EZTEC Empreendimentos e Participacoes SA

BOVESPA:EZTC3

Earnings Call Transcript 2020-Q2

[Hugo Benevides Soares, executive]

Good morning, one and all, and welcome to EZTEC's results presentation for the second quarter of 2020. Please note that this call is being recorded. [Operator Instructions]

Before we start, we'd like to mention that any statements during this call pertain to EZTEC's business projections. Operational and financial targets are based on management's beliefs and premises as well as on currently available information. Future considerations do not constitute an assurance of performance. They involve risks, uncertainties and premises. Investors may take into account that general economic conditions, industry or operational circumstances may ultimately affect EZTEC's future performance. They may cause the company's results to differ materially from those expressed in those forward statements.

Now I would like to pass it over to Emilio Fugazza, EZTEC's Chief Financial Officer and Investor Relations Officer, who will get us started. Emilio, please, you may go on.

[Antônio Clemente Fugazza, executive]

Hugo, thank you very much. It is delightful to be here presenting the first half 2020, second quarter 2020 results for EZTEC.

So going to the slide on Page #3, you're going to see operational and financial highlights. From the operational side, I would like to highlight net sales of BRL 581 million in first half 2020. In launches, there was a lack of launches in the second quarter, so we ended up in the first half 2020, BRL 564 million. Land bank worth BRL 8.9 billion by the end of the first half, but the trend is going to be BRL 11.6 billion by the end of the third quarter 2020. We are going to discuss about it further on.

Financially speaking, the company ended up the first half with a gross profit of BRL 79 million in the second quarter with a gross margin of 52.2%. Net income was BRL 68 million with a net margin of 44.4% in the second quarter 2020. And in terms of cash position, net cash was BRL 1.3 billion, generation of cash of BRL 29 million. I would like to highlight BRL 519 million of performed receivables. With agreements of statutory lien, we have BRL 504 million, IGP plus 10%, IGP plus 12% annually and a little bit of IGP plus 8% annually in our direct receivables portfolio.

Moving on, Slide #4. I would like to say a little bit more, 3 slides about land bank. This is a very important subject this quarter specifically because we ended up with almost BRL 9 billion in land bank. Taking in mind that in the second quarter specifically, acquisitions were something around BRL 1 billion. Let's say that from this BRL 1 billion, I would like to highlight 1/3 of this value, revaluating our own land bank, previous land bank. And 2/3, I would like to highlight buying land in the east zone of São Paulo, specifically in the neighborhood of Mooca, something around close to BRL 600 million.

However, the third quarter, specifically in the last 40 days, were priceless in terms of land bank acquisition, was something around BRL 2.6 billion new piece of land. Taking in mind that we have signed some options of BRL 2.6 billion, the majority of those BRL 2.6 billion are options signed with the landlords. So after due diligence, we're going to ratify those acquisitions, reaching something around BRL 11.6 billion by the end of the third quarter 2020. Reaching that, we're going to increase land bank from the commercial side, the high-end side, mid-high-end side. However, we have in our land bank enough possibilities to launch in each income class we'd like to fulfill in terms of new projects, new launches whenever we want to launch that project.

So moving on to the slide on Page #5. We are talking about 2 projects that we acquired in this third quarter, so like subsequent events. The first project is the project in the left side of this slide. It's a project of high-end tower inside the complex, inside this project worth something around BRL 400 million of PSV. It's a project, so inside a mixed-use complex, which means a corporate tower, a mixed-use tower and a residential tower. So nowadays, the residential tower belongs to EZTEC. This project is close by Marginal Pinheiros in the south zone of São Paulo, less than 0.5 mile from Parque da Cidade project, Morumbi project, Morumbi shopping mall project. So it's a supermarket called Carrefour. It's the very first store of Carrefour in the city of São Paulo. It's a large piece of land over there. And it's a kind of project that we are looking forward to seeing launched because it's going to be the same success, very close to the same success we have with the Parque da Cidade project launched last year.

The second piece of land in the right side of this slide is a small piece of land in the city of Osasco in the metropolitan region of São Paulo. It's a project of potential sales value of BRL 115 million. So we bought this piece of land in a public auction. It's a project that we can see the project Jardins do Brasil, very close to this piece of land. It's a very well-known plot in the city. It's a very well-known place in the city. So it's a kind of project that we are going to launch projects over there with the same price, a little bit higher than Reserva JB that we launched last year to target gross margin of a little bit above 40% given the cost over potential sales value of 12%.

All in all, those projects can reach something around BRL 600 million in potential sales value. But as you can see as a highlight, apart from these 2 projects, the company also has BRL 2.1 billion in projects, confidentiality agreement signed, so options signed, due diligence ongoing, to be ratified by the end of this quarter.

So all in all, let's go to the slide on Page #6. This slide is very important to understand what happened to this company in terms of land bank or land acquisition since we released our follow-on September, October 2019. So since then, we bought something around BRL 4 billion of land bank potential sales value. You can see right over the slide that the acquisitions we made so far, we must have to pay ongoing BRL 516 million, but the current inventory of land in this company also has something around BRL 198 million to pay and including some piece of land in resolution clause, but future obligations or grants or CEPACs to increase the potential of this piece of land can reach something around BRL 220 million.

