MRV Engenharia e Participacoes SA

BOVESPA:MRVE3

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, good morning. Thanks for standing by, and welcome to the MRV Engenharia conference call. [Operator Instructions] We'll now turn the call to Mr. Rafael Menin. Please, Mr. Menin, you may go on.

[Rafael Nazareth Menin Teixeira de Souza, executive]

Good morning, everyone. First of all, I would like to thank you all for attending our call to release the earnings of the fourth quarter '18. We are very happy with the indicators, be them operating or financial. It was the best year for the company. We did very well in all indicators. We had growth of 10% in net revenue, gross margin continues to be stable and MRV, as you know, has been showing performance with very low volatility, constant margins. So it is unique in the construction industry in Brazil. Another key aspect is that our profits continue to grow. The company grows but extensive grow at the lower level. With that, profitability and profit continue to grow.

And finally, on the first page, those indicator is very important. Our ROE, which was 10.5% in '16, closed the year at 16.5%, an extremely healthy indicator compared to the industry benchmark.

Of course, ROE had important growth because of the company's increasing profitability as I mentioned before, but also the retention in the company's balance sheet, when we had the merger of LOG and [indiscernible].

Another aspect to be considered is that MRV has been investing in the last 5 years in the land bank. Today, we have land bank with 50 billion with extreme quality spread in more than 100 cities, it is in which MRV operates. If you think of MRV's share of the market, it's only 12%. Despite it being the largest company in the segment, that's still very low, which shows the potential growth for our business.

On the other hand, when we take a look at the cities we have been for longer, for example, Uberlândia and São José do Rio Preto and Ribeirão Preto, our share is close to 70%. MRV has been delivering a product that stands out in the market. It is more modern, more sustainable and it delivers on time with extremely high-quality materials, which makes our products to be desirable in this economic segment. So the share is not a surprise to us.

Another aspect that is quite important is that we started a restructuring process in 2014. We started with the 2 CEOs, myself and Eduardo Fischer, and the plan has matured from then on. And the next step is the merger of some areas, we have already announced that a few months ago. And we have [ about here ] who has been with the company for 12 years developing beautiful work, and he is going to the board and Ricardo Paixão is going to take over Leo's position.

In addition to this move that we understand that's important for the company and really to bring aware to the company, make it more agile, dynamic and modern, we have implemented a role of innovations. MRV has been investing heavily in innovation. For you to have an idea, in '17 we spent BRL 35 million in innovation. And this year, in '18, we've spent BRL 43 million, with an increase of 22%.

On the other hand, the G&A ex went from 5.97% to 5.6%. So what's the message here? MRV is a company that is becoming lighter. We are diluting our investments, but digital investments are growing. And we believe this is the right move to go. Today, I can say that the MRV is the only [ Consultec ] in the world market.

We have very important investments in hardware, in the way we build the properties more automated, more industrialized, but also we invest in how we relate to our customers, from the time they buy their property to the follow-up during construction, to transfer credit to banks and post construction. So it is the only [ Consultec ] that is a technology construction company in the world.

And we know that our clients are young. Consumption habits are changing, and MRV is preparing to offer to clients, within this full housing platform, different ways of consuming properties. They will be able to buy a property or perhaps rent property or maybe buy into a consortium pool. So this is how investments are going to be crucial for us to have the flexibility to offer the product clients will want at any point in time.

And another important aspect is working in squads. Today, we have several squads going on. This is a modern, assertive agile model of operation and -- which is not very much used in the industry in which we operate. And once again, we are ahead in the digital transformation process.

Another thing to highlight and that has to do with our concern with customer experience, we have reached an NPS of 43, and we want our NPS to continue growing in the coming years. We know how important our product is for customers based on 12 hours consuming our product. So having an experience that is positive is crucial for the success of our business.

Another relevant aspect, and I have already showed that before, is the [ NSBP use ] and MRV will continue to operate in the economic segment but assessing other funding sources. [ NPS ] is healthy. Last year, we've realized a positive investment in the citizens' interest rates that were about 11%, plus interest rates are now at 8%. So we realized that the market approach, it's still lagging behind. And MRV, once again, wants to introduce new business models, highly modern product for this market niche. That comes right after Minha Casa Minha Vida program. And just an indicator, 5% of the launches in 2018 were in the segment, and this is going to be growing. We want to get to 60,000 units a year, out of which 10,000 are going to be at midyear, which prices is about 250,000 compared to Minha Casa Minha Vida, which is 150,000. So at some point in the coming years, the 60,000 product will be implemented. And this year, of this segment, it's going to be about 25% in volume of sales for the segment.

