Cyrela Brazil Realty SA Empreendimentos e Participacoes

BOVESPA:CYRE3

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to Cyrela Brazil Realty conference call, which will discuss Q4 earnings of 2018. [Operator Instructions] As a reminder, this conference is being recorded and that 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 on March 21, after the closing of the B3 trading session can also be accessed on the company's website.

Before proceeding, we would like to mention that forward-looking statements that may be made during this conference call relating to the company's business prospects and 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 on domestic market conditions, the general economic performance of the country and international markets and, therefore, are subject to change.

We have Mr. Raphael Horn, Co-CEO; and Mr. Miguel Mickelberg, CFO with us today. I would now like to turn over the floor to Mr. Horn. Mr. Horn, you may now begin.

[Raphael Horn, executive]

Good morning. The outcome of last year's elections was certainly the most important event in Q4 2018, consolidated the recovery of economic agents confidence and asset prices in the Brazilian financial market. Despite some caution regarding the approval of the pension reform, a key factor in the country's financial recovery, we are confident on Brazil's economic upturn. The Cancellations Act was the most important event. After years of legal uncertainty, there are now clear rules for canceled purchases and delayed deliveries.

Concerning operating results, we began to see the first signs of a rebound in inventory sales in late 2018 and early months in 2019. We'd also like to highlight Cyrela's launches, which sold well once again. Reduced inventory levels remains one of the highest priorities. In addition to the improved micro -- macro and micro economic environments, we had positive net income and cash generation in Q4. Our sound financial health and low leverage ratio allowed us to pay interim dividends totaling BRL 230 million in December 2018, reflecting Cyrela's management's commitment to adjust our capital structure. We are confident that the Cyrela's team is fully prepared for another year of successful launches and recovery in inventory sales.

Now I'll comment on our operating results. On Slide 4, we'll address Cyrela's launches. In Q4, we launched BRL 2.7 billion, 113% more than year-on-year. In 2018 launches amounted to BRL 5 billion, 65% growth year-on-year. We launched 29 projects in Q4, 17 in São Paulo, 4 in Rio, 2 in the South, 2 in Campinas and 4 in Minas Gerais. 17 are in the Minha Casa, Minha Vida housing program, 5 medium range, 7 high-end products. Excluding swaps, the volume launched in Cyrela's share is 47% higher than the previous years. The company's share in the volume launched in 4Q, 64% compared to 62% year-on-year.

Slide 6, highlights the launch of the Rio by Yoo in Rio with PSV of BRL 439 million, sales over 87% in the quarter.

On Slide 7 shows Cyrela Ibirapuera by Yoo at São Paulo. Launched in October, PSV of BRL 416 million and 100% sold.

On Slide 8, we'll talk about our sales performance. In Q4 2018, presales totaled BRL 2.4 billion, 95% higher than BRL 1.3 billion registered in Q4 2017. 2018, sales totaled BRL 5 billion, a 55% growth year-on-year. Excluding swaps, presales amounted to BRL 3.2 billion in Cyrela's shares, a 40% increase year-on-year. The states of São Paulo and Rio jointly account for 92% of our sales in the year.

On Slide 9, we'll address sales speed. The company's annual SoS was 45%. Looking at sales speed, projects launched have been 66% sold.

On Slide 10, we will address Cyrela's total inventory. At the end of the quarter, inventory totaled BRL 5.7 billion, a 2% increase quarter-on-quarter. The change in our inventory can be seen in the chart on your right.

On Slide 11, we'll talk about finished units. In this quarter, we sold 9.3% of the finished units in the beginning of the year. Adding to the inventory projects delivered along the quarter, pricing of units at market value, finished units inventory decreased by 12.3% quarter-on-quarter. We are aware how important this matter is to the company, and we'll continue to focus our efforts on these products. Rio accounts for 38% of our finished units inventory.

