic about that market too, as well as in the rest of LATAM in this new environment of commodities. Regarding the urban business and investments, on September 20 of this year, the Court decreed the insolvency and liquidation of IDBD. After this decision, the group lost control on that date, leading to the decision to cease consolidating the financial statement. Therefore, we no longer consolidate our Israel investment. In Argentina, shopping malls have reopened recently after a six-month lockdown. We began reopening in partial phases, starting in the interior of Argentina, and now 100% are open. We are seeing much more development in that area too. In the office sector, operations remain almost normal with slightly more vacancy but stable compared to other areas. On the financial side, we successfully exchanged our bonds that matured this year. We can move to the next Page number 3 and see that the region's four countries remain at similar levels of plantation. I am really glad about this. At this time, the decision margins were very low, primarily in Argentina, and fortunately, we decided to plant and maintain our levels. We are facing a promising campaign with a significant increase in market prices, primarily in soybeans and corn. Having these 262,000 hectares planted in the region, we are very optimistic about our operations this year. I will now introduce Mr. Carlos Blousson.

Carlos Blousson, Speaker

Thank you, Alejandro. Good afternoon, everyone. We are now shifting to the section on farming, commodity prices, and global stocks. The graph shows that prices are continuing to rise. In the past three months, corn prices have increased by about 26%, and soybeans by 33%. This can be attributed to several factors. On the supply side, crop production in the United States has been lower than anticipated, reducing global stock levels to amounts we haven't seen in five years. In South America, the start of planting has not benefited from optimal weather conditions due to a lack of rain, and we are seeing higher exports than typically expected at this time of year. On the demand side, there is a notable post-pandemic increase, especially in China. Exports are rising despite a stall in strategies, as China is leveraging its purchasing power during a period of dollar depreciation, making conditions more competitive. Regarding stock consumption, soybean stock ratios worldwide have decreased by 24% due to post-pandemic demand outpacing supply, particularly in China. For corn, the global consumption ratio has fallen to 25.8%, with a significant decrease of 40.9% seen in the United States. This decline is due to reduced production forecasts and increased exports, along with higher corn usage for ethanol production, which has been influenced by rising oil prices resulting from the pandemic. In Brazil, soybean prices are more competitive compared to the United States, while Argentina is experiencing higher demand from Brazil, having already sold over 50% of their future production. The current regional head has soybean prices at 67% above the budgeted levels and corn prices at 53%. We’ve consistently been above our budget for both soybeans and corn, and as long as planting conditions remain favorable, we will continue selling at attractive price levels. Moving on, let's discuss the farming campaign for 2001. As illustrated in the weather maps, there is some uncertainty regarding regional weather development. Conditions are slightly deteriorating due to La Niña, resulting in average rainfall. However, forecasts indicate a neutral situation post-rain, which should allow for normal planting progress in the region. As for soybeans, we are currently at 37% planted within the optimal timeframe. We are anticipating the rain season for successful completion in the upcoming month. In terms of corn, regional planting progress stands at 40%, with the completion of corn planting in Argentina and Bolivia expected before year-end. Additionally, we will finalize 100% of the wheat and commence harvesting in Argentina next month. Another important factor is the exchange rate; the graph shows currency depreciations of 80% in Argentina and 4% in Brazil over the last quarter, resulting in an annual devaluation of 33% in Argentina and 28% in Brazil. Thank you all. I will now pass it over to Matias.

