MRV Engenharia e Participacoes SA

BOVESPA:MRVE3

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, good morning, and thank you for waiting. And welcome to the conference call for analysts and investors of MRV for the earnings of the second quarter of 2020.

Rafael Menin and Eduardo Fischer; the Executive CFO and IRO, Ricardo Paixao. [Operator Instructions]

Now I would like to hand the floor over to the President, the CEO, Rafael Menin. Please, you may continue.

[Rafael Nazareth Menin Teixeira de Souza, executive]

Good morning, everyone. Thank you again for attending this call. Well, let's start talking about our sales in the second quarter. We are quite pleased with the performance of the company. We had a second quarter way up compared to what we thought about in the beginning of the pandemic. It's record sales despite this very difficult period, without stores closed. So this is an indicator that deserves our attention.

Our digital platform was scaled quickly as a result of the investment we've been doing for a long time. And so in this year of 2020, we're going to allot BRL 100 million to this digital agenda. This is something we're strongly focused on. And in the next quarters, we'll deliver quite innovative solutions for our customers.

The second highlight is the cash generation. We've generated BRL 215 million, going back to our historical levels. The transfer system was interrupted several times since the beginning of last year, and the second quarter transfers went back to their regular levels. Caixa Bank made several important changes that expedited the system, especially in this moment with the restriction of movements. And we expected this model to continue in terms of cash generation volume from now on since we don't see for the third quarter any restrictions to transfers.

The third point that's very important, as we mentioned in the release, it talks about the multi-funding platform. MRV is currently seen today as a company that has a national operation. We are operating all over the country. We've been -- we're operating with very high levels for a long time, 40,000 units produced for many years now.

So what's going on now? It's the increase of our operation outside My House, My Life, MCMV market. So if we want, we'll realize the volumes, so that's almost BRL 1 billion, which is a significant figure. It is a big company outside the -- My House, My Life market, MCMV. We continue to bet on the economic and the growth. And the -- this segment outside My House, My Life is -- the customer's slightly -- with slightly more income than MCMV. We see a very favorable market for that.

And interest rate is the main driver for that. Interest went from 12%, 9%, now it's 7.5% per year, the interest rate. And when you look at the longer curves in Brazil, we believe that interest rates will drop to 7% to 6.5% plus TR. TR is now 0. So this segment will increase -- improve even more. This is something we're very confident.

Luggo is a company that's growing fast. Today, we have 8 developments in construction or whose construction is starting next month. So we expect to sell maybe twice as much as we have sold in the first tranche for the real estate fund. So it will be a business division that will escalate year-on-year.

Also, AHS is another company that we strongly believe in. The U.S. market is a gigantic market, very mature. So AHS has a special operation in very important markets. It's verticalized. Today, we have 6 developments that are either stable or in their final stabilization stages, and they are already open for sale. So soon, we may have a very positive surprise coming from AHS.

So it's also important to understand that MRV is a single solution, multi-funding, not only operating in Brazil, but it's well as in the U.S. market. So we have a dispersion geographically in terms of products.

Urba is also a company we strongly believe in. It's a company that has gone through important changes recently. It's very mature now. Its land bank is growing and a significant one. And we have developments planned with a very affordable price with the quality of life that's unique to the Brazilian market. So this is a company that's worth looking at. It's a company that will grow and escalate its growth strongly, and it will have a key role in the projected growth of MRV.

I also like to highlight the social role of the company. We have been investing more and more in social responsibility. This is a very important agenda, especially in a country with so many inequalities, such as Brazil.

It's a company that's aware of its importance to encourage other companies in our segment, in our industry, so they can follow a similar agenda. So the entire group of MRV, we have donated almost BRL 20 million since the beginning of the pandemic. And this is very important, and it will be increasingly important for companies to do their share for the benefit of society as a whole.

Now I will hand the floor over to Ricardo Paixao, and he will talk about the main figures of the company this quarter.

[Ricardo Paixão, executive]

Thank you, Rafael. Thank you all. Now moving on to the figures and financial highlights. I would like to say that the production and the record sales, 38% growth when compared to the same period last year, has resulted in a revenue -- net revenue, BRL 1.6 billion, with plan to grow even more in the second quarter with the higher revenues.

