Cyrela Brazil Realty SA Empreendimentos e Participacoes

BOVESPA:CYRE3

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to Cyrela Brazil Realty conference call where we'll discuss the second quarter of 2020 earnings results. [Operator Instructions]

And 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 that was published yesterday, 13th of August, after the close of the B3 trading session can also be accessed on the company's website.

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

With us today, we have Mr. Raphael Horn, our Co-CEO; and Mr. Miguel Mickelberg, our CFO. I will now turn the conference over to Mr. Horn. Mr. Horn, you may begin.

[Raphael Horn, executive]

Good morning, everybody. While the second quarter of 2020 was marked by the global adherence to social isolation amid the coronavirus pandemic, and that seriously effected the performance of both the Brazilian and global economy. Even though the pace of our construction work did not slow over significantly, sales fell sharply, especially in the month of April. As a result, we've postponed most of our launches scheduled for the second quarter. However, the real estate industry have recovered well in June, and the sector had a very good restart, driven by the interest rates at all-times low and the partial reopening of the economy combined with good inventory sales and the launch of Ipiranga. In terms of operation, sales under Minha Casa, Minha Vida program were the main highlights during the quarter, once again showing the resilience of the low-income segment during economic crisis.

Concerning our financial performance, we've recorded a strong gross margin of 32.8% and a net income of BRL 68 million. Considerable uncertainties, but the strong sales forces and inventories make us confident that the real estate industry will perform well in the coming quarters.

Now let's comment on our national launches.

[Miguel Mickelberg, executive]

Thank you. Good morning, everybody. On Slide #5, we'll address Cyrela's launches. In the 2Q '20, we launched 5 new products with a PSV of BRL 105 million, 81% less year-on-year. Excluding swaps, the volume launched in Cyrela's share in the second quarter was [indiscernible] lower year-on-year. The company's share volume launched in the second quarter of '20 was 73% compared to 80% year-on-year.

On Slide 6, I'll highlight the major release in the quarter that was 52% sold on that period, which was deeper on the level.

On Slide 7, we'll talk about our sales performance. In the second quarter of 2020, the pre-sales were BRL 818 million, 58% lower year-on-year. Excluding swap, presales amounted to BRL 1.5 billion in Cyrela share, a 28% decrease year-on-year. The State of São Paulo accounted for 70% of our sales.

On Slide 8, we'll address sales speed. The company's annual SoS was 50.7%. Looking at sales speed by period, projects launched in the second quarter of 2020 have been 43% sold.

On Slide #9, we'll address Cyrela's total inventory. At the end of the quarter, inventory at market value totaled BRL 5.7 billion, down by 6.5% quarter-on-quarter. The change in our inventory can be seen in the chart to our left.

On Slide #10, you can see a breakdown of our finished units. And in the second quarter of 2020, we sold 8% of the finished units in the beginning of the period. Adding the inventory projects delivering along the quarter, pricing units at market value, finished units inventory decreased by 5% quarter-on-quarter.

On Slide 11, we'll talk about delivered units. In the second quarter, Cyrela delivered 12 projects totaling almost 3,000 units and a PSV of BRL 641 million. In the first half 2020, more than 6 units of -- 6,000 units were delivered, representing a PSV of BRL 1.3 billion.

On Slide 13, we will address our financial results. The net revenue was BRL 839 million and [ 9.7% ] higher quarter-on-quarter and 10% lower year-on-year. In the first semester, the revenue was BRL 1.6 billion, [ BRL 1 million ] (sic) [ BRL 100 million ] or 9% lower year-on-year. The gross profit in the quarter was BRL 275 million, up by 5% quarter-on-quarter and 6% lower year-on-year. In the first half, gross profit amounted to BRL 536 million, pretty comparable to 2019. Our net profit totaled BRL 68 million in the second quarter of 2020 with a net margin of 8.1% compared to a profit of BRL 28 million quarter-on-quarter and BRL 114 million year-on-year. In the first half year, net profit reached BRL 96 million.

