Cyrela Brazil Realty SA Empreendimentos e Participacoes

BOVESPA:CYRE3

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to the earnings call for Cyrela Brazil Realty S.A. regarding the earnings for 3Q '22.

Today, we have with us Mr. Raphael Horn, CEO; and Iuri Zanutto J. Campos, Senior Manager for Investor Relations.

We would like to inform you that this presentation is being recorded and simultaneously translated. The translation is available by clicking on the button interpretation. For those who are listening to English, you may choose to click on mute original audio. Additionally, for those who wish to have access to the presentation in English, it is available on the company's Investor Relations website at www.ri.cyrela.com.br.

During the company presentation, all participants will not be able to open your mic. Next, we will begin the Q&A session. [Operator Instructions]

We would like to clarify that any potential statements made during this call relating to the business perspectives of Cyrela operating goals or financial goals are company management forecasts that may or may not occur. Investors must understand that any political macroeconomic factors or other operating factors may affect the future of the company and lead to results that materially differ from those expressed in such future considerations.

To begin the 3Q '22 earnings call, I'd like to hand over to Mr. Raphael Horn, CEO, who will begin the presentation. Mr. Horn, you may begin.

[Raphael Horn, executive]

So in this quarter, 14 projects were launched with a potential PSV, totaling BRL 6.3 billion in the year-to-date of 2022. Net sales were BRL 2.3 billion, an increase of 41% quarter-over-quarter. That's why the company achieved BRL 5.2 billion in sales in the year, a 32% increase compared to '21.

In addition to those operating values informed, we have $1.6 billion in the quarter with 33.9% gross margin, showing a certain recovery when compared to the previous quarter. And lastly, the company had net income of BRL 239 million (sic) [ BRL 289 million ] in the quarter and BRL 609 million (sic) [ BRL 601 million ] for the first 9 months.

Moving forward, we'll wait for new signs from the new elected government. We are rooting for the announced tax responsibility, fiscal responsibility as one of the main aspects of their government.

Now let's talk about our operating results.

[Iuri Zanutto J. Campos, executive]

Thank you, Raphael. Good morning, everyone. First of all, on Slide #5, we'll talk about the quarter launches. So in the third quarter, we launched 14 new projects, as Raphael mentioned. PSV of BRL 6.292 billion, BRL 26 million higher than the second quarter of '22. The share of the company in these launches was 73%. If we exclude the swaps and consider that in the percentage, the volume launch was BRL 2.3 billion.

On Slide 6, we'd like to highlight the launch for the quarter with the Oscar Freire 1560, a project on the Oscar Freire street on the Pinheiros neighborhood side. It's beautiful.

On Slide 7, the sales performance for the quarter. Contracted sales BRL 2.2 billion, an increase of 67% quarter-over-quarter. If we exclude the swaps, BRL 1.713 billion in sales in the Cyrela percentage. The state of Sao Paulo was responsible for most of the sales at 69%.

Slide 8, sales speed. The SOS for the quarter was 44.3%. When we look at the sales speed of the launches in that quarter, the launch projects are at 41% sold up to the end of September.

Slide 9, total inventory. End of quarter, the market value was BRL 8.911 billion a 10% increase quarter-over-quarter as a result of the previous launches. And here, we can see the quarter-over-quarter differences.

On Slide 10, the concluded inventory. We've sold 7% in the beginning of the period. When we add the projects delivered and pricing of units, the -- we have 19.6% compared to the previous quarter.

Last operating Slide #11, the units delivered. Cyrela delivered 21 projects this quarter and 4,289 units and a PSV of BRL 1.7 billion. And year-to-date, 7,935 units, 40 projects with a total PSV of BRL 3.2 billion.

Moving on to the financial results. So the net revenues were BRL 1.250 billion, 21% higher than 3Q '21 and 24% higher than 3Q '22. And year-to-date, BRL 4 billion -- a little over BRL 4 billion, 16% higher than 9 months '21. So we have the gross margin in 6.3% and 34.7% in the same quarter of '21. 32.2% of the gross margin a bit lower than 35.3%, which was the 9 months '21 figure.

