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Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon, ladies and gentlemen, and thanks for standing by. Welcome to the conference call of CCP to discuss the earnings regarding the second quarter 2018. The audio and the slides are simultaneous webcast on the company's IR website, www.ccpsa.com.br/ir. [Operator Instructions]

Before moving on, we would like to let you know that this conference call may contain assumptions about future events, which are subject to risks and uncertainties that may make those expectations not to become concrete or that are substantially different from expected. Forward-looking statements usually issue the opinion on the date they are made, and CCP does not [ feel ] committed to update them in the light of new information.

Today with us, we have Mr. Pedro Daltro, CEO; and Mr. Thiago Muramatsu, CFO and IR officer. Please, Mr. Daltro, you may go on.

[Pedro Daltro Dos Santos, executive]

Thank you very much. Good afternoon, everyone. It is a pleasure to once again have a conference call to release the earnings of the second quarter '18, that was a quarter marked by the volatility in Brazilian economy. We had a period with the strike of truck drivers. We had the World Cup, and certainly, that had an impact on our businesses. However, we expect to resume our businesses from now on.

I'm going to start with Slide #5 of our presentation with our accomplishments of the second quarter and subsequent events. First of all, we completed the sale of Parque Shopping Belém. We had a stake of 25% in the shopping mall, and it was no longer in the company's strategy. We did not want to be in malls that we could no longer manage. So we decided to sell our stake, and we completed that in the second quarter of '18.

In addition, we continued our work to manage our liabilities, settling some more expensive debts and also renegotiating existing debt. Altogether, if you put both together, you are talking about BRL 140 million in the renegotiation of debt in the second quarter, which decreased our cost and had a positive result -- positive consequence in our results.

We also sold the last [ shed ] that we had in -- warehouse that we had in Tamboré. That was part of the negotiation that we had with Prologis. It was not part of the joint venture. And because of that, we also had the warehouse as not strategic for potential sale, and the sale became concrete in the second quarter of this year.

Going to Slide #7. We have our financial occupancy rate for CCP and also physical occupancy. Financial occupancy reached the highest level since the year of 2014. That was fruit of our activity in leasing along the last 3 years. And with that, despite the fact we had turmoil -- you know that in 2014, we didn't have that much. It was a more stable period. So the comparison base is very good. At that period, we delivered lots of property. And so this quarter, we got to 91.7%. And in shopping malls, we are close to 95%.

I'm sure that the second quarter was the most active quarter in terms of leases for CCP since 2014, especially in the segment of shopping malls and more specifically in those malls that have been delivered more recently. So we had lots of leasing activity in malls, occupancy reaching almost 95%.

As for offices, we are close to 90%. Again, the second quarter had a bit of a downtime because of the truckers' strike and the World Cup, but we expect the third and fourth quarters to show an increase in occupancy, and we expect to get to record historical levels.

As for physical occupancy, the same applies. We were very close to our record levels. We still have some vacancy in offices, about 2,000 square meters, but we feel that this is picking up, especially post World Cup, and we expect to bring you good news with regards to financial, physical occupancies.

On Slide 8, we show a bit of our performance indicators for shopping malls. Here, it's important to highlight that we sold our stake in Belém and also minority share in Cidade São Paulo. So the comparison base is a bit affected as for total sales. But still, if you consider same-store sales with the same comparison base, we have a negative percentage, 0.4%, and this is primarily explained because of the truckers' strike and the World Cup.

By mid-May, for you to have an idea, we were having quite a positive quarter with numbers very close to the first quarter of '18. Mother's Day had been a very interesting sales period when compared to the same period last year. But again, the truckers' strike and the World Cup just brought the rate slightly down. It's important to highlight that the comparison base with the first quarter '17 is high because the second quarter of '17 was when we had the FGTS, the workers' compensation funds, released by the government. So when you compare this year to last year, you had this non-recurring event, and we had growth of sales up 7.7%.

So although the number was slightly negative this quarter, when compared to that high number of the second quarter, the difference becomes higher. But I would say that 10%, 15% of the stores were affected, really low, but the rest of it was basically because of the truckers' strikes and the World Cup. Same-store rent also about 2% affected by lower sales in the period.

On Slide 9, we show our performance in office leasing revenues. Once again, our comparison base is different, but basically, we had a growth in our Triple A revenues and still a drop in Class A revenues in offices, basically because of the move that we had last year, more towards the end of the year. And I believe that along the next quarters, and perhaps in the third quarter, this will still show. But as of the fourth quarter and next year, even Class A offices will show positive results because we are going to remove from the comparison base the truckers’ strike. Shopping centers, the same thing. We had the strike. We had the World Cup, and this was what affected leasing revenues. And we also had no distribution centers that we had, had last year.

Well, with that, I'm going to turn it over now to Thiago to talk about our financial highlights.

