Cyrela Brazil Realty SA Empreendimentos e Participacoes

BOVESPA:CYRE3

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to Cyrela Brazil Realty conference call in which we'll discuss Q3 2019 earnings results. [Operator Instructions] This conference is being recorded, and it will be available at www.cyrela.com.br/ri. This call is being simultaneously interpreted into English and is being broadcast over the Internet. Questions can be asked by participants abroad. The earnings release published yesterday, November 7, after the close of B3 trading session is also available at the company's website.

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

We have Mr. Raphael Horn, Co-CEO; and Mr. Miguel Mickelberg, CFO, with us.

I will now turn the conference over to Mr. Horn. You have the floor now, sir.

[Raphael Horn, executive]

Good morning, everyone. Cyrela had a strong operating performance once again in Q3. In addition to a significant presales value of launches, those projects launched during the quarter achieved a strong sales speed of 44%. Sales of finished goods or finished units were healthy as well. The approval of the welfare reform in October was one of the greatest political and economic achievements in recent years, was largely responsible for driving the Brazilian stock market and share prices. Coupled with inflation and economic activity data below expectations globally and domestically, interest rates hit an all-time low which led to a fall in future interest rates in Brazil. In this context, the real estate industry welcomed the news that Brazil's main banks were lowering their mortgage rates for individuals. We remain confident in Brazil's potential to attain sustainable growth in coming years.

Q3 is the 12th consecutive quarter in which we generate positive cash at BRL 78 million. Net debt remains low and cash position remains high. And we're comfortable that it allows us to continue adjusting our capital structure, always focusing on maximizing shareholders' returns. We're confident that our team is fully prepared for this new cycle that has just begun.

And I'll turn over to Raphael -- or to Miguel rather.

[Miguel Mickelberg, executive]

Thank you, Rafa. Good morning. On Slide 5, let me talk about Cyrela's launches.

In Q3, we launched 22 new projects with a PSV of BRL 1.8 billion, 94% more year-on-year, excluding swaps. And the volume launched in Cyrela was 112% higher year-on-year. The company's share in the volume launched in the quarter was 70% compared to 77% year-on-year.

On Slides 6 to 9, we highlight some of the major releases in the quarter. All of them were at least 50% sold in the quarter.

On Slide 10, let me talk about our sales performance. In Q3 2019, presales were BRL 1.6 billion, a 65% increase year-on-year. Excluding swaps, presales amounted to BRL 3.2 billion in Cyrela's share, a 9% increase year-on-year. The state of São Paulo accounted for 71% of our sales.

On Slide 11, let me talk about our sales speed. The company's annual SoS was 54.8%. Looking at sales speed by period, projects launched in the quarter have been 44% sold.

12, we will address Cyrela's total inventory. At the end of the quarter, we were at BRL 5.4 billion, 4.5% higher quarter-on-quarter. The change in our inventory can be seen in the chart on the left.

On Slide 13, you can see a breakdown of our finished units. We sold 13% of the finished units in the quarter at the beginning of the period. Adding our inventory of projects delivered along the quarter and pricing units at market value, finished units in inventory decreased by 9% quarter-on-quarter. We are aware of how important this matter is to the company, and we'll continue to focus our efforts on these products.

On Slide 14, we'll see our delivered units. In the quarter, Cyrela delivered 14 projects totaling 4,600 units. Delivered units account for a PSV of BRL 1.2 billion, 92% higher year-on-year. Year-to-date, 9,100 units were delivered, accounting for a PSV of BRL 2.4 billion.

On Slide 16 now, I'll present our financial results. Net revenue was BRL 935 million in the quarter, the same amount as Q2 2019 and 29% higher year-on-year. Year-to-date, net revenue amounted to BRL 2.7 billion, up 48%. Gross profit in the quarter was BRL 289 million, down by 1.4% quarter-on-quarter and 41% higher year-on-year. Year-to-date, gross income was BRL 831 million, 66% higher year-on-year. Our net profit totaled BRL 104 million in the quarter with a net margin of 11.2% compared to a profit of BRL 114 million in the previous quarter and losses of BRL 121 million in Q3. Year-to-date, gross income reached BRL 267 million.

On to Slide 17. This is our profitability. In Q3 2019, our ROE was 7.3%. BRL 0.27 was the earnings per share.

On Slide 18, I'll talk about debt. Gross debt at the end of the quarter was BRL 2.5 billion. With a cash position of BRL 1.8 billion, our net debt was BRL 696 million. 17% of the total gross debt are related to loans for construction and 79% is long term. Our net debt over the equity ratio was 12.7%, 4.4% higher quarter-on-quarter due to BRL 300 million in dividends paid in the period. The low debt level confirms Cyrela's financial solidity and puts us in a privileged position to adjust our capital structure and improve return to shareholders.

Slide 19 shows the company's cash generation. In Q3 2019, our cash generation was BRL 78 million compared to BRL 196 million in Q2 and BRL 303 million in Q3 2018. Year-to-date, cash generation amounted to BRL 424 million compared to BRL 867 million (sic) [ BRL 668 million ] in 2018.

We'll now begin the Q&A session. Thank you.