And finally, net income, BRL 289 million compared to BRL 238 million in 3Q '21. And year-to-date, BRL 601 million net income.

On Slide 14 about the profitability. Our return on equity, average equity was 12.7%.

On Slide 15, indebtedness. Gross debt was BRL 4.2 billion with a gross cash position of BRL 3.9 billion. The net debt achieved BRL 2.61 billion. The total gross debt, 75% is long term.

In terms of leverage, our net indebtedness compared to net equity was 3.5%, 1.9 percentage points lower than the previous quarter. The low level of indebtedness ratifies the principal financial solidity of Cyrela and enables us to maximize return for our investors.

Last slide before Q&A, cash generation. In 3Q '22, we had cash generation of BRL 188 million compared to a cash burn of BRL 48 million in the previous quarter and cash generation of BRL 177 million in the same quarter of 3Q '21. Recurring events, BRL 133 million. It's in the slide. That was the sale of the Cury's shares. We've accumulated BRL 87 million.

Now we'll move on to the Q&A session. Thank you, everyone.

[Operator]

[Operator Instructions] Our first question is from André Dibe from Itau.

[André Dibe, analyst]

I have 2 on my side. The first one is about low income. I've seen that you've launched in the program lowered a lot, actually, almost half compared to the same period last year. So your exposure is mainly through JVs who grew their volume in that period, maybe to offset the reduction in your launches. So I'd like to understand how you balance that out about what you launched in your own program and the exposure that you have through the JVs?

And if you can give us some flavor on the strategy for that segment, what you would expect that should be in the future and the demands on that? And second, subsequent events that you have in the release about selling the Cury shares. I know it's hard for you to open up your strategy in terms of that. But I'd like to know how you assess the investments in Cury and other companies such as Plano and Lavvi, and if you're considering divesting in your other shares.

[Raphael Horn, executive]

About your first question about our share and low income if we are blending that with our partners, with our joint ventures. The answer is no. We don't do that. Our partners, our joint ventures are -- they're independent. They decide on the volume that they want, and we don't take that into consideration when we forecast what we're going to do for the year. We don't really have targets for PSV or buying new land. We buy -- I always like to say that we buy what we like. And this year, we launched less MCMV program because we had less profitable land compared to last year. But once again, this is mainly a result or a consequence. It's not something that's really planned. That's just what happened. And we believe that the segment is still okay. It will continue to be okay, but you have to be prepared for that. So nothing new in that sense.

About Cury, we sold a small share. I would say that we were like recycling a little bit of capital, generating a bit of cash. Obviously, it was very profitable for us, but it's a very small share. We're still a very relevant partner there in the company. So nothing really changes. It's just capital recycling, I'd call it that. And the other partners, once again, we've mentioned this a lot. We don't see leaving a relevant participation behind and controlling shareholders. At least I can't see after 10 years from now, but we don't see us leaving these companies. We like them a lot. We admire them. So we will remain. Sometimes every now and then, we like to recycle a little bit of capital, but not really going into a structural condition.

[Operator]

Our next question is from Fanny Ore from Santander.

[Fanny Oreng Avino, analyst]

I have 2. First of all, I'd like you to comment about levels of revenue recognition for the upcoming quarters. You mentioned you had some specific projects that helped potentially in recognition, but also gross margin. So I'd like to know what is your outlook for revenue recognition and gross margin for the upcoming quarters?

[Iuri Zanutto J. Campos, executive]

Fanny, thank you for your question. Really hard to determine a specific value or amount. You really know that most of our top line has already been contracted, which is the backlog that we recognize in the upcoming quarters together with the ongoing works. And the other points are less predictable, such as new inventory sales, recognizing launches, swaps and so on. So it really depends on the mix of those sales and the launches each quarter.

