MRV Engenharia e Participacoes SA

BOVESPA:MRVE3

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, good morning. Thank you for holding, and welcome to the conference call of MRV Engineering. [Operator Instructions]

Now I would like to turn the floor to Mr. Eduardo Fischer. Please, Mr. Eduardo, you may proceed.

[Eduardo de Souza, executive]

Good morning to all. Thank you for your participation in our result for this conference call for the first quarter 2018. There are some important things about this first quarter and our expectation for 2018. So let's see.

We had a first quarter that was very good, the first better quarter in some important landmarks. We've had a record of net sales, record in income, in revenues and in net profit. So the first better quarter, first quarter in a long time. We're estimating we're starting 2018 with our right foot. We continue delivering all the growth that we had during 2017 that we started planning a few years ago. But this growth is coming almost full from city where operations have been consolidated for some years already.

What is important about this? Within the concept of stores and increasing our penetration in the markets where we are already, we were able to grow the operation without generating pressure. And if we start to see this dilution of G&A and commercial fixed expenses, this is a movement that will continue as we continue growing with this. In our strategy, this growth will continue coming from increasing penetration of markets where we are present. And this dilution of fixed expenses will continue. We're quite comfortable with what we planned, what we've been thinking since 2014, 2015 as a strategy of growth. And it has been relevant 2017, and it continues occurring 2018, and we look at the next quarters with great optimism.

The demand continues quite strong. This is a year that despite the World Cup and elections, presidential election, this is not affecting us. We have operations that are going very well. Demand is great. Demand is growing. We see the behavior of customers with less hesitation. The closing of sales is happening in shorter terms and in shorter time than in the past. This is a sign of confidence. And we have had the perception of our team.

Another important aspect that was questioned was our volume of launches in the first quarter. Yes, we have launched less than we had forecasted initially. But I would like to reinforce that this does not affect our planning for the launches of 2018. We are going to the month of -- the middle of the second quarter of the year and the launch of the second quarter will be more robust than the first one. We have to remember that traditionally, the second semester is a semester that is more agitated, let's say, it has more launches than in the -- nothing that happened in the first quarter will affect the launches or sales for the year. We are probably delivering in 2018 a robust volume and a higher volume in launches and sales than in 2017.

An important point that I would like to highlight as well, we have been implementing our construction method more and more, the concrete walls. We should reach the plenitude 100% of concrete walls. And it's an important aspect because this has been showing a reduction in the cycle, which is another gain potential. We've been talking about it little. We've been talking a lot about growth, about demand, how to absorb markets better, markets where we are, but we have a further opportunity, which is the reduction of the construction cycle. Our business cycle has been shortening. An example, between the first quarter of 2017, the first in 2018, we had a behavior in the cycle of 4 months in average. In my perception, we have the potential to be able to go further. If you look at [ the issue ], we are able to see opportunities of growth coming from -- growth of profitability due to the increase in the company production sales and launches and a great opportunity in the shortening of the cycle, which is also very relevant. You see what has been happening with our ROI, which has been growing. And our expectation and this will continue improving.

So just to conclude, we had a first quarter that was very, very good in my vision with some important marks. 2018, I'm very optimistic. We have closed April very well and good relaunches as well. The expectation is that we -- during 2018, we can generate a higher cash than 2017.

Leo is going to talk about this return to shareholders. We're very comfortable with 2018. We're on track to reach all goals that we established, and we're going to deliver a growing profitability.

Leo is going to talk about dividends and other.

[Leonardo Corrêa, executive]

Good morning to all. Some detailing here, some more specific detail. We entered the period of accounting changes, rules -- rule changing. MRV is mainstreaming these modifications that were launched by the specific authorities, adopting the new standards. So it's important that MRV does not foresee impacts on our statements because of the change in the rules. To be quite specific, the line that brought greater changes was related to the provisioning of -- we passed from a provisioning based on the track record and past record to prospective provisioning according to the rule. And 2018, we have an estimate of losses and credit at the sale. From the point of your DRE, the volume provision quarter per quarter, which should not be materially different from what we've been provisioning quarter-to-quarter in the last year. The way of measuring is different, but the economic factor -- the company do not change. We are going to continue being transparent and conservative in our report as we are in the other expense and provisioning lines. Eduardo has mentioned our operating performance. I'm going to emphasize that the growth of launch brings growth in sales.