Slide 12, we'll talk about the delivery of the units. In the quarter, there are 8 projects, 2,500 units. In 2018, we delivered 14,300 in 48 projects. Units delivered in Q4 accounted for a PSV of BRL 4.3 billion, 22% more than year-on-year.

And Miguel will now talk about financial results.

[Miguel Mickelberg, executive]

Thank you, Raphael. Good morning. On Slide 14, we'll talk about financial results. Gross revenue amounted to BRL 1,331 million, 84% and 65% higher year-on-year.

In Q4, we had -- net revenues were impacted by BRL 254 million. The increase in net revenues, excluding by provision for cancellations was mainly due to higher volume of launches recognition in the year. In the year, net revenue totaled BRL 3.1 billion, 20% growth year-on-year. Gross income in the quarter was BRL 334 million, a 63% quarter-on-quarter and 53% higher year-on-year. In 2018, gross income reached BRL 835 million, 16% higher year-on-year. The company's gross margin in the quarter was 21.5%, 3.2 percentage points lower than the previous quarter and 1.9 points lower than the same quarter in '17.

Gross margin in 2018 was 26.5% compared to 27.4% in 2017. Our profit totaled BRL 116 million in the quarter with a net margin of 8.7% compared to BRL 121 million core losses in the previous quarter and a profit of BRL 49 million year-on-year. 2018, losses totaled BRL 84 million compared to BRL 95 million in 2017.

On to Slide 15, our profitability. In Q4 2018, our return on equity, measured as the net income of the past 12 months over the average shareholders' equity was minus 1.6% and our EPS was BRL 0.30 per share.

On Slide 16, we'll talk about our customers financial solutions. In the quarter, transfers, trust of deed and payoffs amounted to BRL 732 million, 30% -- 13% down quarter-on-quarter and 14% higher year-on-year. Considering units, transfers, trust of deed and payoffs totaled 300 -- 3,800 units, 8% lower quarter-on-quarter and 37% higher year-on-year.

On Slide 17, we'll talk about debt. Gross debt at the end of the quarter was BRL 2.4 billion. Cash position was BRL 1.5 billion. Thus our net debt was BRL 820 million. Out of that total, 32% of the total gross debt are related to loans for construction 80% -- 88% long term. Our net debt over equity was 14.8%, 1.9% higher quarter-on-quarter. The low debt level confirms Cyrela's financial solidity and puts us in a privileged position to adjust our capital structure and improve returns to shareholders.

On Slide 18, we'll talk about cash generation. In Q4 2018, our cash generation was BRL 137 million versus BRL 303 million quarter-on-quarter, BRL 311 million year-on-year. In 2018, cash generation was BRL 803 million.

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

[Operator]

[Operator Instructions] Enrico Trotta with Itaú BBA.

[Enrico Trotta, analyst]

I have actually 2 main questions. The first one has to do with cash generation dynamics. Looking through the year, when you look at Q4, finished units sales picked up when compared to Q3. Looking at 2019, given the ramp up you had of those launches in Q3 you may have increases in construction costs. What's the cash generation dynamics in 2019? Selling more finished units, but at the same time spending more on construction given this investment in new launches. And the second question I would like to ask. When you look at the backlog margin. It's now flat in Q4 when compared to Q3, at the 40% level despite higher launch volumes in Q4. And we of course expect these launches that have better margins than those of previous projects. Shouldn't that margin have gone up because these new launches would have better margins? I would like to better understand that dynamics. What can we expect about that margin for new projects?

[Miguel Mickelberg, executive]

Enrico, this is Miguel. Let me talk about cash generation first. Actually, in 2019, it's a more challenging scenario this year than last year. Let me point out that in Q4 2017, we had BRL 1.7 billion worth of deliveries. It had a positive base for transfer in early 2018. We don't have that effect now. Investing more in marketing, construction and land and last transfer, the cash scenario is more challenging despite the sales of finished units. This is a weaker year for cash generation. There will be positive cash generation still. But our focus is to keep our capital structure plan paying out dividends despite lower cash generation. As to the backlog margin, the rate is high, 43%, ex interest and launches are not giving better margins. There are few exceptions, but it was acknowledged as the equivalent, so there is no impact in the backlog, but we don't see that rate increasing in the future.

