MRV Engenharia e Participacoes SA

BOVESPA:MRVE3

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, good morning. Thanks for waiting, and welcome to the conference call for analysts and investors of MRV regarding the earnings of the third quarter 2020. Today with us are our CEO, Rafael Menin and Eduardo Fischer, as well as our CFO and IR Officer, Ricardo Paixao.

[Operator Instructions] Now we are going to turn the call to Mr. Rafael Menin, the company's CEO. Please, Mr. Menin, you may go on.

[Rafael Nazareth Menin Teixeira de Souza, executive]

Good morning, everyone. It is a pleasure once again to be with you in our MRV earnings release. Today, Fischer, myself and I are in the same room, and we all wearing masks. So our voice is going to be a bit muffled.

So let me talk a bit about the company, to talk a bit about the past, then we get to the present and the future of the company.

We had a first cycle after the IPO of -- which was from 2007 to 2013, which was a cycle of exponential growth. We went from 30 to 160 cities. So it was no penny growth, very differently from other listed companies, and has been quite profitable. Despite all difficulties, we grew 100% a year. And MRV really trailed this first cycle quite successfully.

And then there was another cycle, which was very important from '13 to '18, when we deleveraged the company, we invested on people, processes and IT infrastructure, and also on a very robust back office. With that, the company became very prepared and mature to operate in the huge geographic area with a huge volume, 40,000 apartments a year, which until then was a volume that no other player in Brazil had performed.

But more important was the cycle that started in 2019. That was a cycle whose characteristic was an expansion of our product portfolio in the same geographic regions, important growth in our digital agenda, again, very robust agenda and very different from what the industry is talking about. Our agenda comprises the entire cycle of relationship with our customers, which starts at the time of sale, then monitoring construction, turning the key, and more important than that is how we interact and will interact with our customers while they are already living in our living units, which is the most valuable time in which we are investing more and more in terms of money, efforts and human resources to really change the housing experience of our clients.

Also worth noting is AHS, which is a subsidiary in another country with a much lower capital cost that quarter-on-quarter has been gaining a higher relevance in our future strategy.

And why are we so optimistic about our project? As I said, it started back in 2019, and it's gaining more and more momentum. We believe that Brazil and also the U.S., both countries will have quite well-behaved interest rates for the next 2, 3 years. And that transforms completely, especially in Brazil, which is a country that has lived with high interest rates. It transforms complete our market and opens avenues of opportunities. Lu is a company that depends on lower interest rates, and this is something that we are seeing today, housing that meets the needs of the market. This is a company that's been quite successful. We see no competition, at least not in the close future. We are really in blue ocean here.

AHS is the same thing. We have the capacity of generating assets with good yield, with low interest. Ratio between interests and what we sell and what we get from the market makes us be in a very unique positioning in the American market, because it's a completely vertical company that brings with it the know-how that was acquired by MRV in the last 40 years. We want AHS to get 5,000 units by 2025. And in MRV, we have, for some time now, an operation of 40,000 units. So certainly, it will have a competitive edge in the cycle of growth that started again last year, which -- the joining of MRV. In fact, we completed the operation in the first quarter this year. And AHS will certainly benefit from the know-how of working at such large-scale and such large geography as we have been doing.

So this is what we see. Our MRV Corporation Group has a unique capacity of generating high-quality assets. We already operate in 170 cities in 2 different countries.

Now I'm going to turn to Ricardo Paixao that is going to talk a bit more about our financial and operational indicators. And then we open for your questions. Thank you.

[Ricardo Paixão, executive]

Hi, everyone, it's a pleasure to talk to you about the results of MRV in the third quarter. I would like to give you a few numbers in operations. We have a historical record of net sales, almost BRL 2 billion, with growth of 41% year-on-year and 8% compared to the second quarter 2020. This quarter was also marked by a recovery of launches. We got a total of BRL 1.9 billion of launches, 14,000 units, 1% growth year-on-year and double the number we achieved in the second quarter 2020.