In this specific quarter, we had 1 or 2 specific one-off launches that really brought up the top line, as you mentioned yourself. So really hard to say what the path will be like. I believe that we don't -- won't have that many -- much of a variation in upcoming quarters upwards or downwards. Obviously, one quarter will be up, another will be down, but not major ups and downs. I'd say that, that level is pretty similar to what the upcoming quarters will be like. For gross margin, I think the discourse is the same. So it depends on the components that are more volatile, new inventory sales, inventory mix, new launches.

So in this quarter, same thing. Maybe one or another big launch well sold with the higher margin that helped. We didn't really have an impact of construction in the first and second quarter we did, and we mentioned that. So that also helped the margin this quarter. But looking forward -- going forward, we don't have anything relevant mapped out. So if we don't have any other excess expenditures, the margin will improve, but we can't state that just in a decisive manner.

[Operator]

Next question is from Ygor Altero from XP.

[Ygor Altero, analyst]

The first one, a follow-up about Cury. So the share of -- sale of shares, does that translate into dividends as you're in a comfortable position in terms of indebtedness, no leverage? And what's your mindset in launches, the outlook for '23, as in '22, you're able to launch a lot. So what are you thinking in terms of operation size?

[Raphael Horn, executive]

About dividends. Our dividend exposure is low today. It will grow them. In the next 2 years, it will increase because we grew a lot. We've grown a lot in these past years. So that's natural to have a cash burn. You'll see leverage increasing in the upcoming 2 years. So I wouldn't expect major dividends. You know that we like to pay dividends. We paid a lot of dividends for many years, but -- so in an expansion cycle, it's harder to do that, unfortunately. I wouldn't expect too much dividends in addition to the minimum mandatory dividends because our leverage will grow. And after that stabilizes and things go back to normal, that's when we like to pay dividends.

About the '23 outlook, without giving you guidance, as Iuri mentioned, in general terms, it should be similar to this year, but we don't really have, though, a commitment to target in volume. We have a good pipeline for next year. But obviously, the market is still uncertain. The economy is uncertain. The interest is uncertain. New administration is coming. So a lot of things for us to discover. We hope that the government elect will have fiscal responsibility, and we hope it's going to be a good year.

So a lot of things still have to happen, and we're rooting for that, good things. So it's year after year and we don't really have that much visibility about '23 concerning the market, the economy, interest and tax. So let's wait how -- and to see how things will unfold.

[Operator]

Our next question is from Bruno Mendonca from Bradesco.

[Bruno Mendonca, analyst]

I have 2 questions. You did a mark-to-market in the Plano & Plano investment. So I'd like to hear your motivation for that to see what happened. It was mark-to-market according to the IPO price, so I'd like to know what changed. That's my first question.

And second one is about cash. We've seen a growth in the portfolio, and it's still growing fast. What's the outlook for the business? You also issued debentures in CashMe. It wasn't created with subordination. It seems to me like it was a simple debenture. So could you give us some information of that. At the end of the day, is it Cyrela corporate debt? Or is CashMe being able to fund on its own according to that type of framework.

[Raphael Horn, executive]

Iuri is going to talk about Plano, and then I'll talk about cash.

[Iuri Zanutto J. Campos, executive]

Thank you, Bruno, for your question. Pretty much in that line that you mentioned. It was mark-to-market according to the IPO that was 2 years ago back then. So it wasn't mark to book. So there's a difference between the final value and how it's booked to our share. So that premium, so to speak, has to be tested once a year to see if that's right. We did that last year. We did that again this quarter. It's based on the discounted cash flow according to company assumptions. And about the assumptions, the market became worse for everyone. It's been a year now, especially low-income companies in terms of gross margin and predictability of launches. So based on the discounted cash flow, we had to adjust that even though it's a small one, we still had to do it.

[Raphael Horn, executive]

Bruno, about CashMe, we should achieve 90% of the target this year. So asset origination, yes, we did a little in the third quarter. So it's within expected and within the targets. So it's going to be a good year for CashMe.

