EZTEC Empreendimentos e Participacoes SA

BOVESPA:EZTC3

Earnings Call Transcript 2021-Q4

[Pedro Tadeu, executive]

Good morning, one and all, and welcome to EZTEC's Results Presentation for the fourth Q of 21. Please note that this call is being recorded. [Operator Instructions].

Before we start, we'd like to mention that any statements during this call pertaining to EZTEC's business projections, operational and financial targets are based on management beliefs and premises as well as only currently available information. Further considerations do not constitute an insurance 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 result to differ materially from those expressed in those forward-looking statements.

Now I would like to present myself. I am Pedro Tedeu, IR coordinator. And here with me in the room, there is [indiscernible]. It is Mr. Emilio Fugazza, our CFO and Investor Relations Officer, who will further talk about the financial figures in this presentation.

Now moving forward, I would like to start in the third slide, where we're going to start talking about the launches of 2021. And here, we will be able to see that we launched something close to BRL 1.9 billion, BRL 1.9 billion in PSV. Talking about the more recently launches, the main spotlight is on Unique Green, our first phase that we launched in the last quarter, a project that is something close to BRL 367 million, 100% stake EZTEC in where you'll be able to see that is already 52% sold. Along with, we launched another project that is split in several phases that is PIN Osasco. Project is only BRL 41 million stake EZTEC -- 60% stake EZTEC, and it is 18% sold. At the bottom of the chart of the slide, we'll be able to see all the other launches that really made possible the previous year.

Moving forward to the Slide #4 to our operational performance. I'd like to highlight the chart that is in our last that is showing you the launches and the sales in terms of PSV. And then you will be able to see that the majority of our sales -- the majority of our launches that we made at BRL 1.9 billion that I just talked about, we only sold BRL 400 million on them. So this is the majority -- this is the main challenge that we are carrying with this new year of 2022 to be able to address all of this inventory under construction that has been made in the last year.

Now going to the right part of the slide, I would like to emphasize about our conciliations In 2021, we had BRL 127 million in terms of conciliations, an average something close to BRL 30 million and BRL 40 million per quarter. This volume of conciliations is very close, very mutual BRL 166 -- BRL 126 million in installation that we saw in 2020. So the company was able to maintain the same amount of conciliations despite all the challenges scenario that occurs in the last -- that occurred in the last year. And even when we talk about the net sales, you'll be able to see that we kind of maintained the same amount that we have done in 2020. Now in 2021, realized maybe something close to BRL 1.2 billion in net sales.

Moving to the Slide #5. Let's start talking about the landbank, and you will be able to see how our landbanks changed across the last quarter -- and you'll see that if you kind of maintain the same amount that we had in the third quarter. Despite therefore almost BRL 500 million that we had in launches, we had some changes in broad here, specifically the addressed indexation by NCC that is correct in our landbank that made us finish with the fourth quarter 2021 in BRL 11 billion in our landbank. Alongside of it, we have options with consolidation costs that is in some BRL 2.6 billion. So our landbank portfolio is something close to BRL 14 billion.

In the bottom part of the slide, you will see that the majority of this land is well located in the south zone of Sao Paulo, of close to BRL 7 billion of this BRL 11 billion in landbank is located here in this normal part of the city where we focus the majority of our recent launches. In the chart at your left, you'll be able to see that something close to BRL 5 billion is medium and high-end product with the brand EZTEC, BRL 2.6 billion in side of our low-end project or economic projects that is attached to our brand Fit Casa and BRL 3.8 billion, something close to BRL 4 billion inside our EZ Inc bank or value for commercial for the Commercial segment.

Now talking about the inventory, you can see in the chart that you are left the dispersion, the original dispersion of our inventory. And then you see that the majority of it is focused, is concentrated in the south zone of Sao Paulo, 72% of it, and in Guarulhos, in the Sao Paulo metropolitan region, 11% of it. And talk about the segment and dispersion by it, we can see that there is this red part in the chart that correspond to the commercial inventory that the company is currently carrying. It's important to point that the majority of this commercial inventory is already rented. So there -- so it's giving some rent in revenue for the company.