[Operator]

[Operator Instructions] Victor Tapia from Bradesco asks the first question.

[Victor Tapia, analyst]

My first question is about cash generation. You have been posting stronger cash generation. It slowed down a little. Are you -- was it because of a land purchase? Or is it Minha Casa, Minha Vida, the social housing program? Can you give us some color on that? And my other question is about the expected dividends payout for the year. Is there any impact? And I have another question about the CCP shares. Are you considering selling it?

[Miguel Mickelberg, executive]

Victor, this is Miguel. Let me talk about cash generation. We had announced early in the year that our cash generation scenario was more challenging in the second semester. We had fewer deliveries on the higher end. We have to sell finished units to maintain the same level. Yes, there -- we are speeding up the payment of land, especially when you compare it to last year, and starting construction of the launches of last year. So that was on our radar. Cash generation would be challenged.

There is the effect of Minha Casa, Minha Vida, Plano & Plano, was about BRL 50 million, it generated less -- BRL 50 million less. Looking forward, as Minha Casa, Minha Vida gets back on track and a few nonrecurring effects, we believe that cash generation will be stronger, along the same lines of what we expected earlier in the year, between BRL 500 million and BRL 600 million. So we're not changing our dividend strategy. It's way below that of the strategic planning. And we are planning to make a decision on the dividends payout in early December.

[Raphael Horn, executive]

Victor, about CCP -- CCP shares, that's not a strategic decision on our part. It -- we are at a very early cycle. Rentals or corporate leases go up -- we believe they'll go up. Prices will be better then. And we may consider selling but not at this time.

[Operator]

Alex Ferraz, Itaú BBA, asks the next question.

[Alex Ferraz, analyst]

Rafa and Miguel, I have 2 questions. One is more specific about CPPIB. Could you elaborate on these projects? Did you sell a part of it? Or did you completely sell it? What was the rationale behind that sale?

And my second part -- or my second question, when you look at the first 9 months of the year, you are at BRL 3.4 billion, will surpass BRL 4 billion. Taking into account the [ 4-4-4 ] plan, are you going to exceed that mark, taking into account that the fourth quarter is stronger but provided that the São Paulo market keeps being strong?

[Miguel Mickelberg, executive]

This is Miguel. As to the [ SPS ] sales, we started that partnership with CPP to develop projects. We are probably selling 4 projects. We just booked 1 of these [ 2 ]. We are -- we have an 80% -- or they have an 80% stake. We're going to build it and maybe convert the operation once it's ready. That partnership can reach up to 10 projects. But this is something new to us as well.

About the [ 4-4-4 ] now, yes, 2019, 2020, we're going to exceed the BRL 4 billion mark. And that was not on purpose. Our strategy has always been to reduce equity, reduce capital. We have been focusing on it. But we're keeping the dividend level. We'll keep paying out dividends. The objective of the [ 4-4-4 ] was to reduce our capital footprint. We'll keep on doing it. We're not going to reduce dividends to fight it. Regardless whether the cycle is getting better or not, we're keeping the [ 4-4-4 ] pillars.

We end up purchasing better land than we expected, and we can exceed. Therefore, that's what's happening in 2019 and 2020. There's no point in considering what we'll be doing in 2021, 2022. This is an exercise that will take us nowhere.

We are not giving any guidance as to volume of launches. We believe we can reach or exceed BRL 4 billion with no pressure. We don't want to purchase land to please analysts. We want to purchase land when it makes sense. Luckily, we managed to exceed 4 BRL billion, but BRL 4 billion was all right. So we're happy we're reducing our capital base. But that was not on purpose. There was no pressure to purchase land. We purchase land maximizing profits. And we're not giving any guidance. We'll keep on purchasing land because we are happy with the purchase, not to please analysts or whoever that may be. We'll stick to [ 4-4-4 ] in 2019, 2020. We'll launch more than 4, maybe, 2021. It will reduce dividends. No, we're not doing it. I think I answered your question, didn't I?

[Operator]

Luis Stacchini from Crédit Suisse will ask the next question.

[Luis Stacchini, analyst]

I have 2 questions. Based on revenues in the quarter and the number of launches, we should expect more revenue. Maybe you're reconciling backlog because the projected was higher than what you booked. What was the sales volume that was -- and my second question, can you give us an update of your cash, maybe the portfolio signs? What's the goal for 2020? What can we expect from this business next year?

[Miguel Mickelberg, executive]

This is Miguel speaking. As to the revenue, because of stronger billing, we had BRL 3.3 billion worth of sales in [ cancellation ]. Revenues amounted to BRL 2.7 billion. We're selling more than we're actually gaining revenue. Usually, it's a quarter you do not book that revenue up until you start construction. It's about [ BRL 30 million ]. This is already revenue based on the sales price. But we are selling more than booking the revenue.

So I'll turn it over to [ Andre ].

[Unknown Executive]

Our portfolio is BRL 400 million. And I think we have some good expertise because of our real estate knowledge. We're doing it little by little. We're not in a hurry. We're not giving any guidance and not even making any promises. Everything is according to plan. So far, so good.

