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Cresud S.A. (NASDAQ:CRESY)

F1Q13 Earnings Call

November 23, 2012 9:00 AM ET

Executives

Alejandro Elsztain – Second Vice Chairman and CEO

Matias Gaivironsky – CFO

David Perednik – Chief Administrative Officer

Analysts

Pedro Richards – Raymond James

Operator

Good morning everyone. And welcome to Cresud’s First Quarter 2013 Results Conference Call. Today’s live webcast both audio and slideshow maybe accessed through Company’s Investor Relations website at www.cresud.com.ar/ir by clicking the banner teleconference. The following presentation and the earnings release issued last week are also available for download on the company’s website. After management’s remarks there will be a question-and-answer session for analysts and investors. At that time further instruction will be given. (Operator Instructions). You will have also the possibility of sending a question via webcast by clicking on the question to host tool.

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 would now turn the call over to Mr. Alejandro Elsztain, Chief Executive Officer of Cresud. Please go ahead sir.

Alejandro Elsztain

Thank you very much. Good morning everybody. We are beginning our conference call of results of 2013 first quarter. If we can go to page number two, we see the main highlights for the first quarter.

From fiscal year 2013, the company adopted accounting policies, IFRS, that is changing a lot of our balance sheet and we are going to take a lot of minutes to explain the effect of this new system for our balance sheet.

The operating income totaled 180 million pesos, 9% lower than last year due to our 20 million operating loss from the agricultural segment offset by 16% increase in the operating income from the Urban segment. The agricultural segment was affected this year a lot in derivatives. Future sales of this campaign were 30 September very high, and those made a loss [business of] [ph] 36 million pesos loss this year comparing to last year that was a 16 million pesos gain.

So, there is a very big strong effect on the agricultural in derivatives that is affecting the agricultural line that is just [hedge] [ph] of the campaign that will change, I’m not very happy because the prices went down. But this effect was in the 30 September and but it’s affecting comparing year to year. But reality is agriculture for first quarter is almost zero, in the IFRS system, agriculture is reflected every time you are producing, and the first quarter is not producing. So, this affect is almost zero, we’re going to talk about just cattle and dairy, mainly the sugarcane business is doing very well.

Our net loss of 16.5 million pesos was reflected this quarter, mainly due to higher net financial results; we’ve started the crop season and we expect to plant crops in approximately 207,000. This is the planted area of Cresud that is going to go to Cresud, Cresca, Agrouranga and BrazilAgro. Apart from that there is some (inaudible) some funds that Cresud doesn’t produce and [replacing] [ph] in a fixed payment to others to reduce and diversify the risk.

Crop production, mainly corresponding to various planting during 2011 and ‘12 season decreased by 19%, and due to lower yields caused by the drought that affected the whole region. That was the main explanation of last year that affected the last part of this crop that we harvest between June and September.

The beef cattle segment recorded a loss of almost 2 million pesos in gross income compared to profit of last year of 6.7 million pesos, this was really explained by lower holding results, last year holding was positive like 9 million pesos, this year it’s almost zero.

In the case of the milk, the production, we continue to note high production levels, in excess of 20 liters per cow, in El Tigre facility. We have increased our interest in IRSA shares, reaching 64.5%. And our general shareholder meeting resolved to pay 120 million pesos cash dividend that is going to be paid soon, this represents a dividend yield of 4.53%.

If we move to page three, we see the weather and humidity conditions in the region, this is very good news for Cresud and all of the companies in South America, we see the green shows good weather conditions, yesterday we had rains in the North of Argentina too, that is the part that is more delayed for planting because it’s not always it’s planted in December, so it’s very good news for the whole portfolio of plan of Cresud. So, we are expecting and we’re going to see in next page, that USDA is expecting good yield for the whole region.

And here we see that in fourth page, USDA estimations shows that the drop of last year soybeans Argentina was for 49 million to 41 million, expecting for next 55 million tons. In the case of Brazil the same, from 75 million tons, last year drought went to 66 million and it is expected to be 81 million surpassing the United States yields of soybeans so becoming Brazil the largest soybeans producer of the world.

And in corn, we see the same, the big drop on the yield of corn in the United States from 335 moving to 271, so that was the main effect of the drought in the States that changed a lot of the price of our [main] [ph] assets and the affect in the soybeans too. So but, the forecast for this year is much higher, 55 million tons for Argentina and plantation is growing very, very well.

