Cyrela Brazil Realty SA Empreendimentos e Participacoes

BOVESPA:CYRE3

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to Cyrela Brazil Realty's conference call, where we'll discuss Q4 2017 earning results. [Operator Instructions] As a reminder, this conference is being recorded, and the recording will be available at the company's website at www.cyrela.com.br/ri. This call is being simultaneously translated into English and is being broadcast over the Internet. Questions can be asked by participants connected abroad. The earnings release published yesterday, March 22, after the close of the BOVESPA 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 prospect and projections and operating targets related to its financial growth potential are predictions based on management's expectations about the company's future. These expectations are highly dependent upon domestic market conditions, the general economic performance of the country and international markets and, therefore, are subject to change.

We have Mr. Efraim Horn, Co-CEO; Mr. Paulo Gonçalves, IR Director; and Mr. Miguel Mickelberg, CFO. I would like to turn over to Mr. Efraim Horn. You have the floor, sir.

[Efraim Horn, executive]

Good morning, ladies and gentlemen. Let me start with the overlook of Q4 2017, that has proven to show good economic results despite the uncertainties of the elections. We have seen indicators of the uptake of the company, BRL 17 billion in 2017 after losing BRL 100 billion in 2015 and '16. Despite room to reduce interest rates even further, banks are more prone to give credit. Consumer confidence is again on the uptake, and unemployment rates are stable. The industry is launching fewer and delivering fewer projects. Average prices have been stable for some months. Just in few areas, prices are picking up again. Gradually, we begin to feel that in our operations.

In 2017, net sales reached BRL 3.3 billion, up 17.8% compared to the same period in the previous year. I would like to highlight our delivered products sales. They reached almost BRL 1 billion, 55% increase when compared to 2016. This uptake could have been faster if we had a solution for our #1 problem, which is cancellations.

The highlights for the quarter and the year was cash generation. Company has reached BRL 245 million in the quarter and BRL 712 million for the entire year when compared to losses of our cash of BRL 115 million in 2016. Given our debt profile, which is very conservative, the company has decided to distribute extraordinary dividends amounting to BRL 200 million to be confirmed in our next ordinary general meeting. That's part of our strategic planning to optimize the company capital structure, aiming at recovering our ROE.

I would like to share that in the past 2 years, both Cyrela and [indiscernible] have been improving substantially in-depth every engineering projects, products, suppliers, materials and design. By doing so, we have managed to differentiate our end product. So customers have that value perception. We can also make a difference both to sell our stocks that have that recognized quality and at the same time, we can leverage our brand for newer projects. Let me just share 2 stories with you that are part and parcel of our company, but it's not heard everywhere else, especially investors.

We delivered a project called Classic Lapa in previous quarter in the district -- in the neighborhood called Lapa. It's our entry-level product. One of the consumers, when he was receiving that project, he was surprised, very happy. That's not what I bought. It's much better. But you, Cyrela, I am at a crossroads. I cannot invite my family to my apartment. An engineer asked him, "Why is it that you cannot invite your family over?" And he said, "They'll think I'm rich. Everybody is going to ask me for a loan. This is way above what they are used to. It's way above my own expectations." So the message was we managed to surprise consumers, raising their expectations. It's easier to sell stores -- stocks rather.

There's yet another story. One of his family members purchased an apartment from our competition 3 years ago, and the product was delivered just a month ago. And this worker that works in the engineering department at Cyrela was, of course, frustrated, and he shared that story with us. "I'm not going to take it. I must sell it." "Why are you selling your apartment?" We asked them -- him. And he said, "Everything that was Cyrela [indiscernible], I cannot be happy getting that apartment from another company." So that is the customer's perception, our worker's perception, so that reputation will be shared in word-of-mouth to the marketplace.

All right. Let me move on to Slide 5 in our presentation. Let me talk about the launches, the new projects. In Q4 2017, we have launched BRL 1.3 billion, aligned with Q4 of the previous year. For the year, new projects reached BRL 3 billion, up 4% when compared to 2016. In this quarter, we have introduced 19 new products, 16 in São Paulo, 2 in Rio and 1 in southern Brazil, in Porto Alegre. Excluding swaps, the volume launched in Cyrela's share was BRL 2.1 billion, up 2% year-on-year. The company share in the volume launched for the year was 70% compared to 75% in 2016.