Also the sales over supply reaching 21%, the best number since 2014. We also had transfer -- record transfer of credit to the bank, 13%, a growth of 5% compared to the second quarter and double last year, an evolution of 21% units produced in the quarter compared to the second quarter of '13 with 9,500 units. As demand and sales are very high since the beginning of the year, the company started several work in the third quarter 2020, and we have other constructions to start in the fourth quarter.

A bit about the financial highlights. We had the largest operating revenues of the company in our history, BRL 1.76 billion, which is 12% higher the same period last year. Also the cash generation of the company visions with more than BRL 300 million in the quarter, making net debt to payout ratio to 3.3%, obviously, positively impacting all our covenants. An increase in net income of 27% compared to 2020, and in line with the same period last year.

Also, we had -- we've raised BRL 500 million with 5-year time bullet, going back to our average term of debt for 24 months, in a very comfortable position.

Now I'm going to talk about the numbers of our subsidiaries. Luggo has been increasing land back with 21,000 units. We also had 72 million launches and BRL 22 million net sales in the period. Luggo in the closing of between the second and third quarter, we had the third development sold, but in only 5 months for us to reach 95% occupancy. And then we had the rental of our final development with 32% of our units leased. In AHS, we have 1 project completed, now with 7 projects, and we are for sale.

And now I'm going to open for your questions. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from Enrico Trotta from Itau de Valores.

[Enrico Trotta, analyst]

[Foreign Language] I have 2 questions. First, if you could give us a bit more color about cost pressures in the sector? First, understand the trend of gross margin. Your EBITDA margin is basically flat. So I would like to know what you see in terms of cost pressures for MRV. Also the Minha Casa Minha Vida program? Casa Morelia is a bit more difficult for us to passing on the pressure for costs. So if you could talk a bit about that. I know that you are a bit more outside the Minha Casa Minha Vida because of Venta Morelia can perhaps offset costs.

The second question is a bit about the competitive scenario market share. You're saying about market share in a Minha Casa Minha Vida and Casa Venta Morelia. I would like to know where you're gaining share. And also how you see the competitive scenario, more specifically in São Paulo, given there are lots of players talking about growing and being super excited about the market? These are my questions.

[Eduardo de Souza, executive]

This is Fisher. Okay. So let's start with our first question. Cost pressures. What do we see today in the company? Well, indeed, the industry is very much active. And what is going on is a crisis of supply and in some materials. And we saw 2 movements. First because there was a material delay, which really did not impact our production, and then a certain pressure for an increase of prices. That is happening, again, in some isolated materials. Of course, we are engaging our best efforts to gain productivity, efficiency internally. Several projects going on for us to offset somehow this. So I do not say, at least not in the short term that we are going to have a negative impact that will cause us to have a problem to recover margin. Of course, that our scale helps. And we have a better purchasing power.

And so we are the last to suffer the more adverse impact. So there is some pressure, but I do not think that they will lead us to lose margins for the coming years. And I think that in the first quarter of next year, this pressure is kind of going to give away. So I think we are going back to the normal environment.

As for gross margins. We talked a lot about that in the last 2 quarters. So what happened? Along the pandemic, we had a more robust sales effort. And with that, we had a slow drop in -- low drop in sales -- in margins, I'm sorry. And of course, this is something that is going to be seen in our balance sheet for some time. I do not see a major variation of margins in companies in the industry. It shouldn't happen. The regulatory agencies should not allow for that. But anyway, we see the margins of that are a consequence of a more aggressive sales effort during the pandemic. And that should be seen for another perhaps 2 quarters, still inside 2021. And as of then, you will see margins going up, probably as of the second half of next year. And I don't see it going further down. This is basically what you're going to see in terms of margins.

As for the competitive scenario and gain of market share, what resize that indeed, in the second quarter, in the very middle of the pandemic, several competitors, especially the smallest, kind of held a bit their positioning and left the market took a halt, and we did gain market share. We want to keep it. The scenario is changing, the small -- the mid-size competitors that had taken a break are coming back but in a tougher scenario because we did occupy some of these spaces, and they will have to compete with us back.

