Cyrela Brazil Realty SA Empreendimentos e Participacoes

BOVESPA:CYRE3

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to Cyrela Brazil Realty S.A.'s Q1 2023 Earnings Call. We have Mr. Raphael Horn, CEO; and Mr. Miguel Mickelberg, CFO and IRO with us today.

This call is being recorded and simultaneously translated. You can hear the translation by clicking the interpretation button. To those here in the English translation, you can mute the original audio by clicking mute original audio.

Also, you can find the slide deck in English on the company's Investor Relations website at www.ri.cyrela.com.br. [Operator Instructions]

We would like to inform that any statements that may be made during the call related to Cyrela's business perspectives, operating and financial targets are projections made by the company's management that may or may not occur. Investors should be aware, the political, macroeconomic and other operating factors may affect the future of the company and lead to results that differ materially from those expressed in such forward-looking statements.

To open Cyrela's Q1 2023 earnings call, I'd like to turn it over to Mr. Raphael Horn, CEO. Mr. Horn, you may proceed.

[Raphael Horn, executive]

Good morning, everyone. Continuing the good results reported in 2022, Cyrela's operation in the first quarter '23 showed satisfactory performance. Still in a challenging macroeconomic scenario, and uncertainties regarding supply and demand in our segment, the company remained true with its strategic planning of continuing to launch unique developments in selected regions, always offering a differentiated experience for the customer.

We launched 8 projects in the quarter, BRL 1.3 billion, BRL 479 million has already been sold. Added to an inventory sale of BRL 1.1 billion, we totaled BRL 1.5 billion in net sales in the quarter, 18% higher than the same period last year.

Regarding the financial performance, Cyrela showed resilient results at the beginning of the year, BRL 1.3 billion in net revenues, slightly above year-on-year. Gross margin of 30.7%, net profit BRL 164 million, 12.7% net margin and ROE is 12.3%. Once again, one of the highlights was the company's low leverage at 6.5% in the quarter.

The company understands the magnitude of the challenge that the year 2023 poses and we continue to operate with diligence to maintain its positive performance, always seeking to maximize its return for customers, shareholders and other stakeholders.

On to our operational results now.

[Miguel Mickelberg, executive]

Thank you, Rafa, and good morning, everyone. On Slide 5, we'll address Cyrela's launches. In Q4, we launched 8 new products with a PSV of BRL 1.3 billion, 30% higher year-on-year and 52% lower quarter-on-quarter. The company's stake in the volume launched in the quarter was 69%. Excluding swaps, the volume launched in Cyrela stake was BRL 875 million in the quarter.

On to Slide 6, we'll talk about our sales performance. In the quarter, presales reached BRL 1.5 billion, a 42% reduction quarter-on-quarter and 18% year-on-year. Excluding swaps, sales reached BRL 1.1 billion in Cyrela's stake. The state of São Paulo accounted for 56% of our sales.

On Slide 7, we'll address sales of speed. The company's CSO in the last 12 months was 49%. Looking at sales speed by launch Vintage project launched in Q1 have been 36% sold.

On Slide 8, we'll talk about our inventory. At the end of the quarter, inventory at market value was BRL 8.7 billion, 4% lower quarter-on-quarter. The change in our inventory can be seen on the chart on the left.

On Slide 9, we show our finished units. We sold 11%. Adding the inventory projects delivered along the quarter and pricing of units at market value, finished units increased by 4% quarter-on-quarter.

On Slide 10, we'll talk about delivered units. Cyrela delivered 10 projects in the quarter at 2,714 units and a PSV of BRL 1 billion year-to-date.

on Slide 12, rather, we'll present our financial results. Net revenue was BRL 0.3 billion (sic) [ BRL 1.3 billion ], 6% lower quarter-on-quarter and 4% higher year-on-year. The gross margin for the first quarter was 30.7% compared to 31.4% in the previous quarter and 31% in the same quarter of 2022. Gross income in the quarter was BRL 160 million (sic) [ BRL 164 million ] against BRL 208 million quarter-on-quarter and BRL 162 million year-on-year.

