Cyrela Brazil Realty SA Empreendimentos e Participacoes

BOVESPA:CYRE3

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Cyrela Brazil Realty Conference Call where we will discuss the first quarter of 2019 earnings results. [Operator Instructions] As a reminder, this conference is being recorded and the audio will be available at the company's website, www.cyrela.com.br/ri.

This call is being simultaneously translated into English and is being broadcast over the internet. Questions can also be asked by participants connected abroad. The earnings release published yesterday, 9th of May after the close of the B3 trading session can also be accessed on the company's website.

Before proceeding, we would like to mention that the forward-looking statements that may be made during this conference call relating to the company's business prospects and forecasts and operating targets related to its financial growth potential are predictions based on management's expectations about the future of Cyrela. These expectations are highly dependent on domestic market conditions, the general economic performance of the country and international markets and therefore are subject to change.

With us today are Mr. Raphael Horn, co-CEO; and Mr. Miguel Mickelberg, CFO.

I will now turn the conference over to Mr. Horn. Mr. Horn, you may now begin.

[Raphael Horn, executive]

Good afternoon. The Ibovespa index hit an all-time high of 100,000 points in the first 90 days of the new government. However, tensions between the executive and the legislative branch abated, motivated by the political coordination to approve the pension reform eroded the market's optimism. If the reforms are approved, we are going to see an economic recovery. We remain confident that Brazil can take the path to renewed growth and development, even though the volatility caused by the political situation may delay or slow this process.

Concerning our results, launches performed well for another quarter with a sales speed of 52%. One of the highlights is -- in this regard was the first project under the Vivaz brand. In the first quarter, our cash generation was BRL 150 million with a net income of BRL 48 million. This reflects not only the better economic situation, but also our management's internal efforts.

Now we will comment on our operating results. On Slide 5, we will address our launches. In 1Q '19, we launched 9 new projects with a PSV of BRL 547 million, 26% higher year-on-year. Excluding swaps, the volume launched in Cyrela's share in 1Q '19 was 62% higher year-on-year. The company's share in the volume launched in 1Q '19 was 78% compared to 60% year-on-year.

Slide 6 highlights the launch of the Atmosfera Brooklin project in São Paulo with a PSV of BRL 142 million and sales over 48% in 1Q '19.

Slide 7 highlights the launch of Living Wish Panamby project also in São Paulo with a PSV of BRL 125 million and sales over 65% in 1Q 19.

On Slide 8, we will talk about sales performance. In 1Q '19, presales totaled BRL 1.44 billion, 70% higher than the BRL 613 million year-on-year. Excluding swaps presales amounted to BRL 746 million in Cyrela's share, a 97% increase year-on-year. The cities of São Paulo and Rio de Janeiro jointly added for 82% of sales.

On Slide 9, we will address sales speed. The company's annual SOS was 49%. Looking at sales speed by period, projects launched in 1Q '19 had been 51% sold.

On Slide 10, we will address Cyrela's total inventory. At the end of the quarter, inventory market value totaled BRL 5.19 million down by 11% quarter-on-quarter. The change in our inventory can be seen in the chart on the right.

On Slide 11, you can see a breakdown of our finished units. In 1Q '19, we sold 11% of the finished units at the beginning of the period. Adding the inventory of projects delivered along the quarter and pricing of units and market value, finished units inventory decreased by 11% by the end of quarter. We are aware of how important this matter is to the company and we will continue to focus our efforts on these products.

On Slide 12, we will talk about delivered units. In 1Q '19, Cyrela delivered 5 projects totaling 1,440 units. Units delivered in 1Q '19 account for a PSV of BRL 357 million, 64% lower year-on-year.

I will turn now the floor over to Miguel, who will present the financial results.

[Miguel Mickelberg, executive]

On Slide 13, we will present our financial results. Gross revenue was BRL 826 million in the quarter, down by 38% quarter-on-quarter and 83% higher year-on-year. Gross profit in the quarter was BRL 249 million, down by 25% quarter-on-quarter and 99% higher year-on-year. Our net profit totaled BRL 48 million in the quarter with a net margin of 5.9% compared to a profit of BRL 116 million in 4Q '18 and losses of BRL 51 million in 1Q '18.

Please go to Slide 15 to see our profitability. In 1Q '19, our return on equity measured as the net income of the past 12 months over the average shareholders' equity was 0.3% and our EPS was BRL 0.13.

On Slide 16, we will talk about our customers' financial solutions. In 1Q '19, the transfers, trust of deeds and payoffs amounted to BRL 625 million, 15% lower quarter-on-quarter and 16% lower year-on-year. Transfers, trust of deeds and payoffs totaled 2.9 thousand units, 22% lower in the quarterly comparison and 15% lower year-on-year.