So we do see a bit more of a competitive scenario compared to 3, 4 months ago, particularly in some markets. The England state of São Paulo is a bit more competitive market traditionally. So we see it happen. But again, when you think of supply and demand, well, we continue at levels that will reach during the pandemic. So our challenge today is for launches to keep at a high pace. The fourth quarter should be a strong quarter of launches for us to keep the market share that we were able to accomplish. This is our strategy. I hope I have answered all your questions.

[Operator]

Our next question comes from Gustavo Cambauva from BTG Pactual.

[Gustavo Cambauva, analyst]

I have a few questions as well. Well, first, with regards to your gross margin. If you could elaborate a bit what kind of margin you have by segment? So you have SBPE, you have Luggo, so -- and also growth outside Minha Casa Minha Vida. If you think this is something that is going to pull margin up? Or if the margin for your products is similar to what you have in Minha Casa Minha Vida?

And the second question is about your land bank. Well, you do voice expectation of 8,000 units have in one side, half the other. But in terms of land bank, you have about 2/3 in Minha Casa Minha Vida and 1/3 outside. So I would like to know if you're seeking for new land for these products outside Minha Casa Minha Vida. If you are finding a bit harder to buy land or not? And what capital you would have to invest to bring land banks to a 50-50, which is your launch -- target in terms of launch.

[Ricardo Paixão, executive]

Well. Let's start, gross margin. Well, the gross margin in the economy -- economical segment is about 30%. Although we are reporting a slightly lower margins historically, this is what we have, 32% about this magnitude. We expect to recover this margin in the economical segment as of the second quarter -- second half of next year. And I think that at some point, we are going to get from 22% to this level that we believe is quite suitable.

As for the segment that we call low mid, that is 1 tier above Minha Casa Minha Vida, the margin is slightly higher, given that we do not have price limits. So we have a bit more competitiveness amongst banks. Private banks work at the segment, even with the transfer of clients during construction, which is very important. So we believe that these developments can have margins slightly above Minha Casa Minha Vida.

Then in the Luggo segment, gross margin is lower. But on the other hand, we do not have sales expenses. So the returns were very similar to what we have with Minha Casa Minha Vida. And then over this -- an area that we have a higher gross margin, but the trade-off is that we have longer cycles. AHS, again, gross margin very similar to Minha Casa Minha Vida. You're thinking of selling units with a gross margin of approximately 29%. And again, sales expansion -- expenses are lower. So I would say the return that we have on AHS in our portfolio, AHS is a company that is going to bring the highest contribution margin, the highest return on investment.

Land bank. For us to get to the 80,000, what happened in the last 4 or 5 years is that we bought about 80,000 units a year, basically in Minha Casa Minha Vida, and we launched about 40,000. So the land bank is quite robust. Today, we have a land bank perhaps a bit above optimum in Minha Casa Minha Vida. But on the other hand, we have a slightly lower land bank in the other segments. So the dynamics from now on is going to be to buy a little less compared to what is going to be launched in Minha Casa Minha Vida, and to buy a bit more than we'll launch in the other segments.

So in terms of total capital allocation, I don't think we are going to see any important change compared to the last 3 years because we are going to allocate less capital in the economical segment and a bit more capital in the other segments. As for competition, indeed, we have some cities, São Paulo being the main one, the metropolitan region of São Paulo is the region with the most competition.

Elsewhere in Brazil, low competition in terms of lands, the companies that were recently listed, all of them except for one, our focus on the metropolitan region of São Paulo. So we don't see the competition going up elsewhere. Even in the Luggo segment, and this new line that we are expanding, we chose 30 Brazilian cities to work in these 2 segments, and the competition in most cities is quite low. So I believe we are quite well positioned to serve this new wave of Brazil.

[Operator]

Our next question comes from Nicole Inui from Bank of America.