Moving on to Slide 6. Let me highlight new -- 2 new projects that were very successful in São Paulo. One is called Living Exclusive in the Socorro neighborhood, sold 100% in the quarter; and the other one is called Quadra Greenwich, 47% sold by December. It's a little above that today.

On to Slide 7 now. Let me talk about sales performance. In Q4 '17, presales totaled BRL 1.3 billion, 15% higher than Q4 2016. In the year, sales reached BRL 3.3 billion, up 18% when compared to 2016. Excluding swaps, presales amounted to BRL 2.3 billion in the Cyrela's share, a 14% increase year-on-year. The states of São Paulo and Rio jointly accounted for 87% of our sales in the year.

On Slide 8, we will address sales speed. The SoS was 34% compared to 29% in 2016. Looking at sales speed by period, projects launched in this quarter have been 44% sold.

On to Slide 9, total inventory. At the end of Q4 2017, inventory market value totaled BRL 6.2 billion, down by 0.6% when compared to the previous quarter. The change in our inventory can be seen in the chart on your right.

On Slide 10, we have a breakdown of our finished units. We sold 11% of our finished units at the beginning of the period, ending the inventory of projects delivered along the quarter and pricing of units at market value. Finished units inventory decreased by 3% quarter-on-quarter. We are aware how important this matter is to the company, and we're going to continue to focus our efforts on these products. Rio and northeastern Brazil account for 33% of the finished units inventory.

Moving on to Slide 11, I'll talk about delivered units. In the quarter, Cyrela delivered 14 projects totaling 6.5 thousand -- 6,500 units. We delivered 20,000 units in 55 different projects. Units delivered account for a VGV of BRL 1.7 billion, up 9%.

I'll turn over to Mr. Paulo Gonçalves to talk about financial results.

[Paulo Gonçalves, executive]

Thank you, Efraim. Good morning. On Slide 13, I'll talk about our financial results. In order to compare the 2 periods, all numbers in previous periods are going to be presented in a pro forma style, considering MAC of the equity equivalents method.

Gross revenue amounted to BRL 832 million, down 8% quarter-on-quarter and 35% higher year-on-year. Gross revenue was BRL 2.7 billion, 14% less than 2016. Gross income in the quarter was BRL 219 million, down by 13% quarter-on-quarter and 48% higher than the gross income year-on-year. In the year, gross income reached BRL 717 million, down 28%. The company's gross margin in the quarter was 27%, 2.4% above the 24.6% of the previous quarter. In this quarter, the company showed a profit of BRL 49 million, losses of BRL 95 million in the year against a profit, BRL 151 million in 2016.

On to Slide 14. Let's talk about profitability. In Q4 '17, our return on equity measured that the net income of the past 12 months over the average shareholders' equity was minus 1.6% and our EPS was BRL 0.13.

On Slide 15, I'll talk about our customers' financial solution. In the quarter, transfer, trust of deeds and payoffs amounted to BRL 641 million, 25% lower quarter-on-quarter and 27% lower year-on-year. Considering units, transfers, trusts of deeds and payoffs totaled 2.8 thousand, 30% lower in the quarter in comparison, 27% lower year-on-year.

Slide 16, I'll talk about cash generation. In Q4 2017, our cash generation was BRL 245 million versus a BRL 285 million quarter-on-quarter. Let me point out that in this quarter, in addition to the company's strong recurring cash generation, there was a cash inflow related to the sale of equity interests totaling BRL 66 million. In 2017, our cash generation reached BRL 712 million against a cash burn of BRL 115 million year-on-year.

On Slide 18, I'll address our indebtedness. Gross debt at the end of the quarter was BRL 2.6 billion. Cash position was BRL 1.4 billion. Our net debt was BRL 1.2 billion. 60% of the total gross debt are related to loans for construction, and 50% is long term. Our net debt-over-equity ratio was 18.8%, 4% lower than the previous quarter. Given the consistent cash generation and the comfortable level of indebtedness of the company, the board approved an extraordinary dividend distribution to be approved in our assembly -- in our general meeting amounting to BRL 200 million. We are providing better ROE for our shareholders.

Now I, Efraim and Miguel are available to answer any questions you may have.

[Operator]

[Operator Instructions] Our first question come from Gustavo Cambauva from BTG Pactual.

