Even Construtora e Incorporadora SA

BOVESPA:EVEN3

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and thank you for holding. Welcome to Even's earnings call concerning the results of the third quarter of 2023.

[Operator Instructions] We would like to inform you that this event is being recorded and will be made available on the company's IR website where the complete material concerning this earnings call will be available. It is also possible to download this presentation. [Operator Instructions]

We would like to clarify that any statements that might be made during this teleconference regarding Even's business prospects as well as its operating and financial projections and goals are based on the beliefs and assumptions held by the company's management and on information currently available. Forward-looking considerations are not a guarantee of performance and involve risks, uncertainties and assumptions since they refer to future events and therefore, depend on circumstances that may or may not happen. Investors should understand that general economic conditions, industry conditions and other operating factors may affect Even's future outcomes and may lead to results that materially differ from those expressed in these future considerations.

Here with us today are the Chief Executives of the company; Mr. Marcio Moraes, CEO; Mr. Marcelo Dzik, CFO; and Mr. Tiago Krall, Strategic Plan and Investor Relations Director. I will now give the floor to Mr. Marcelo Dzik, Even's CFO. Mr. Dzik, you may proceed.

[Marcelo Dzik, executive]

Good morning, everyone. We were pleased to present Even's Earnings Results concerning the third quarter of 2023, as well as the accumulated results for the first 9 months of the year, In order to provide more transparency to Even's and Melnick's separate operations. The following figures represent Even's Sao Paulo's results, excluding Melnick's participation.

In our release, you will find the detailed breakdown of both consolidated and ex-Melnick's figures. I would like to begin with the highlights for Even Sao Paulo in the Slide 3.

In the graph, in the upper left-hand side of this slide, we highlighted the rising volume of launches to the amount of BRL 973 million Even's share in the first 9 months of the year. Representing an increase of 24%, when compared with the same period of last year.

Our net sales totaled BRL 1 billion, Even's share and represent an increase of 20% in relation to the first 9 months of the previous year. So far, in 2023, we have delivered BRL 1.3 billion of [ GSV ] which is 42% more than what we delivered in the same period of 2022. The 9 months of 2023, net revenue totaled BRL 1.2 billion, an increase of 23% when compared with the same period of last year.

We reported a gross profit of BRL 283 million accumulated in the year, an increase of 23%, when compared with the first 9 months of 2022. And adjusted gross margin of 25.3%. We have noticed the tendency for the recomposition of margins, as new launches and inventories are recognized in the revenue. Our inventory gross margin is estimated at 27.8%. The accumulated net income for Sao Paulo's operation was BRL 135 million in the first 9 months of the year. A significant increase of 92%, when compared with accumulated results of the first 9 months of '22, which represents an annualized ROE of 12%. Moving on to launches, there were 3 projects launched in Sao Paulo amounting to a GSV of BRL 278 million, of which BRL 199 million corresponds to Even's share.

In the next slide, we show the rendering of these projects in Sao Paulo, mainly Marquise in the high-end segment, GO Madre and GO Joaquim in the compact segment, which are respectively 48%, 48% and 98% sold, as of October.

In Slide 6, we show you the renderings of 2 projects at the prelaunch phase, in which amounts to approximately BRL 1 billion in [ GSV ], Esther, next to Ibirapuera Park and Casa Sabia, located in the neighborhood of Moema.

On Slide 7, you can see the sales performance. We had an impressive performance in the sales of launches with the sales over supply ratio of 46% [ in third quarter ], and we continue with the strong sales of remaining inventory as can be seen in the graph on the left-hand side of the slide.

In total, we sold BRL 298 million that's Even's share and reached a total SoS of 14%. Concerning cancellations, the graph on the right-hand side of the page, we ended the quarter at BRL 40 million, 32% below the figure for the same quarter of the previous year. It is important to note that we continue with low delinquency in our client portfolio.

In the next slide, we present our deliveries. In this quarter, we delivered Arcos Itaim with a PSV of BRL 90 million. In Slide 9, we break down our inventory. Now we have a total inventory worth BRL 1.9 billion in Sao Paulo of which only 13% represents finished inventory. Out of inventory under construction 89% will be delivered from 2024.