On Slide 17, you can see our indebtedness. Gross debt at the end of the quarter was BRL 2.1 billion. The cash position was BRL 1.4 billion, but our net cash was BRL 670 billion, 29.4% of the gross debt are related to loans for construction and 90% is long term. Our net debt over equity ratio was 12%, 2.8% percentage points lower quarter-on-quarter. The low debt level confirms Cyrela's financial solidity and puts us in a privileged position to adjust our capital structure.

On Slide 18, you will see company's cash generation. In 1Q '19, our cash generation was BRL 150 million versus BRL 137 million in 4Q '18 and BRL 184 million in 1Q '18.

Now we will begin the question-and-answer session. Thank you.

[Operator]

[Operator Instructions]. Our first question comes Mr. Trotta with Itaú BBA.

[Enrico Trotta, analyst]

I have 2 questions. The first one is about dividends. You mentioned in the release that in April you finished another issuance of dividends, so I believe that's well addressed. Should we expect to see a trend of dividends every half year? Or are you going to announce different strategies for dividends till this half of the year? Now when it comes to finished units, if we consider the drop in deliveries, we can see that in the first quarter, the number of deliveries was lower and you are still selling finished units. What do you think is going to happen until the end of the year? Do you think we are going to finish the year with BRL 1.5 billion or even lower than that?

[Miguel Mickelberg, executive]

Good morning, this is Miguel. When it comes to dividends, our leverage was very low in the quarter. It was 12%, which is very low in a long time, so we want to reduce that number even more and pay dividends. We don't know the timing yet, but we like the dividend model that we are using to pay dividends every half year.

Now when it comes to finished units, we had an internal target of selling around BRL 1 billion in the year and we won 27% of that in the first half of the year. So we are keeping a good pace. April and May were lower because of the new launches that we have, but we believe that we are going to reach that level.

[Operator]

Our next question comes from Victor Tapia with Bradesco.

[Victor Tapia, analyst]

The first point I would like to address is related to gross margins. It was a surprising level, they have been so for some years now. But we also saw dropped year-on-year and on quarter-on-quarter too. So I would like to know your expectation when it comes to the margins for the whole year 2019? And how is that going to impact your profit? And the second point if you could tell me more details about it. I would like to know more about your expectations when it comes to sales of the projects that you just launched? I would like to know your expectations for Minha Casa, Minha Vida segment and your expectations for the whole year in that segment?

[Miguel Mickelberg, executive]

Good morning, Victor, this is Miguel. When it comes to gross margin, in the past quarter, we said that our new launches have a higher gross margin, but our other margin is concentrated in heritage projects and other high-end projects with higher margins. So the dynamics of seeing a lower margin, that's expected. Now on the other hand with the gross margin that we would want, that is going to be higher as we have been seeing -- it has some volatility because we have a lot of finished units with lower margins, so we expect to see higher margins, but we may have quarters with lower margins as well.

[Raphael Horn, executive]

Good morning, Victor. This is Raphael. You asked us about the market and sales and launches. It's good -- It's been good. It's making a slow progress. It's certainly better than it was before. We have to wait for the reforms to be approved, so that we can regain the growth. But you can see that our results have been improving quarter-over-quarter. Now when it comes Minha Casa, Minha Vida, we are more focused on working with a Cury and Plano & Plano in that segment and our participation in that segment is very little. We focus on our partners and they are doing fairly well.

[Operator]

Our next question comes from Mr. Jorel Guilloty from Morgan Stanley.

[Wilfredo Guilloty, analyst]

My first question is about cash generation for the rest of the year. In the first quarter of 2018, you sold a lot of finished units, which helped cash generation, but can we expect a significant cash generation from now on? Or is it going to be similar to the first quarter? And the second question is about your expectations when it comes to your suggestion, when it comes to purchasing land blocks?

[Unknown Executive]

When it comes to cash generation, we had a very strong quarter especially because of the finished units and also because of lower construction expenditures. And we expect to have lower cash generation than we had in 2018. We are spending money in constructions and new launches, so the volume in the year maybe even lower than the one that we had in the first quarter 2019. You asked that we are happy about our land bank. We are, yes, we are. It could be better obviously, but I believe that our position is very good. Of course, it could be better, but it could. And land bank is about continuous work. We have to pay attention. And you asked if we are expecting to launch more than we have been launching and about the Triple Four target that we have, our focus is to pay dividends, we believe that we have to keep our profitability high. We are not going to change that plan for increasing our land bank to launch new projects. Our plan remains the same. Obviously, we have a lot of land bank and we are going to purchase new land plots if they are appropriate, but we are maintaining our Triple Four target and our dividends payments plan.

[Operator]

The next question comes from André Mazini with Citibank.

[André Mazini, analyst]

My question is about finished units. I would like to understand a little bit more about the acceleration that we saw in the quarter. Is it more related to you selling finished units according to the book price and at the same time the banks have a better appetite to provide credits? Or are you giving discounts on the book price and what would that discount be?