If we move to one second – I’m sorry, I’m receiving the comment that the presentation is not working. And so, some investors have asked us to stop the conference call because they are not really ready to read. What I’m saying, I’m very sorry. We are proposing to investors to reschedule for it – one minute. So, one minute, and let’s wait a minute, I will stop here to be sure that everybody is seeing. And after that moment I suspend, not cancel stay online, so I invite everybody to stay online. And I would like to be sure that everybody follows me, that I’m running a lot and without the presentation that is very tough. Thank you very much.

Company Representative

We are ready to continue. I will ask you to refresh the presentation. It was mistake, it was uploaded, the press release is there on the webcast. So, right now the presentation is already uploaded. So we can continue, but please refresh the presentation on the system.

Alejandro Elsztain

We expect you are ready. And let’s move to page number five, attractive commodity outlook.

And here we see evolution on prices of the four main products and something that I explained in the highlights about the effect of derivatives. Prices at September were at the top and derivatives were affecting negative because of that. In the case of soybeans, there was a big drop after that, like 14% from the highest prices of soybeans. And in the rest some dropped too and that is what I explained at the beginning.

So, we see that the prices are very firm in all of the products in the agricultural products, not in the beef and milk. In the agricultural commodities because of drought, the combination of drought, first, Argentina, Brazil, South America region, later the United States drought, the combination of both made this increasing prices that made so strong a situation and so tight the situation of demand in commodities.

There was [some drop] [ph] and we’re seeing that today’s prices are strong enough, demand is very slim. So, we expect not to see higher losses on the prices than today. There was a big [accommodation] [ph] on prices. So, we’re seeing they are [free enough][ph] to the next part of the campaign. And this is the year that we have the highest hedge position of our history we’re going to show you later with Matias, what percentage of Cresud it’s hedged on the future market.

When we talk about cheese and milk, the situation is different. In here the prices are not recovering, there is a small drop in prices of this year. Almost even price in the milk so that is affecting margins for both activities.

If we move to page number six, I would introduce Matias Gaivironsky.

Matias Gaivironsky

Good morning everyone. So, I apologize for the delay in the presentation. Going to page six, you can see here our hedge position for soybean and corn in the different countries and their consolidated positions.

So, you can see that in Argentina, the soybean for this campaign, we already hedged 61%, in Brazil 54%, in Bolivia 14% and in Paraguay 35%, that give us that we have our net consolidated hedge position of 50% at the price of $414 per ton. In the case of the corn, we have 65% of Argentina already hedged in Brazil 44% and consolidated basis we have 47%, at a price of $194 per ton.

In we move to page number seven, we can see our evolution of crop area, and that shows that we had an increase of 8% year to year. This year we are planting 221,000 acres, proving the four countries to BrazilAgro and CRESCA in the case of Brazil and Paraguay. And so, the largest still Argentina with 115,000 acres, 71,000 acres Brazil, 24,000 acres Bolivia, and 11,000 acres Paraguay. 57%, of that is soybeans, second in size is corn, now sugarcane became 5% so sugarcane, this is in area not in sales that is much higher. So, sugarcane plantation is growing part of Brazil, we began plantation of sugarcane in Bolivia and that is the affect of this growth.

And here we are showing the transformation of the area to agriculture. This year we are expecting to transform 24,600 acres, 7,600 in Argentina, 11,700 in Brazil and 5,300 acres in Paraguay.

If we move to page number eight, we can see the yields that we closed last year and this is the graph that shows that the yield was affected by the drought. We can see the yields for both corn that went from 6.5 last year to 5.7, so the drought affected our last year results, the 2.5 in soybeans while we do 2.0, so that was the main effect of the drought for the old regional yield evolution. That when we do in total production, we see a drop from – we grew in area but we had a drop in total tons because of the affect of the drought affecting the four countries.

And if we see the first quarter, this is last year, so it’s not affecting our total, the balance sheet of this year, which was so just concluding what happened last year.

In next page, we can see cattle and meat production for the first quarter. And the first quarter, we can talk about in the production, I would share with you that fiscal year last year, we had a stock of cattle of almost 70,000 heads. Today, the stock is almost 61,000 so there was a drop on stock of 13% but we had an increase of production of almost 30% in beef for the third quarter. And in the case of milk, having almost the same stock so it didn’t change, production is almost the same, 21 liters to 21.4 liters, so just only an increase of 2.1% to 2.21% to 6.4%.