On to Slide 13 to see our profitability. In the quarter, our return on equity net income of the last 12 months over the average shareholders' equity was 12.3%.

On Slide 14, we will talk about the debt. Gross debt at the end of the quarter was BRL 4.6 billion. The cash position was BRL 4.1 billion. Thus, our net debt was BRL 486 million. 77% of the total gross debt is long term. Our net debt over equity ratio was 6.5%, 1.4 percentage points lower quarter-on-quarter. The low debt level confirms Cyrela's financial soundness and puts us in the right direction to maximize the return to shareholders.

Slide 15 shows the company's cash generation. In Q1 2023, our cash consumption was BRL 35 million against a cash generation of BRL 54 million quarter-on-quarter and BRL 53 million in the first quarter of last year.

Now Rafa and I will be available for the Q&A session.

[Operator]

[Operator Instructions] Tainan Costa from UBS asks the first question.

[Tainan Costa, analyst]

I actually have 2 questions about margins. What should take on the outlook given the more complicated launch strategy? Are there any discount policy on your radar that may affect your margins? The question is about the land bank. How soon can you introduce new launches given the land bank you have? Do you have to speed up buying land for 2024? Or are you comfortable with that position on your land bank?

[Miguel Mickelberg, executive]

I'll be talking about gross margin. Actually, the gross margins for the launches that were accounted for the quarter were a little below what we had seen before. 28%, that's the margin for the quarter. That's the [indiscernible] at the beginning of the booking, the margin is close to 27%. At the end, it will be reaching the 34% level. So [ border ] may affect at the beginning, but gross margins will be close to those of last year, 31%, 32%. The launches that haven't been booked yet up until March. I mean they haven't been accounted for. They have a gross margin at 31%.

So we do believe that there may be a slight improvement in gross margins because of that effect. When you look at gross margins for the first quarter, those launches of '21, '22 is usually above that at 34%. We believe that gross margins will recover slightly throughout the year, but I don't expect much differences or many differences going compared to those numbers of last year. And we don't think that discounts will impact gross margins throughout the year.

Raphael will now address the question about land bank.

[Raphael Horn, executive]

As far as the land bank for 2024 is concerned, we have -- most of it has been purchased already. We don't see any problems for 2024. Of course, the market has been very selective, but it's a good thing we purchased that ahead of time. We don't like to start buying left and right to fill any gaps for the following. It's good thing. We have almost everything is in-house already. So we are at a relatively comfortable position.

[Operator]

Gustavo Cambauva from BTG Pactual asks the next question.

[Gustavo Cambauva, analyst]

I actually have 2 questions. One, is about São Paulo. We have seen many promotional events, some discounts. I'd like to hear your take as to what the competition will probably do? Do you detect any price drops or more discounts being ramped up? Do you think that then -- that, that may impact your inventory as well?

The second question is about CashMe. You have securitized your portfolio. But I would like to understand the dynamics at CashMe, especially for those that are looking for real estate credit, what's the demand like on the part of buyers as well as the funding side? What's the cost of funding for CashMe? What's the spread like? What's the development of the portfolio? Could you update us on the situation of CashMe?

[Raphael Horn, executive]

Hello, how are you? We haven't seen many discounts from the competition. The market remains quite challenging. However, we've been able to navigate through these rough waters, if I may. Products are very differentiated. When you have that combination, the entire combo, we can show more resilience. Well, I don't -- we don't expect -- of course, if macroeconomic situation deteriorates, of course, that will impact us. So with the given characteristics I mentioned, I think we were able to navigate through.

On to the question about CashMe. The demand is somewhat weaker in the quarter across the board. I don't know whether it's for the entire market, but for CashMe. After Americanas costs went up, but we have been able to operate with our standard spread. It's more complicated. It's a little more expensive, but the operation continues according to plan. The demand is somewhat weaker, at least that was the case for the first quarter.