And in the chart, in the middle below is where we will be able to see more clear our inventory under construction and how this -- how we make this challenge to go up across this 2022 year. The majority of our inventory is not ready. So only 12% of it is ready units under our inventory and something close to 60% of it is inventory that corresponds to product that were launched or are under construction inside the city of Sao Paulo. So those are operational figures. I would like to pass now to Mr. Emilio Fugazza, who will start to talk about the financial performance of the company. Mr. Emilio.

[Antônio Clemente Fugazza, executive]

Pedro, think you so much. Let's go to Page #7, financial performance, net revenue on top left of this slide. We started with in BRL 958 million in 2021, with a little increment compared to 2020, although, within the quarters, in the first, second and third quarter, was a growth compared to the same quarter in 2020. 2021 fourth quarter was not good enough to improve or to keep the idea of net revenues growing this quarter. So certainly because we have been suffering a lot of incrementing costs, only to bear in mind, when we talk about costs, it's important to understand that for 5 quarters in a row, we have been adjusting our costs in our accountancy.

Over 50% above the INCC index here in Brazil, which means that the cost, the company had been facing, specifically in the city of Sao Paulo, the projects with this shapes, with these designs, we have been developing here in the city of Sao Paulo, it's a little bit different than the average project from the INCC, which means that the gross margin of our company is specifically impacted from this increment in cost above INCC, and plus the volume of sales from units, not performance so far, which means that when you think about the first 3 quarters of 2020, we saw, coming from revenues, a lot of -- an amount of units performed with gross margins above 50%, specifically because they are from projects we delivered in -- within 2019, 2020 or earlier than that.

Apart from that, it's important to mention that we have been facing a kind of thing in terms of construction costs that is completely different than we saw in 2010, kind of a year that we saw a spike in construction costs lasting almost one year that time. Nowadays, it's a little bit different. The first impact from this cost was the mismatch we have been watching in the supply chain here in Brazil specifically. Apart from that, the commodity costs, steel -- mainly steel despite of steel cost was something around 200% in the last 2 years. But apart from that, nowadays, that news come from the Europe, the war between Russia and Ukraine means that the supply chain is disorganized again.

And we don't know for sure what kind of impact can provide. But the way we have been dealing with in our accounts in terms of booking costs is something like that. We have been watching, the exposure, we can see and we have, and we got from some kind of supplies, some kind of materials. And as we got something around 30 sites under construction in the city of Sao Paulo, we can understand what is happening in one of them and trying to understand what that kind of specific impact can be seen in the other sites of construction. And then we can book an adjustment over those costs. And that's why, until we have been watching an increment in gross margin from 43% in 2020 to 46% in 2021, the specific margin of the fourth quarter 2021 is below what we saw in the third quarter 2021.

Saying that, talking about selling expenses, selling expenses is pretty much in line we saw in the past 4 years. So the ratio between publicity and stands, or the Mooca we have been doing, over gross sales, it's pretty much 4%, which means in line with our main target for those expenses.

In terms of G&A expenses, 2021 was BRL 113 million comparing to BRL 105 million 1 year earlier, which means something around 7% improvement, which is less the IPCA. IPCA last year was about 10%. So we could manage that -- those expenses in order to keep those in line.

Moving on to slide on Page #8. Page #8 can provide a quick glance about financial results. Financial result was BRL 168 million, which means almost 40% of the total amount of net profit gained by this company in 2021, and to ask pretty much the same result of 2020, but the composition, the breakdown of those are completely different. 2021, obviously, the main -- the key factor for this amount of financial -- positive financial result is our asset coming from -- our results coming from the portfolio for the receivables. But now specifically in the second half of 2021, we saw great increments in terms of compensations over the cash this company has as the base interest rate in Brazil is coming from 2% at the beginning of this year, to almost something around 11%, nowadays is about 11.75%, which means that almost BRL 1 billion is impacted by this amount of interest rates gaining ground here in Brazil.