[Gustavo Cambauva, analyst]

I actually have 2 questions. The first, you talked about cash generation, right? But what drew my attention is this substantial increase of accounts receivables of finished units, almost BRL 450 million in the quarter. Is this increase in your receivables come from transfers, and you are going to have a very strong cash generation effort in 2016? Or is it Cyrela's portfolio selling your inventory based on the company's own financial schemes? So what's your take of cash generation for 2018? And here's my second question. It has to do with the marketplace rather.

[Efraim Horn, executive]

[ Efraim started out by saying that he ] can detect a gradual improvement on the demand side and new projects.

[Gustavo Cambauva, analyst]

Could you elaborate on your take for your inventory sales? And also newer -- new projects? Is it going to remain the same? Or do you foresee any kind of improvement in that area?

[Paulo Gonçalves, executive]

This is Paulo. Let me address your first question, and then I'll turn over to Efraim to answer the second question. As to receivables, there's no increase in our financial projects. It's about BRL 420 million, BRL 430 million. What happened was that we have deliveries concentrated towards the year's end. Two major projects, [indiscernible] and Panamerica, they were both delivered at year's end. And we sold a lot of finished units towards the end of the year, too. When you talk about our cash generation projections, there's a good level. That's what was performed, as you mentioned. We have managed to sell a lot of finished units, almost BRL 300 million worth; for the year, almost BRL 1 billion. So we have a BRL 2.6 billion inventory to convert that into cash. Construction prices are low. The most difficult deliveries have already been concluded. Slowly, banks are less restrictive in conceding credit. Yes, the cash generation outlook is positive. Let me just say that when you talk about cash generation in 2017, we had about BRL 115 million of nonrecurring items. I don't think we are going to repeat that in 2018.

[Efraim Horn, executive]

This is Efraim. Let me address your second question. Congratulation on the creativity of coining the term [indiscernible]. Your question's about inventory sales and new projects. Inventory sales may be a little above what we had last year, and the reason is for the net position. Because most of the inventory units we're going to sell, they are not -- they are clean of the cancellations effect. So we believe that the net result will be better. Last year, I think we sold inventory units on the overall, but we had a lot of cancellations. So the net number was a little worse. This year, there won't be that many cancellations. As to new projects, since Cyrela has a higher number in the beginning of last year, there was some political uncertainties, especially in São Paulo. And we expect to introduce or to launch many more projects. So the political outlook and the legal outlook must, of course, help. But we have to overcome some of these legal issues to launch newer projects.

[Operator]

Rodrigo Fraga from Citi.

[Rodrigo Fraga, analyst]

I have 2 questions. Let me piggyback on what Cambauva asked. I think you have improved sales, but you also talked about a contribution, that reduction of cancellations as a percentage of the gross revenues. Deliveries were down a little bit towards the year's end, but major drops are expected to take place in the 2 first quarters of 2018. What kind of improvement can we expect in the first 2 quarters in this year just by reducing the number of cancellations? And my second question is about the uptake in sales. I would like to better understand, what's more important to you today? Is it something that you're doing internally? That you are going to explore even further? Or is it a better perception on part of consumers? What -- or whether more credit with lower interest rates?

[Miguel Mickelberg, executive]

This is Miguel. Let me answer your first question, then Efraim will address the second. We expect that cancellations are going to be more compared to the 4 -- Q4 last year, but this is a volatile number. We still have major deliveries to conclude. So when you model our revenues, our volume of construction is slowly decreasing because we are delivering more than we are introducing or launching. So we're going to reduce that. That impact will be revenue line. Looking forward, this year's sales will be a bit bigger, depending on the number of sales. But we are dependent on the number of sales for the year. The uptake of selling inventory units, let me address that question in 2 parts. Most of the inventory sales depend on its seasonality. The worst period is the last 6 months before the delivery because consumers have to put a down payment, and they don't have that perception of the end product. The construction is still dirty, so to speak. When the product is ready, they can see the reality, the quality of the project. So that helps them make a decision. So in this year, especially in São Paulo, you have very -- or many projects that have been recently delivered. It's not that the last 6 months before the delivery. That's the worst decision time. That's where we are 6 months ago, especially in São Paulo. So improving rates, of course, helps. But we believe that it can improve even further. Inventory units in Rio. We know that the economic situation in Rio is somewhat different. The speed there won't be as fast as it is in São Paulo.