The gross margin stayed within what it was expected, with a slight -- improved 28.4%. Now in the lower line, when we look at the expenses, we have a dilution of G&A over volume, from 6.2% to 5.6% in the second quarter. But commercial expenses over net sales were in line, with 2 percentage points better than last year.

Financial results was BRL 15 million lower than the -- when on a quarterly basis because we had to reinforce our cash due to the COVID, and also a significant drop in the revenues because the IPCA inflation rate was much lower in this period. The net income was BRL 124 million, and it would be BRL 131 million if we weren't for the -- if it wasn't for the donations that Rafael mentioned.

Now going over the financial statements. We have a strong position, BRL 2.5 billion. Also, the cash generation, BRL 215 million. Our leverage closed the period at below 20% over net debt/PL, which improved our position. July has been a strong month, both in sales and in transfer, so supporting our cash generation expectations. Luggo and AHS. Luggo has, in constructions, BRL 320 million in -- in VGV, in assets that are stable or are being stabilized in AHS.

So now we can go on to the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Pedro Hajnal from Bradesco BBI.

[Pedro Hajnal, analyst]

I have 2 questions. As you've mentioned, in this migration of the city administration and people to home office, there is a decrease in the administration process. I would like to understand whether the plans are taking longer than -- projects are taking longer to be approved, more than longer than usual. And also, I believe you're gradually reducing the discounts. But I would like to understand until when do you want to keep this strategy to have a positive prospect for sales?

[Eduardo de Souza, executive]

Pedro, this is Fischer speaking. Let's start with the first question. Regarding the approval of projects. Actually, we felt that it was -- the second quarter was a bit more difficult, the process more difficult. The notary public offices and the city administrations were either closed or slow -- working very slowly due to the pandemic.

What we see now in the third quarter, we see a much better scenario. Some of them are operating normally. Others are in a much more positive scenario than the second quarter, which allows us to look at the second half of the year with a much higher level of launches when compared to the first half of the year. We traditionally launch more in the second half of the year. So this trend would be maintained.

I believe that once -- things are not back to normal yet, but it's -- they're much better than the first quarter. And I believe that until the end of the year, they will begin to increasingly go back to normal. The third quarter will have a growth in sales, and the fourth quarter, even greater, as it is a tradition for us.

We've been more aggressive in sales in the second quarter due to the pandemic. Rafael said well that we were able to reach a level of sales of supply that's very high. We are doing things much faster now. And the cycle is growing faster -- going faster.

So we see for the second -- for the third quarter, the gradual discussion of discounts we were providing is not at the same levels at pre-COVID. Our strategy is to maintain a high sales over supply. So we decreased a bit the discounts. We're working to grant credits [Foreign Language] to reduce the portfolio granted.

So we are making these 2 efforts to resume the other prices and increase our portfolio. So this is our strategy to maintain a high sales of the supply. And the third quarter starts at a level that's similar to what we saw in the second quarter.

So we're confident that with that, we'll be able to maintain a sales level much higher and will lead MRV to increase the market share. We saw that our market share has grown in some cities. And we want to maintain our sales, sustaining higher market share.

[Operator]

Elvis Credendio would like to ask a question.

[Elvis Credendio, analyst]

Rafael, Fischer, Ricardo, I have 2 questions. First, about production. You mentioned that some construction works have been postponed for the next quarter. I would like to understand, is there any impact on the gross margin since some projects were stopped for a period or interrupted? And if there is an impact, how would that relate to your consolidated gross margin? I would like to understand, do you think it's 28%? Should we expect that level? Or will it change?

The second question, we're looking at the trade receivables. Yes, if you could talk about more in detail about that, it would be nice.

[Ricardo Paixão, executive]

This is Ricardo speaking. Now starting with production. Actually, our construction works were stopped, almost 20%. We reached 20% at a certain period. And then, with time, that has been gradually reduced. The impact on the gross margin is what you see now. We don't have any other corrections or increasing costs looking towards the future because all the corrections have been made already.