Now please let's go to Slide 14 to see our profitability. In the second quarter in 2020, our return on equity measured with the net profit of the last 12 months over equity ratio was a positive 6.9%, and our EPS was 18% -- sorry, BRL 0.18 per share.

On Slide 15, you can see our debts. Gross debt at the end of the quarter was BRL 2.9 billion. The cash position was BRL 2 billion. Thus, our net debt was BRL 905 million. 19% of the total gross debt are related to loans for construction and 71% is long term. Our net debt over equity ratio was 17.1%, 1.0 percentage points above last quarter.

Slide 16 shows the company's cash generation. In the second quarter of 2020, our cash used was 96 -- BRL 67 million compared to a cash generation of BRL 13 million against last quarter and BRL 196 million in the second quarter of 2019. In the half -- in the first half of the year, the cash use amounted to BRL 54 million.

Now Rafa and I are going to go on to the question-and-answer session.

[Operator]

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

[Enrico Trotta, analyst]

Two very quick questions. The first one is just if you could comment and now looking forward in the third quarter of the year, based on what so far we've been having, our sales dynamics, if you could just give us a hint on what is the relative performance between the high-end and the mid- to low-end compared to the pre-crisis items. And if you could please just tell us a little on how the higher management is intending to launch for the second half of the year. We can see that we have quite a few people pretty encouraged with the post-COVID response.

And the second question -- and that is more on the dividends. And we have the panel inquiry with potential offers on short term, and we have a second relevant area that could better for Cyrela. What is the timing? Is this your intention to pay the dividends in the short term or to hold the liquidity and wait a little bit to see how this economic scenario is going to build up along the next months? What is the expected timing of those dividends, if those offers proceed? So if you could align with those 2 issues, that would be great.

[Miguel Mickelberg, executive]

Enrico, this is Miguel. Well, first, with relation to the sales, indeed, we had it pretty good. Month of July was the best month of the year, and it was good not only in the launches -- we had good launches, good launches and some launches, but also in our presales and our finished units. And so we are indeed pretty encouraged to keep on launching for the next quarters. And if the second half is good, we'll have room to add a couple of extra products to the market.

As for the high-end, in Minha Casa, Minha Vida, well, the fact is, Minha Casa, Minha Vida is more resilient. With the smaller build, no market drops or falls. But in the high-end, but -- or in the mid/high-end, then we had most of the increase in the volumes and the sales volumes for both June and July.

As for the second question, unfortunately, as you know, very well, all those offers, our process is underway, and we won't be able to make any specific comments relative to those, Enrico.

[Enrico Trotta, analyst]

That's all right, Miguel. Now okay, so if you allow me another second question, which is, if you could talk me about the competitive scenario in São Paulo, either for the low-income or high-income, I would say that the sales performance in the industry was a pretty good highlight amidst all this crisis. And people were talking about accelerating launches and just launching a lot of finished units. And in São Paulo, we were talking about 30,000 units, and now they are talking about 60,000 units. So I would like to know and to hear from you whether you have a mid-term concern with all this surplus offer or if you think the real -- the interest rates are pretty low. So do you think the market can absorb that for the next 12 months? I'd like to hear anything about that.

[Miguel Mickelberg, executive]

Well, Enrico, yes, we are still at the very beginning of the cycle, but you see competition is competition. In other words, I mean, you just have to stay put and get your grip and you got to be careful, of course. I mean, those are slippery slopes, and -- but we are indeed pretty encouraged and excited about the economic cycle. Let's see what's going to be the level of competition, the size. And so I think this is a pretty -- it's always on our radar, yes. And it's really something that we can just -- we have to just have our heads up for that all the time.

[Operator]

Our next question comes from Mr. Elvis Credendio from BTG Pactual.