[Operator]

Next question Mr. Gustavo Cambauva from BTG Pactual.

[Gustavo Cambauva, analyst]

I actually have 2 questions. Could you please talk about the sales of finished units. How is that dynamic playing out. You had very strong results in the quarter, driven more from launches. Can you explain the expectations of finished unit sales. Have you conducted any specific actions. Have you adjusted the market value of your finished units. Are you conducting any promotion or anything of that sort to help boost finished unit sales? And my second question is about commercial expenses. I think it's low given the amount of launches, expenses were low or limited. Can you further explain what is the level of commercial expenses in the future? We'll be making some adjustments? Is it going to be higher or lower?

[Miguel Mickelberg, executive]

Cambauva, this is Miguel. Let me talk about the commercial expenses. Yes, we had BRL 6 million increase in Q3. And you look at the spend, you have the accountable because that is also immobilized, and we added BRL 23 million instead. The average is about BRL 13 million. So that generates expenses effects in the next quarters and media and stand expenses will boost commercial expenses. But on the other hand, we expect reducing maintenance of finished units inventory because sales are picking up. Overall, we don't expect new increases in SG&A. I'll turn it over to Raphael to talk about SoS.

[Raphael Horn, executive]

As to the inventory, SoS should improve because cancellations are dwindling. Year-on-year they are going down and as a consequence, SoS -- net SoS will go up. Net sales doesn't have to go up to make SoS grow up too, and inventories will end eventually. Curitiba had a problem, so it's only natural. In terms of inventory it's a little bit better. In '19, we will have better inventory performance than that of 2018. I think we are heading in the right direction. It's a positive outlook. Rio de Janeiro is still a problem area and also Rio Grande do Sul. We had a few projects that are somewhat closed, commercial offices, hotels, these are more troublesome projects because they have lower speeds. But overall, inventory will go up and down. The market is getting better, inventory will move along the way.

[Gustavo Cambauva, analyst]

Let me just ask about the inventory. In terms of price. What's the impact of price on margin. Do you believe that you may consider price increases or do you have to give discount to still keep on selling. What are the more challenging areas? What's the price dynamics in those places?

[Unknown Executive]

I think it depends on the region. Once you give a discount, the discount is the new price. We are not giving more discounts. We have been giving discounts for 3 to 4 years, and we have been suffering a lot. But I think we've reached the bottom end. But in some areas, we can think about change in inventory prices a little, not everywhere, but in few places. As the economy improves, the cycle improves, we are at a better position to operate. We're not there yet, but we can consider some price increases. It won't affect the gross margin, but the cycle is in upswing. We were suffering in the past 3 to 4 years, now we can begin to think about -- we have some leeway to change prices.

[Operator]

The next question comes from Luis Stacchini from Crédit Suisse.

[Luis Stacchini, analyst]

I actually have 2 questions. My question is about size. Situation is somewhat favorable and even changing prices, as Raphael said, but most companies are actually looking to expand, to benefit from this more positive outlook in Rio state environment. In the case of Cyrela, you are still maintaining that the scores to have BRL 4 billion mark. But are you considering increasing that target a little bit more when you have a more positive outlook, it's not something that you're going to do forever, but maybe to benefit from this good moment in time to launch new projects and benefit from it. And the second question is somewhat connected to the first one. Should you adopt a more aggressive stance? Is it because of the competition? So here is my question. What is the outlook for launches for medium sized projects, especially in the City of São Paulo? Can you talk about that market dynamics?

