Rossi Residencial SA

BOVESPA:RSID3

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to the earnings conference of Rossi to discuss the results of Q4 and full year 2017.

The audio of this earnings conference will be translated simultaneously by the Internet at www.rossiresidencial.com.br/ri. At that address, you can also find the presentation in PowerPoint for download. [Operator Instructions]

Before continuing, we'd like to clarify that any declaration that may be made during this earnings conference concerning the business perspectives of the company, projections, operational goals, financial goals are beliefs and assumptions of Rossi's Board of Directors as well as information currently available to the company. Future considerations are not guarantees of performance. They involve risks, uncertainties and assumptions because they refer to future events and, therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors may affect the future results of the company and may lead to results that differ materially from those expressed in such future considerations.

We'd like now to pass the floor to Mr. João Paulo Cuppoloni, CEO of Rossi. Sir, you may proceed.

[João Paulo Rossi Cuppoloni, executive]

Good morning. It's a great pleasure to be with you. Once again, we're here for the earnings conference for the full year 2017 and Q4 2017. This year, 2017, was a very important year for us. We sped up the restructuring process, financial restructuring. The first great step was the renegotiation of 90% of our debts, corporate debts, at Bradesco Bank and Bank of Brazil, together with the renegotiation of operational, also, debts with Caixa Economica Federal, and we informed this through the Material Fact. So now we are really prepared once again to go forward. Part of these renegotiations had an impact on the company's results concerning 2017 and another part will impact the results of 2018 and the next years, but we finished the year with a net debt of BRL 1.7 billion, which represents a drop of 15% in relation to Q3 2017 and 14% in relation to the end of 2016. With this, the leverage index defined by the net debt and equity dropped by 4.5x when compared to the indices of Q3 2017.

In parallel to this effort of deleveraging -- financial deleveraging, we had important progress in the simplification of the operational structure of the company such as: first, reduction of the activities in nonstrategic activities. We finished the joint venture with Construtora Capital and RB Capital with operations in Manaus and Belém; second, restructuring of customer service area, unifying many areas that used to be separate such as collections, customer retention, transfers, customer relationship and technical support; and third, we reimplemented our ERP system in order to make it more flexible and in accordance with the simplifications apart from migrating our servers to the cloud. All these measures contribute for a 38% decrease in general and administrative expenses when compared to previous year. We believe that with this in-depth financial restructuring, both operational and financial, we'll be -- will help us to resume our launch cycle in a healthy, efficient and controlled way.

2017 was already a turning point for the company. We launched a project in the region of Campinas with a total PSV of BRL 45 million and have already sold 50% of the units. In reality, we have already sold 60% of the units by February. Now for upcoming years, we envision a reorganization of Rossi into 4 business units: First unit, projects in compliance with the government housing program, Minha Casa Minha Vida; second, that we call Rossi Developer; and the third, Norcon Rossi, our joint venture in the city of Aracaju in the north of the country; and the fourth, Rossi legacy backlog, responsible for managing the projects launched in past years. Each business unit will have an operational capital structure that will be appropriate to its size and launching potential, observing the metrics and efficiency and risk indicators.

As a starting point, we have a land bank that totals in BRL 1.3 billion for the next 2 years, in Rossi's share, with launching potential in the next 2 years. Around 30% in compliance with projects of Minha Casa Minha Vida government projects and the remainder divided between areas in the state of São Paulo, city of São Paulo and Campinas, and in the State of Sergipe, belonging to Norcon Rossi. This launching potential may grow with the acquisition of new land plots and as the dynamics of the real estate market enables us to have a more efficient management of the risks involved in the business.

During this year 2018, our greatest challenge is the transition from this -- to this management model while fully taking advantage of our brand's potential, of our team's skills and the quality of our land bank and business partners. We hope that during the next quarters, we will continue innovating with quality and commitment to its customers with a new launch cycle to reach a consistent level of cash flow and return for shareholders.

Well, now let's go on to the presentation. We will show you the results for Q4 2017 and full year 2017.