About the debenture issuance. CashMe already has BRL 1.6 billion, BRL 1.7 billion in the portfolio. The market is open. We did one with Itau. And we've closed that with other players to do an [ ex-Creo ]. And then we do one debenture here, another there for bigger structured operations that we have. So the [ Creo ] market and the CashMe market is based on [ Creo ]. So if the market continues to operate, nothing changes. It's just a one-off debenture that we have. So we can have some blend in that and bigger operations that we don't always get into the [ Creo ]. So yes, the big thing is decrease.

[Operator]

Next question is from Elvis Credendio from BTG.

[Elvis Credendio, analyst]

Two questions on my side. First is the Eden project. Given the magnitude of that, can you give us more details about the launch schedule and other phases now in '23? Should everything be done in '23? How are the sales going for the first phase? What you see in margin for that project and the negotiations to sell the multifamilies tower that should be fourth quarter.

And I want like an update in construction costs. Are there any inputs that are still concerning you or any inputs that you're getting some savings on that? And what's the expected forecast inflation? Are you adding some more margin on to that or not?

[Raphael Horn, executive]

About Eden, it's a project that we really like. We should launch only 1 tower this year, beginning of next year, second tower. And then depending on market appetite, we'll launch more next year. Expectations are pretty good. We believe it's a very unique product. It's hard to have that type of land nowadays. And it was approved in the previous directives. We're really excited. We've been celebrating, and the brokers are very excited.

Well, we're just very excited. Let's see. We hope it works. It's a big project. So if it works, there's a lot to sell. But obviously, it depends on the demand and market speed. So it is a project that we love. About the gross margin of the project, it's a good margin. I don't know it right off the bat. About construction costs, Iuri will answer that.

[Iuri Zanutto J. Campos, executive]

Thank you, Raphael. Thank you, Elvis for the question. Gross margin of that project specifically, we don't usually give gross margin per project, unfortunately, sorry. About construction costs, in the past 3 or 4 readings of the INCC came close to 0. So that's good news. Even though it had 2 years where construction costs were going up nonstop. We've even seen some inputs dropping in price, so a negative price variation. And on the other hand, there's another input that's not new, and I've heard you asking about this in other earnings calls last week and this week, which are the byproducts of cement and concrete. There have been some highs, one after the other. But in net-net, one offsets the other. So our construction costs are pretty much under control in the past quarters, even having stabilized a little on the upside, but it's news that we're very happy with.

And you asked about inflation. Well, same thing with gross margin, we don't give guidance on that type of internal figure. So we didn't make any significant changes to our assumptions in the past times. We assess it constantly to see if we should adjust upwards or downwards, but it wasn't the case recently.

[Operator]

Next question is from Marcelo Motta from JPMorgan.

[Marcelo Motta, analyst]

I have 2 questions mainly related to inventory. I'd like to understand your mindset to sell concluded inventory because when we look at the figures quarter after quarter, the last 2 were a little bit shier given the level of concluded. And the other sales expenses. So are you going to need more marketing to sell? And I'd like to know how that can affect the margin dynamics as well.

[Iuri Zanutto J. Campos, executive]

Motta, thank you for your question -- to ask your question. We assess inventory if it's concluded or not on a case-by-case basis. We have monthly and biweekly meetings. We're always paying attention to inventory and each one has a different strategy. So if we have to give a discount, we'll give a one-off discount, but it's not the general rule. There is a specific solution for each case. So I really don't see that as an issue for the company. What I have seen, though, not only in our bottom line and also the results that I saw for the competition last week and this week is that there may have been -- they've been having a bigger sales effort.

So be it whichever it is, media, advertising, nothing really relevant, but I have seen sort of a pattern going on. I would guess that it's a pattern for the industry. We need to put in a little bit more effort to finalize the sale. And I think that's normal given that the scenario is worse in the past '18, '11, '24 months even. That's it. Anything missing?