[Raphael Horn, executive]

It's not a boom market. I wouldn't use the word. We can't detect any kind of boom for an explosion of sales. Boom doesn't necessarily mean something good. It can mean chaos. Prices go up. Land prices go up. It's just crazy. But it's nothing of that sort. We've been struggling in the past 4 years, the market is picking up a little, but based on a very depressed baseline. The question about growing or not growing? Here's our point. We're not moved by numbers BRL 4 billion, BRL 5 billion, BRL 3 billion. We purchased nice pieces of land that we like. If it's BRL 4 billion fine. If it's BRL 4.5 billion, it's BRL 3.5 billion or -- it doesn't matter. And we're not changing. The market conditions are better, no, no, we're not going to BRL 7 billion. We cannot buy BRL 7 billion worth of quality land for any reasons. We cannot do it, and we're not trying. We can't sell BRL 7 billion worth of sales. And we'll be all regretting that strategy for 3 years in a row. No that's not the point. It's important to maintain quality. And just by chances BRL 4 billion. And our equity has to be compatible. If we get to BRL 5 billion fine, but we're not concerned that much about it. We're not speeding up our capital structure. And of course, we want to give ROI, that is an interesting number. Not launching new projects you're going to give a terrible ROI. So we still have our challenge, but our mindset is the same. We cannot operate with quality and use BRL 6 billion. It may happen in 1 year out of chance, because you've found great opportunities, great land and that's it. But it will be by chance. It's not going to be a predefined strategy to reach that number. The most important thing is the mindset. The number is a consequence and we are very optimistic with the team, with the culture and the cycle we are about to enter. We're more optimistic, but we are maintaining our feet on the ground with the same culture.

[Luis Stacchini, analyst]

As to the launches, can you talk about the launches in São Paulo to see higher number of new projects, new launches? And how are you operating in this scenario?

[Raphael Horn, executive]

In 2018, our grid was bigger than 2017, not because the market was better, because you had good plots of land. Given the zoning loss in São Paulo, it's taking time to approve projects in the second semester. Our evaluation for 2019 is better. The market is getting better. We're very optimistic with the conditions. But again, with our team, people are talking about boom in the market, I don't see that happening. The market had been bad for so long. Things will not live in a crisis forever. Except for Argentina everyone is growing. We're not going to remain in that turmoil forever. 3, 4 years of down time and we are getting out of it, but it's not a market boom yet. I wouldn't call it that way. And we are happy. We're no longer in that crisis scenario, and launches are better and more numerous, but it's far from being called a market boom. And we are just changing the curve. The down was very deep, we are just beginning to pick up and on the rise again.

[Operator]

Next question is from Mr. Andre Mazini from Citibank.

[André Mazini, analyst]

My first question is about revenue booking of projects launched in Q4. 3 of them were booked, more than 50% of Moema House by Yoo in Rio. So basically these projects were already in a more advanced construction phase. So that's why, you have so much revenue in 1 quarter. So this is the first question. The second question is about the accounting changes and how you provision cancellations, before it was below gross income and it's going to be above now. And you had an on/off revenue increase for the Q4 because of this new classification. Can we expect lower gross margins vis-a-vis when that provision changes?

[Miguel Mickelberg, executive]

Andre, this is Miguel. As to the booking, the 3 projects you mentioned did not have construction. This is a high-end land with swaps at high prices, so the land accounts for more than 50%. That's the cost of it. So we didn't have any construction expenses that are relevant before launch. As to the changing of the provision criteria, actually cancellations provision provided positive impact in the gross margin, about 1%. We added BRL 250 million in revenue and BRL 86 million of gross income. So it's more than the average margin for the company. It was positive, not negative. Looking forward, since the cancellations margins are little higher than the average margin. As we revert those provisions, you can have positive impact in our gross margin depending on the mix of the quarter, of course, but the impact is not as high as in this quarter because we reverted 4 quarters in 1, so it accounted for the entire year.

