Cresud(CRESY) - 2019 Q4 - Annual Report

Key Information This section presents key financial data and outlines significant risks, especially those tied to Argentina's macroeconomic instability Selected Consolidated Financial Data This section presents the company's selected consolidated financial data for fiscal years 2019, 2018, and 2017, prepared under IFRS - Effective July 1, 2018, Argentina's hyperinflationary status required IAS 29 application, restating financial statements to current measuring units[36] Consolidated Statement of Income Highlights (in millions of Ps.) | Indicator | FY 2019 | FY 2018 | FY 2017 | | :--- | :--- | :--- | :--- | | Revenues | 82,665 | 69,286 | 67,907 | | Gross profit | 31,058 | 27,111 | 25,203 | | (Loss) / Profit from operations | (9,807) | 29,451 | 4,147 | | (Loss) / Profit for the year | (28,497) | 19,185 | 3,622 | | Profit (loss) attributable to Equity holders | (18,749) | 4,272 | (624) | Consolidated Statement of Financial Position Highlights (in millions of Ps.) | Indicator | As of June 30, 2019 | As of June 30, 2018 | | :--- | :--- | :--- | | Total non-current assets | 354,930 | 398,201 | | Total current assets | 153,059 | 159,473 | | TOTAL ASSETS | 507,989 | 557,674 | | Total non-current liabilities | 329,387 | 345,261 | | Total current liabilities | 89,602 | 88,952 | | TOTAL LIABILITIES | 418,989 | 434,213 | | TOTAL SHAREHOLDERS' EQUITY | 89,000 | 123,461 | Consolidated Statement of Cash Flows Highlights (in millions of Ps.) | Indicator | FY 2019 | FY 2018 | FY 2017 | | :--- | :--- | :--- | :--- | | Net cash generated from operating activities | 17,874 | 16,897 | 16,547 | | Net cash generated from / (used in) investing activities | 7,383 | (22,077) | (4,634) | | Net cash (used in) / generated from financing activities | (18,006) | (2,805) | 4,244 | Key Financial Ratios | Ratio | 2019 | 2018 | | :--- | :--- | :--- | | Gross margin | 0.37 | 0.38 | | Operating margin | (0.12) | 0.42 | | Net margin | (0.34) | 0.27 | | Return on Equity (ROE) | (0.27) | 0.17 | Risk Factors The company faces substantial risks, predominantly linked to Argentina's macroeconomic and political instability, and other emerging markets Risks relating to Argentina The company's Argentine operations are heavily exposed to the country's volatile macroeconomic conditions, political uncertainty, and government interventions - Argentina's highly volatile economy, with 54.9% expected inflation and 2.5% GDP contraction for 2019, directly impacts the company's financials[47] - The Argentine Peso depreciated 51% against the U.S. dollar (Oct 2018-Oct 2019), with reinstated foreign exchange controls limiting capital repatriation[49][57][84] - Argentina's cumulative three-year inflation exceeding 100% led to its classification as a hyperinflationary economy from July 1, 2018, requiring IAS 29 application and impacting financial statement comparability[63][64] - Argentine government intervention, including nationalizations and price controls, creates policy uncertainty, exacerbated by the 2019 national election outcome[75][79] Risks Relating to Brazil Operations in Brazil are subject to significant government influence, political instability, economic slowdowns, and regulatory restrictions - Brazilian operations face risks from significant government economic influence, instability, inflation, exchange rate fluctuations, and political events like the 'Lava Jato' investigation[108][110] - Brazilian Law No. 5,709/71 restricts agricultural land acquisition by foreign-controlled entities, potentially limiting Brasilagro's development and expansion[112][114] - Extensive and stricter environmental regulations in Brazil could significantly increase expenses and lead to administrative fines or criminal sanctions[115] Risks Relating to Our Agricultural Business The agricultural business is exposed to inherent risks including volatile commodity prices, unpredictable weather, diseases, government policies, and illiquid assets - Commodity prices for cereals and oilseeds are cyclical and highly sensitive to global supply, demand, and speculative trading, creating significant price risk[135] - Agricultural production is vulnerable to unpredictable weather, pest infestations, and cattle diseases, which can reduce yields and adversely impact financial results[135][138] - The Argentine government could reinstate or increase export taxes on agricultural products, negatively impacting sales and operating results[139][141] - A substantial portion of assets is illiquid farmland, making portfolio adjustments difficult