And now we're seeing these results pass through demonstration, increasing profit and our ROI. Increase of ROI is our objective. We understand the points related to cash and FGTS are equation, always with some collateral noise, but with the -- really the focus on residential launching, we are seeing the deposits in savings increase, creating more liquidity to banks and, consequently, further real estate market as a whole.

Our equivalents line continues improving even if with some volatility and improvement being by subsidiaries to our L -- and for LOG prime and the generation of cash, therefore, diminishing -- decreasing debt. It's initially slow but a clear direction. We have delivered 25,000 square meters, and revenue is already coming in the second quarter. So we're going to close below 7%. Capitalizations are already committed with expansions to respond to the demand of clients. It's e-commerce showing it first.

As pointed, I would like to emphasize that related to dividends, we have announced an extraordinary dividend. It was paid already in April. We have dividend paid in June. And as we said, we are not to create a fixed rule and/or change of status. We want to have consistency and deliver. And this year, we have a table on what we've been paying shareholders 4 years ago. We were returning 50% of results even in very upsetting moments, economically speaking. We're going to continue this practice. More important than talking promising is to continue delivering.

Now we are going to pass to the question -- to the questions.

[Operator]

[Operator Instructions] First question comes from Enrico Trotta from Itaú BBA.

[Enrico Trotta, analyst]

I have 2 questions. The first one related to land banking and land acquisition. I think the land bank is -- the first quarter that land bank has grown. I want to understand if we reach the ideal land bank size and from now onwards increase launching and the turnover of lands and expand ROI of the company, ROI of the company. I would like to know how much you expect in the impact of cash with the land bank. And the second question here is more to -- next week, on the 16, there is a meeting of the FGTS board, which is the fund for length for service. We have been talking about the government having been thinking about increasing Line 1, 1.5. I would like to know if this true and this should be taken to the meeting, to the board meeting. And if it's Line 1, where do resource of funds come from? Is it from the treasury or the fund at length of service with FGTS? I would like to know if you're aware of this discussion.

[Eduardo de Souza, executive]

Thank you. First question about the land bank, yes, we made a great effort in last 3 years. And we made investments that in my vision were very relevant for 2 reasons. First one is that we took benefit of many opportunities in the market that was squeezed, and we made very excellent business. It will be a very good pillar for profitability in the future. This is a point. Another one is to be able to face the strategy of greater penetration in the markets where we are inserted. This is a strong movement we made in last year. In 2018, our perception is that some practices have greater competition, especially in the capitals and metropolitan areas. The opportunities of good business has decreased. In other play locations, now you have that medium or smaller cities that have excellent opportunities. We should have a year of less active purchases at land banking [indiscernible]. It's not only replacement, we should be above this. But the expense made with land bank is not only in the purchase, sometimes you have -- you started installments. This is reimbursement of the cash comes with purchases of previous years. We should have -- and this disbursement of cash more or less equal to last year. In regards to FGTS, there are lots of debate. Leo mentioned this in his opening speech, especially this year where there's a greater, more active movement in the treatment of low income market. Yes, we have been following this very closely. And we are hearing movements that want to be made or are being taught about by the government. An important message is talking to the curating board and CEO. The cash economic that comes from the arbitration of market, we can't do anything, that is disruptive. The stability in the long term exists in all agencies that are discussing this. So if there will be a part of increasing Line 1.5, I am not worried about this. If there is economic stability, which is the basic premise for this, the sense is being very positive. If -- second, if you look at the absolute figures, today is the great -- we're great players of the 1.5 line. It's a good operation. And actually, we are the greater operator of the 1.5 in Brazil. I don't see this movement as something to be worried about. Funding is the most important thing. It's our oxygen for the operations. We follow this very closely and is not something that is worrying me now because we participate in the discussions. And I can tell you, there's nothing decided in regards to the increase of 1.5 or there's going to be any addition.