So looking in the short run, we see gross margin around 28%, 28.5%. That's what we present now. And the recovery of the gross margin that we expected for this year, due to the COVID and the discounts we are giving to customers, that has been postponed to next year. As for provisions or allowances, what we see is that default rate that we saw in the month of May and June and July has been very similar to the behavior pre-COVID.

So the corrections we had to make in the provisions, in the first quarter, we had to make a correction in the criteria. The criteria has remained the same. So the level that we see now is just a natural organic growth without any change in the criteria.

[Operator]

Our next question comes from Jorel Guilloty from Morgan Stanley.

[Jorel Guilloty, analyst]

I have 2 questions. I would like to ask about the gross margin. How do you see the gross margin in the future? Do you think it will increase since you reduced the discounts to sell apartments? Clearly, now, you are at the low level, 28%. But what do you see towards the end of next year in terms of gross margin and how it would grow?

The second question is about inventory. I believe it's now at BRL 800 million. I would like to understand whether you are comfortable with this inventory level. Or do you believe that sales may continue to grow given the demand you're seeing now?

[Rafael Nazareth Menin Teixeira de Souza, executive]

This is Rafael Menin speaking. Well, about the gross margin, is -- like Ricardo has said, the gross margin this year will move sideways, meaning we won't expect any significant change in the gross margin. It will be around 28.5%. And we'll work strongly so that next year, more towards the end of next year, for that to recover 300 basis points in the gross margin.

Of course, it is a future consideration. We cannot make a statement towards that, but we want to get back to our historical margin in the last 3 years. We believe that is possible. And the increase in the SBPE, this credit line has -- this facility has a gross margin that's better than MCMV market, which will play an important growth -- will have an important role to increase our margin.

But we shouldn't expect this gross margin to increase a lot in the first quarter, in the next quarter. We believe that next year, the economy will be healthier, with a reduction of unemployment, the growth in the economy. So we believe we can increase our prices a little bit more. So this is the target for the end of next year.

In terms of inventory, we remain at a very good level of sales. July has been the best month so far in terms of sales. August has started very well. And this will be our policy for 2020 to remain aggressive in terms of sales. But I think that this is not affected. It justifies the strong increase in the margin.

Our digital platform has played a very significant role, the reputation of the brand. And our customers are looking for companies that have a good reputation in the market, that have modern quality products that deliver their products. And that makes a difference. We see the level of demand that has increased in recent months, strongly. So we expect a high volume of sales in the coming months.

And then an important point is the recovery of launches. Now the notary public offices and city administrations are starting to open and operate again, not as pre pandemic, but better than the months of March, April and May that had been very critical for public facilities. And so we -- this will increase as the public authorities resume their regular operations. And maybe, in the second quarter, it will be slightly below the sales -- the volumes sold.

[Operator]

The next question comes from [ Gabriel Gasparecci ] from Crédit Suisse.

[Unknown Analyst]

I have 2 questions. First, I would like to understand the competitive side, the -- you mentioned these market share gain, either in new entrants or maybe people that are already competitors, but they want to grow.

And the second question is to understand other initiatives to improve the gross margin. And -- but I would like to understand that maybe you see an opportunity to accelerate the production cycle or maybe leverage trade receivables. What are the ways that the company sees to improve this ratio?

[Eduardo de Souza, executive]

[ Gasparecci ], this is Fischer speaking. In the competition, as I said previously, what we see lately, and we saw growing competition, especially in the larger cities and the capitals of the states in the past. That's what we saw, but also more competition coming from smaller players, especially in small towns and medium-sized towns.

In the last 3 months, this scenario started to change. The big players remain, but the small players are losing market share. This is why I mentioned that we're able to gain market share, also because of the absence of -- from this competition that has been decreasing.

And also because of our more aggressive sales policy, we're able to win market share in most of the cities we're present. Now the challenge is to make this market share to consolidate at a higher level, to lead -- to take the company to another level of growth. So this is, in our mind, is a strategy we're tackling now.

So the new entrants that we see, basically, there are companies that are having their IPOs now, but it's a big concentration in the São Paulo and Rio de Janeiro markets, mainly, which doesn't affect us so much, especially because the new entrants are highly focused on middle and high income. There are very little people focusing on our core business. And they're highly concentrated geographically, especially in São Paulo.