in response to changing economic or regulatory conditions[152] Risks relating to IRSA´s business in Argentina IRSA's real estate business faces industry-specific risks, including property value decreases, operational challenges, market concentration, and regulatory restrictions - IRSA's shopping malls face risks from tenant defaults, declining rental prices, and increasing e-commerce competition, potentially affecting profitability[171][208] - Most of IRSA's rental income is concentrated in the Buenos Aires metropolitan area, creating high susceptibility to local economic downturns[173] - Argentine law restricts leases with a two-year minimum term and prohibits automatic inflation-based rent adjustments, limiting flexibility and exposing the company to inflation risk[191] - Unrealized revaluation adjustments on investment properties can significantly fluctuate due to market and macroeconomic factors, causing material volatility in reported earnings[212] Risks Relating to the Operations Center in Israel Israeli operations face significant regulatory risks from the Concentration Law, regional political instability, and financial challenges within IDBD and its subsidiaries - The Israeli "Concentration Law" mandates a two-tier corporate structure, forcing IDBD/DIC to restructure and divest certain holdings by December 2019[242][243][630] - As of June 30, 2019, IDBD faced negative equity, negative operating cash flow, and a low credit rating, challenging debt commitments and risking insolvency claims[258][260] - IDBD is under regulatory pressure to sell its controlling stake in Clal Insurance, potentially resulting in a lower sale consideration[265] - Subsidiaries face specific market risks: Cellcom in competitive telecom, PBC in real estate, and Shufersal in the supermarket sector[268][280][283] Risks Related to the ADSs and the Common Shares Investors in Cresud's ADSs and common shares face risks including price volatility, dilution, limited SEC disclosure, enforcement difficulties, and restricted dividend repatriation - As a foreign private issuer, Cresud is exempt from certain SEC rules, including quarterly reporting, proxy solicitation, and insider trading reporting requirements[308] - Enforcing U.S. court judgments against the company or its directors in Argentina may be difficult, as Argentine courts may not enforce actions based solely on U.S. federal securities laws[310] - Shareholder rights under Argentine law are fewer and less defined, with a less developed legal framework for disputes like class actions[315] - Argentine government restrictions on capital movement and currency conversion may impair ADS holders' ability to receive dividends in U.S. dollars[316] Information on the Company This section details Cresud's history, business segments, organizational structure, and property, plant, and equipment History and Development of the Company This section outlines Cresud's evolution from its 1936 founding to its current status as a diversified agricultural and real estate company - Cresud's modern era began in 1994 with new control, followed by a 1997 NASDAQ listing and acquisition of a controlling stake in IRSA for urban property investments[324] - The company expanded agricultural operations internationally, establishing Brasilagro in Brazil (2005) and acquiring land in Bolivia (2008) and Paraguay (2008)[324] Recent Farmland Sales Transactions | Farm | Location | Hectares Sold | Transaction Date | Sale Price | Gain (Ps. million) | | :--- | :--- | :--- | :--- | :--- | :--- | | La Esmeralda | Argentina | 9,352 | June 2018 | US$ 19 million | ~480 | | Jatobá (partial) | Brazil | 9,784 | June 2018 | 300,000 soybean bags | N/A | | Jatobá (partial) | Brazil | 3,124 | June 2019 | 285 soybean bags/ha | 401 | | La Suiza (partial) | Argentina | 10,000 | June 2018 | US$ 10 million | ~266 | - In June 2018, DIC sold a 16.56% stake in Shufersal, losing control, followed by a further 7.5% sale in November 2018, reducing its stake to 26.02%[25][345] Capital Expenditures (in millions of Ps.) | Category | FY 2019 | FY 2018 | | :--- | :--- | :--- | | Total Capex | 14,443 | 15,912 | | Agricultural Business | 1,320 | 2,573 | | Urban Properties & Investments | 13,123 | 13,339 | Business Overview Cresud operates through two primary business lines: Agricultural Business and Urban Properties & Investments, each with distinct strategies and portfolios - The company operates in two main segments: Agricultural Business and Urban Properties & Investments, the latter through its 62.35% stake in IRSA[369] - The