[Operator]

Next question from Bradesco, Luiz Garcia.

[Luiz Garcia, analyst]

Two questions. First, if you could talk about the rhythm of launchings, the pace the launches will take because of new financing, funding. It seems there is no volatility. It happens every year. But now if sales and launches continue having the pace this was expected, with the strong rhythm, the strong pace we saw in the first quarter. Second question about the drop in the status, and you have been touching upon this. And what we can expect from this quarter. There's always some seasonability. What could we expect ahead? And also include another point, which is the adoption of FRS 9. We saw direct provision for asset. So I want to know if this provision as a percentage of the portfolio suffers any change or not. What could we expect on provision on sales with the adoption of the FRS?

[Eduardo de Souza, executive]

Let me talk about launches and the commercial, and then we will have provision and the [ path forward ]. Let's see. Launches. As I said in the opening, the launches echo was good, the perspective is good. Nothing that happened in the first quarter really was away from the goal. I'm very comfortable with it. We have many things. Land bank is mature, and the launch is not a preoccupation. We have been addressing this. I think it's going to be very important. The great markets, these are important in the second quarter because it starts this year, a good move in the market was very good. So everything indicates that we will have a good behavior in sales. Adding to the big market, you have more launches. So I continue believing that we're going to have 2018 even stronger than '18. I'm going to get to talk about this type. So when we talk about the status, we say that we have been addressing this since the implementation. So we expected more dissolutions than our present. We expect 8% to 10%, [ maintaining ] 12% to 15%. So we made a further step. It's a guaranteed sale. We only -- a sale -- cancellation or dilution. Its value is 0. So what we've been seeing is we've been decreasing this quarter per quarter. There's a little volatility. If we see the trend in cancellation, much smaller. The tendency is to be much smaller than we have to 12% to 14%, something around this range for next year, with its full implementation of the guaranteed sales. So this year, we are going to see below 5% of cancellations.

[Leonardo Corrêa, executive]

So first of all, there was a change in the rules. The rules started to be in place in the first quarter 2019. But in terms of comparability, you start to have to work 2018 within these rules. We had a standard, which was an older standard. We looked at the track record, the portfolio remained -- had a default. We started to move. And if the client would -- the customer would [ pick ], we could make a positive registration. The way or the norm requires that you make a prospective provision. And I have to reemphasize, the most important thing for us is the number that we saw our provisioning quarter per quarter. It was about 20, 25 or even higher quarter per quarter is what we've been to continue seeing from now onwards. If sales increase more, this number will probably grow a bit more because it ends up being a percentage of the sale. What do we do or what has been adopted. The company has worked greatly pro salute in all credits that we grant our clients. And I understand who our customers are to really cut this default rate. We have an -- we don't have an exact number. We have an overall rule. And we've been studying customer per customer. There are some profiles that have higher potential, higher tendency to be default for this. We have a higher provision for others who have a profile that is, call it, more secure. We make a smaller provision. These things vary according to the enterprise or with enterprises with great demand very well. So we close a bit the credit line. We grant a shorter term, not only demand but also the credit. We've been using and incorporating tools, artificial intelligence tools. The objective is really to try and understand for whom or to whom we are granting credit and doing it in the best way possible, having the lower loss possible. It is inherent in this portfolio. We know this, but the less we can lose, the better. If I have a very rough rule, it's about 1.5% of the value of sale. This is what we've been provisioning. And we'll continue provisioning in the following quarters. And this number is not an overall. It's really made individual per individual, but the track record we've been seeing is this. And at the moment, as things are changing, the rule is changing, we wanted to make the year 2018 completely comparable to 2019. So we have decided since now to implement it immediately.