[Thiago Muramatsu, executive]

Well, good afternoon, everyone. We are on Slide #11 now. First, I would like to talk about net revenue. With quite substantial growth in the second quarter compared to the previous year of 55.2%, basically because of the increase of revenue with the sale of Shopping Cidade São Paulo. Out of this effect, we have a slight drop, basically because of leasing revenues, as Pedro mentioned, 3.7%, but service revenues increased and therefore minimized the drop of net revenues compared to the previous quarter.

When we look the half year of '17 against the half year of '18, in leasing, we started to have a more positive bias, pulled by shopping malls. We still have an adverse event of lease revenues that we had in -- that we don't -- no longer have this year. So in this comparison base, the property that we sold accounts for almost for BRL 1.6 million in addition to the Class A properties that still have an effect showing in the second and third quarters. But in the fourth quarter, we are going to see a growth in revenues.

As for NOI, we had the reduction '18 against '17, slightly below revenue, therefore, an improvement of margins. And we also have the effect of the warehouses. And excluding this effect, we are very close to no difference between the second quarter '17 and second quarter '18.

Year-to-date, we continue with growth, even higher than the leasing revenues, especially because of reduction of expenses, improvement in margins, and in the first quarter, we had very interesting results in NOI.

As for EBITDA, it continues to grow, 42% compared to quarter-on-quarter and 33% half year against half year. And again, the reasons are the same, the sale of Cidade São Paulo.

Going to the next slide, Slide #12. We have our net profit. We left a loss, both in the second quarter '17 and the first half of '17, going to profit of 23% (sic) [ BRL 23 million ], year-to-date BRL 32 million. And FFO, again, from minus BRL 6 million in the second quarter '17 and minus BRL 16 million in the first half of '17 to year-to-date of almost BRL 56 million in the first half of the year. So growth of more than BRL 70 million in absolute numbers.

In the bottom part of the slide, we talk about our financial expenses. We had BRL 48 million in financial expenses. And it's important to remind you that we had BRL 48 million because we had the impact of the sale of Parque Shopping Belém and

Cidade São Paulo, the recognition of capitalized interest of BRL 8.3 million. Out of this effect, we would be slightly below BRL 39 million in financial expenses.

And with the latest negotiations of debt that we completed this quarter, probably as of the next quarter, we are going to show even better results in terms of financial expenses.

And finally, going to the last slide of our presentation, Slide 13, we talk a bit about our indebtedness. We continue to deleverage the company. And deleveraging has been enabling us to have more cash generation. Comparing the first quarter to the second quarter, we went from 2.6 to 2.4 net debt-to-EBITDA ratio. We still have room in our financial covenants. We have 3.5, and now we are at 0.6x. Basically, we have 52% of our debt in prefixed debt and 48% connected to CGI, with an average cost of 8%. And our production prefixed, that is at 9.6%.

As for the amortization schedule, we have been reducing year-after-year. We still have a balance of amortization for the second half of this year of BRL 150 million, but we have been reducing smoothly without any peaks of amortization. And for the coming years, as of 2019, this is going to happen.

And now we are going to go on to your questions.

[Operator]

[Operator Instructions] Luiz Peçanha from Banco Safra would like to ask a question.

[Luiz Peçanha, analyst]

I have 2 questions. The first with regard to financial expenses. We see that it is going down and, therefore, contributing to your increase of profit. I would like to know what else you are doing to try to reduce your financial cost and expand this margin? You still have a large part of debt in the -- prefixed in TR that has a slightly higher cost. My second question is about M&As. Should we expect new sales of assets? And do you have anything for acquisition in your pipeline?

[Thiago Muramatsu, executive]

This is Thiago, [ Luis ]. I'm going to answer your first question. Just to make it clear, in the second quarter, we had an apparent increase in our financial expense, but we had a recognition of capitalized interest because of the sale of both Cidade and Parque Shopping Belém. Out of this effect, we are slightly below the previous quarter. And basically, what we did was to try and reduce the cost of debt, which is going to start to show a little better. In the third quarter, you're going to see it a bit more tangible. We almost reduced BRL 150 billion in the quarter of our debt that we had also pegged to TR, and we had prepayment of another debt that was at TR plus 10%. So with that, we are reducing the cost of debt that is above 10% in prefixed, and we are looking into alternatives to have an extension of our debt with a reduction of cost. However, because there is still some uncertainty about to where our CDI is going to and our production debt that are pegged to TR still have a long duration to come, we don't want to have an impact on our covenants in terms of corporate debt. If we go to see -- if we change the production debt to a corporate debt, it may even be more expensive because of the duration. But anyway, we are studying alternatives, and we might have something interesting for the second half of the year.