[Elvis Credendio, analyst]

I have 2 questions here as well. The first one is with regards to the land plot, if you could you give us an update on how the land owners are. Do you think that the plot sand prices are tending to a recovery? And what do you see about the strategy from now onwards? Do you think it's for us to take the first step for the next site? Or is it too early?

And the other question is with regards to renegotiation requests from the clients. I would love to have an update from you on what is the status of that and the portfolio, how it's been behaving.

[Raphael Horn, executive]

Good. Well, for the land and for the plots of land, I mean, it's a sort of a slower market. And then you see the prices. That didn't fall in 1 or 2 months and neither are going to go up that badly. And we are obviously going to have some economic recovery. But a couple of players are buying. You see plots of land, and then the prices are going to up. But we are not land banking speculators that we're not anticipating and just trying to make money out of that. No. We are developers. So our -- we needed to have a positive cash flow, and that's it. And we believe that the plots of land are a good part of that. And we think that our [indiscernible] for 2021 is for the group, and the main concern is now maybe 2022. We think that the market is not saturated, if you will. So we can still do that.

Now with regards to competition, we don't know. But so far, it's not something that you can market list yet. So it might come up, but it's just a matter of being attentive and keeping an eye on it. But we have been able to operate pretty satisfactory. Interest rates play a big role, but it's really a matter of being attentive to how fierce the competition will be.

[Miguel Mickelberg, executive]

Yes. This is Miguel here. With regards to the net -- negotiations to net debt, we've had -- 11% of our clients have requested the renegotiation of installments, and a large share of them chose to pay because we were always, obviously, negotiating the interest rates. And 1/3 of them basically have been able to pay and all the others are sort of pretty advanced in their negotiations. They remain like [ 2 to 3 months ] in that, but they are sort of getting back. So -- and this is obviously going to be translated in, we think, that maybe something like 5% to 10% of the estimates that we did in the forecast that we did for the year. But our renegotiation requests is standing to 0 for a while now. So we think the situation is pretty much under control.

[Operator]

Our next question comes from Daniel Gasparete from Crédit Suisse.

[Daniel Gasparete, analyst]

Two questions. And the first is more related to how is it that you see the interest rate scenario for the real estate division. Because, I mean, we could envision that this drop was about to come. But do you see any additional drop? That is something that we can expect in the short run?

And the second question is more to understand the dynamics of the real estate prices. How do you see the pressure for an increase in the prices at the final consumer so we have a scenario of potential growth and price raises in the short term?

[Miguel Mickelberg, executive]

Gasparete, it's Miguel here. Well, this leads to the interest rate and the current products. We still think that there is still some room for a fall. Because if you check the spot rates, and it's much higher if compared to the background figures. And on the other hand, we have the these metrics in the offer and demand, and that may hinder things a bit. So we think that the structure of our products has to just evolve a little bit so that we can spread the offers and so -- and we don't really have a lot of info on what should happen in the short term, but the banks are kind of behind this type of product. And we think, sooner or later, this is about to happen.

If you check the loans for real estate, they are growing in their margins, and the companies are not delivering much. So offering supply are indeed helping us right now, so it's a good opportunity for us to be more aggressive by changing products instead of just adding up on spot rate for the existing product.

So now linking this to the unit prices. And then, of course, the drop on the interest rates affects the affordability pretty markedly, and that is probably going to be much lower than the rent that they might pay, and that encourages buyers. And this interest rate is a great mechanism of incrementing the offer and also for prices. So offering supply, and especially in São Paulo, the stock levels have gone down significantly. So this is a vision of positive dynamics for price raises, and the interest rates are going to be one of the main drivers for that to happen.

[Operator]

[Operator Instructions] Our next question is from [ Thaiza Alonzo ] from Citibank.

[Unknown Analyst]

My question is on the -- my apologies if it is redundant. But São Paulo has represented 70% -- 77% allowances of the period. And considering Cyrela's participations, they only have 7%. And so how can we expect for the evolvement on this rhythm and also the competition perspective and if you intend to sell your landbank in areas which are not that attractive?

