Rossi Residencial SA

BOVESPA:RSID3

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the conference call of Rossi to discuss the results of the first quarter 2018. The audio of this conference call is being broadcast simultaneously over the Internet at www.rossiresidencial.com.br/ri. At that address, you can also see business the associated PowerPoint presentation for download. [Operator Instructions]

Before moving on, we'd like to clarify that any forward-looking statements made during this conference call as regards to business perspectives of the company, projections, financial and operational targets are beliefs and premises of Rossi's management as well as information currently available to the company. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties, premises because they refer to future events and, therefore, depend on circumstances which may or may not occur. Investors must understand that general economic conditions, industry conditions and other operating factors may affect the future results of the company and may lead to results that differ materially from those expressed in such forward-looking statements.

I would now like to turn the call over to Mr. Fernando Miziara, Financial Director, CFO and IRO of Rossi. You may proceed, sir.

[Fernando de Mattos Cunha, executive]

Thank you. Good morning, everyone. I would now like to read the message from the management.

As disclosed along the first quarter, the restructuring, financial and operational of the company continues in full steam, especially as regards to completion of the agreement that was entered at the end of March. One of the highlights of this transition process between the cycle of recent years, including the company's national geographic expansion and growth and the cycle that is beginning now in 2018, which will take us back to our origins by focusing and extracting the maximum potential of our core values, is in the simplification of the company's operating structure, especially in the regions that we consider to be strategic. We can say the biggest event of this quarter of 2018 was the termination of the Capital Rossi Joint Venture, a company of the group that used to operate in the cities of Manaus and Belém. In addition, we'd like to add the definite completion of our agreement with Bradesco bank. We don't need a cash disbursement. Rossi and Capital terminated the partnership by splitting the existing assets. And despite the evident impact on the main operational and the financial indicators, especially under the 100% view and the IFRS analysis, the end of the joint venture will allow the company to focus its attention on regions considered to be strategic and where future launches will now be concentrated.

In this sense, our land bank did not change during this quarter, except for the areas transferred to our partner in connection with the termination of the Construtora Capital partnership. And we continue to develop and work on the approval of the projects that make up Rossi's BRL 1.3 billion in PSV with short-term launch potential. Some of these projects are expected to be launched within the second half of the year. However, launches will depend on the real estate market dynamics, allowing for an efficient management of the risks involved in the business.

In terms of operating results in the first quarter 2018, the company recorded a fall of SoS sales by 3.1 percentage points when compared to the previous quarter since, although the key economic indicators suggest an economic assumption trend. However, this recovery has been slower than we had expected and incapable of significantly affecting employment and income indexes, which are fundamental pillars for the sustainable development of real estate activity.

On the other hand, our sales cancellation levels dropped by 27%. Part of this reduction is already a reflection of the restructuring of the customer service area, which brought the commercial department closer to the resale and client retention areas and contributed to the maintenance of high resale indexes for units canceled in the quarter,

that which -- nearly 60%.

Finally, I think it's worth highlighting the company's ongoing efforts year after year in order to reduce cost and optimize its administrative structure. In this quarter the company's G&A reduced by 30% when compared to the same quarter of the previous year, which had already been recorded at 36% lower than in the first quarter 2016.

I would now -- would like to move on to discuss the results of the first quarter of 2018. I myself will begin from Slide 3 that discusses the sales of the company.

In the other part of the slide, we can see the that gross sales reached in the first quarter 2018 BRL 123 million, BRL 94 million for Rossi's share. In the lower part of the graph, you can see the gross sales of -- for finished units. That amounted to 81%. In the lower right-hand side, we show the geographic breakdown of its sales.

Moving on to Slide 4. We can see the evolution of the cancellation rate.

In the first quarter, the cancellations amounted to 72 in the 100% basis, 61% for Rossi's share, a 27% reduction, which is quite significant in relation to the same period of last year. One of the highlights of this quarter that has been anticipated was the high level of units that were resold reached -- that reached 60%.

In the lower part of the slide, we can see the cancellation in relation to the construction stage and also a breakdown according to the region.

On Slide 5, we can see the summary of the operating indicators such as SoS and net sales.

We have reached 14% as quarterly SoS. And for the last 12 months, it reached 50%, as you can see in the upper part of the slide.

Net sales for the quarter amounted to BRL 51 million; and for Rossi's share, it reached BRL 34 million.

On next slide, Slide #6, we can see the inventory profile of the company.

The company has today an inventory of BRL 0.6 billion or BRL 0.5 billion for Rossi's share. The inventory has impacted negatively in the basis because of the transfer of units to Capital Construtora (sic) [ Construtora Capital ] due to the termination of the joint venture with Capital Rossi, as we mentioned previously.