Let's begin on Slide #3, please. Here, we have gross sales, operating indicators. On the upper part of the slide, we see that sales reached BRL 168 million in Q4 '17, BRL 137 million belonging to Rossi. Full year, BRL 861 million and BRL 675 million is our share, 2017 full year. Now at the bottom on the left, we see the sales of ready apartments, which represented here 89%. Here on the right, lower right corner, we see here the gross sales.

On Slide #4, the upper part, we see the evolution here of cancellations. In Q4, cancellations represented BRL 109 million, 100%, 83% Rossi's part cancellations of sales. Full year BRL 668 (sic) [ 601 ] million and 400 -- BRL 601 million, BRL 448 million, a significant reduction, 35%, in the number of cancellations in comparison with 2016. I'd like to call your attention. This number could be even higher if it were not for the end of the partnership of -- with RB Capital, which anticipated BRL 67 million in cancellations in Q3 and Q4. Another highlight of this year was the resale of the cancellations. Here we see, in 2016, 68%. On the -- at the lower part, we see the cancellation distribution in relation to the progress of the construction.

Going now to Slide #5. We have a summary of the indicators: SoS and net sales. SoS 17%. In the last 12 months, 53%. Now concerning Q4, due to the drop in VGV, we had an increase of 60%, as can be seen below, in net sales in comparison with -- comparing 2017 with 2016.

On the next Slide #6, we see the company's inventory. The company has today a total inventory of BRL 900 million or BRL 700 million Rossi's part. In this quarter, we had a negative impact on inventory, BRL 106 million, due to the transfers to RB Capital due to the end of the partnership. I already mentioned this was to pay the balance payable that we had with this business partner. On the lower left, we see inventory of units that are finished and those to be delivered, 75% are delivered, 25% we will deliver by the end of 2019.

On Slide #7, we see the land bank of the company and the VGV potential in accordance with the earnings share. Q4, we bought 2 plots of land in the city of Campinas VGV. Here you can see both land plots are for government's Minha Casa Minha Vida projects and others are plots of land that can be launched in the next 2 years.

Development and launches, the rhythm will depend on the real estate market and also the success of the restructuring plan we're going through. We are reviewing our strategy for launches for the next few years, and we are making great effort to really once again have launches. Another important point to be highlighted, like the other plots of lands, these 2 last acquisitions will be paid without cash disbursements of the company.

Finally, I would like to mention that in Q4, part of our land was reclassified for demobilization due to renegotiate the debts of the company. Part of the balance will be paid by really giving plots of land.

Now I'd like to pass the floor to Fernando, our CFO. And he will make his comments concerning the financial performance of the company in Q4 and during 2017.

[Fernando de Mattos Cunha, executive]

Thank you, João Paulo. Good morning. Continuing with the presentation on Slide #10 (sic) [ #9 ]. Here, we see cash and debt, Slide #9. So we have the balance of debt, BRL 629 million and using IFRS. And now the corporate debt, which is practically the same, BRL 1.1 billion, and this dropped by [ BRL 315 ] million in comparison with Q3 due to renegotiations already mentioned by Mr. João Paulo. At Bank of Brazil, we also restructured our corporate debt for -- with a better schedule for payments in accordance with the long-term cash flow of the company. Due to the immediate impact of these negotiations in 2017, in this quarter, we'll reduce the company's leverage by 4.5x in the Rossi part and bearing in mind the index net debt and equity -- over equity.

Now going onto the next slide. We show on the upper left corner the projects delivered -- deliveries. 2017, we delivered 3 projects, 543 apartment units PSV Rossi BRL 270 (sic) [ 227 ] million. On the upper left -- upper right corner, we see the costs to be incurred. At the end of Q4 '17, BRL 84 million costs to be incurred, a reduction of 80% when compared to the same period 2016. This drop is the result of the organic evolution of the projects to be delivered by reducing the number of launches in the last few years. On the same slide, we see the evolution of the transfer speed to banks. In Q4, 25%. Now the cash inflow, which is shown on the -- in the lower right corner reached BRL 179 million in Q4 '17, BRL 145 million belongs to Rossi.