Another key factor for good results in 2021 was the equity income projects, which means that our projects we have been doing in partnerships, both in the middle income segment and the low income segment at a high income segment. 2021 was something around BRL 77 million. And I would say that highlights from this is the project coming from the branch, Minha Casa Minha Vida, Fit Casa. There's not any problem of our governments with the brand [indiscernible] Fit Casa. We have already delivered 2 projects from this branch. In both the 2 projects we have -- we see a lot of our budgets incrementing the margins, the gross margins of the projects coming in from [indiscernible] income brackets. Let me highlight that the gross margin of the projects in the fourth quarter 2021 was about 44% above the general and the average gross margin of our company.

Net profit came at BRL 430 million, an increment of BRL 25 million compared to 2020, net margin of 45%, an increment of 2 percentage points, which is good enough given this scenario we have been passing through. And in terms of backlog results, in the back -- in the bottom right side of the chart, you can see BRL 324 million of results to be recognized, a backlog margin of 42%.

It is important to highlight here that this decrement of 3 percentage points in margin means that some projects are for very good margins above 45% were delivered up to the full quarter 2021, which means that all the revenues were recognized so far. And obviously, the average weight of those projects is partially responsible for this decremental margins. Apart from that, the projects recognized from launches in 2021 are projects that we can see margins come in, I would say, below the average 45% we saw in 2020. Projects like Arkadio, for instance, are a project in the mid to high income segment in the South Zone of Sao Paulo, you were going to see coming in line with the average margin of -- gross margin of EZTEC at 45%.

On the other part, on the other hand, you can see Dream View Vila Prudente. Dream View Vila Prudente as Pedro mentioned before is a project of [indiscernible] Sao Paulo, very good project. But so far, the recognized of revenues are having a 38% gross margin. On average is something to expect 42% gross margin. How much from this plan, I'd like to highlight another key factor in terms of gross margin and backlog margin, which means is a proxy of gross margin in the next coming quarters.

We have payments in advance for the supply chain here in this attack coming from BRL 20 million in 2020 to BRL 100 million in 2021, which means that the company has been doing a very good management in terms of trying to deal with this incremental cost buying in advance a lot of materials, especially some kind of commodity materials in order to -- I would say, to avoid incremental costs. All those materials are storage within 4, 5 piece of land. We have been spread all of the City of Sao Paulo.

And as we are a very great player here, big player here and holding more than 40 pieces of land, we have plenty of space to do something like that, which means that the BRL 100 million means something around 1 or 2 months of percentage of completion, percentage of completion not recognized so far because when we pay materials in advance means that we have this disbursement of cash and I have recognized it in my accountant as payment in advance to the supply chain. But we are not recognized as recognized of costs under construction, actually cost under construction to fulfill the percentage of completion in terms of recognizing revenues.

So, our -- I think our mindset is to deal with these costs in order to keep the margins at historical levels for EZTEC which remains above 40%.

Coming to Slide #9, the portfolio for the receivables, I would like to highlight here, we ended up that year at BRL 384 million in terms of total amount of clients declined from 6000 clients in 2020 to almost 1,000 clients in 2021, meaning that BRL 622 million, our payment in advance for that, [ acquaintancy ] specifically, trying to migrate from EZTEC's financing project to the banks, to take in commercial borrowing mortgages from the commercial banks, specifically because we had on average 10.3% plus IGP, which was almost 30%, 33% at the full year of 2021 to the client.

And the majority of the commercial banks on average provided something around 7% to 8% all-in interest rate through this client. So the clients with enough capability, they could bring that contracts to the bank in order to save this increment of operating spreads. That's not the kind of thing that we have been watching, we have been facing in the first 2 months of 2022. On the other hand, we have been facing some incremental contracts coming to our portfolio specifically because the conditions -- the commercial conditions to those clients are, I would say, getting a little bit worse for them.

So it's highly expected to see the portfolio of the portfolio of receivable was increasing by the end of this year, 2022.