So, if we move to page number 10, we can talk about last year the balance sheet for the first quarter included the sale of one farm that was the case of San Pedro fund, it was the third quarter of 2012, and San Pedro farm in Brazil. This year, the first quarter there is any farm sale in the balance sheet, there is only one sale than after the balance sheet closed that was done in October so it’s reflected on the balance sheet. And this is the farm of Argentina, the farm in Brazil that was purchased two years before at 37.7 million real.

And it was sold two years later at 75 million real that represent a 37% internal rate of return having invested in the meantime 10.4 million real. So, a big gain of transformation of land in Brazil but not reflecting up to now on the balance sheet of BrazilAgro and Cresud neither.

So, I will introduce Mr. David Perednik, that will explain us the IFRS evaluation of the disclosure for next year.

David Perednik

Good morning to everybody. We expect to change that we have to make in our financial statements in the first quarter. First, not only it affected the evaluation in the different results but also it has affected in material way, the disclosure that we are making of our different results on also our different assets. And we’re going to explain them right now.

With respect to the joint businesses, there is a main change that on the interest in equity in the field of our investments, we have 50% of share not proportionally consolidated any longer, that means that we are not consolidating them in P&L. The company studies and analysis of the business as a whole, really the segment business, are accounting them, and they’re consolidating them. So, you’re going to see in the charts of the financial statement that in the P&L, we no longer have finances, the CRESCA company in Paraguay is consolidated, they are only in the VPP line, proportionally in the – sorry – in the line of company’s joint business denote are not operative. And but the segment business we do consolidate them.

Especially in part of biological assets, the biological assets of the company are valued at fair value, and see significant biological growth, the evaluation is based on in-court and after that point you’re seeing discounted cash flow measures. This is also a change because before we only were go not seeing the assets – ask of the moment that we were in harvesting. And now we’re going to recognize the biology – the asset according to biological growth.

With respect to the changes in real property, there is new classification in the way that we disclosed this is our financial statement, we have 35 existing properties, separated than property plan and equipment and property for sale, this is the way the value FRS rules are considering for every company in the world. And in different properties we are including the properties intended to generate rental income, in our case in Cresud case, this means lease farms and we are consolidating well for shopping centers from our real-estate share needs, OCC and land reserves.

We expect to the property plan and equipments, we’re including funds and we tell that the farms that are not intended to generate income that meet the farms that we are producing. And the property for sale, we are including the properties intended for sale and from brochure agreements.

We still do changes in the recognition of income from property sales, both the sale on income are generally recorded at the time of execution of the title bids and we are not more recognizing NRB. We expect to the impact on leases, the leases including stead-wise increases on broker’s fee, mostly recognize under the straight line method of the contract terms, that means that we are straightening the different monthly or quarterly rent over all the contract terms and are accounting them year by year.

With respect to the investments and financial instruments, like our farms in yields at Hersha to Brazil and CGLT, they must be valued at market value according to the new rules, value IFRS in main change that we have to consider in this quarter, because before we were taking only the cost of this investment, we were not considering the market value. That means that we are going to have in the future an important volatility in our income statement from these financial shares.

With respect to the equity industries, Banco de Crédito and Palermo, they are accounted as equity nationals we have no change compared to what we have been doing up to now. And with respect to the business combinations, IFRS is considering no more that include real.

Okay, let’s go to the page number 12, where we’re going to see Cresud income statement as of 30 September. With respect to the growth income, here we increased 42.4 million pesos, 25% from 37.1 million pesos for the three months period ended as of September 30, 2011 to 79.5 million pesos gain for the three months period as of 30 September 2012. And this was mainly due to an increase of 31.9 million pesos, 134% in the growth profit from our crop segment from 23.8 million pesos in 2011 to 55.6 million pesos gain in 2012.

With respect to the beef cattle segment, we had a decrease of Alejandro have already said of 8.6 million pesos or 128% in the gross profit from 6.7 million gain from the first quarter of 2011 to 1.9 million pesos loss for the first quarter of 2012.

With respect to the meat segment, we had a decrease of 1.2 million pesos or 53.5% in the gross profit of this segment from 2.2 million pesos from First Q of 2011 to 1.0 million pesos gain in the First Q of 2012.

With respect to sugarcane, we had an increase of 18 million pesos in the gross profit from the sugarcane segment from 0.4 million in the first Q of 2011 to 17.5 million gain for the first Q of 2012, and this was mainly due to a higher price and also to a higher production of sugar compared year to year.