Another important aspect is that the company got 40 awards in 2018: customer experience, digital, the investors, sustainability, so we are very proud. The MRV team is very proud of having been awarded 40 times in the year.

And finally, I would like to mention that the first 2 months of the industry brought some setbacks. This is normal when there is a change in administration. So the month of January was not very good for the transfer of credit. So February started to coming back to normal. And according to the instruction released last Friday, we expect that as of March, funding goes back to normal.

So the quarter should have a very small impact with regards to a transfer of individual credits to banks, and we are feeling that '19 is a year that starts with a robust pipeline in term of launches. We expect to launch more than '18. And if we launch more, we are the best, better economy for the country, we can sell more, transfer more customers to banks and build more units. In doing so, we should have greater revenue and profit and broad indicators have better levels than '18.

Now I'm going to turn the call to Leo Corrêa.

[Leonardo Corrêa, executive]

Good morning, everyone. First, I would like to thank you all for attending the call. This is the last call of MRV as a CFO. I'm going to continue on the company day-to-day for a very long time but at the level of the Board of Directors. Ricardo Paixão is taking over my position. He has excellent training and education, focused on the area of processes, which he acquired more before coming to MRV and he has been with us for 11 years at -- being in different areas of the company, knowing the company in details and he had been already working as IR Officer and CFO for 2 years. So we are going to have a very smooth transition of letting people accommodate in their different positions and optimizing the company's financial management even further.

Rafael talked about the financial indicators, specifically our ROE, so I would like to address other topics. And I would like to draw your attention to the chart that we have in our earnings release. Capital structure, we returned BRL 3.2 billion to our shareholders, which is a lot higher than what was allocated in the capitalization structures. With that, we have achieved our customer satisfaction but also have been compensating our shareholders. In this context, we paid out BRL 456 million in dividends in '18. And perhaps a change that you haven't noticed that is important to highlight. For many years, we have been capitalizing about 50% of the results. Now we are changing the proposal. We choose to increase the payout to 75%. The message is objective and clear: the normalization of the economic activity in the country aligned to optimum capital management enables us to continue growing and making available a greater part of the results to our shareholders.

I thank you all for the support for many years. And now we are going to open for the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Luis from Credit Suisse.

[Luis Stacchini, analyst]

I have 2 questions. The first is with regard to your payout. Leo mentioned a bit about that. You are speaking of increasing it to 75%. I would like to know if this increase can be considered recurrent. Last time, you increased to 50%. You had already been practicing the 50% for a long time. And based on this payout, could you say that the pace in the buying of land is going to be a bit more moderate from now on? And the second question that I would like to ask, still with the FGTS budget. And you said that you're probably going to get back to normal as of March. We have an interview last week about that. So what makes sense in terms of impact of launches and transfers to banks this quarter, if any? If you are thinking of already have greater number of launches post carnival. So if you could talk a bit -- I guess a bit more color with that regard.

[Eduardo de Souza, executive]

This is Fischer. Well, first payout, your first question. We have been talking about that for some time now. When we migrated to 50%, we started to execute that. Our level of leverage is low. Every quarter, we reinforce the points that we generate cash. We have been generating cash for 26 quarters in a row. So it does not make sense to have a position that comfortable and not paying out dividends. So this is a sign that our payout is growing, and it tends to be recurrent. It's a new level as of now. As for land bank, we have already mentioned that in those indications, we have made heavier investments in the buying of land in the 4, 5 years until now. The market was doing well, and it made sense to make those investments. As of now, we are going to more think of replacements. Rafael mentioned that we are aiming at growth, so the trend is for the land bank to grow slightly compared to what we are launching, but at a level that is lower than what has been in the past 4 years. So I don't know if it's -- we're going to buy a bit more then we are launching, but not as much as we were in recent years because of market opportunities. And your last question about the workers' compensation funds, the FGTS, we had a bit more impact on January. February closed yesterday at a much better level, not back to normal, but better than January. And we expect at even because of the news on Wednesday that March is going to be quite robust. And that somehow offsets a weak January. But more important than that, we have to look forward at the level of rationality that we have in this government that understands the importance of housing in terms of employment, payment of taxes. The government understands that the industry needs investments and the project has to go on. And I think the actions as we sort of reflect on that. So I'm quite optimistic about the remainder of the year. Rafael said that in the beginning of the year, we want to deliver growth. And I think the news this week are proof of that. So we are quite optimistic for the remaining 10 months of the year.