So we don't see that this is a factor that could have a negative impact to us. What we see in the next 3 months is a window of opportunity that's been open for us to grow, increasing our market share. That is much -- very much in line with this pricing strategy we're implementing.

Regarding your other question. Yes, ROI is on our minds all the time. And you mentioned the gross margin, but there are other opportunities we're pursuing. One of them, you mentioned, with the sales of our supply. The level we see now and we -- our challenge is to maintain it. Maybe this is an opportunity as well to accelerate the entire business cycle, start in construction earlier and finishing the whole development in a shorter period and having Caixa as a partner.

So this is the main leverage. We're working on receivables, but this is not mature yet. But we're working on that front as well, and we can have some gain from there. But this is in our radar.

But differently from our -- the conference call we saw 3 months -- we had 3 months ago, today, we have another opportunity because MRV is able to exit the crisis better than it started. So the crisis is not finished yet, but we see opportunities for that to happen again, either increasing prices or market share, which will be in line with the strategy we created many years ago.

Multi-funding. If the person makes BRL 2,000 a month or BRL 10,000 a month, they can enter the company and have a product for them. So that's a strategy that started many years ago, and that's now becoming real in the -- during this crisis. So this is starting to become true now. Okay?

[Operator]

Marcelo Motta has a question.

[Marcelo Motta, analyst]

My question is about the digital initiatives. You mentioned in the beginning that you have BRL 100 million invested this year. Would you talk a bit more about it? What are the main investments? What are the gains we should expect in the long run after the pandemic? Any impact on cost or EBITDA margin? Could you please talk a bit more about that?

[Rafael Nazareth Menin Teixeira de Souza, executive]

Marcelo, this is Rafael Menin speaking. The digital investment, of course, it has a relationship with efficiency. Part of that is being targeted to that automation of processes, and there's a lot of good things going on. But a good portion of this investment is targeted towards new business opportunities, Marcelo.

As Eduardo mentioned, we are creating a housing ecosystem. The customer will continue to make business with us in our platform for many years. It's a completely different model from the traditional real estate in which the customer buys the product, has the keys and the relationship ends. What we're creating, in our opinion, is a unique model in the industry.

We've searched for solutions worldwide. And we didn't see anything similar to what we are creating here. It will be an ecosystem in which the customer will continue to have a business relationship with us, with the group, for many years, either selling the apartment within our platform, multiple business solutions that would be created with this digital endeavor.

We cannot open more now because this is an important strategy for the company. So we can't give you more details. But today, we have -- we are now creating products that are highly innovative. We have almost 400 people working on our digital agenda. So there is a lot -- there are a lot of solutions, very interesting ones that will be launched in the coming quarters.

And we know that this agenda has a beginning, but doesn't have an end. It's an ongoing strategy. If there is a cost in the cash flow and all that, and in the financial statements, but we are sure they will have a strong return on it in the future.

We're preparing the company for a new business model in terms of its operations, for another level of growth. So it's a very interesting -- a totally new solution for housing in Brazil. I cannot give you any more color than to that because it's a strategic decision for us. But it will make MRV a completely different company from what exists in the market.

[Marcelo Motta, analyst]

When we have the announcement and the launches along the year, in 2021, there will be a completely different product? Or is it a gradual process? Just for us, to this end, is it in the short, mid of run, or is there many initiatives distributed a long time?

[Rafael Nazareth Menin Teixeira de Souza, executive]

Marcelo, we're talking about many initiatives. Of course, some are more disruptive, others are more developmental as an evolution of our process. But I would say that the concentration will be mostly next year. But there are very interesting things that the company will provide to its customers and prospects in the next quarters.

[Operator]

The next question comes from Ygor Altero from Santander.

[Ygor Altero, analyst]

First question is about dividends. The company has been quite resilient despite the pandemic in terms of sales. So I would like to understand what are you thinking about paying dividends? And the second question, I'll ask after that.