[Operator]

Next question Mr. Jorel Guilloty from Morgan Stanley.

[Wilfredo Guilloty, analyst]

I have 2 questions. The first one, the provision for cancellations in our P&L, 50% of our sales will be canceled, right? Having said that, can this level be considered too high? My second question. We have a very strong leverage position of BRL 1.5 billion in cash. At the same time, you're beginning a new construction cycle. What are the special dividends perspective in the context in a growing scenario?

[Miguel Mickelberg, executive]

This is Miguel. Cancellations provisioning is about 50%, you're right. First is to consider when the law is valid, in principle, for new contracts, and we have no evidence that cancellations will be lower than 50% for every project we deliver. So we maintain the same provision if we have proved that the percentage is lower, we can review that number. So it may be conservative, but we don't see any evidence to change that number. As to the dividends, you're right. Our leverage is below 15%. It's lower than what we worked in our strategic planning, and we may have more leverage in distributing dividends. Our focus is [ 4, 4, 4 ] to have our P&L smaller.

[Operator]

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

[Marcelo Motta, analyst]

I actually have 2 questions. Can you elaborate on your launch mix 2018, was concentrated in Minha Casa, Minha Vida grades 2 and 3? Do you think that participation go down when you have higher end launches? Can you talk about provisions too? It was more troublesome quarter the end of cancellations and inventory changes? You talked about São Paulo, Rio, South? When you look at general data, Rio is a lot worse than São Paulo. Can you please elaborate on these 2 issues?

[Miguel Mickelberg, executive]

This is Miguel. As to the mix, Minha Casa, Minha Vida, it accounted for 27% of our launches in 2018. It's not that high, and we always state that we like that segment, but it won't account for a large portion of Cyrela's business. The ballpark is about 1/3 of the launches. It was a little lower. And our strategy is to be present in that segment. As to provisions, yes, it was a heavier quarter. We had that legal contingencies impacting negatively our numbers and we had revenue from land, but we don't expect these higher numbers looking forward. Everything we know have been booked in our balance sheet, but we don't expect any major changes in the future.

[Operator]

Next question Mr. Renan Manda from Santander.

[Renan Manda, analyst]

Let me talk about contingencies a little bit more. Was there concentration in one specific project or something more across the board? And about the reclassification of that project in the Northeast, have you reviewed that amount provision for that project? So here is my second question. How is the finished unit sales this year -- early this year? What about the Minha Casa, Minha Vida changes? Have they changed your planning?

[Miguel Mickelberg, executive]

Let me talk about provisions and contingencies. Of the BRL 40 million -- BRL 30 million, BRL 20 million of those BRL 30 million were for 2 specific cases basically. That was the concentration, the rest is across the board. As to impairment, for the inventory impairment Rio, a little bit in [ Belem ] and Porto Alegre in South and land mostly in Rio. The cancellations impact was mostly from Rio. As to launches, Raphael will answer that question.

[Raphael Horn, executive]

We've talked a lot about launches and finished unit sales. You have keeping track of quarterly sales of everyone and ours, included. That story is fine. We can survive. It's not a market boom, again, but we are happy with what we have. The team is good, we purchased good land and we are optimistic. But that's not it. The market is wonderful, no, that's not it. Good land, we'll sell. Bad land, we won't be selling. I will only consider market boom when you can sell projects in bad land. As to low income is impacting our transfers, no. Most of the low income projects, we do it through partners, they operate. We do that very little. There is no impact whatsoever our partners this year. We believe that things will go back on track and they are going to be doing what they had planned for the year.

[Operator]

[Operator Instructions] Since there are no further questions. I'll turn over to Mr. Raphael Horn for his final remarks.

[Raphael Horn, executive]

Thank you for taking part in our call. This is a better context, and we have to keep on working day in, day out and hope the government gets the approval of what they -- what it has to do, and this is going to be a good year. Thank you. Have a good day.

[Operator]

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