With respect to our share in (inaudible) we had a lower loss of 2.3 million pesos or 47% from our agro-industrial segment, the feedback under this business from 4.9 million pesos loss in first Q 2011 to 2.6 million pesos loss in 2012. Sorry, when I’m referring 2011 and 2012, I’m referring to 2012 and the first Q of 2013.

With respect to the other segment, we mainly have our share in (inaudible) and we have an increase of 4.1 million pesos or 150% in the gross profit from 2.6 million pesos in the first Q of 2012 to 6.7 million pesos in the first Q of 2013. And okay, with respect to the increase of 23 million or 10.5% in the gross profit from our real estate business fees, this was a gain of 228.3 million pesos for the first Q of 2012 compared to 252 million pesos in the first Q of 2013.

Going to operating income, the operating income increased 15.1 million pesos or 8.6% from 127 million pesos gain in first Q 2012 to 192 million pesos gain in the first Q 2013. This was mainly due to a decrease of 44.2 million in the operating income from our agricultural business segment from 25 million pesos gain in first Q 2012 to 19.1 million pesos loss in 2013.

We had a decrease of 100% in our income from the sale of farms from 34.3 million pesos gain in first Q of 2012, compared – sorry, during fiscal year 2013 we had sold San Pedro farm that means, which explains the main difference. And this year we haven’t had any sale of farm.

With respect to the hardware operating income, the first – the main difference was the future demand from a profit of 50 million pesos last year to a loss of 28 million pesos that has already been explained by Alejandro.

With respect to yields, we had an increase of 60 million pesos in the operating income from our real-estate business from 154 million pesos in 2012 first Q to 214 million pesos in the first Q of 2013.

Seeing our financial results, our financials were 314.4 million loss for the first Q of 2012 compared to 120.5 million pesos loss for the first Q of 2013 and the main variations were generated by higher financial debt interest due to higher debt by interest rate. We have very higher loss of 103.2 million pesos compared to 26.4 million pesos loss in 2012. A higher loss of 63 million pesos loss generated by foreign exchange rate, it was a first Q of ‘13, we had (inaudible) compared to 0.095 in the first Q of last year 2012.

With respect to the gain that we had in the share of Hersha financials coming from our company of real estate, our share need – we had a difference of 145.6 million pesos between good periods related to the change in the certified view of the Hersha financial that I already explained that this is one of the main changes that we have in our financial statements.

And finally, with explanation with P&L, the net income attributable to the shareholders of result of the part mention, our net attributable to shareholder, the net income attributable to shareholders increased 28.6 million pesos from 95.1 million pesos loss for the three months period of the first Q 2012, compared to 16.5 million pesos gain of September 30, 2012 or the first Q of 2013.

Okay, going to page 13, here we have the breakdown of our total debt – consolidated debt of Cresud, primarily consolidated yields of BrazilAgro and Alto Palermo. So, at Cresud standalone basis, we have $242 million of debt on a consolidated basis, net debt of the company is 740 million remains stable compared with the last quarter.

Net debt to EBITDA, you’ve seen this quarter of EBITDA analyzing this EBITDA between, we don’t longer have the evolution of EBITDA because of the change of the rule. So analyzing this EBITDA that reached 3.6 times net debt to EBITDA and net debt to net asset 34% but remember that this is a book-value and not at market value.

So, now operator, we like the investors to make questions. Operator? Moment of questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We do have a question from the line of Pedro Richards from Raymond James. Your line is now open.

Pedro Richards – Raymond James

Hi Alejandro, Matias, David, thanks for the call. I have several questions. My first question is regarding the evaluation of the farms under IFRS, David went through in detail over the presentation. But I wanted to understand what does IFRS state about the evaluation of farms so you showed that you have them under PPE. Does new IFRS rule or would like to use fair-value or market-value or does it allow you to keep them under historical cost? Thanks.

Alejandro Elsztain

Thank you Pedro. Regarding the evaluation of properties, remember that under IFRS you don’t have the obligation, you can choose between keep measuring all the properties at book value or at fair-market value. We decided to value all the properties at book-value and that is mainly to avoid the volatility of different valuation under our financial standard. We prefer to be conservative and only recognize the gains when we sell the farms.

So, under IFRS, remember that you have right now three different categories for our assets that are investment properties, property plan and equipment and property for sale. We only in the financial standard, you will find a note of the estimation now our – the rational value of our properties only for the investment properties. That’s – in Cresud are only properties that we have to lease to third parties.