[Operator]

Fanny Oreng from Santander asks the following question.

[Fanny Oreng Avino, analyst]

I actually have 2 questions. Can you elaborate on your launches' performance? What's your take on for the first -- or for the second quarter? My question is more low-income launches. Despite the workers' compensation issue, the government may improve the program conditions on the short term. Would it make sense to expand the CashMe participation in the mix? Actually, there are 3 questions. What's your take on your dividend payments for the next 12 to 24 months?

[Miguel Mickelberg, executive]

Fanny, as to the performance of launches, we had 3 major launches in São Paulo in April. Two in Moema and 1 in Ipiranga. Sales speed is reasonable. It's too early to tell, but the response has been positive from the marketplace. We may have a reasonable number of launches in Q2.

As to low-income projects, we like that segment. I think it's the right time to be there. Of course, we cannot talk about the workers' compensation decision because it remains uncertain, only 2 justices have voted, but we keep monitoring their decision, and we have to have that good exposure to low-income projects. But that requires purchasing land and it takes time. There should be no short-term impact, therefore.

As to dividends, we burn cash in the quarter, and we expect to burn even more cash for the entire year. There should be some leverage increase and the market remains challenging with many uncertainties. We have to wait for the stabilization of the cash leverage, and we have to be more comfortable as to the future of the market. So it's unlikely to have extraordinary dividends being paid this year. And therefore, next year, that will depend on the market and our cash flow, but the chances are a little higher for next year.

[Operator]

André Dibe from Itaú asks the next question.

[André Dibe, analyst]

I would like to follow up on the questions on dividends. Is this leverage ceiling remains at 25%? That's my question. Maybe it's not unlikely this year. How soon can we imagine more dividends being paid out? And my second question is about to better understand the market dynamics. The first answer you gave us, you don't see discounts coming in, but the fact is that operational performance for the beginning of the year was a lot better than expected. In January, you had savings being withdrawn at record numbers. So the good performance was surprising. Do you expect that is behind that sales performance despite an unfavorable conditions? So these are my 2 questions.

[Miguel Mickelberg, executive]

This is Miguel. Let me answer your follow-up on dividends. We remain at the 25% ceiling. That's the agreement we have with the Board. There's many uncertainties as to how high we can get as far as leverage is concerned, but this will be a lot clearer before year's end. Leverage is on the rise. We've seen that happening. We expect to burn more cash and we have to be convinced as to where it's going to stabilize to consider paying out extraordinary dividends.

As to the market Dibe, well, that trend will continue. We were expecting negative GDP or 0. That was 1.52%. This year, we are expecting GDP at 0. Now they're beginning to talk about 1.5%. Brazil hasn't stopped and Brazilians love real estate. And if the company keeps on going, the demand will be there. The market remains challenging, selective, but the demand is still there. We cannot say it's surprising. I don't consider the scenario surprising. But we hope it continues that way. It was a lot better 2021, 2022. That was a surprise.

We hope macroeconomic conditions remain the same. The banks love to finance individuals in real estate through cross-sell, and we hope the bank's appetite remains the same. And as long as there is activity, we'll be launching products. Let's keep hoping for the best. So far so good.

[Operator]

Pedro Hajnal from Crédit Suisse asks the next question.

[Pedro Hajnal, analyst]

I was a little late, so I'd like to apologize in advance if you already addressed that issue. What would be the main lever for results? Is it gross margins, speed of sales, what can be the driver for the year? Can you expand your margins or the projects pipeline? Do you believe that the speed of sales can be higher than what you have reported so far? Or what would be the main drivers in your opinion?

[Miguel Mickelberg, executive]

Pedro, this is Miguel. Well, most likely, the main driver is the recycling of our land banking. The launches were mostly purchased in first half of 2020. And there was a major inflection with a lot more inflation than expected and higher interest rates, affordability was highly impacted. So for this vintage of land banks that we purchased then has been difficult to maintain the minimum margin. Land that we have purchased now, they are according to this present reality. If there are no surprises, this is an important driver to expand our margins because for the land we purchased now, we take into account our minimum margins.