So all in all, after ratifying this amount of land we bought in the third quarter 2020, we're going to reach a land bank worth something around BRL 11.6 billion in potential sales value. The costs, including the grants, is about BRL 1.72 billion. So you can see the ratio cost over potential sales value about 14.87%. So 54% of this whole cost we're going to pay in the short, medium and long term. So from now and 5 years, we're going to pay something around 54% of this whole land bank of BRL 1.72 billion. The average cost over PSV in these last acquisitions, it's about 19%. Let me remind you that if you buy a piece of land in the metropolitan region of São Paulo, for instance, the city of Osasco or Guarulhos, you have to pay something around 11%, 10%, 12% cost over potential sales value. But if you buy something around the south zone of São Paulo, a very fancy neighborhood over here, cost can reach something around 25% cost, the ratio of cost over PSV. So it's important to remind you, this doesn't matter if you can get a gross margin of over 40%. That's the target. That's the main idea for the completion of this land bank.

So moving to Page #7, you're going to see operational performance. There is no lack of information. Obviously, you got this information last July, 30 days ago. Just remind you that the second quarter 2020, we got something around BRL 148 million gross sales and BRL 124 million net sales. On the left side of this slide, you can see that 2020 we launched BRL 564 million, the gray bar, selling something around BRL 261 million of this harvest, the 2020 harvest. So far, the third quarter 2020, so far, we reached something around BRL 150 million of gross sales, which means that within 40 days of the third quarter we reached more gross sales than we could get in the whole second quarter 2020.

So the slide on Page #10. You're going to see next launches. Next launches means that we have been working on BRL 6 billion of projects, taking licenses in the municipality of São Paulo or Guarulhos or Osasco in the metropolitan region of São Paulo. But in the short term, we are going to see those projects you can see on Page #10. First of all, Gran Maia Giardino e Palazzo. Gran Maia means a project in the city of Guarulhos, a very well-known city for EZTEC itself. It's a kind of middle segment project of BRL 204 million potential sales value, more than 500 units to be launched by the third quarter 2020.

For the fourth quarter is going to come something around 3 projects. The first of them is going to be in República do Líbano. The project is called Park Avenue because it's in the same avenue of the EZTEC headquarter in front of a very known social club in the city of São Paulo. It's a very fancy place to reach BRL 25,000 per square meter, gross margin of this project, above 50%. The second one, Armando Ferrentini, in a neighborhood called Aclimação in the south zone of São Paulo, very well-known place for EZTEC itself. The stake of EZTEC in this project is about BRL 106 million to be launched also in the fourth quarter 2020. And finally, Fit Casa Estação José Bonifácio, very close to a train station over there in the east zone of São Paulo, it's a low end. It's a kind of Minha Casa Minha Vida project, BRL 131 million potential sales value. It's a kind of project in a segment that we are going to disclose a little bit more in the next slides.

Let's go to Page #11. Page #11, you are going to see a little bit more deeper what kind of projects and results are going to come from projects, Minha Casa Minha Vida program in the city of São Paulo and metropolitan region of São Paulo. This disclosure you are going to see a little bit deeper in the earnings release from this quarter.

So first of all, Fit Casa Brás. We launched this project in the fourth quarter 2018. Something around 75% of the project sold, gross margin of 46%, and the whole gross profit coming from this project so far is about BRL 13 million, making a good contribution for the results for the company.

The second one, Fit Casa Rio Bonito, first quarter 2019. We have already sold something around 95%, 90% to 95%, gross margin of 45%. And the total amount of gross profit that we have already recognized in our profit so far is about BRL 29.5 million.

Fit Casa Alto do Ipiranga launched first quarter 2020. We have recognized this project's earnings and profits, 46% in the second quarter 2020, 46% gross margin. So far, we have something around 30% to 35% of this project sold.

And finally, PIN Internacional. PIN Internacional is a very huge project that we have 60% stake of this one, developed by our partner in the city of Guarulhos. Our stake is about BRL 162 million, already sold something around 40% and is going to be recognized in our earnings by the second quarter -- by the third quarter, I'm sorry, third quarter 2020 with the same regular margin of 40% above.

Financial performance on the slide on Page #12. You are going to see, first of all, net revenues. Net revenues coming at BRL 153 million in the second quarter, a little bit less compared to the first quarter 2020 or fourth quarter 2019, specifically because in a company like EZTEC, which is a company that's very easy to understand every single operation, every single maneuver from the accountancy side, you are going to understand that revenues come from 3 sides.

First of all when we sell performed units because it's 100% of the revenues coming at once. But obviously, because of the crisis, because of the pandemic moment we are living, so far, so less units within March, April, May were sold in this specific segment or from performed units.

Secondly to come, a bunch of revenues could be the launches, specifically because when you launch a project and this project is very well sold at once in the same quarter, you are going to recognize the amount of revenues corresponding the cost of the land. So you are recognizing the cost of the land because of the percentage of completion matter we have been using in our accountancy. And as you know very well, in the second quarter 2020, there were no launches. And that's why when you see BRL 309 million 2019 fourth quarter or BRL 250 million in the first quarter 2020, much more revenues coming from the side of the launching projects.