In the lower left graph, we can see the distribution of red finished units and those to be delivered. 84% refers to units that have already been delivered, and the 16% that remain will be delivered by 2019. And we can also see this distribution according to the region on the bottom left-hand side -- right-hand side, sorry. We can see the land bank of the company on the next slide. And also, we can see the breakdown according to the income brackets and the geographic locations.

In this quarter, there were no changes in PSV, except for Manaus and Belém, who had the potential of launch after 2019, and they had been transferred to Construtora Capital in the termination. As

we mentioned previous, we are working on the approval of projects whose potential to be launched within the short run will provide a higher PSV. Some projects are likely to be launched in the second half of 2018 depending on the market conditions.

Now I'll turn the call over to Mr. Renato, our, Controlling Director, so that he can present and make his own observations as regards the financial performance of the company for this quarter.

[RenatoRocha Diniz, executive]

Thank you, Fernando. Good morning, everyone.

Continuing the presentation and describing what is displayed in Slide 9. As Fernando mentioned before and continuing the restructuring process of the company, we have completed in this quarter the process of termination of the joint venture of Capital Rossi, which used to operate in the North area of the country, and the main operating and financial indicators of the company were affected significantly. On the same slide, we show in detail the corporate accounts that suffered most significantly because of the change of the accounting methods for the companies which will remain in -- under Rossi's management, and this was not completed up to December 2017. There was an increase in the receivables.

And also, in relation to the debts related to SFH in the IFRS vision, on next slide, Slide #10, we can see the reconciliation between the gross debt and the cash position in different regions with 100% of IFRS, 100% view, and also Rossi's part. And the -- an impact has been suffered, as I mentioned in the previous, I mentioned the debt of SFH had a reduction in relation to the fourth quarter 2017. This is due to the sale of the other projects in Manaus that they were fully transferred to Construtora Capital. In the upper right-hand side, we can see the corporate debt had no impact as a result of such operations. The total debt is BRL 1.2 billion in the 3 regions.

Moving on to Slide 11. We show on the top left-hand side the deliveries and its history. In the first quarter 2018, 1 undertaking was delivered with 46 units and PSV of BRL 66 million for Rossi's part. On the right, we can see the reduction of costs to be incurred that at the end of the first quarter 2018 was BRL 37 million, and it had a relevant reduction of 80% when compared to the same period of last year. This was the natural evolution of all the construction works that will be delivered along the year and also the divestment of the units in the North region and that were transferred for capital structure associated with the termination of the joint venture.

Still on the same slide, we can see the evolution of the transfer speed the company that reached 23% in the first quarter 2018, and the cash inflow, which is shown in the -- on the bottom right-hand side of the graph, reaching BRL 119 million for the quarter and BRL 98 million for Rossi's share.

On next slide, Slide #12, we can see the reduction in the SG&A as a result of the continuation of the structure that the company is undergoing. As we show in the top graph, since the second quarter 2014, there was a reduction by 80% in the headcount in the office area of the company. This reduction brought the sales of 80% of the [ G ] made for the quarter when compared to the same period of the previous year.

In relation to commercial expenses, there was an increase related to the change of the accounting method used by the companies of JV Capital Rossi that were fully transferred to Rossi. If we do not regard this impact in the value of BRL 4.4 million, there was a reduction of 10% in the expenses when compared to the first quarter 2017.

On Slide 15, we show the evolution of the main metrics of our results.

Net revenue in the first quarter 2018 was BRL 60 million, a drop of 57% when compared to the same period of last year. This drop is due to the smaller sales that were made in this quarter.

On the top right-hand side, we can see the growth in gross income, -- gross margin, excluding interest allocated for the cost, that entered the quarter in BRL 11 million, a gross margin ex interest of 18%. That is an increase of 8.2 percentage points in relation to the first quarter 2017.

The adjusted EBITDA for the first quarter 2018 was negative in BRL 67 million against BRL 61 million that was recorded -- also negative that was recorded in the first quarter 2017. A relevant reason for this worsening is the contracted sales.

And on the bottom right-hand side, we can see that the loss that was recorded amounted to BRL 143 million amount.

I now turn the call to the operator to start the Q&A session. Ladies and gentlemen, Rossi's management is available for the Q&A session for analysts and investors.

[Operator Instructions]

If there are no questions, we'd like to turn the call over to the company's management for the final considerations.

[Fernando de Mattos Cunha, executive]

We would like to thank you all for having attended this call. And the company's management would like to stress the success that we had with capital partnerships, more than 6,000 units that have been delivered, that happened at a moment when the company will start focusing on its own core markets and, there also, the distribution of important products. So we are considering to include more popular products in our portfolio. We would like once again to thank everyone for having attended this call.

[Operator]

Rossi's conference call is completed. We'd like to thank you for your participation, and have a good day, you all.