As far as costs, the accrued ICC is 1.7% from June to April. And our construction basket is slightly lower than the INCC. So you have a 10-month period with an almost flat INCC, which is good, because it contributes to defending margins. If we remain that way, that can also be an important driver. In practical terms, I will address your question about, if we can launch, if there's the market, if you have decent speed of sales, we can expect good results for the year.

The trigger is to actually launch more products, a market that is welcoming the entire portfolio of projects, but we hope that the market is there. We analyze the market on a project-by-project basis. So we have many good things to launch this year, but we hope the market is welcoming.

[Operator]

Ygor Altero from XP is next. Bruno Mendonca from Bradesco asks the next question.

[Bruno Mendonca, analyst]

I have 2 questions. Consolidations and deconsolidations for the quarter? That's my first question from SKR and Eden. Of course, you disclosed the cash generation. Can you elaborate on the impacts on margins, both reported gross margin, but also the REF margin, whether these consolidations and deconsolidations will affect them?

And my second question is about SG&A. We have very good numbers in G&A decreases quarter-on-quarter, year-on-year had nominal value, but commercial expenses are much higher. Can you explain that, all the better? I know you have to reclassify CashMe. Is that the only reason? Can you elaborate on higher commercial expenses and lower G&A? And what can we expect for the future?

[Miguel Mickelberg, executive]

Thank you for your questions, Bruno. As to consolidations and deconsolidations, Eden was a project that generated cash. So it contributed to less cash burn. At SKR, we have separated that effect, so we isolated the impact in the net accounting numbers. As to gross margin, gross margin was low for the quarter. So when we compare Q4, ex-SKR would have been a little higher. And as to REF, the revenue -- the REF revenue is very small when you compare to the BRL 5.8 billion of Cyrela. So it does not cause any relevant impact, a few base points of impact, but the REF margin would have been a little smaller than our own. But it's a very minute effect because the REF revenue is very small.

As to commercial expenses, in the quarter when compared year-on-year, we have increased in 2 lines. One is for stands. We had to write off a few launches stands, and it's only natural that you may have a little more than Q1, that was the case, BRL 15 million in write-offs because we have holidays and [indiscernible] and you start construction in March, April. So it's worth pare down the stand to prevent expenses in low season periods.

There's another impact in the commission line Vivaz their sales in 2022 and also in 2023, that was relevant. We had more sales from Vivaz and the commission is taken from the price. It's full price. That's why you have increases. Commission goes through results through POC. It's only natural that it goes up. When compared to Q4, that is commission for Q1, it's within third-party services, commercial expense. So that's usually higher.

Commercial expenses for the year, we don't expect any major variations when compared to last year's numbers, especially as a proportion of revenue and new launches. We maintain the same efficiency levels as far as sales, budget adherence, and we maintain the same budget parameters. We haven't changed any, not for commissions, not for the stand amount, not even for the media expenses. So we don't expect, therefore, relevant changes when compared to the volumes that will be launched and sold.

[Operator]

Jorel Guilloty from Goldman Sachs asks the next question.

[Wilfredo Jorel Guilloty, analyst]

Can you hear me?

[Miguel Mickelberg, executive]

Yes, we can. Yes.

[Wilfredo Jorel Guilloty, analyst]

I have 2 questions. Can you give us more color on the lower inventory prices? Is it for specific products, 1 vintage? Can you elaborate on the drivers for that drop? And the second question is about CashMe. What's your strategy for the mid- and long term for CashMe? Is it going to be 15% of the book value? Do you believe it can expand even more when compared to Cyrela? What are the avenues to growth, more credit targeted in the state of São Paulo or other states, other types of homes? If you could update us on the strategy of CashMe, that would be fantastic.