Finally, the revenues we are getting right now is coming from the projects we have under construction so far. So because of the authorities here in São Paulo, in Brazil, they took in mind that civil construction, the sites, the construction site is an essential activity to keep going in our economy. We could get all the sites under construction without any kind of problem within the second quarter 2020. And that's why we have this amount of BRL 153 million without any kind of problem coming from the construction side.

Let's talk a little bit more about gross profit and gross margin. Let me remind you that when you see backlog margin in the previous quarters, you see something around 44% to 45% gross margin. So in the following quarters, you could expect something around 44% of gross margin at least. But in this specific second quarter 2020, more than that, we have recognized a little bit more adjustment coming from the receivables, coming from some changes in our accountancy regarding specifically some projects we have under construction. And that's why we could reach 51% gross margin in the second quarter 2020, but mainly because the volume of revenues were too low so any small adjust in costs comfortably can get or can raise the margins quickly. That's why you can see 51% gross profit in the second quarter 2020. However, in the following quarters, you are going to see a flat gross margin, above 40% definitely.

Talking about selling expenses and G&A expenses, obviously, because of the pandemic moment and the huge crisis we were living on, you can see that the company made a huge maneuver to decrease the volume of expense and a huge amount of decrement you can see in the second quarter by selling expenses because we were not selling with publicity. The stands were closed, completely closed. We took advantage of new tools to work on sales. Tech vendors and our brokerage team, our brokerage side made a huge maneuver in terms of improving tools, improving ways to our brokers to offer our projects, to offer our products to the clients that we can expect that the following quarters we are going to see a new level of selling expenses definitely. In terms of G&A, obviously, because there were some sort of adjustment in terms of earnings, in terms of payrolls, some firings here, so all in all coming BRL 6 million less than the previous quarter, a nominal adjustment in G&A expenses.

On Page #13, keep going with the financial performance. You can see financial results mainly because BRL 21 million is coming from our portfolio of receivables, direct receivables we are providing financing to our clients. IGP is so good, huge as an inflation adjusting our portfolio. So the total amount we can get was BRL 21 million, making a very good 1/3 contribution in terms of the total amount of net income.

Equity income on the top right side of this slide is about BRL 6 million mainly because of Reserva JB, the project in the city of Osasco. A project that alone was responsible for selling the largest number of the units from the whole second quarter 2020. This is a project controlled in partnership with other companies. And EZTEC has a stake of about 70% from this project.

Net income is coming at BRL 68 million for a net margin of 44%, a record in the last 4 quarters definitely. Obviously, less than expected, but much better than we thought at the beginning of the quarter, definitely, with the maneuvers, with the very good practice in terms of prices or in terms of pricing. Let me remind you that the pricing, specifically in the third quarter, now is increasing twice as much the inflation, the IGP, which is inflation in our sector. So you can expect very good results coming from the third quarter 2020.

And finally, results to be recognized. Obviously is not increasing specifically in this quarter specifically because we have no launches in the second quarter 2020. But on the other hand, on the other side, you can see a remaining 45% gross margin over here, backlog margin, making it stable, making it flat since the third quarter 2019.

On Page #14, a big picture of our portfolio of direct receivables. Let me remind you that we ended up in the first half 2020 overseeing BRL 504 million, meaning almost 1,900 clients under management here in our company. The highlight for this quarter is that. So in terms of payments over origination, we got a little bit more payments than we thought previously simply because the basic interest rate here in Brazil is so low, record low. We are talking about something around 2% nowadays. So people with some savings, obviously, they use those savings to pay back those units or the units. And that's what happened in both in the portfolio of receivables, performed receivables or under construction receivables. And that's why when you see my balance sheet, you're going to see a lot of money, even had BRL 29 million of cash generated this quarter. It's because people are paying anticipatedly, pay in advance the cash from their acquisitions, which means that we are doing all the construction without taking any single penny from the banks in terms of production finance. This is very good. And obviously, pay in advance for me means that I can support all the SG&A from this company.

Gentlemen, ladies and gentlemen, the last slide on Page #15, value generation for our company, is just to remind you that the first half 2020 we ended up reaching shareholders' equity of BRL 3.9 billion, almost BRL 4 billion in our company. And from liabilities, mainly land payable booked in our accountancy of 3%, meaning something around BRL 116 million. Dividends to be paid, 2%, which means BRL 67 million. So from the asset side, the most important asset side that we can talk about, cash and equivalents, almost BRL 1.3 billion. Receivables are over BRL 1 billion, both performed and unperformed receivables. Inventory or land bank, we are talking about BRL 953 million. But as I told you before, it's going to reach BRL 1.7 billion by the end of the third quarter if all those piece of land would be ratified after the due diligence.

So saying that, I would like to open for questions and thank you very much for your continued support.

[Hugo Benevides Soares, executive]

[Operator Instructions] In the absence of any questions, our conference call for the results presentation of the second quarter of 2020 is officially over. We thank you all for your attention and hope you have a nice day.