[Ricardo Paixão, executive]

Ygor, this is Ricardo speaking. Well, first question about dividends. We started the year thinking about paying 50% in dividends. And then the crisis started, the pandemic. We reduced that. We're thinking about 25% of last year's profit. But now, since we see the demand is quite resilient and the strategy is working well, the cash flow is strong, I wouldn't be surprised if, at the end of the year, we'll pay more than the minimum mandatory dividends.

[Ygor Altero, analyst]

Okay. And the second question in terms of competition, there are smaller players and there has been a clear gaining for you in market share. So how do you see the positioning of these competitors now? Do they have capital to go through this crisis? Do you believe we will continue to gain market share from these players? And on the other hand, restrictions for Caixa and the federal banks that -- because they want to give priority to these small players.

[Ricardo Paixão, executive]

Okay. Starting on the second questions. Yes, we see that Caixa has a concern to have more and more formal players operating in this industry because it's much better for them in the future. They know how the development was made and performed. They keep track of our projects. Since the beginning, the project -- and they make monthly visits to the construction site. So they are much more confident in terms of the value of the project and reducing any loss due to default they may have in the future, if they have to get the mortgage, and due to nonpayment.

In terms of competition, we have competed at several levels. MRV has increased its volumes, and the granting of credit facilities linked to FGTS has dropped. So we see the gain of market share. This is how we managed it. But looking at visits, on market research, we also observed that the smaller players -- I wouldn't say only the small, the teeny tiny ones, the [ ants ], so to speak, but the -- there's some slightly higher or bigger players that depend on physical shops to make their sales on real estate agents. So they're more stressed during this periods because they don't have the tools to make this sale possible.

From the cash point of view, they are suffering because it's much higher for them to have access to the capital markets. They are more indebted. So what we can see that maybe in the next year, 1.5 years, competition will be slightly lower. But this is a profitable business, of course. So towards the future, competition will increase more than we have now. And we do -- we are prepared for that.

[Operator]

The next question comes from André Mazini from Citibank.

[André Mazini, analyst]

First question, it's about the partnership you made with Allianz in Parque [Foreign Language]. Is that an SBPE or Luggo? Could we expect more partnerships with the shopping malls players because these multi-use malls is something that would be an interesting strategy.

And the second point, it's about the great spirits that Caixa has given in 6 or 8 months, in which the owner doesn't have to pay for the loan facility. Do you think that could reduce the default levels? Have you had any previous experience in Brazil?

And in the United States, there was a series of rate, and it didn't work well. Of course, we cannot compare it to the States because, there, the buyer could use the loan and invest in several different properties. And this is different in Brazil, it's a single property. So the question is, if you have any experience with similar benefits in Brazil? If you have any experience in terms of default and what will happen?

[Unknown Executive]

Okay. André, thank you for your question. Let's talk about the opportunities that arise around the shopping malls. Yes, we are indeed negotiating. In [Foreign Language], we bought 2 lands, and we're going to launch 2 SBPE lines: one would be a more compact one, and the other one would be a bit more expensive. We're talking about apartments between BRL 250,000 and BRL 350,000. It's a great location, close -- almost close to the ocean. And the price is quite competitive for the location. We also closed the Luggo product almost inside the mall, and we're negotiating 304 plots of land with the same characteristics.

So the answer is yes. What we see today is that the malls are changing. The retail is changing a lot. Parking lots, for example, that used to be essential, strategic to the malls. Today, is not so important. So there is extra space in some malls. So we may increase that area, especially that area of operation, especially with Luggo, especially in developments connected to malls because this is very nice. And it may increase in traction in coming months.

Regarding the grace period of Caixa, what we see is that a few customers are using it. When we saw the news, we thought that everybody would use that benefit. But this is not happening when a small percentage of customers has used that. I don't have the exact number, but [ Kaka ] can give you the figures in terms of percentage.

But the important point here, André, is that this sanitary crisis caused people to stay home much more and the home became much more important for people, for the families. So many of our customers live in a not-so-comfortable conditions. And therefore, they understood that it makes sense to a lot more money or invest more in the quality of living. And therefore, a property is key for the family to be well located with leisure opportunities and a good location.