[Operator]

Next question, Alex Ferraz from Itaú BBA.

[Alex Ferraz, analyst]

I have 2 questions. My first is about that announcement of extraordinary dividends. My question is, do you believe that you're going to do that in 2018? Some smaller dividends or -- but more often, every 2 quarters depending on the cash generation performance? And my second question's about projects approval. We are keeping track of the legal issues. My question is, even in the projects that we have acquired, according to the new zoning laws, have you had any approval issues before a resolution is made? So here are my 2 questions.

[Paulo Gonçalves, executive]

This is Paulo. Let me address your first question. We have been saying that we're going to reduce and adjust our capital structure. This is already happening. So we did that for the first semester, and we may do something else in the second semester, but that will be dependent upon how things evolve. We have 2 major challenges for the year. You just talked about one of them, cash generation. We must see that happen. And we have several debts, a BRL 1 billion and BRL 500 million of corporate debt, and this is an election year. Don't forget that. If we can take some credit throughout the year, that may happen. And if we can actually generate the cash we expect, we may distribute dividends once again in the second semester. As to the second question about the approvals of a project and new projects portfolio, Cyrela has, for the year, a very varied portfolio, protocol projects and projects according to the new zoning laws. We believe and we expect that the country is reasonable enough to overthrow that injunction that will prohibit these protocol projects because the law is clear. When you have a transition period of X number of months, every protocol project are going to be assessed by the new law. This has been happening, and we hope there is -- they're reasonable. It may not happen. And then in that case, we'll have to postpone about 30% of our projects in São Paulo alone because that affects São Paulo for the next year or the next semester. And we're trying to anticipate those projects that were initially allocated to a more distant future to try to cover that gap. Of course, it affects us, but the entire market, too. But Cyrela has many plots of land to introduce new projects not related to the protocol, and we'd have to speed up those projects to replace the other ones if the injunction is maintained.

[Operator]

Next question, Victor Tapia from Bradesco BBA.

[Victor Tapia, analyst]

The first issue I'd like to address is about a recent decision that was announced by the legal authorities in Rio de Janeiro, a cancellation of a specific project you have. And you're going to return part of what was withheld, maybe [ 75, a 9% ] retention of what buyers had already paid before that cancellation. My first question is, can you give me more color on that case? And my second question, I believe this is an old project, right? And maybe the impact of that decision is not substantial to Cyrela. But what's your take on that becoming jurisprudence in Rio de Janeiro because that was the legal authorities was the ministry of public -- the district attorney's office that determined that. Do you believe it can become jurisprudence to impact the company further? And my other question's about, you have about 89 projects underway, and you have been reporting cost savings for construction. It has been happening -- has been helping your margins. What are your expectations to get even further construction savings, to get even better impact in the company results?

[Miguel Mickelberg, executive]

This is Miguel. About the DA's office, that decision was about one project. It's an old project called [ Paso Real ] in Rio de Janeiro. We don't believe it's going to become a jurisprudence case. It's within the state environment. I don't believe it's going to impact. It would depend on a decision made by federal courts. We don't believe there won't be any further impacts on cancellations.

[Victor Tapia, analyst]

And about construction savings?

[Miguel Mickelberg, executive]

Yes, that's true. Construction costs reduced dramatically, 30% less compared to 2016. And looking beyond, savings won't amount to that much. We have fewer construction sites that are active today. And we have signed several contracts, and we have replicated those savings in our results already. Let me just comment on the construction savings. We hope we don't get no further construction savings. And why is that? The reason behind it was the -- the slowdown in the economy. But as long as we can reduce the number of construction, of course, consumers will be just as strong, and construction is 34% of VGV. Everything you save in construction, we wouldn't give a discount, so the benefit is bigger. Of course, you have a direct impact in margin. But all the way, we're losing money, because consumers can get that in the marketplace as well. That makes sense. It's a good sign when you have no further construction savings because we'll be able to boost prices as well.

[Operator]

Next question, [indiscernible] from Morgan Stanley.

[Unknown Analyst]

I have 2 questions. Cyrela sales in 2017, is that a trend in 2018? Can you talk about the more new projects in the markets where we are? Do you see the competition speeding up the number of new projects? Or is it a more conservative growth that you expect?