Moving on to our land bank in Slide 10. We currently have BRL 4.7 billion in land bank, concerning Even's share comprising 21 lots located mainly in prime neighborhoods of the south and west side of Sao Paulo. On Slide 11, as an important part of our strategy. We present our solid capital structure. We ended the quarter with a gross debt of BRL 853 million and a cash position of BRL 506 million, which is a net debt-to-equity ratio of 22.6%. Highlight the amortization schedule of corporate debt with a very long maturities, that are consistent with our business side.

In the quarter, we conciliated BRL 133 million of operating cash, reflecting the high volume of construction work and the higher allocation of capital to purchase land, as well as the payout of dividend to the amount of BRL 50 million, corresponding to about 50% of the accrued profit in the first half year. Now on the Slide 12, we present the consolidated financial indicators. Net revenue in the quarter amounted to $652 million, a decrease of 5% compared to the third quarter of 2022. And an increase of 12% accumulating the year when compared with the same period of 2022. We delivered a gross profit of BRL 124 million, with an adjusted gross margin of 22%.

Lastly, we delivered a net income of BRL 48 million in the quarter, representing a net margin of 9.2% and an annualized ROE of 10%. In the first 9 months of 2023, we delivered profit worth of BRL 159 million, 52% higher than the profit made in the whole of 2022. Now I would like to give the floor to Marcio Moraes, Even's CEO.

[Marcio Moraes, executive]

Good morning, everyone. We are confident as our launches continue demonstrating high levels of SoS, positive results, attesting to the quality of the products we're putting in the market. We have just opened now in the fourth quarter, the sales centers for Esther, Ibirapuera and Casa Sabia [ in Moema ], which are high-end products with relevant PSVs and in unique locations.

We enjoyed the wonderful performance in the third quarter. With sales of inventory maintained high levels of previous quarters. Even though July is a seasonably weak. Even's inventory is young and diversified and in the coming results they really were launched as much as we saw, maintaining our inventory at a very healthy level for the quarter. Construction costs remain stable with the INCC index, the last 12 months at 3.5%, should not be a problem for the industry in the short term.

Changes to Sao Paulo city master plan should facilitate the purchase of land in the city, generate new and good opportunities for the industry and for you. Even announced qualifying [indiscernible] acquired along the years, which allows for amazing high-end projects in desired regions of the city of Sao Paulo. We have major launches for 2024 with a special mention to Faena, Sao Paulo, an iconic project of residences and the luxury hotel. We have great operating capacity and a solid balance sheet, which enables us to execute our projects and take advantage of the good opportunities presented by the real estate market. We are eager to continue launching focusing on the profitability of our projects. And we're committed to growing the company's margins and ROE, as well as to work in to maintaining [ consistent ] results. Thank you all for your presence again and we can now move on to the Q&A.

[Operator]

[Operator Instructions] Let us now proceed to our first question. It comes from Rafael, sell-side analysts for [ BOPUS ].

[Unknown Analyst]

I have 2 questions, the first question, I would like to discuss the gross margin, especially the REF margin. If you could break down the margins in terms of days of launches. And the second question, if you have fewer deliveries, how this impacts the cash and how you expect to reach the level of leverage? And how you are in terms of deliveries for 2024?

[Marcelo Dzik, executive]

Thank you for the question. Dzik here. We have been talking about this, we have been very transparent that we are in an expectation with a reduction of margins. We know that 2022, our margins were under pressure. The cost of markets in our sales of compact and emerging markets. And now in 2023, we have seen and we expect for next month, a gradual recomposition of margins, especially in Sao Paulo. We can see these numbers in the REF margin, a little bit. But our inventory [ margin ], even at this level, I mean, and when we talk about the new launches, we have been balancing our margins, with gross margins that are much better. So when we look in summary, we have had more difficult margins, what we see looking forward, is a gradual recomposition of our margins.

[Unknown Analyst]

In relation to cash how do you see, in which quarter it will be the peak of leverage?

[Marcelo Dzik, executive]

We had a year with some cash burn especially on the construction work. We had a high -- very high volume of construction work in the last 12, 18 months and in the purchase of land. We have been changing. We have refined our strategy -- leverage strategy. We have putting more cash into our land. So we have burned more cash in 2023. We should -- it will depend on the level of land purchase in this next cycle. But in 2024, it will be in line with what we did in 2023.