Agricultural business acquires under-utilized land, enhances value, and selectively sells properties for capital gains, owning 23 farms totaling 599,615 hectares as of June 30, 2019[369][377][380] - IRSA's Urban Properties business has two centers: Argentina, with 15 shopping malls, premium offices, and luxury hotels; and Israel, with a diversified portfolio via IDBD and DIC[369][383] Agricultural Production Volume (FY2019) | Product | Volume (tons) | | :--- | :--- | | Total Crops | 599,238 | | Sugarcane | 1,999,335 | | Cattle | 11,173 | IRSA Shopping Mall Portfolio Highlights (as of June 30, 2019) | Metric | Value | | :--- | :--- | | Number of Malls | 15 | | Total GLA (sqm) | 332,150 | | Average Occupancy Rate | 94.7% | | Total Tenant Sales (FY2019) | Ps. 66,075 million (-13.9% YoY) | Organizational Structure This section details Cresud's corporate structure as of June 30, 2019, including key direct subsidiaries and associated companies with their effective ownership percentages Key Subsidiaries and Ownership (as of June 30, 2019) | Company | Effective Ownership % | Main Activity | | :--- | :--- | :--- | | IRSA Inversiones y Representaciones S.A. | 62.35% | Real Estate Development & Management | | Brasilagro Companhia Brasileira de Propiedades Agrícolas | 43.29% | Agricultural Properties in Brazil | | Futuros y Opciones.Com S.A. | 50.10% | Agricultural Information & Brokerage | | Sociedad Anónima Carnes Pampeanas S.A. | 100% | Meat Packing Plant | - Israeli operations are held through a multi-layered structure, with Cresud controlling IRSA, which then controls IDBD and DIC via intermediate holding companies[535] Property, Plants and Equipment This section provides a detailed overview of the company's tangible assets as of June 30, 2019, including agricultural farmlands and urban property portfolios Owned Agricultural Farmlands (as of June 30, 2019) | Country | Number of Farms | Total Hectares | Net Book Value (Ps. Millions) | | :--- | :--- | :--- | :--- | | Argentina | 13 | 401,713 | 4,219 | | Bolivia | 3 | 9,875 | 1,043 | | Paraguay | 1 | 17,566 | 1,823 | | Brazil | 6 | 167,580 | 4,027 | | Total | 23 | 599,615 | 10,679 | Urban Properties Portfolio - Argentina (as of June 30, 2019) | Property Type | Leasable/Saleable Area (sqm) / Rooms | Net Book Value (Ps. Millions) | Occupancy Rate | | :--- | :--- | :--- | :--- | | Shopping Malls | 332,150 sqm | 29,038 | 94.7% | | Offices | 115,378 sqm | 19,583 | 88.3% | | Hotels | 718 rooms | 1,394 | 66.5% | | Land Reserves | >1.2M sqm | 12,824 | N/A | Urban Properties Portfolio - Israel (as of June 30, 2019) | Property | Location | Use | Net Book Value (Ps. Millions) | | :--- | :--- | :--- | :--- | | HSBC Building | United States | Rental properties | 39,779 | | Matam park - Haifa | Israel | Rental properties | 21,504 | | Herzeliya North | Israel | Rental properties | 14,696 | | Tivoli | United States | Rental properties | 9,107 | Operating and Financial Review and Prospects This section analyzes consolidated operating results, highlighting hyperinflation accounting's impact and segment performance Consolidated Operating Results The company's operating results for fiscal year 2019 were significantly impacted by Argentina's hyperinflationary economy, requiring financial restatement under IAS 29 - IAS 29 hyperinflation accounting, applied from July 1, 2018, critically impacts results by restating financials to current currency values, affecting comparability[675][687] Operating Results Summary by Business Line (FY2019 vs FY2018, in millions of Ps.) | Business Line | Revenues FY2019 | Revenues FY2018 | Segment Profit/(Loss) FY2019 | Segment Profit/(Loss) FY2018 | | :--- | :--- | :--- | :--- | :--- | | Agricultural Business | 13,249 | 10,681 | 2,199 | 3,270 | | Urban - Argentina | 10,534 | 9,706 | (26,716) | 16,183 | | Urban - Israel | 56,722 | 46,138 | 9,724 | 8,605 | | Total (Segment Info) | 80,505 | 66,525 | (14,793) | 28,058 | - Profitability significantly declined due to a swing in 'Net gain from fair value adjustment of investment properties' from a Ps. 16,849 million gain in FY2018 to a Ps. 23,618 million loss in FY2019, primarily in Argentine urban properties[718][756] - Agricultural business revenues grew 24.0% to Ps. 13.2 billion in FY2019, but segment profit fell 32.7% to Ps. 2.2 billion due to lower farmland sales gains[737][795] - Financial results improved from a Ps. 33.8 billion net loss in FY2018 to a Ps. 12.4 billion net loss in FY2019, driven by a positive net exchange difference as 56% inflation outpaced 47% currency devaluation[808]