On Page #10, the highlight is the financial performance of Fit Casa. Fit Casa , as I said before, is our branch for [indiscernible]. highly managed by the [indiscernible] here in Brazil. Fit Casa was responsible for 56.3% of gross margin in the fourth quarter 2021. On average, the whole year 2021 was 51.7% gross margin, and net profit of BRL 68 million, which means that almost 15% of the whole amount of net profit coming from EZTEC, 15% belongs to this branch. We have nowadays 5 projects under construction on this branch, 3 of them with in partnership to -- 1 in the site of Sao Paulo and the state of Osasco, the other 1 in [indiscernible] in partnership with [indiscernible], and 2 projects completely managed by EZTEC. One is called Fit Casa Alto do Ipiranga to be delivered by the end of this year, providing savings in our budget. And the second one, we are beginning the construction of this product, which means Fit Casa Estação José Bonifácio in the far East-zone of City of Sao Paulo.

The main highlight of this slide later is the return on equity of Fit Casa's branch, which means 21.2% return on equity. The shareholders' effort of this branch is about BRL 400 million.

Moving on to Page #11, talking about assets and liabilities coming from EZTEC. Let me highlight the assets first. Firstly, the cash and equivalents coming to BRL 900 million, almost 23% of the total amount of equity in this company. The performed receivables from finished units, BRL 579 million. Let me remind you that I told you before, 380 are completely managed by in our portfolio of performing the receivables, which means that another BRL 200 million are receivables coming from projects that we have almost delivered in the fourth quarter or in the third quarter of 2021 and the time line for being sent to the banks to bring the contracts to the bank to transform this BRL 200 million of receivables into cash for our company in the next 2, 3 months so far.

Another kind I would like to highlight is the cost of the ready inventory. As Mr. Pedro mentioned before, the total amount of the portfolio of units performance about BRL 500 million. And so far the cost of this inventory is about BRL 242 million, which means that the forecast for gross margin in those -- in this inventory is about 50%. Landbank is BRL 1.3 billion, BRL 1.3 billion is compared to the BRL 11 billion Mr. Pedro told you before at the slide of landbank, which means that the ratio between cost and potential sales value can be something around 12%. Let me add that this 12% includes grants and setbacks we have been booking in our landing order to increase the potential of the land. So all in all, the cost -- the finished cost for this landbank at the end of 2021 was BRL 1.3 billion.

In terms on liabilities, I'd like to highlight BRL 102 million of dividends to be paid. The payable lands we got so far coming from this BRL 11 billion of potential sales value is about BRL 200 million. So compared to the assets, BRL 1.3 billion in landbank, BRL 200 million means something around 15% of the total amount of the landbank to be paid in the next coming quarters. And only, and let me say again, only BRL 23 million of debt, so meaning that the total amount of debt that this company has been carrying the whole year of 2021 is about BRL 23 million for a total amount of shareholders' equity of BRL 4.2 billion.

That's possible specifically because we saw, in the last 2 years, a lot of payments in advance coming from our clients. And from this cash equivalent, you can see on the assets -- on the assets charged of BRL 900 million, something of around 40% belongs to the projects, meaning that they are -- we have deposits, specifically from each project under construction right now. And so I have to use this amount of money before to take any kind to borrow any kind, any single penny from our finance products. And that's why, so far, was not necessary to borrow money from the banks of project clients.

Moving on to slide on Page #12, the subsequent events. Here, I would like to highlight that -- and on this slide is mentioned BRL 405 million of PSV already launched, but it's a little bit more than that because we have acquired a project at the end, very end of the fourth quarter 2021. And the numbers of this project, potential sales value and units sold, we are going to release within the earnings result of the first quarter 2022, which means that, so far, we have already launched something close to BRL 500 million.

But from those projects right here, the good news is the speed of sales of those projects. We are open to the clients a little bit earlier than the carnival here in Sao Paulo, which means 1 month ago for those projects at February. And we saw expression Ibirapuera been sold 42% of potential sales value of almost BRL 180 million. Exalt Ibirapuera is something around 40 to 50 square meters, BRL 228 million potential sales value. We saw 27% being sold at the beginning of this launch, exactly as we saw in the fourth quarter 2021.