[Operator]

Our next question comes from André from Citibank.

[André Mazini, analyst]

Well, first, congratulations, Ricardo Paixão, for -- of the changes in the company. My question is a bit a follow-up on the last question about Minha Casa Minha Vida Tier 2. There was a bit of news saying that on the newspaper, that the Tier 2 investments will be a lot lower this year. I don't think that it will come to an end, but if it were the case, I think that today, you have some 70% to 80% of your volumes on Tier 2. If Tier 2 is ended and investments go to Tier 3, how would be your speed of sales? I think less people would have the money to buy the units because you would have less subsidies. So hypothetically speaking, if Tier 2 is ended, how do you work with the scenario?

[Eduardo de Souza, executive]

Well, I did not read the news that you're mentioning. But what's happened at the turn of the year, there was higher [ returns ] to Tier 1.5. It is true, it's a bit tougher. And what you're going to see is that the share of 1.5 in our portfolio, the decrease in which honestly to me it is good. 1.5 tier have disadvantages. But in the long term, it kind of unbalanced the gain, especially with smaller cities in the inland of the state of São Paulo, it consumed too much subsidies. So I think that for a balance of the system, this hardening of the 1.5 is positive. But I do not see any restrictions to Tier 2. What happens is that 1.5 will migrate to 2. And I think that what you're going to see is a higher share of our operations in Tier 2. And we have part of our operation in Tier 3. So I do not see the movement. I don't know if I answered your question, but that's what I feel.

[André Mazini, analyst]

Okay, Fischer. It's quite clear. If you could talk about the speed of sales of 2 and 3 in the delta in which one of them?

[Eduardo de Souza, executive]

They are very similar. Obviously, the Tier 3 is slightly lower, but the family income for 3 is higher. So we will work on Tier 3 in capitals where you usually have a greater demand. So if you think of MRV's average, they have very similar numbers. In São Paulo, the speed of sale [ of each ] is a bit higher but not really standing out. I would say that the average is quite equivalent.

[Operator]

Our next question comes from Victor from Bradesco.

[Victor Tapia, analyst]

Well, first, I think I would like to ask you, almost as a follow-up on the first question. The answer was a bit qualitative. In terms of hard numbers, what do you think the impact can be for the first quarter?

So we have launches that are coming a bit below, so I would like to know. For the quarter and for the year, what do you expect in terms of margins, inventory levels, recurrent inventory, inventory of finished units and G&A if it's going to continue to go down? And another thing I would like to know, if you could give us a bit more color is about the write off in the pro soluto. If you could tell us how much you have that is more than 12 months behind that could be written off in the next 12 months.

[Ricardo Paixão, executive]

Well, this is Ricardo speaking. Okay, first, the write-off. I have the BRL 13 million completely provisioned in our balance sheet, no impact whatsoever. So what we did is that we got [ always solid ] that had matured more than 2 months -- 2 years ago, that is 24 months, and written and rolled them off. Impact, 0. And this is what we are going to continue to do. As for the dilution of SG&A, we want to continue to dilute our SG&A. What is important is that sometimes we compare to some companies that are listed. And now with SG&A the classification of expenses is different in between companies, so -- and you can get that by adding SG&A and other operating expenses, and if you do that, you're going to see that we are the most effective in the industry. So we are going to continue diluting our SG&A; ready inventory, stable, 9%, with a nominal growth of BRL 80 million is due to the closing of the ventures that were funded by Banco do Brazil, especially in the Northeast. And there is an upside to it. When we sell this, and we transfer to banks, it is cash generation direct to the company. And the other point that you asked, first quarter impact on launches, we have no impact on launches. We cannot disclose numbers so far, but we are going to close a first quarter of '19 way above the first quarter of '18.

[Victor Tapia, analyst]

Okay. Just a follow-up with provision of what you have in your portfolio. Could you break down what is more than 12 months behind? Can you provide some kind of disclose?

[Leonardo Corrêa, executive]

No, this is not a disclosure that we will make. But you are going to see every time that is past 2 years is going to be written off. But more important than write-off is the provisioning policy that we have that remains the same. So the net amount again will have no impact on our numbers.