[Unknown Executive]

Our inventory was never a huge problem for us. But to have too much inventory that is a problem, especially if you have a high rate of cancellations. What is happening now is that we are selling finished units and cancellations dropped significantly. But again, it's not that finished units changed, it's just that the level of cancellation has decreased. And that's what we said before. When that happens, we are going sell more and we are going to generate more cash. So thankfully, we are close to 0 cancellations. It is in a very low level. And that is why it seems that we are selling more finished units. But one thing is to sell finished units when you have lower cancellations and that's the best scenario possible.

[Operator]

Our next question comes from Mr. Motta with JPMorgan.

[Marcelo Motta, analyst]

I would like to ask you about the launches along the year. We see many companies launching more products in the beginning of the year, decreasing their pipeline of launches along the year. And I also would like to know about the geographic distribution of your launches, of course, you're focusing on São Paulo, but is there any other region that is performing well too?

[Unknown Executive]

I believe that our launches are well distributed along the year and in the second quarter, we are going to see some launches as well. So I believe that our distribution is very good. In the second half of the year, we will be very good as well. And the second question was about geographic distribution exactly, I'm sorry. We are focusing on São Paulo, Rio and Porto Alegre. Most of new launches are in São Paulo. We have some projects in Rio, but the economy there is still recovering. I'm sure that you know about it. And Porto Alegre is a smaller market. So there are no surprises in relation to the geographic distribution.

[Operator]

[Operator Instructions] Our next question comes from Mr. Manda with Santander.

[Renan Manda, analyst]

I actually have 2. First about indemnities. I saw a drop in the expenses in the quarter. I would like to know if that's related to an isolated situation. And if you are going to keep that liable? And also about land bank. Are you still purchasing land plots, especially here in São Paulo, and what do you think about the prices? There are many companies concentrating launches here in São Paulo with volumes going up, but our land plots are still being sold with attractive prices. Do they have a good return rate or are you still seeing some pressure when it comes to negotiating land bank.

[Miguel Mickelberg, executive]

This is Miguel. When it comes to indemnities, the number was very low, it was BRL 10 million. We see some volatility in that number -- in that figure. It is harder to have settlements in the beginning of the year because people are traveling. They are on vacations, but we are going to see higher volumes in the next quarters, but we are going to see some volatility too. Now when it comes to land bank, our Triple Four target is all about having a good strategy when it comes to purchasing land plots. If you buy too much land bank, you may end up in a very unhealthy curve. We have to do it in a very well-planned manner with a good strategy. And of course, prices are going up, but we don't have to purchase land banks. We have to be patient. If you don't rush things up, I believe that you are going to find some good opportunities. We are at the beginning of a new cycle. I don't think it is a topic of concern right now. But the main point is that our strategy allows us to be very patient when it comes to purchasing land bank.

[Operator]

The next question comes from Mr. Stacchini with Crédit Suisse.

[Luis Stacchini, analyst]

I would like to know a little bit more about competition in São Paulo. Do you think that can be a problem for your launch in São Paulo, if there is a new launch from the competition in the same region that you plan to have a new launch and do you think that there is a risk of losing market share? So I'd like to know a little bit about your opinion when it comes to the competition and seeing more launches in São Paulo. And the second question is about the lower contribution that we saw this quarter. We saw a lower participation of Cury in your results, because there's some volatility in the low income segment. So I would like to know more details about that? Is it a nonrecurring impact and that you are going to recover in the next quarter?

[Miguel Mickelberg, executive]

This is Miguel. We saw 2 nonrecurring impacts. The first one was our Ibirapuera spend that had an impact and also a contingency. Those were the 2 higher impacts. We believe that, that line item is going to have an expressive results, especially because of the construction work in Ibirapuera and because of Cury. Now when it comes to the competition in São Paulo, well, we all expect prices to go up at some point. We have been working with low prices for 4 years now. It is not going to happen now, but it is going to happen at some point. We just have to think where in the cycle we are right now. If -- and also it really depends on which funds to be approved. The economic cycle is more relevant than the launches that are happening in São Paulo right now. So I believe that the economic scenario is going to be more significant than the new products that we are going to see in São Paulo. São Paulo is still a major city. We still have very good regions in São Paulo to launch new products. If the economy does not move forward, does not make any progress, we are going to stall as well. Now as we see some recovery then the market is going to recover as well. And we just have to make sure that we are rational when it comes to purchasing land plots.

[Luis Stacchini, analyst]

Okay thank you very much. Now another question. When it comes to the shares in Ibirapuera, can you tell me a little bit more about the impacts of that?

[Miguel Mickelberg, executive]

The shares had around BRL 7 million in fixed assets and our share was BRL 3.5 million. So we had minus BRL 2 million of impact in our line item.

[Operator]

[Operator Instructions] There are no more questions, so I would like to turn the floor over to Mr. Horn for his final remarks.

[Raphael Horn, executive]

Thank you, again. And see you in the next quarter. Thank you very much.

[Operator]

That concludes Cyrela's Conference Call for today. Thank you very much for your participation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]