So homes -- the tradition of owning a home in Brazil has always been a dream. And now it's been become even more important because this COVID crisis that is here to stay caused the home to become ever more important for people. And we know that the Brazilian economy allows for the market to grow at -- in every levels of income. And since the interest rate will be at adequate levels, we expect the real estate market to grow a lot in coming years.

I think that this year has been complicated. But now, it's a bit better than we expected. But for the future, we have an interesting macroeconomic and microeconomic agenda going on. There will be a lot of private investments in the future. And the government will make a fiscal effort not to allow inflation to go back -- to grow again in the country. So interest rates are at a good level. Inflations are being under control.

So I believe that investments will increase in Brazil, and housing investments will double in coming years in Brazil, undoubtedly. So this is how we see the market. This is how we think things will happen. And if this becomes true, we'll have a very interesting market for many years to come. And those that do a good job in terms of geographic location and positioning will be able to profit from this market growth.

[Operator]

[Operator Instructions] The next question is from [ Christiane Francis ] from Safra.

[Unknown Analyst]

The funding from the government for My House, My Life has shown -- has proven insufficient in September, October, and for the industry, is not so predictable. The sales in that segment are doing fine. But what are the prospects for lack of funding in 2020? And what would be the possible solutions to that?

[Eduardo de Souza, executive]

[ Christiane ], this is Fischer speaking. As Rafael said in the previous question about the importance of housing industry and how this market addresses major social issues we have in the country, so all the government and administrations see that. We -- what we see today in the interactions with the government and the FGTS is the funding must be maintained so that the program won't suffer because it addresses the main difficulties of society, especially in the medium and large cities. So we see an alignment from the government in trying to protect the main funding because it's interesting for MCMV.

Also, as we have a macroeconomic scenario that's more balanced, that's the effort we're doing now. And that reflects in an interest rate that is low in the long run, then will remove pressure from the FGTS, the guarantee fund. And we see that from our customers because many of our customers that's -- initially buy to using their FGTS. In the transfer, they can now use savings because that is even more competitive at the higher levels of MCMV that don't have this subsidy.

So that removes the pressure from the funding more directed towards low-income families. That's how we see that. Of course, this is always a source of concern. But the feedback we're having from all the parties related, FGTS and the government included, it's a common understanding that the funding must be preserved so that it continues to play the role for which it was created, that is to support housing policy.

[Operator]

The Q&A session has now ended. For the final comments, I would like to turn the floor over to the CEO, Mr. Eduardo Fischer.

[Eduardo de Souza, executive]

Well, thank you. I believe we have covered everything regarding operational aspects of MRV, especially what's going on now and how we responded, and we responded well to the pandemic. I would just like to go over one point that we didn't talk about, and there was a good disclosure in our release regarding ESG.

Two things are happening during this pandemic. My digital migration much faster. The companies are digitally accelerated in an unthinkable way. And -- but the same is going on with the ESG topic. Here, at the company, we see that people, investors and shareholders are requesting that. And this won't change. So this is a way for us to show what we have been building on this topic in the last 20 to 30 years.

Rafael talked about our commitment to society. We quickly responded, helping society to provide support in -- of providing food and health, especially in the towns we're present. But there's a lot more than that going on in the company. We have a Vice President exclusively for ESG.

For 2 or 3 years now, we are apart from the sustainability index of the stock exchange of Brazil. We're now increasing the number of photovoltaic solar panels to decrease the carbon footprint. We offset the carbon use in the company. So there are many steps we've taken that, now that this topic has been accelerated, we can show that we're doing well on that topic. So we are proud of that.

But also, this is an opportunity for us to exercise our responsibility regarding ESG. That applies to the other companies of the group as well as to MRV, our volunteer work projects, our donation projects. A lot -- we're doing a lot in that area. And we wanted to give that disclosure in the opening.

This topic has become very important in the company. This has become a strategic topic in all the companies, and I don't see a change in that. And we're doing fine regarding that topic, and we'll invest even more on that.

So just to close it, ESG is a topic that we are a benchmark in the industry, and we want to be a benchmark in that -- in the market in general. And we did well considering the moment we're going through. Thank you all very much. We see you on the next call.

[Operator]

The conference call of MRV has now ended. We thank you all for attending, and have a good day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]