[Unknown Executive]

Overall, that's a yes. We believe that sales will be bigger than newer projects. Our newer projects and also the competitions' are being sold very well right off the bat, 100% in one weekend in one of the cases. And the name of the neighborhood is called Socorro, which means help. It should be called Paradise. And of course, we wanted to sell more because organically, last year, especially in São Paulo, we did not launch as many projects as we would like because things are difficult at the beginning of the year. We'd like to introduce more, to launch more. There's that legal issue, the protocol. 30% of our projects will have to be changed very quickly in order to launch everything according to plan. Even without it, there will be more launches in 2018 with or without that protocol issue.

[Unknown Analyst]

And what about the markets where we operate? Are competitors boosting their new launches, too? Or are they more conservative?

[Unknown Executive]

Let me be specific on a market-by-market basis. In the south, it's the same. There are few competitors, so smaller market in Rio. The entire market is, of course, in a -- at a crossroads, very, very occasional projects. It's not the case. Competitors are not going to introduce more projects. In São Paulo, competitors have changed, but there are several smaller companies now ready to launch. But there are other competitors.

[Operator]

Next question, Marcelo Motta from JPMorgan.

[Marcelo Motta, analyst]

I have very 2 quick questions. Could you comment on disbursements of purchasing land? What's your take for next year? You talked about deliveries and the cash generation scenario. Can you talk also about what happened to Cury? And to take a closer look at their results, too?

[Paulo Gonçalves, executive]

This is Paulo. Let me address your first question. Miguel will address the second. Disbursements to purchase land, we are going to reduce that. In 2016, they amounted to [ BRL 210 million ]. In 2017, they were BRL 889 million; Q4, BRL 70 million, but for the year, [ BRL 189 million ]. When we look at 2018, the trend will be the same. We have a reasonable stock of land. We must replenish that, but there shouldn't be any major increases in that area.

[Miguel Mickelberg, executive]

Let me talk about Cury. Their Q4 was very strong, as you could see. They said sales of [indiscernible], and that results contributed to our P&L in BRL 31 million. For 2018, we hope they launch even more, and they'll have even better results that they had in 2017. In 2017, they had sales of BRL 700 million, and their net profit was BRL 120 million.

[Operator]

Next question is from Guilherme from Crédit Suisse.

[Guilherme Rocha, analyst]

I have 3 questions actually. First, I would like to better understand the outlook for margin. On one hand, finished units sales

[Audio Gap]

but you have less impact on the cancellations. And you have already had all these savings, construction savings, and you're going to have greater margins. When making all that calculation, you're going to have fewer impact of finished units sales. My second question is, what's the price difference that you can measure between one launch an a finished unit in places with similar conditions? And finally, my last question is about commercial expenses. You had major drop in Q4, especially because of third parties. I thought there would be an even further drop by reducing finished units inventory. I'd like to better understand what's the recurring level as of now.

[Miguel Mickelberg, executive]

This is Miguel. As to margins, these are the major factors. You put it perfectly. We believe that launches helps us going to up to gross margin to 35%. But construction savings caused a negative impact, only BRL 9 million in this past quarter. When compared to 2016, the average was [ 50, 40 odd ] by quarter, and margins were even better than the other quarters because of cancellations. So I believe the net effect is positive and margins are going to gradually increase this year and the following years up until we reach our objective. As to commercial expenses, we believe that for 2018, volumes will be a bit smaller than that of 2017, maybe bigger than the annualized last quarter. That involves commissions and bonuses, sometimes are outside and sometimes inside a contract. We may have a lot of reductions. We'll be stable. There'll be some more media. And the long term, the major impact in the line is for inventory for land taxes, BRL 70 million in 2017. We expect that to go down a lot in years to come. And about the finished units in the secondary market, it's very difficult to address that because that depends on the region, the demand, the offer or the supply. It's difficult to come up with a very specific answer.

[Operator]

[Operator Instructions] Since there are no further questions, I'd like to give the floor to Mr. Efraim Horn. You have the floor, Mr. Horn.

[Efraim Horn, executive]

Several industries have shown growth, and there's this mismatch of sales numbers when compared to early last year. We see that in the oil industry, logistics, freight. We have a very a clear expectation that this year will be much better than last year and, of course, better than the past 3 years. We're starting a new cycle, a cycle that was very harmful to Brazil and our industry overall.

[Operator]

That concludes Cyrela's conference call for today. Thank you very much for taking part in this conference.