On the one hand, new opportunities brought up by the next master plan we'll -- ready to bring in cash, but we also have some high-end projects. And as we had in the last year. We may have a very positive result in terms of advances of revenue. We have a big project. We are in the prelaunch of Sabia in Moema, with a very high -- almost BRL 1 billion of [ GSV ] into projects. And we are structuring the launch of Faena, our biggest project for the beginning of next year. So this is a very high-end project. There's 3 very high projects. We expect to see very positive results in terms of revenue but it will depend on our purchase and the speed of launches and sales.

[Operator]

Our next question comes from Maria Angela, sell-side analyst from Itau BBA.

[Maria Angela, analyst]

I'd like to know how you see the demand and competition of high-end in Sao Paulo City for 2024? What do you see what can be a differentiating factor in your products, if you're going to see a similar year in terms of launches, as we have seen '23 or it would be fast. Like to see -- another question of margins by launch, when are we going to see the margins reported by the company that's closer to the backlog figures? By the end of next year, by the end of -- the middle of next year, the end of next year, what's your pipeline?

[Marcelo Dzik, executive]

Dzik here. Thank you for your question. First, talking about high-end markets. We monitor this very closely. We have seen consistent levels of sales, and we see a very positive environment for our launches. So we have these presales now, close to BRL 1 billion. We have had 1 year, almost 1 year of sales, and we see the segment -- monitoring very closely this segment.

Our differentiating factors when you talk about finance, but when we concentrate very good locations in projects with very large lots with very nice entertainment here. And we have seen a very good -- a very high level of absorption. This year has not been different, so a market that has been working with a very high levels, but with a very good absorption. So even at Even side with big projects in what we have been planting, cultivating with RFM projects in partnership with RFM, more boutique projects, that will be launched next year. I see a very good space for the high-end projects.

So regarding the trends for the margin, Maria Angela, it will depend on the speed of these launches. So our prospect is, yes, by the end of 2024 to be at a very high -- a different level, but it will depend on the speed of launches. And obviously, on the speed of absorption of this inventory.

I have mentioned here a few times, we have a very important volume of prelaunches and also of land that we intend to launch and also answer your question about volume, it will be more or less the same volume as this year. It will depend on the absorption by the market. But our land back in our operating capacity allows us, we could go a little faster, a little slower. But we have been cultivating this recomposition of margins and we believe by the end of next year, we'll be at a much better level.

[Operator]

Our next question comes from Herman Lee sell-side analyst from Bradesco BBI.

[Herman J. Lee, analyst]

We have 2 questions. The first one, I'd like to understand your sales strategy in how you have been working in terms of discount given the inventory. And the second question, more regard -- concerning the competitive environment, so how you see the competition in the purchase of land if you have felt some changes in the payment conditions?

[Marcelo Dzik, executive]

Dzik here. I will talk a little bit about the sales strategy and then our -- our sales strategy we have been monitoring this projects by projects. So we are very attentive to the curve of each one. We have a very low tolerance for finished inventory and for compact units, which is a consequence of our master plan. Although our operation is very concentrated in the high end. We do have some compact units and our tolerance for these compact units, which depends more on the economic cycle, the profile, the industry is very low.

So our focus in our projects, high-end projects, our type units, our average ticket has been growing. We have been working very well in this market. And the idea is to take advantage of the product differentiating factor and take advantage of the aggregate added value, but paying attention to the curve on a project by project in general tolerance for finished units in a tour and also total tolerance to compact units [indiscernible] the investors. So our inventory, BRL 100 million is related to Ibis Hotel, which is not the character is of our typical finish in inventory, we have some deterioration due to costs. But this is an inventory we have in planning to sell. Our strategy is not to carry it. But it has been a very positive result. In the pandemic, the hotel business went through a very difficult period, but it has been delivering. This one has been delivering very positive results. But this carryover is much lighter for us. Now Marcio will talk about land bank.

[Marcio Moraes, executive]

Thank you for your question. Concerning the competition for land, this year was atypical because it was a year in which we discussed the master plan. So by the half of the year, the master plan was approved. So we held on, we held these launches waiting for these changes in the master plan.