[Luiz Garcia, analyst]

So you're not expecting changes in terms of percentage since this more conservative rules. But if you have more 1.5 lines in the portfolio that this reduce the pro salute as a percentage of sales, are you estimating stable percentage, both the portfolio -- is there a change in the size or the pace of growth of the portfolio?

[Leonardo Corrêa, executive]

There are 2 variables to be considered. You talked about greater volume. 1.5 means a smaller portfolio, but on the other hand, an acceleration of the cycle means a bigger portfolio because I'm constructing more quickly. Therefore, I give less time for the customer to pay, especially what we call pro salute B, which is as post keys, let's say, after the delivery of keys. And the 2 variables, one is contrary to the other. One is expanding, one is decreasing. So it becomes neutral at the end. At the end of the day, yes, I imagine neutral.

[Eduardo de Souza, executive]

Just to complement what Leo is saying, if you think about all the provision, provision is something we take very seriously into account. We're not allowed to play with this. We cannot afford it, be it provision for technical services. We take it very seriously and in a very conservative manner. If you consider all provisions, almost BRL 600 million provision, perhaps this does not happen. We might even have a gain here. The vision is that this in here, even -- because of the nature of our business and its cycle, it requires first to be very conservative and very serious in dealing with it. Summarizing what Leo was saying, if you get the entire sum, it's lots of money allocated to provision because we have this vision, this conservative look, it's very necessary to a business such as ours.

[Operator]

Next question from Jorel from Morgan Stanley.

[Wilfredo Guilloty, analyst]

I have 2 questions. First of all, a question about your goal for launches. From what I understood, you have a goal of 50,000 units to be launched in 2018. But to reach this number, you should launch per quarter plus 50,000 in an annualized manner. Could you give me more details of what brings you this confidence to this goal, especially in terms of flow -- of approval flow of the government? Just to confirm, the credit portfolio, MRV portfolio, you understand that the percentage of sales of 18%, you believe that this will continue forward or will become -- or will remain stable?

[Unknown Executive]

I have good answer to the first question. Yes, I am confident that we will fulfill the launches of this year because the land bank that was constructed during the last 2, 3 years is very big, very robust and with a high degree of maturity. This is not my concern. I think that in the second quarter, we're going to have a more robust number. It will continue into the second, third and fourth. As I said earlier, the second semester tends to be stronger always in terms of launches. So I'm confident that this will be fulfilled. And what is really valid for us at the end of the day is sales. The sales are coming strongly. We have a stock and inventory we can work on. And there's a robust land bank more and more mature and closer to legalization. So this great part of this land bank that is already legalized would be ready for lunch. So I'm very confident that the second, third and fourth quarters will be very robust in launches. In terms of the portfolio, as we have been growing sales, the portfolio has been growing. It's natural. As a percentage, I don't see a great change. Obviously, there's a certain volatility because of the factors that I just mentioned. Greater volume for the 1.5 line means a smaller portfolio but a more rapid cycle with a portfolio of pro salute B that is a bit higher as a percentage. There is no significant change.

[Operator]

[Operator Instructions] Next question comes from Luis Stacchini, Crédit Suisse.

[Luis Stacchini, analyst]

My doubt has to do with reconciliation. I would like to understand from you the reconciliation of the stock at market value. Looking at the stock the fourth quarter, to get the percentage and subtract net sales, I have a higher stock that's been reporting -- are you having some change because of repricing? Looking only in the fourth and removing sales, I guess BRL 5.2 billion and you repurchased something BRL 4.7 billion. Could you explain to me this gap, if there was a reclassification of project from Line 2 to Line 1.5?

[Unknown Executive]

There is a part -- there are 2 or 3 factors. One is linked to Line 1.5 with the price drop and other reclassifications, smaller reclassifications. There's no great difference. But I can -- and to more -- in detail with you. If you want more details outside the call, we'll talk later then.