[Operator]

Our next question comes from Jorel from Morgan Stanley.

[Wilfredo Guilloty, analyst]

I have 2 questions. The first, the recent numbers of Abrainc is saying that launches for -- these grew by 57%, reaching 85,000 units. In São Paulo, there was a threefold increase in the last year. And the same time, the investments of FGTS are decreasing. We thought today that you reassured that you wanted to get to 50,000 units in Minha Casa Minha Vida. Given these facts, I was trying to understand, do you think it seems difficult to reach this target before competing more for funds? My second question. You mentioned that your share in the market today is 12% and that you want to increase your market share. Does it include Tier 1 and what is your target?

[Rafael Nazareth Menin Teixeira de Souza, executive]

This is Rafael. Okay. What's happening really is that we have a higher volume of launches in São Paulo for the Minha Casa Minha Vida program. So now MRV have the advantage of operating throughout results. So some cities will have more competition, others will have no competition at all. And that's the beauty of our business. Is it complicated to do the operation without geographic dispersion? Yes, it is. But we did our homework. We are more resilient than many of the market and market shares like this. In some cities, we have a market share of 67%, that's quite high, but other important cities, including São Paulo, Goiânia and Curitiba, we have a market share that is not as high. So that shows that we have room to grow. Aiming at Minha Casa Minha Vida and that's quite reasonable. We bought some 14 on [ alembic days ], very qualified throughout Brazil and as we launched s better product, with a better location in cities where we have a lower share, we will naturally sell more, even supposing -- and I agree with you, the size of Minha Casa Minha Vida that is 400,000 units a year, will be flat. Even if the economy gets better, there is an evolution in income and employment. But the demand is higher than the funding, which is good for us. So our homework has been done. And from now on, the homework is to launch more in the cities in which we have a lower share. Let's see how interesting this is. We have this target of 45,000 units, a bit more than that. We want to grow little in Minha Casa Minha Vida and get to 50,000. We don't believe this is very complicated. We are going to 46,000 to 50,000 in many cities. We have a fantastic land bank with a very low share and grow in market segments that are not as representative, which is the floor of the FGTS. So little growth in Minha Casa Minha Vida despite the low share and our higher-growing FGTS, which is not apt with the same profile, a slightly larger apartment, slightly better location, but we are very comfortable that these 2 movements will happen and we will be successful. And finally, Tier 1 is not our G&A. We are not going to work with Tier 1. We want to work on Tiers 2, 3 and FGTS. And just to add, Jorel, our growth of market share is going to be compared to a smaller informal contractor. Caixa Econômica Federal is controlling quality more. They received complaints, and that affects their portfolio. They have a portfolio of apartments for 20, 30 years, which is the time of the mortgage, and they are trying to improve quality. So the small contractor that are too informal, that don't collect taxes and do not meet the best construction parameters are probably going to go down, and we are going to gain market share from them.

[Wilfredo Guilloty, analyst]

Okay. It's very clear. So your market share, this 12%, is it for Tier 2 and 3 and not 1, 2 and 3?

[Rafael Nazareth Menin Teixeira de Souza, executive]

It is 1.5, 2 and 3. These are the 3 segments that are market segments. An important data that we always talk about, there is this concern with treasury and [ UCU ]. Last year, [ UCU ] provided BRL 9 million for Tiers 1, 2 and 3. But this is a market of BRL 80 billion. So you'll see, BRL 900 million of investments from the public sector to a vis-à-vis of BRL 80 billion, so we are very comfortable. The program is important for the government. It is directly and indirectly responsible for 1 million jobs, for the GDP and what we see, the new administration is the will to do more. Funding today is a barrier, but you have a leader that is going to work with that segment one smart app, FGTS, so we are optimistic. Economy went through a horrible period. MRV went through the crisis, growing little but improving margins, gaining share. And as the wind starts to blow in our favor, our process of getting to 60,000 is completely doable again. MRV has geographic presence, know-how, differentiated product, investment in technology, consolidated brand, our land bank of lending of BRL 50 billion. So the company has the confidence it will deliver in the midterm.

[Operator]

Our next question comes from Marcelo Motta from JPMorgan.