[Nicole Inui, analyst]

I have 2 questions. First, just going back to funding. You mentioned that you're going to pick up funding in the next quarters. So I would like to know, for the first quarter and next year, how much you're planning to launch in the programs. And my second question is about AHS. I know that you're already expanding to other states. You are in Georgia and Texas. I would like to know what is the stage of this project. And do you have plans to expand to other states and which ones?

[Ricardo Paixão, executive]

Nicole, this is Ricardo speaking. Well, first, with regard to launches next year, what we see? Launches outside Minha Casa Minha Vida are going to gain momentum. So we expect approximately 25% of launches outside Casa Venta Morelia, 75% inside, again using the workers compensation fund. And then several other lines, the new brand, low mid, Luggo and AHS. All the other lines, except for the ones that operate with the workers' compensation fund. AHS, what we see is that we are in South Florida, which is an excellent market. We are expanding now to Dallas, Texas and also to Georgia. So I would say, in the next 2, 3 years, we are going to be focusing on these markets, probably gain a bit musculature in the cities that we are going in. And then we might go on to other 2, 3 states, but a bit further down the line.

[Operator]

Our next question comes from Ygor Altero from Santander.

[Ygor Altero, analyst]

Also 2 questions on my side. First, to talk about sales. Your sales continue to be quite strong, hitting record in the third quarter. So I would like to know what you see in terms of trend for the fourth quarter? And then if you could talk about the different performance or the performance in the different regions. If you could break down your performance, especially outside the São Paulo market?

Second, I would like to know the evolution of your pro soluto portfolio. We know that unemployment is a threat for the coming months. So I would like to know how you see this portfolio in the future.

[Eduardo de Souza, executive]

Hello, this is Fischer once again. Okay. Sales, well, as I mentioned in the previous question, what we see today is that the strong demand, the stronger demand that came up during the pandemic is here to stay. So we see a number of leads at a very high level. So the trend has not changed. There is a special challenge of ours, which is to supply the company with enough inventory to capture this demand. Perhaps this is our greatest challenge. All the tools that we created in technology to capture clients faster, to have a much more fluid faster sales have been working well. We did it well in the third quarter, and we want to launch even more in the fourth quarter. So to beat the challenge, the demand continues to be quite strong. So I do not see why we should lower our pace of sales because, again, high demand and more supply.

Pro soluto. Well, this is something that we are always talking about. We have engaged all efforts, including technological efforts for that. When our client comes in, we analyze all the ratings with artificial intelligence to grant credit as responsibly as possible. So we see the behavior of our Pro soluto getting better, and we have really engaged all efforts for such.

And another thing that is important. This diversification of products, income, funding is also going to be very important in this aspect. You get clients with better income, with a more special funding. It leads to better behavior. We grant less pro soluto, and we have less delinquency. So a long time as our strategy to diversify our portfolio, it starts to gain momentum. And Paixao talked about what we expect to launch for next year. That is going to be a positive effect on our balance sheet. So just to mention the 2 variables, I mentioned. There's lots of work to do, but we think that the management of this portfolio is going to be quite positive. So those 2 pillars are going to take us to a better place in the future,

[Operator]

[Operator Instructions] Our next question comes from Jorel Guilloty from Morgan Stanley.

[Jorel Guilloty, analyst]

I also have 2 questions. The first is your cash position. I would like to know your likelihood of paying higher dividends vis-à-vis your results? Or if you're going to keep cash for AHS or other initiatives? And the second question, I would like you to talk about, again, the different regions. We know that São Paulo is a strong market today. Is there any other regions that you see a strong demand? So could you give us a bit color on that?

[Unknown Executive]

Okay. Yes, your audio was stopping a bit, but I think the first question was about the payout of dividends. Okay. Well, the company is well known for being an excellent dividend payer. We always try to pay out 50% dividends -- 50% dividend payout compared to the net income of the previous year. Last year, we had a payout of 75%. This year, we expect it to payout 50%. But because of the pandemic we discussed in the Board, it was decided to pay the minimum mandatory dividend. But in view of what's going on, the strong cash generation, although we do have some uncertainty for the future, we should go for a payout of 50%. I do not want to commit that we are going to -- especially for the fourth quarter this year, but probably for the first quarter next year, I think we can go back for the payout of additional dividends.