[Operator]

Next question from Christian [indiscernible] from Banco Safra.

[Unknown Analyst]

Please, I would like you to recapture today what you did for losses to be reduced in 2016, and you started to present profit in 2017.

[Unknown Executive]

It's because the prime has been presenting an improvement in the operations, it's been some time. Our recognition of income, of revenue has to do with the reported gross to DRM as enterprises are being constructed. Another thing, as the prime has a great leverage, has to do with the Selic rate. And for several following months, the continuous months, is really bringing cash after paying the taxes, after paying interest rates, it's a slow movement but with the right direction.

[Operator]

Next question comes from Marcelo Motta from JPMorgan.

[Marcelo Motta, analyst]

My question in terms of images or you see -- of margins, sorry, of gross margin, do you expect the thresholds that you have seen in the last quarters? And also, you mentioned in the beginning of the call more dilution of costs and having a concentration in launches in cities where the company is already present. Diminishing, cutting these operational costs, operational expenses, is the tendency. The same for the margin?

[Unknown Executive]

Okay. Our gross margin, I think, should remain flat during 2018 and perhaps 2019. I see no movement in the gross margin. It has a sound level. I don't see it growing much more. You have some oscillation, some ups and downs, but it should remain on the level it is. In regards to dilution, yes, our expectation is that this growth that started to happen is not completely may, but it will continue in 2018, 2019, will continue generating dilution and, therefore, an increase in return. As I have said before, our G&A and our fixed expenses is already there for operations that we planned back in time. As I said in the opening, our growth is coming full with operations that are consolidated. So yes, my expectation is that during the year 2019, we still show an improvement with the decrease in the other 2 lines.

[Operator]

Next question comes from Renan Manda from Santander.

[Renan Manda, analyst]

I would like to know if there was any advance in the conversations with banks in terms of [ repo ] sales to the premium line, if you have anything about this product.

[Unknown Executive]

Refunding. Yes, we've been talking with banks in terms of -- okay, in 2 ways. One is approval, permits, et cetera. This is being worked on, and this is something that will occur more to the end of the year. And from point of views of banks, we continue talking to private banks and both official banks. Banco do Brasil and Caixa Econômica are interested. Especially, we're seeing a drop, a continuous drop in funding rate of the FGTS, and the entrance of money in the savings will bring more liquidity to the market.

[Operator]

[Operator Instructions] Next question comes from Raquel Costa from Bradesco Asset.

[Raquel Costa, analyst]

I would like to know about the LOG capital, if this had been planned and if new capital is coming and talk about the expectations.

[Unknown Executive]

This capital from LOG last -- in January, LOG has an expansion plan. It means more entrance of fund that has a strong demand. This is a great probability. MRV will not contribute in LOG.

[Operator]

[Operator Instructions] I would like to turn the floor to the presenters for final considerations.

[Eduardo de Souza, executive]

Well, I'm going to close. And just to reinforce my message, we started 2018 well. We are continuing to deliver that return evolution that we were talking about with increase in operation, increase in expenses, dilution. This is the expectation we have for 2018 and 2019. I think most of the challenge, the greatest challenge was back there, we decided to have a high and robust land bank we bought in very good conditions. We have a scale to grow with stability and very round, very smooth operation. I'm very optimistic in regards to 2018. 2019, my idea is delivering more and more robust results. Everything is showing this. The first quarter is the first step in this direction.

Just to highlight something that I consider very important, it's one of the differentials in MRV. MRV has an approach in regards to provisioning, but it's very conservative, very serious. And we have -- therefore, we have a company that does not deliver surprises, especially negative surprises. It's always positive, a stable company, almost a retail company. We have this concern, and when we look at the consistency of our results during the years and the quarters, it is demonstrated.

Thank you very much for your participation, and we meet in the next call. Thank you very much.

[Operator]

The conference call for MRV is finished. Thank you very much, and have a nice day.