[Raphael Horn, executive]

Hello, Jorel, how are you? As to adjustments in the inventory. They are very marginal, the way that we see it. We adjust prices up or down depending on the market. Back in December or January, we adjusted prices. We do that every 6 months. Sometimes prices go up or go down. We lowered slightly the price of that inventory given the market reality. It is very small. And it's only part of the game. It's not because of a vintage or a region, small price decreases across the board. We are going to replace INCC every month. So every now and then you have to make small adjustments, but it's not -- nothing major, no specific region, a little bit everywhere. And we don't see we're not doing it.

I don't think we're doing that for the rest of the year. So we should focus on new launches and trying to include the full margin. And we have been operating at margins a little lower than standard because just as Miguel said, inflation rates in 2021, '22 affected the land bank. And the margins we are implementing in the market is not exactly what we wanted, but it's very close.

As to CashMe, the 15% of PL, that number is somewhat misleading because it takes more time, and then it will reach the PL. It wouldn't be that size, that PL, that big. We have to consider that number post CRIs. That's not the right number. 15% is not the right number. When we are below leverage or CashMe that number may seem bigger. But we've had 2 CRIs. We have 2 other CRIs' for the quarter, and we'll adjust the PL to the right place. CashMe is an operation that requires leverage, right? We have 10%, 15% of sub and the rest is semi. It cannot consume so much capital. I don't think it is going to be 15%. It shouldn't be and it won't be 15% of Cyrela.

The strategic planning, we can talk about it in further detail, but overall, our goal is to grow. CashMe is a company for the entire country, not only for São Paulo. It's focused on home equity. We have been operating there, and the intention is to keep on growing little by little with that low payout number.

[Operator]

Marcelo Motta from JPMorgan is up next.

[Marcelo Motta, analyst]

Can you elaborate on financing? Casa has increased the PPE. Banks have seen some savings account withdrawals. Have you seen any margin increase from both public and private banks? Sales in April are okay, right? But do you detect any changes from your consumers?

[Miguel Mickelberg, executive]

Motta, this is Miguel. We've seen an increase in the financial or the mortgage rates. They published that. 70 bps that was the increase when compared to late last year. We talk to banks and they see the demand for real estate financing remains strong. We haven't seen any impact caused by these higher rates.

[Operator]

André Mazini from Citi asks the next question.

[André Mazini, analyst]

Can you explain the provisioning criteria change? You reverted BRL 27 million provision. Was that due to any accounting regulation that changed? Or the auditors thought differently? Or is it just a matter of administration reasons -- administrative reasons? And the other question about CashMe, more expensive banking credit. Is it worth to focus CashMe strategy to direct financing -- to have a direct financing, to have some crowning in vis-a-vis higher credit or higher costs for credit?

[Miguel Mickelberg, executive]

Good morning, Mazini. This is Miguel. As to the change of provisioning change, CashMe is a very new operation. We started in 2018. At the start, we adopted a very conservative provisioning criteria, because we didn't have all the parameters in place. So we stressed out the model, and it had to stand on its own. So that's why provisioning was way more conservative. As we accumulated statistical data, we had several options under our belt. And then we had a more robust database to come up with more precise parameters to define provisioning rules. Losses are a lot smaller than what we projected first and following IFRS 9 to provision expected losses, we indicated that we needed a much smaller provisioning. That's why we made the adjustment in the quarter.

On to the second question. Rates practiced by CashMe are much higher than IPCA plus 2 financing and the funding costs are very high. IPCA plus 12 spreading would be a lot smaller than what CashMe wants to operate. I don't see that as a possibility at this time.

[Operator]

This concludes the Q&A session. I'll turn over to Mr. Raphael Horn for his closing remarks.

[Raphael Horn, executive]

Thank you for attending the call. Let's hope for macroeconomic and macroeconomic situations in Brazil maintain the same. This concludes Cyrela's earnings call. Should you have any questions, please contact the Investor Relations team at ri.cyrela.com.br.

[Operator]

Thank you very much for attending. Have a good day.