As for the capital to be allocated in AHS, well, we continue with the initial plan that was approved, $70 million to invest in the beginning of next year, AHS. I don't know if you were in the call, but we have expectations of the having less in AHS assets in the short term. So we're probably going to have a sales stress for next year. So with sales and the allocation of capital that we agreed from start, we are going to continue with the plans of growing with AHS.

[Rafael Nazareth Menin Teixeira de Souza, executive]

And this is Rafael. As for your second question, with regards to sales activities, what we see is that sales are really picking up. We do not have any market that is really outperforming or underperforming specifically. In Minha Casa Minha Vida, we see very good performance. Demand continues high. So again, there is not that one special city that will outperform or underperform all the others. Performance is quite well balanced and strong everywhere.

[Operator]

Our next question comes from Thais Alonso from Citibank.

[Thais Alonso, analyst]

Congratulations for your results. I would like to ask about Urba. What's your prospects for the future? And what is the potential size it has in the future? And the second question is about the new brands to be launched. Could you talk a bit about those new products? Or what is going to be like? Is it focused on the workers' compensation fund segment?

[Ricardo Paixão, executive]

Thais, this is Ricardo, once again. Start with Urba. What we did, in fact, is that we grew Urba land bank in the last quarter, already targeting our growth plan. This is quite aggressive growth plan. We expect too long prolong to next year, from 3,000 to 4,000 units, and we see the potential of this business as very high.

So within our internal business plan, this is not guidance, it's just our business plan, we estimate to get to 15,000 lots per year in the next 5 years. So this increasing land bank meets our expectations to increase loans for next year and for the coming years, but we want to stabilize at 15,000 in 5 years. And some of Urba projects are already close to the launch. So there are the things that are under design. They are much closer to launch, which is important for us to meet our short-term growth plan. In the long-term plan, mix is more advanced project, with land to be acquired to change what kind of usage they can have.

[Eduardo de Souza, executive]

And this is Fischer to talk about the new brand, which is to be launched soon. We believe there is a vacant space at an income level that we started to operate when we went one notched up Minha Casa Minha Vida. So I'm talking about property from 450,000 to 500,000 in the São Paulo market, for example. With this new interest rate demand, this is a huge market with strong repressed demand because of years of high interest rates. And that might have a huge potential. So we are working on that.

We are exploring this market, try to understand it better. Since we started with the initiatives outside Minha Casa Minha Vida, we understood we had the capacity of creating an -- trust your partner, which is important. Operationally speaking, we are going to take our MRV know-how in production and scale to a higher income range. And we believe that we'll complement very well our platform as a whole. We have a breakdown of that in our release. And with that, we are going to get most income ranges in Brazil with view. From 2 minimum age to 11 minimum age, MRV has some kind of product for them. And we are going to do that with basis.

So we are not going to do it unprofessionalize it at. And we are going to work with specific cities. We listed some cities in which we can work this product. And we decided to create a specific brand for that, which is going to be something soon. And we are going to continue with our strategy to expand our platform. So that's the idea. We are very much encouraged what we developed inside that shows that it's quite interesting business, including in terms of margins, and it's probably going to be a line that is going to grow in the coming years.

[Operator]

[Operator Instructions] Our next question comes from [ Jonathon Country ] from JPMorgan.

[Unknown Analyst]

[Foreign Language] Congratulations on your results. I have 2 questions. One, about ROIC. If you think that you're going to recover the numbers in the past in the first quarter of next year in line with what you said in terms of gross margin. And then I wanted to know what's going on in your portfolio for next quarter.