Now going on to Slide #11. We see the reduction of SG&A expenses. With our continuous effort for operational restructuring, as shown on the upper graph, since the Q2 '17, we had a reduction of 77% drop in administrative workforce since the second half of 2014. This resulted in savings of 34% when compared to the same period in the previous year. Now the savings in sales expenses, commercial expenses, 46%, as we can see here on the lower right corner of the slide.

Finally, on Slide #12, we see the evolution of the main financial highlights. Net revenue 2017, BRL 326 million, a drop of 39% in comparison to the same period previous year. This drop is due mainly to deflation by the index and its impact on monetary correction of units that are ready and also to the increase of the share of nonconsolidated operations, especially concerning net sales.

On the upper right corner, we see the evolution of gross adjusted income ex interest, which closed the quarter at BRL 20 million with a gross margin ex interest of 27%. In the year, adjusted profit was negative BRL 200. Margin close to 0. Adjusted EBITDA in Q4 was negative BRL 47 million in comparison with BRL 6 million negative in 2016. Now the full year, negative BRL 300 million in comparison with BRL 500 million in the previous years. This decrease is explained by deflation according to government's inflationary index and its effect on net revenue.

Finally, on the right lower corner, we had a net profit of BRL 142 million in Q4 '17 and an accumulated loss of BRL 338 million in the year, relevant impact due to the effects of the renegotiation of corporate debts mentioned previously.

Now we'd like to pass the floor to the operator to begin the Q&A session.

[Operator]

Ladies and gentlemen, Rossi's Board of Directors is available for the Q&A session for analysts and investors. [Operator Instructions] Mr. Guilherme Mendes from JP Morgan would like to ask a question.

[Guilherme Mendes, analyst]

I have 2 questions. The first, in terms of debt, we see this relevant impact in Q4. You said that there should be an impact next year too. I'd like to know, do you know the impact in 2018? And second question, launches. Can we have an idea of the launches in 2018 and whether if this is -- would be sustainable? Also in the government's housing program, Minha Casa Minha Vida, the relevance of this program in the company in the long term, we saw that your land bank is aimed at this government housing program and whether you intend to buy more plots of land for different programs?

[Fernando de Mattos Cunha, executive]

Good morning, Guilherme. Thank you for the question. I will speak specifically about your first question, the restructuring of the debt. In fact, as you observed, there was a relevant impact on the full year 2017. We expect an impact also in 2018, but it's still early. It's still premature to estimate numbers for 2018. It depends on some factors and things we will implement during the year. Now concerning Q1, we don't expect any impact on Q1 concerning the restructuring. The impact should happen gradually during 2018 depending on the implementations. João Paulo will answer your second question now.

[João Paulo Rossi Cuppoloni, executive]

Thank you for the question, Guilherme. Concerning launches and the participation of the government's housing program, we prefer not to give you guidance or an estimate right now because of the market conditions. What we can say is that we have a land bank that is ready to make launches this year, next year, some plots of land, some of them have a longer maturity time. Our idea, with this new restructuring of the company, the government housing program, we're preparing the structure for the government housing program to represent 30% of our launches. It's only an estimate. And our structure, that's 30% with the government's program, the launches. During the year, we will have a better idea of the dynamics for launches, both in Rossi Developer and Rossi that we -- where we have a concentration in the city of São Paulo and Campinas. We're prepared. We have the land bank for -- plots of land for launches. And during the next quarters, looking at demand and financing, we can give you a better idea later on.

[Guilherme Mendes, analyst]

In terms of debt, the remaining balance here, could you comment?

[Fernando de Mattos Cunha, executive]

Yes. With Bradesco Bank, BRL 750 million.

[Operator]

[Operator Instructions] Since there are no more questions, we pass the floor to the company for the final comments.

[João Paulo Rossi Cuppoloni, executive]

Well, I'd like to thank you all for participating on behalf of the Board of Directors. As we said in the beginning, it's a transition year, a challenging year, one more challenging year. A lot was done in 2017, both in debt restructuring and deleveraging and also in operations and strategy with focus on what we believe we should do in the next few years. We know that we have a lot to do, but we're very optimistic and we believe that we're prepared for this year. Thank you, and see you next time.

[Operator]

This concludes Rossi's earnings call. We thank you all for participating. We wish you a good day.