[Marcelo Motta, analyst]

I have 2 questions. The first is if you could talk about your gross margin trends in the beginning of the presentation. It continues to be quite stable year-on-year. But within the year, we see it slightly higher than going down in the second term. It may be explained by the Tier 1.5. Given that we are not going to see as much 1.5, do you think it makes sense to expect margins to go back to the levels close to 37%? So what is the gross margin trend for the year? And also, if you could talk about your experience with funds from FGTS. Considering the vis-à-vis this year, you would be talking about BRL 1.5 billion, BRL 1.6 billion in investments, would you transfer all that to Santander? What do you think of growth for this line of business?

[Ricardo Paixão, executive]

Okay, Marcelo, this is Ricardo speaking. First of all, gross margin, indeed, level 1.5 Tier impact our product significantly. We didn't have a product that was exclusive to the 1.5 tier. It was similar to Tier 2, and we would adapt in some cities for 1.5, and that affects the gross margin. We're probably going to be -- to have a much lower rate of 1.5, and we should expect resuming the gross margin for this year, perhaps not as high, but certainly for next year. As for the FGTS funding, we are just starting. It's a pilot that we have with Santander Bank. This is a product that we have been working with Caixa Econômica for some time now as they have been our partner for long. It's not probably going to be BRL 1.5 billion, BRL 1.6 billion, for this year. This is a plan for the next 2, 3 years to get to 25%.

[Operator]

Our next question comes from Renan from Santander.

[Renan Manda, analyst]

Without going into much detail on the numbers, I would like to know what are your sales like in the beginning of the year. You reviewed your curve in the end of last year, and I would like to know if any changes in parameters have affected your speed of sales for January and the sales that you are completing, if they have more pro soluto or not? So what is the situation after the changes in -- at the end of last year?

[Rafael Nazareth Menin Teixeira de Souza, executive]

This is Rafael speaking. We are in the middle of the first quarter. It's been 2 months, so a bit more than mid-quarter. The behavior is good. Sales are good. The changes in Tier 2 were very small. In Tier 3, no changes. Tier 1.5 was indeed a bit more impacted but because it accounts for a lower share in our portfolio, the impact for MRV is really very little significant. So we expect a first quarter that is good. First quarters are never as good as the fourth quarter when you compare the first quarter to the fourth quarter. In the first quarter, you have the current volume of everything and the year actually begins after that. So -- but we can say that the main lead, the visits to our stands, we are having a very good first quarter, better than last year. And again, we are quite optimistic. We expect a year that is better than last year. Consumers want to buy more. They feel more confident. Employment and income will still grow little but will be better. And once again, the company has a small share. We are working many cities with a very qualified land bank with very good product, and we still have a small share. We haven't explored the market fully. All that said, we believe we have very high chances of even -- of having a year even more positive than '18. And the year started well. I think transfer of credit to banks will be better in March, will resume to good levels. And with 2/3 of the quarter going on, we cannot say it's going to be better or worse, but it seems that this is going to be better than last year. And pro soluto, finally, because we were working with clients with a slightly higher income than Tiers 2 to 1.5, our pro-soluto roles have remained unchanged. So we don't expect any changes in pro soluto. Today, we have 13% of the vis-a-vis in pro-soluto, and I think this is what is going to remain for the rest of the year.

[Operator]

[Operator Instructions] We are now closing the Q&A session. We are going to turn the call back to the company management for their final consideration.

[Eduardo de Souza, executive]

Well, this is Fischer speaking. One thing I said that about 2018 that we would have shorter cycles, and the results of the fourth quarter show that with a bit more strength. We are still selling at a higher speed that we build. The numbers are getting better throughout '18, and the revenue in the fourth quarter show a successful initiative. The pace of construction is increasing but below the speed of sales. And with that, we can reach everything that Rafael said in the beginning, higher dilution, better returns. That is our objective. The year starts well with record people visiting and looking for our products, the launches in the fourth quarter will be better than the first quarter of '18. And so we are starting the year quite optimistic that we are going to deliver a larger operation than '18, and we will enjoy the benefits that this will bring us. We thank you very much. And I am going to turn the call back to Leo just for the closing. And thanks for attending.

[Leonardo Corrêa, executive]

Well, once again, everyone, I would like to thank you all for joining us in this call. I would like to thank Rubens who invited me to be Executive VP of the board. And remember I'm going to continue on the day-to-day of the company following the work of Ricardo being available to you all. We have the contact. You have my contact, and I'm still available if you have any questions about the business, about our prospect. If you want to discuss strategy, what we are going to do, we are here for you. Thank you very much.

[Operator]

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