And the other question is with regards to the costs. You think that if -- by increasing the margin that -- do you know the margin of this project in front of the others, in face of the others?

[Miguel Mickelberg, executive]

Well, of course, São Paulo played a huge role in our market share. And it seems that it won't change much in the future. Now here in São Paulo, the plot plan in some segments, for 2020, 2021, I mean, they are -- grid is pretty full for 2022. In some segments, we have our -- some of them, the grid is full. And some others, not exactly. So in some areas, we might need to procure for 2022, and we do that pretty carefully without any rush and for -- and is this something that we do strategically? Of course. And we've left the areas that we didn't want to be. We are basically in São Paulo, Rio and Porto Alegre. We have a couple of small plots here and there. So we can monetize them. But -- and also within São Paulo itself and Rio itself, we might have some -- which are not exactly a strategic one. So we might sell them, and we -- so we just have some liquidity because they're not exactly that strategic.

So [ Thaiza ], let me address your second question. But first, the margin. I mean, our margin is a mix of many different periods. And so -- and our units are going with lower margins.

So the finished units, specifically, they are coming with gross margins of 35% -- 34%, 35%. And especially if you consider what was at the end of 2018, 2019, those projects, they start to represent more of the gross margin. That's why it is going up a little bit, and it's sort of getting closer to the margins of the newest unit.

[Operator]

[Operator Instructions] Our next question comes from Mr. Marcelo Motta from JPMorgan.

[Marcelo Motta, analyst]

Two quick questions. Still on the margin. I mean, we've been hearing from some corporations that the sales were -- of finished units have increased, and people are sort of anxious to get themselves arranged soon. And Miguel said that this is a product that has a smaller margin than the launches. But the -- and I just wanted to know what was the pressure.

And then the second question is on the revenues. Despite the COVID situation didn't really put many of Cyrela's products on standstill, but still something that we might have to be careful on the third quarter, and we might have some increase in productivity. So what do you envision as the rhythm for the following quarter?

[Miguel Mickelberg, executive]

Well, we haven't really noticed anything in particular about selling more due to COVID. I would say that this is still low income reshaping many years from crisis hit margin, historically low prices, high affordability. And this dynamic is just continuing. I mean we are getting back to the back -- to the old dynamics. And for our high-end landbanks and plot plan, I mean we have been witnessing this segment slightly different with people buying more plots plan and houses. But I hope this is the case, but I -- we don't have the business as a real evidence.

[Raphael Horn, executive]

Yes. I think this is a still normal market behavior, in my opinion, and the launches are going well, and this has nothing to do with COVID. So it's a positive, really. And then just the same that we saw that in the landbanks and so on, but in the -- and in the -- and for the corporate developers, not this much.

With regards to the acknowledgment of the revenue and the works in the South, we have works that have to be suspended more to the end of the quarter. And for sure, if they hadn't been put in the standstill, we might have had some more million of a higher revenue recognition. So -- but all in all, the work volumes are pretty satisfactory considering the pandemics in the second quarter. I would say that they are a driver for the third quarter and to increase the revenues. They increased the stock sales.

[Operator]

[Operator Instructions] If there are no further questions, I would like now to give the floor to Mr. Horn for his final remarks. Mr. Raphael? Mr. Horn?

[Raphael Horn, executive]

Well, once again, thank you for your interest in Cyrela. And we are pretty confident in the future, and this has been pretty [indiscernible] For both human and the corporate perspectives, we are getting back to work and either home-based or whatever. For the market dynamics and the consumption and the real estate sales, they are returning to normal faster than we expected. So we are pretty happy that the whole industry executives from any sector are pretty encouraged with this upturn. So let's keep on working and thank God that the COVID was a bit shorter than we thought it would. So thank you, and let's just step ahead.

[Operator]

Well, that concludes Cyrela's conference call for today. Thank you very much for your participation, and you -- thank you.

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