[Rafael Nazareth Menin Teixeira de Souza, executive]

Jonathan, this is Rafael speaking. Okay. First, ROIC. We see a recovery of ROI because of our growth, Minha Casa Minha Vida performing well. So we are going to have gross dilution of expenses that is meant to have an impact on our ROI. The second stage of growth is going to come from the recovery of our gross margin. As I mentioned in the beginning of the call, this is probably going to get better as of the third quarter 2021. And our target is to get close to 32%, which is our historical average gross margin. So

by getting to 32% and further diluting expenses, certainly, ROI is going to go back to what it was 2, 3 years ago and even expands further. I'm going to turn to Ricardo Paixao to answer your question in terms of provisions.

[Ricardo Paixão, executive]

Well, Jonathan, provisioning, as you know, when the pandemic started, we were quite conservative and increased our provisioning because we did not know what was going to happen in the future. What we see is that delinquency is lower than what we had expected. And then there are some uncertainties in the macroeconomic scenario. We don't know what the economic activity is going to be like next year. We everybody expects it to be better than this year, of course, but we don't know how it will behave. So we are having a higher provisioning. Being conservative until we know what the macroeconomic scenario is going to be like.

[Operator]

We are now closing our Q&A session. For their final remarks, I'm going to turn the call to Mr. Eduardo Fischer. Please, Mr. Fischer, you may go on.

[Eduardo de Souza, executive]

Well, thank you very much. I would just like to highlight 2 points that I think are quite important in our strategy. Rafael in his opening talked about investment in technology, and what MRV did in past years in terms of robust investments, not only financially, but also in terms of headcount. I would like to say that this is a very relevant point in our strategy. In the past 5 years, we have been investing a lot year-on-year on digital processes. And quite often, what shows is the customer digital journey, which is important to us, and it's very strategic. But it encompasses the whole company process. It starts with the acquisition of land banks. We have active prospecting of the market, defining and screening the most important lands and providing the information to our real estate prospectus. It goes through sales, concession of credit, portfolio, everything performed automatically and increasingly precise. And it gets to construction.

We want to provide disclosure of this in our release. We have an innovation center in Belo Horizonte in partnership with Sinai. Since last year, we have a test important investments in construction technology. We are about to complete our first development in Campinas with a new production -- construction process. We are quite optimistic with regard to productivity gains and financial gains as well. It's already being in a rollout phase to the whole of the platform. So the development in Campinas already has interesting reputability. We are going to adopt that in 30 other developments in Brazil, an investment that started 3 years ago, and it might be MRV's new construction process in very while. It has to do with the investments in the supply chain that today work with predefined distribution routes, huge potential, everything developed in MRV innovation areas. And it goes to the front end to provide services in the postconstruction time, raising problems, statistics, knowing exactly who is going to provide services to whom to be as efficient as possible. Again, all that built in the last 3 years with heavy investments in technology. I know the market very well, and we are certainly the company that most invest and is more vanguard in different areas of technological innovation.

And an excellent example of that is Luggo. Luggo grew inside MRV as a start-up and is becoming a business that will add great value to the company. So MRV, if you think of all, the operational spectrum is a company that most invests that is in the vanguard of innovation in construction, not only Brazil, but everywhere. So we are very proud of that.

And another point that I'm frequently asked, especially in the coming months, is our role in ESG. That has gained important, especially in times of pandemic. We are an active part of the society in which we operate for more than 30 years. It has been so. We have robust investments we have an institute that already, worked with more than 30,000 illiterate about we are making investments to help the communities in which we are inserted during the pandemic, the whole company group. We are signatories of the global PAT. We are the only company in the East, which is the Stock Market Sustainability index. This is part of our target. We are truly engaged company, and we have been so for a long time.

So in a time that everybody is talking about that, we are a company of reference, not only in Brazil, but elsewhere. So these are the 2 things that I would like to talk. They are important pillars of our long-term strategy, a company that is focused on the future. And these 2 aspects that I mentioned are very important for our long-term strategy. Thank you very much. It was a pleasure to have here, and meet you again next quarter. Thank you.

[Operator]

MRV conference call is now closed. We thank you very much for joining, and wish you a good day.

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