Now in the second half, now with a defined investor plan, but still with the insecurity of how the [ news ] only law will be in Sao Paulo, which -- such to law what the massive plan approved. So we are cautious. We see great opportunities to buy, but we have this uncertainity of the changes that the [ news only ] law will bring, which will be approved by the end of this year, probably by December 20.

On the other hand, our inventory of land bank, we see some approvals because we have gained of margin in -- because of what has been approved. The competition is not so stiff, all the companies are studying very carefully the purchase of land. So we are -- I think we are all waiting to see what the new legislation will do in terms of 2024. Complementing margin with Dzik here, it's important to highlight especially because of our strategy of big land bank of big lots. Our acquisition or purchase process is very long. It's not rare that it takes years. So we have a lot of things happen, [ March 16 ], is prospecting a lot of lots.

So what we're doing, we're working on this information on these possible changes we're going to have in the master plan. So we can conclude the purchase of land that we see a greater potential in. And as we don't see an increase in purchase. We have a lot of things going on and being prepared.

[Operator]

Our next question comes from [ Helen], sell side analyst for [indiscernible]

[Unknown Analyst]

I have 2 questions here. First, regarding the launch pipeline, you mentioned a few projects that you have for the fourth quarter and beginning of next year. I'd like to understand it in terms of volume, if we can expect an increase in volume for next year, if you are excited about this, in terms of growing the number of launches and also understand if the partnership with RFM, if it will gain more relevance in terms of GSV for the [ company ] .

And the second question is regarding construction costs. We haven't seen a slowdown in the INCC index, if you see that looking forward in the next year, we are going to see some gain in margins because of this lowering construction cost?

[Unknown Executive]

Thank you for your question. I will talk first about the volumes of launches. We are prepared for a significant volume for next year. It will depend on the market -- we have been we have had this positioning. We do not work with very specific numbers, very specific guidance. You know in 2022, we launched less because the environment was hostile. We understood it was a moment to do our homework. In 2023, we launched more than last year. In 2024, we believe we will follow the same line. We have very good projects. Only with these 3, we have already begun the prelaunch work, especially now with the partnership with RFM, which is consolidating.

This is a year of preparation, and as soon as the market shows us that this is possible, we'll have these launches for next year. We have almost BRL 1 billion of PSV in this partnership, not necessarily for next year. but we have a very good land bank position for this partnership that will add to our operations in Sao Paulo.

[Marcio Moraes, executive]

Just -- Marcio here, just to continue. In relation to the partnership, we should have had the launches in this year. But because of the new master plan, which gave us some gain of margins in some of the projects. So we moved it to next year. So there will be some surprises for next year.

In terms of construction costs, we see, the commodities, energy, oil will be a very important commodity. We do not see any surprises of increases of costs except if the war escalates abroad, which will lead the oil price to a higher level, that Brazil will increase its oil production next year. So this will probably hold the price down. Regarding labor cost, because we're going to bring in a lot of the infrastructure cost that we absorbed labor, we see that in the project that we're going to begin construction work in 2024. They are basically contracted and hired with the suppliers we already know, with the 2 companies, the are -- have been in the market for over 40 years. So we know our suppliers that are in line with our project. So we do not see any discrepancies in the construction costs.

[Operator]

Next question from Ygor sell-side analysts from Citi Bank.

[Ygor Altero, analyst]

I see people asking a lot about competition, in master plan, I would like to understand [ to go on a tangent ] that these 2 issues talk with -- we know that one of the attributes of domestic plan is the solidarity quarter. Which will -- kind of a bonus of PSV to the order of 10% to 20%, depending on the lot. And I imagine as a consequence, it makes sense. If you file a lot of projects, that were already on the pipeline to be launched, so you can take -- you can have an advantage in this new regulation. Does this logic makes sense? So for you to hold on launches now and relaunch them later on a new regulation. And regarding the competition in Sao Paulo. Do you think this will bring some relief in the competition, especially for the projects you already have? And that will not be affected by master plan some kind of structured operations. So this is the first question.

And if you allow me, regarding the master plan, how do you see in terms of room for new purchases considering that you have a contracted volume of construction that already presupposes, continuing burning of cash for next semester -- for next quarters. And you have already purchased a lot since the second quarter of '23, if I'm not mistaken, BRL 2.3 billion of PSV added. So this calculation is justified concerning the burning of cash. And is the opportunities given by this new master plan? So these are the 2 questions.