The speed of sales of products being launched is so good. So which means that we have some kind of neighborhoods in some kind of zones, here specifically in the city of Sao Paulo, no matter what kind of apartment it is, we have been watching the final users very interested about buying something because they know for sure that with this amount of inflation we have been facing, the amount of problems and severities that world is facing right now, a good place to be is real state. This is a kind of a Brazilian mindset, and we saw and we have been seeing a very good base on sales in the -- the launches of EZTEC.

Finally, I would like to mention 2 kind of subsequent events, very important to our shareholders. First of all, the partnership between EZTEC and Construtora Adolpho Lindenberg. Construtora Adolpho Lindenberg is a very old friend of EZTEC's, specifically because since we have been public in 2007, together, we launched something around BRL 4 billion in projects, an average of 44% of gross margin. And we got so far something around BRL 1.3 billion in net profit coming from this project, which means, in EZTEC's stake was something close to BRL 1 billion in net [ profit ] coming from this -- coming from the partnership in the specific projects we have been doing so far.

Meaning that from the total out of net profit, EZTEC provided in the last 15 years to Construtora Adolpho Lindenberg was responsible in partnership to provide something around 20% of stakes, which means that they are old friends and, here, the management and the controlling shareholder group of EZTEC pay high respect to the management of Construtora Adolpho Lindenberg. Apart from that, Construtora Adolpho Lindenberg has been public since 1970s, is one of the oldest names on the site of Sao Paulo, and they were truly responsible and fully responsible for development of and launch of very good projects very high-end projects in the South zone in the West zone of City of Sao Paulo specifically Jardins neighborhood. Jardins is a kind of neighborhood very close to [ Polista Avenue ]. So a lot of the high-end development coming from that area are coming with the brand Adolpho Lindenberg.

In the last 5 to 6 years, they were truly responsible for very high-end projects nearby, specifically in [indiscernible], very close to the investment bank's headquarters, projects that's been sold for BRL 30,000, BRL 40,000 per square meter at a very good gross margin -- gross margins in line with the gross margins developed by EZTEC through this years. This partnership and there is a kind of approvals that we have been passed through. But there is -- or there will be 2 kinds of important steps. First of all, it's only a JV. 6 years of this whole JV as part of partnership to develop BRL 1.75 billion in launches, which requires something around BRL 130 million of investments within the first 2 years.

So apart from that, they will -- Construtora Adolpho Lindenberg will propose to the shareholders' agreement that EZTEC has the rights to a subscription option within 4 years, within 2 years after the first minimum period of full year. So within 2 years, so in the 5th and 6th year of this partnership, we can exercise this right. And to share the controlling shareholders group within the current shareholders controlling group of the Construtora Adolpho Lindenberg. All the money we are going to provide is a primary offer. We are not going to pay any single penny to the currency general -- to the currency controlling shareholders group in order to buy this amount of stake. So all we are going to provide is the financial support to this development. The financial, I would say, skills of managing [indiscernible] scenarios like this one we have been passing through, and they are going to provide their expertise to develop high-end projects with very, I would say, cutting edge technology of construction for this specific kind of this low-end public with high or higher quality of construction.

That's the kind of thing that we put a lot of efforts was more than 1 year to discussions with them, and it's a kind of partnership that we are very proud to announce. It's a very big name to be in partnership with EZTEC.

So apart from that, the last kind of subject here is that is a distribution. Given the position of cash, we've got so far, we have so far, the Board of Directors has approved BRL 102 million of minimum legal distribution of dividends, which means BRL 0.46 per share. And we are going to pay as soon as possible and that's why we are disclosing that the ex-dividend negotiation date it is -- it will be March 23 of 2022, which means that 3 days from now, it's going to be the ex-dividends negotiation day. To pay within 10, 12 days, the dividends to our shareholders. So saying that I would like to thank you so far for the audience, and we are completely able to answer any further questions. Thank you so much.

[Pedro Tadeu, executive]

Thank you, Mr. Emilio. We will now open the call for a Q&A session.[Operator Instructions] So since none of you raised the hands, we understand that there -- there's no questions. So we are going to proceed to the end of our conference call. I would like to thank you all for your time, for your time listening to us and understanding the company results. So our conference call for the results presentation is over. We thank you all for the attention, and have a nice day. Have a nice weekend. Thank you all.