[Marcelo Motta, analyst]

No. Very clear.

[Operator]

Next question is from [ Hugo Grassy ] from Citi.

[Unknown Analyst]

The first one is about the loss provision of BRL 68 million terms of related parties from Precon Engenharia. Apparently, there was an agreement that you had with Precon, and there is CADE involved, the Brazilian antitrust agency.

And a second question about credit. So this week we had disappointing news, especially coming from Bradesco in deterioration worsening of default. I know it's hard to predict '23, but if you can talk about today, how do you see the credit appetite in banks? How is that evolving?

[Iuri Zanutto J. Campos, executive]

[ Hugo ], thank you for the question. About Precon, that's a partnership that we have. It's a company that operates outside Sao Paulo. We've had that partnership for a while, that's public knowledge. The information that you're talking about, the Brazilian antitrust agency, the CADE, it has nothing to do with the provision that we had to the bottom line. But some news had come out before that about CADE. So it's a public partnership -- it's public knowledge. So that's in the special purpose vehicles that we have with them, that's disclosed. It's not new. We have that partnership. We do have some credit receivables from them and instruments such as mutuals. We assessed how to recover those amounts, the receivables. So you can see the variation in explanatory Note #13, related parties' credits receivable. And they will pay us through the operation. Operations didn't go as expected.

So we analyze the recoverability of those credits of those assets. And we also consider the collateral that we had and so on. So we reached a conclusion that the recoverability was lower. So we did that provision. And you can clearly see. If you consider the ITR of June '22 compared to September '22, you'll see it's lower -- the amount is lower than we have there in the income statement in the release.

About the real estate market, maybe Raphael wants to comment, but I think it's early to talk about Bradesco's results in the real estate credit market because the result was the day before yesterday, right?

[Raphael Horn, executive]

Yes, but I can answer that. I think it's different. There are different things. I don't follow the listed banks, but there's collateralized credit and noncollateralized credit. The problem is much more with collateralized. I believe that real estate -- that banks are still have a strong appetite for real estate. That's what banks love the most. So when you have clients and even with the SFH, it makes a lot of sense for banks, they really like the line. Because we've been selling it -- has this for a long time. So we don't believe there's going to be a structural change relating to that. I think that's here to stay, having clients to finance their real estate. We believe that their appetite is strong, and it will remain that way.

[Operator]

Next question is from [ Rafael Hader ] from Safra.

[Unknown Analyst]

On my side, I have 2 questions as well. First one is I'd like to know more about the price scenario. So with an expressive volume of launches in the past years, do you believe that there could be a price increase. And because I'd like to know your strategy when you're going to do a new launch, if you prefer to leave more money at the table or try to sell everything until you deliver it or deliver it with 10% inventory ready and work on price and gaining more margin?

And the second one, I have had a technical issue. Maybe you already talked about this. But tell us about the sales in October. I know you had 2 less weekends because of the elections. So maybe people didn't visit the sales [ centers ]. And I'd like to know if that's back to normal now.

[Unknown Executive]

About price, I think they stabilized. They went up a lot with the corona phenomenon, and now they're stable. I don't see major price increases in an objective way or concrete way in a short period of time. But obviously, if the economy improves, then it might change. But we see stable prices. We don't see room for it growing. You said if we like to leave money on the table. No, the answer is no. We do not do that. We like to sell the optimum level and deliver 10% of inventory. That's not that precise. It's not how it works. We're always trying to look for the best price possible and try to deliver it completely sold. We don't like ready inventory that's concluded, all right, that's ready.

We want price, and we want margin. It's a daily effort. That's what we do. So we try to maximize price. And yes, the math is harder because prices are stable now. The INCC went up a lot in the past years. So we have to put in more effort to maintain the margin. It used to be easier. Now it's a bit harder, a bit tighter, but that is the reality. We have to work with that reality, we don't see much room. And the other thing is, [ Rafael ] is how much PSV will drop. It has been dropping, and that's the big discussion, right? And that's a bit tighter, I'd say. So let's wait and see. The economy solves everything. Interest rate solves everything. Let's see how things will move, but we're also ready for more challenging scenarios. But that's what Brazil is all about. It's normal.