So, under the new IFRS you won’t find our estimation of the properties, only for the funds that we lease to third parties. In yields, we have this different – and yields are under investment properties, we have all the shopping centers, the offices under land reserve. So, value for on a consolidated basis of our properties, our investment properties, our estimation that also is conservative, it’s 7 billion pesos that include 6.9 billion pesos of yields and only [75] [ph] million pesos of Cresud. In Cresud we are only – we are only including some farms that we leased to third parties. So, the book value of these 7 billion pesos on our financial statement are 3.4, so you will see all the – will remain with the same valuation that in the past at 3.4 billion pesos.

Pedro Richards – Raymond James

Okay. And do you eventually plan to start releasing an independent appraisal on the rest of the farms that you don’t lease, and start showing the market value or that’s not in the plans now?

Alejandro Elsztain

Up to now it’s not in our plan to release the value or third party appreciation.

Pedro Richards – Raymond James

Okay. Another thing I wanted to understand from the financial statements, if in the sales and cost of goods sold lines, there are two notes that in the full financial statement that lead to the breakdown of sales and cost of goods sold between real-estate and agro business. And I mean, you have a gross profit of before the fair-value of biological assets only taking into account sales and cost of goods sold you have a gross profit of 119 million pesos. And that’s breaking down from yields or real-estate and agro business. You have gross profit of 241 from real estate and a negative gross profit of 121 from agro business.

Can you explain – I want to understand the reason why the sale – I mean the gross profit from sales of crop production that has already been harvested before the fair value of biological assets, gives a loss? Can you clear on that?

Alejandro Elsztain

Pedro, we will see the details, probably we can answer you later, and if other investors and analysts have the same question, you can send me – or you can send me an e-mail and I will forward the answer for everyone.

Pedro Richards – Raymond James

Perfect, and now to very specific questions. Regarding the increasing planted area, that in the presentation you showed that you were increasing planted area to – from 207,000 acres last year to 221,000 acres. And in the press release I think it was expected planting area of 207,000 acres, what’s the difference?

Alejandro Elsztain

The difference is, farms of Cresud rented to third parties.

Pedro Richards – Raymond James

Okay, excellent. And finally, regarding the hedging prices you disclosed here in the presentation you mentioned that you have – the soybean production you have already hedged 50% at a price of $414 per ton?

Matias Gaivironsky

Yes.

Pedro Richards – Raymond James

Is that a price after export taxes $414 per ton?

Matias Gaivironsky

I think this includes the – each country, so this is the average for the price for Argentina, we taxed the rest without.

Pedro Richards – Raymond James

Okay. So, in the case of Argentina, this price is after taxes?

Matias Gaivironsky

Yeah, exactly, net price we close.

Pedro Richards – Raymond James

Okay, the same for the 195 for corn?

Matias Gaivironsky

184 for the corn.

Pedro Richards – Raymond James

Okay.

Alejandro Elsztain

194.

Pedro Richards – Raymond James

Okay. And one final question, regarding the crop yields for fiscal year 2013, the year we are commencing do you expect crop yields to be similar to those last year, fiscal year 2010 or fiscal year 2011, see in the slide in the presentation of crop yields?

Alejandro Elsztain

So, we are now expecting not to have a drought. We plan for having a normal year. And if the situation is normal, but it is too early to explain but really we expect a normal year, the year before was a normal year. So, last year was not.

Pedro Richards – Raymond James

Okay.

Alejandro Elsztain

…we expect to have. And apart of that, remember that a big portion of our assets are maturing farms. So, apart of normal year you have maturity of farms like in Brazil or North of Argentina or Paraguay that every year, the yield increases a part of a normal year more than a mature like (inaudible) that it’s more mature. So, you recover to the normal yields when you are maturing land you’re increasing into the (inaudible).

Pedro Richards – Raymond James

Okay, thank you Alejandro. Thanks for the color.

Operator

(Operator Instructions). There are no questions at this time. So this does conclude the question-and-answer session. At this time, I would like to turn the floor back to Mr. Alejandro Elsztain for any closing remarks.

Alejandro Elsztain

So, thank you very much everybody. We are going to close. We are optimistic because we are increasing area, we have good awareness. We come with a very good normal and good area or planted area for all the region. Good prices, a lot of hedge and a big development of new land to next year. So on short, like always we do – some sale of one asset that reflects very good hidden value that our portfolio has. So we are very optimistic for next quarters. So see you at the end of this year.

So thank you very much and have a very good Thanksgiving Day. Bye.

Operator

This does conclude today’s presentation. You may disconnect your lines at this time. And have a nice day.

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