[Pedro Daltro Dos Santos, executive]

This is Pedro, [ Luis ]. As for MA, you know that the market has been still for some time now a little bit stagnant. I think CCP today has a cash production that is the highest, I believe, since the company was organized. But so we've reduced our leverage, as Thiago mentioned, and if we have -- it was even be better if we didn't have the cash effect of the capitalized interest that accounted for almost BRL 8 million. So I believe that today we have more cash than what we have planned for the beginning of the year. With interest going down, with the cost of capital going down, there might be 2 things, or we stop being from net sellers to net buyers, and we are looking at alternatives. There's nothing to be announced. But the market is getting a bit more heated. There are more people interested in selling than in the same period last year, in fact a lot more people interested in selling than in the same period last year. So we built this cash position to enjoy this moment. But if we do not find any interesting alternatives, if cash generation continues like this and deleveraging continues to be at a high level, we also may consider the payout of dividends. So today, I would say that CCP, at least since I got here, is in a unique moment in terms of capital structure, that is we have enough capital to resume our investments. Opportunities are going to show. In fact, they are already showing. And the issue is price. And we have 2 alternatives therefore: we either stop being net sellers and become net buyers or we pay out part of this cash in the form of dividends because it's starting to be a bit higher than expected. But it's all planned. And what has happened thus is that generation is slightly stronger than what we expected. So I hope you can hear good news from us, which does not mean that we will not sell anything. You know that we had our strategic plan. We want to recycle those companies that are no longer a part of our strategic plan, that no longer makes sense to us. And in the past 2, 3 years, CCP probably sold BRL 1.8 billion in terms of properties and acquired close to BRL 150 million. So we were net sellers. But there is still one another property that we can sell because they're not part of our strategic plan. But from now on, I think we tend to be more net buyers. And there's a lot coming to the market. I don't know if they are going to be at appealing prices, but we are looking into them.

[Luiz Peçanha, analyst]

Okay. If I could ask you one question -- one more question, Pedro, in terms of your stock liquidity, is there anything that you could do to improve your stock liquidity?

[Pedro Daltro Dos Santos, executive]

Yes, and we have been working on that. Thiago has been spending lots of time in it. Unfortunately, the capital markets on the point of view of new issuances has not helped. So to be quite honest, it seems that in this quarter, we would have something interesting. The first quarter was, of course, interesting in terms issuances and everything, but the truckers’ strike, and you know that even better than us, really brought the capital market to a halt. So in order to support growth, maybe the capital market is an alternative, but if it's so close, then it's more of an impairment. It seems that during the holiday period, nothing happens. But we are doing our homework. We have been holding road shows, we have meetings with investors, we are working proactively. What we need is a bit of stability in -- macroeconomic stability in the capitals market. Otherwise, it's hard.

[Thiago Muramatsu, executive]

The company, both Pedro and myself, are prepared if we find the market that is favorable for us to have any kind of move with this regard, which seems to be in the first quarter. But in practice, the second quarter was a lot worse. So we would need a bit of economic stability to be able to increase the liquidity.

[Operator]

[Operator Instructions] There are no further questions in the floor. We are going to turn the call back to Pedro Daltro for his final remarks.

[Pedro Daltro Dos Santos, executive]

Well, the last message is that I would like to tell you that we are quite encouraged with the second half of the year, more encouraged than we were in the first half of the year. We had a very important strategic change in the company, that is trying to reduce our leverage via the investments to improve our return on invested capital, and I'm quite pleased that in the last 2 years, we were able to reduce our cost of capital and generate value to shareholders.

At this point of time, we are deleveraging. It's almost finished. Some transactions that may happen in terms of sale are much more for us to strategic reposition ourselves. We're able to increase the company's cash flow. If you compare quarter-on-quarter, you're going to see that first there was a drop of interest rate, but also it was because we improved our operations, and we deleveraged the company. So it was a lot of efforts that made this happen.

And more and more, we are having revenues that do not need capital invested, that is revenues from services, and that has substantially improved the return on invested capital of the company. That's why, in the last 2 years, we are decreasing our cost of capital. But the company now is positioned for growth. We have a very comfortable cash position. We have a capital structure that is very close to what we consider quite comfortable and the opportunities seem to be coming.

Operationally-wise, we expect and we are seeing for the beginning of the third quarter, especially in the post-World Cup period, an improvement compared to the second quarter. We don't know if it's going to be sustainable because it's been just a short period of time. But now, we are focusing on growth. So the key now is no adjustment any longer, but growth, growth via MA, but also leased areas. You could see in this quarter, we had record occupancy rate. And also growth of sales in retailers in the first quarter, it was very good. Same-store sales, we have some digital initiatives that are starting to take off and are starting to show very good results. We are still not disclosing because it's just the beginning, but results are quite appealing.

And both myself and Thiago are open to any further questions you might have along the quarter, if needed. Thank you very much.

[Operator]

The conference call of CCP is now closed. We thank you very much for attending, and wish you a good afternoon.