[Operator]

[Operator Instructions] Ygor Altero at Santander asks the following question.

[Ygor Altero, analyst]

Can you give us some more detail on the sales of finished units? It seems that you're doing a good job there. Can we expect that same trend in the future? And what is the margin for that inventory?

[Miguel Mickelberg, executive]

Ygor, this is Miguel. Yes, we're on track on our finished unit sales, BRL 1 billion. Q3 sales were good. The margin varies dramatically. [ 1/5 ] has over 50% margin, but several other products were lower margins. Finished units contributes negatively to gross margin. We have reduced the volume of finished units. It will continue to be substantial in the revenue. The projects we are launching now have better margins.

[Operator]

Marcelo Motta at JPMorgan asks the next question.

[Marcelo Motta, analyst]

Two questions. Can you talk about the outlook of Minha Vida for low-income projects? It's a more challenging scenario. And the outlook about subsidies next year -- if you look at your launch mix for the following years, is this business going to grow? Will it remain flat? Can you talk about margin? Part of the answer is in the sale of finished units. And what about the launches? What if that margin grows more than what you've gotten this quarter?

[Miguel Mickelberg, executive]

Motta, this is Miguel. As to the Minha Casa, Minha Vida, those had an impact, but the launches were substantial in the quarter. We are at 30% for the year. We know that there are many uncertainties around the program, but we'll keep on launching new projects. Vivaz can help boost that volume as well. We are still -- we remain confident. We believe in that segment.

As to the gross margin, on the midterm basis, this is going to increase. What we launched in 2019 has about 34% gross margin. In time, these new projects will account for more in the revenue. But there may be major upswings from quarter-to-quarter.

[Operator]

Jorel Guilloty at Morgan Stanley asks the next question.

[Wilfredo Guilloty, analyst]

I have 2 questions. Can you elaborate on the profile of customers that are purchasing high-end projects? Is this someone that did not purchase during the recession? Or is it because there are more investors? And what is the focus now? Is it because people are confident about the economy?

My second question, about the partnership with CPPIB, I would like to understand the profitability of that partnership. Is this a business that can grow abroad as well due to decreasing interest rates?

[Unknown Executive]

Yes. We're selling most of our projects to end users. We like to do it. Why are they buying? I think there are several reasons. The demand in Brazil is high for real estate. Brazilians like and they need a first house or apartment. And for a couple of years, they couldn't do it because of the slowdown. Things are getting back on track now, and people came out of their cage. They're purchasing at a reasonable price not because it's cheap, but they couldn't buy for 4 years. We're not becoming a Venezuela. We're not going to go belly up. So this is the right time to getting back on track. Interest rates are down. Real estate prices are down. It's -- affordability is very nice. Four years down the road without that [ natural ] demand. So this is what we are seeing now. It's appropriate for end users --

And of course, investors are back in the game. There are many investors. For instance, there's no point in leaving your money in the bank. Stock exchange, real estate, well, that's the dynamics that will play out. About the partnership with CPPIB, I'm not going to give you any more detail. We are running this experiment, but it seems to be an interesting business. It didn't make sense in Brazil. It's difficult to get better rates from bad investments. Residential income will become yet another option in real estate. It made sense to us to test it now, and that's why we did it.

[Operator]

Victor Tapia at Bradesco asks the next question.

[Victor Tapia, analyst]

Let me follow up one issue. Land purchase and breakdown of the [ 4-4-4 ]. How do you break that down between low income and medium income, taking into account the volume of purchased land in the following years? And I would like to also understand whether you're comfortable in trying to grow in low income given this ever-complicated scenario for the Minha Casa, Minha Vida program.

[Unknown Executive]

We have several alternatives. We're not going to break that down, what is how -- high income, low income, São Paulo, Rio. We have to feel comfortable depending on the segments. And 3, 4 years, we didn't have Vivaz. Now we do have Vivaz. We can be nimble. For next year, we have way more than the 4 before 2021. Now depending on the price and opportunities, we can purchase land. We do not set that in advance. We want to be in 2021 with a profitable pipeline. It doesn't make a difference whether it's high income, low income. If one segment is suffering, we can shift to the other one. We want to be and remain competitive trying to use our installed capacity. Our team, that is very flexible. I wouldn't make any precise calculations in that sense. What it will play out in 2021 between low income, high income, I'd be lying. We discuss this business on a daily basis, and we pick and choose the right options.

And about the outlook of the program, that will depend on the market. The [ 4-4-4 ], the BRL 5 billion with the launches will keep on growing. Customers want to be profitable and give our ROI at good standards. If there is present -- if Minha Casa, Minha Vida remains with or without subsidies, the segment is still interesting with or without the subsidies. We'll be working with our JVs and Vivaz in this segment.

[Operator]

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

[Raphael Horn, executive]

Thank you for attending the call. We have many things out there in the market for Q4. This is going to be a very exciting fourth quarter. Godspeed. We didn't launch many things in Q3, but there'll be new launches in Q4 and will help improve profitability and get back to very interesting ROI levels. Thank you very much.

[Operator]

This concludes Cyrela's teleconference. Thank you for attending. Have a good day.

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