[Marcio Moraes, executive]

Marcio here. I will try to see if I understood all your questions. Regarding the master plan and the [ solid direct fund ]. So there's a characteristic that it benefited some projects in smaller lots. It gives more benefit to areas of approval below 20,000 square meters. In other lots, the benefit happened, but it was smaller. In smaller lots, the benefit was bigger. So that's why the RFM -- the land in partnership with RFM have been refiled and revised -- regarding Even slots, we had some gains. Some of them, we understand they could be changed. But the ones that come with the structured operations, for example, Faena and [ Farida ], nothing will have nothing will change. And in this case, maybe we have some advantage because the approval cycle in Sao Paulo is slow. Takes a year more or less.

And while the competition is having this new [ file is in ] approval will be launched. So this will give us some advantage in this period. Regarding the competition, the volume that has been launched in this second half year was smaller because the whole market went on hold, waiting to see if it would be interesting to change this new projects or file new ones, which will take 1 more year. We do not buy land to start it for 4 or 5 years. Our land bank is short term with what land that we can launch within 1.5, 2 years. So we are observing this very closely, in terms of new opportunities of purchase.

But when the opportunities come along, we will try to close these deals. And now complementing margin. We are not going to miss out on great opportunities. We have a balance sheet and raising -- fundraising structure to take advantage of this. If we see the opportunity for more land, then we want to work more on the capital structure to bring this land, not necessarily cash, but some -- we have a lot of investors, some raising capital, different strategies, maybe mix both strategies. Part of the land that we have bought in cash, maybe we'll recycle this in this new model of raising funds.

What we do not want is to miss out on good opportunities. We have the structure to take advantage of these opportunities. Each case is different. But yes, we'll try to take advantage of new opportunities rather long by the master plan.

[Operator]

Our next question comes from Igor Gomes, sell-side analyst for XP.

[Igor Queiroz Gomes, analyst]

I'd like to understand which regions you see room to launch with less competition in the high end segment? And how you see the middle income -- everyone now is moving on to high end because of this new more difficult affordability. So you see that we could -- so you think that in terms of launches that it will not be contemplated by the middle of income. I'd like to understand how you see this concerning the middle income segment?

[Marcelo Dzik, executive]

Dzik here. In the high-end segment, which we -- what we have in allocating our efforts in our land bank. Yes, partially, at least depending on what the players want. Yes, the high-end segment has been shown to be resilient. So the questions we -- it's high end. It's not just like turn the key and start moving to a high. We talked about a construction of land bank that takes years. We have been working on these purchases sometimes for 2, 3, 4 years. Faena project, we started the process of purchase over 10 years ago.

So this is not -- this changing strategy is not so easy. When you talk about good rigs like [ Jardin ], Itaim. Really prime locations, the truth is that we are difficult to operate in these regions. And the inventories, yes, it's very short, very low. So 2, 3, 4, 5 years ago, we had a very high level, but -- we have a great assortment in this market.

Talking about the middle, we do have some projects for this. It will depend on the interest rate. Normally, this client depends on financing to buy the projects. So we are concentrated in high-end. But we see some opportunity in the middle and upper middle income segments. We used to operate on this. We see some things in Perdizes, Brooklin, Campo Belo. These are regions we know very well. And we can monitor in these regions.

It will depend on the macroeconomic scenario. Maybe we'll see some opportunity in this segment. But as of now, we are positioned in the high-end market.

[Operator]

[Operator Instructions] I would like to say that our Q&A session is concluded. I would like now to give the floor to Mr. Marcelo Dzik, for his final remarks. Mr. Dzik, you may proceed.

[Marcelo Dzik, executive]

We remain confident in our positioning and our strategy on high-end and differentiated projects in Sao Paulo. We delivered in an adverse economic scenario, good results and consistent. In the first 9 months of 2023. And we believe that our new launches will produce great results in future quarters. I thank you for the analysts, collaborators, partners in this call. Our Investor Relations team is at your disposal for any clarifications. Thank you.

[Operator]

The earnings call concerning the third quarter of 2023 for Even is now concluded. The Investor Relations department is at your disposal for any questions you may have. Thank you all for participating. Have a good afternoon.