[Unknown Analyst]

How about sales in October of the elections?

[Unknown Executive]

Sorry about that. September and October were kind of months, I'd say. It wasn't a big deal, obviously. Obviously, the election got in the way. So about the election, about -- if it's the pre-election, if it's the economic scenario or if it's the World Cup, we don't know. So once again, the months weren't that good. We're not sure if it's the elections fault. I hope it is. So like I said, a lot of things have to happen -- will happen. And like I said, we're ready for any scenario. We're really excited with Ian. We had good launches. So okay, the harder it gets, the more we're going to have to work and we have to be ready for that. So it's no use giving an answer. We have to make things work in any scenario. We expect something really good with Eden. And we hope that the market is still -- that we continue to be successful in this market.

[Operator]

Next question is from [ Jorel Gulati ] from Goldman Sachs.

[Unknown Analyst]

I have 2 questions here. First one is about cash generation. When we take away the Cury's sales, it was good. So basically, BRL 5 million in cash and much better than what we were seeing in the second and third quarter. So I'd like to understand about what you're thinking in cash generation for the future. What led to that breakeven, so to speak, for that quarter -- this quarter? And is it something that we can see in the future if it will continue?

And the other is about land bank. You have BRL 7 billion, BRL 8 billion in Sao Paulo. Sao Paulo has been your focus. So I'd like to understand when will you be buying new land? Or should we expect that soon? Or are you taking it slow because of the market or available inventory. I'd like to understand what we should consider and think about how you're working with your land bank.

[Iuri Zanutto J. Campos, executive]

[ Jorel ], thank you for your question. About cash generation, we try to balance that out always, right? So we have to balance that out with sales of inventory. There's a lot of planning behind that. We have seen the receivables of listed companies in the quarter that also helped to speed up cash generation and the variation of net debt. So going forward, I think we're going to have a very challenging year next year, which is normal. Given the cycle that the company is going through. So it's been 2 years or even more than 2 years that we've been launching at higher PSV levels in absolute terms, BRL 6 billion, BRL 7 billion. So it's natural to have a lot of working capital to burn. We have cash flow meetings almost every week, and we always try to balance that out with new sales and so on.

So without giving you guidance, we believe that we should have a challenging year for cash generation next year, very similar to this year, in fact. And about the land bank, Raphael will answer that.

[Raphael Horn, executive]

So for 2023, we already have land bank. About how much we're going to buy for '24 and '25 are things that we don't really know yet. That's something that's very dynamic. It depends on opportunities or scenarios. So there's a lot of uncertainty. We want to look a little more to see what's going to happen with the new government and see how the economy is going to unfold. What we know is we have land for '23, it's our just-in-time work. We have to have it. '24 and '25, we have time to get ready. And if we're going to grow, we're not -- or decrease risk, that's one of the things that we like to try to understand at least the economic scenario first to be more or less aggressive. A lot of things to come. So we have '23 and then launches, new launches depend on market demand and so on.

[Operator]

[Operator Instructions] The Q&A session is now over. I would like to hand over to Mr. Horn for his final comments.

[Raphael Horn, executive]

Thank you, everyone, for your attention. This scenario is tougher, as you know. So far, we've been able to work around that. We hope it doesn't get worse. And we're really rooting for the -- a good government for a good administration of our new President. I hope that he is fiscally responsible and that we have 4 years of a good economy. So we're analyzing, expecting, hoping and working hard. We'll see you at our next earnings call. Thank you.

[Operator]

The Cyrela earnings call is now over. If you have any questions, please send your question to the IR team by e-mail, [e-mail]. Thank you for participating. Have a good day.

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