Matias Gaivironsky, Speaker

Thank you, Carlos. Good afternoon, everyone. During the quarter, we experienced varied results from our investment in IRSA. Our shopping malls were significantly impacted by the pandemic, leading to most operations being closed since March. We began reopening these malls during the quarter, and by September, approximately 44% were operational. Currently, we have fully reopened, but this isn't yet reflected in our results. In terms of our commercial strategy, we opted to maintain long-term relationships with our tenants and support them through this pandemic, waiving most rents during the quarter, which incurs costs for us, but we believe this will benefit us in the long run as our tenants recover. The office segment has experienced a different scenario, with operations remaining largely unaffected by the pandemic. All of our buildings are up and running, although many companies continue to have employees working from home. We did see a slight decrease in our stock as we sold some square meters during the quarter. Occupancy is stable at nearly 92%, and average rent has dipped slightly to $26 per square meter. We are nearing completion of the Della Paolera 200 building, which we aim to open next month. As for hotels, they remained closed until recently, but the intercontinental chain has begun operations and some shops are set to open this week, which gives us hope for improved results ahead. Regarding the Israel business segment, we unfortunately lost control of IDBD as a judge declared the company insolvent, initiating liquidation processes. This process concluded yesterday with the sale of DAC shares to a third party, resulting in a loss of control over this investment. We began consolidating this investment from September 30, which has led to a loss that we will detail when discussing the financial statements. We reported a net income of ARS7.5 billion compared to ARS9.5 billion the previous year, which is ARS2.9 billion versus a loss of ARS3.2 billion last year. Upon analyzing the components of net income, the first significant factor is in line 6, where changes in fair value primarily from our urban business generated a profit of ARS23.6 billion, up from ARS12.1 billion last year, due to increased property values reflecting a significant rise in the blue chip swap during the last quarter in dollar terms. When translated to pesos, this resulted in a profit. Another important factor is in line 13, our net financial results, where we experienced a loss of ARS18.2 billion last year compared to ARS2.5 billion this year, which I will further elaborate on later. There’s also the income tax element tied to fair value changes; when our properties appreciate, we must recognize a deferred tax that does not equate to a current tax, making it a non-cash impact. In line 16, we account for net income from our continuing operations in Israel. This quarter's reconsolidation led to a loss because in the previous quarter, we had recorded it on a standalone basis with the investment valued at zero. However, on a consolidated basis, we lost control in September, necessitating the recognition of results for most of the quarter and accounting for the effect of the reconsolidation. We had to eliminate various reserves related to this investment, including the commercial and controlling reserves, resulting in a loss of nearly ARS6.4 billion, whereas last year we reported a gain of ARS13.9 billion due to profit from consolidating the subsidiary Gabian. Moving to Page 10, we see the adjusted EBITDA broken down by segment. The agribusiness results are similar to the previous year. In farmland sales, we've seen an increase due to receivables from the sale of some farms in BrasilAgro, particularly with installment payments linked to rising soybean prices. The Grain segment reflects a drop from ARS666 million to almost ARS200 million in losses due to stock from the last campaign still unsold. This quarter, we decided to hedge part of our production, and with rising prices for soybean and corn, we are recognizing a loss that should even out as production evolves in the coming months. Meanwhile, sugarcane results remain stable year-over-year, and we have improved outcomes in cattle due to higher prices in Argentina recognized in real terms. In the FyO and beef cattle facility, we observed a drop, mainly from FyO operations where inflation and salary costs have increased this quarter compared to last year’s extraordinary valuation effects. The urban segment has faced significant losses due to pandemic impacts on shopping malls, although we are optimistic about positive results over the fiscal year. In the office sector, we report a decline of 32.9% tied to lower stock from office sales and slightly higher vacancies. Last year, devaluation effects led to a profit in this quarter due to our dollar-denominated agreements. Lastly, we highlighted sales and developments reflecting the appreciation of offices sold during the quarter. On Page 11, we break down our net financial results. Last year, we encountered a devaluation of 35.6%, translating to a real term of 12%, while this year has seen nearly flat effects impacting net exchange differences on dollar-denominated debt, which is the main financial influence. Additionally, we reported ARS640 million from the fair value of our financial assets compared to a loss of ARS333 million last year, linked to liquidity and investments. On Page 12, we previously mentioned new Central Bank regulations affecting our payments. The Central Bank instructed companies with amortizations to refinance debts, permitting only 40% of dollars for payment while requiring refinancing for the remaining 60%. We contacted our existing holders with two exchange proposals: Option A allows holders to collect cash and new notes for the remainder, while Option B defers payment for those not wanting immediate dollars for up to two years. This exchange was highly successful, with an acceptance rate of 88.41%. Those selecting Option A received 96% in dollars rather than the 40% the Central Bank permitted; additionally, $34.3 million were refinanced until November 2022. On Page 15, we present the debt amortization schedule, detailing our scheduled repayments over the next three years. No new measures followed these repayments. We had issued $2 lean or $3 lean notes during the year, demonstrating our intention to pay all debts; however, Central Bank rules necessitated refinancing. The company maintains a strong cash position of nearly $72 million available. This concludes our formal presentation. We will now open the floor for questions.

Unidentified Analyst, Analyst

I would like to ask you, what expectations do you have regarding the future of the business in Argentina, considering the program that the government has to sign with the IMF and the consequences this may have for the country's future? Thank you.

Alejandro Elsztain, CEO

Regarding agribusiness, there is a lot of optimism in the market. We've seen an increase of more than $100 per ton of soybeans, and this has certainly changed market sentiment. We are considering how this affects the results for this campaign, and it's incredible. In some countries, the results have more than doubled with this increase occurring mid-planting time. Thus, optimism in global food production is rising. We feel that a new trend has developed; it was at $9 to $10 per bushel for many years, but now we are reaching the $12 level, which will undoubtedly affect the optimism in farming industries across South America. Our business, Cresud and BrasilAgro, stands to benefit greatly from this, not only in grains but also in beef demand from China, primarily in Asia, which is increasing significantly as they recover their stock levels. This will surely influence liquidity in the real estate part of our business due to enhanced margins, increasing gains, and the intention to expand farming operations. So, we are very positive about it.

Matias Gaivironsky, Speaker

Regarding the financial side and the IMF, of course, this will impact Argentina’s macroeconomic situation. We don't have clear insights into what the government will decide. What they have indicated shows efforts to normalize the debt curve, addressing refinancing of sovereign debt in local and foreign currency. We hope they will indeed close an agreement with the IMF; we cannot predict when, but we remain hopeful. As for the real estate sector, it should improve significantly compared to this year. This year was exceptionally unique with malls, hotels, and convention centers closed for almost six months. So, surely it will be better. We believe that our platform is prepared to create attractive business opportunities again. Since we supported our tenants, we hope they will strengthen their relations with us and make it through this crisis to be ready for recovery.

Santiago Donato, Investor Relations Officer

There are no more questions. We conclude the Q&A session. At this time, I would like to turn back to Mr. Alejandro Elsztain for any closing remarks.

Alejandro Elsztain, CEO

For agriculture, the first quarter is just the beginning. It's a very optimal situation at the start. In the first quarter, we are planting under good conditions within a favorable window for farming, which is relevant for achieving budget yields. We have a significant campaign ahead, and we are very optimistic about the platform and portfolio that the company is managing today. Thank you very much. We look forward to seeing you next quarter. Thank you, everybody. Goodbye.