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Edited Transcript of CYRE3.SA earnings conference call or presentation 24-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Cyrela Brazil Realty SA Empreendimentos e Participacoes Earnings Call

São Paulo Mar 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Cyrela Brazil Realty SA Empreendimentos e Participacoes earnings conference call or presentation Friday, March 24, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Raphael Horn

Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Co-CEO

* Paulo Eduardo Goncalves

Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Director of IR & Structured Finance

* Claudio Carvalho de Lima

Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Corporate Legal Department Officer

* Miguel Mickelberg

Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Finance Director

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Conference Call Participants

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* Gustavo Cambauva

BTG Pactual - Analyst

* Enrico Trotta

Itau BBA - Analyst

* Luis Stacchini

Credit Suisse - Analyst

* Jorel Guilloty

Morgan Stanley - Analyst

* Luiz Garcia

Bradesco Corretora de Valores - Analyst

* Daniel Gasparete

Merrill Lynch - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to Cyrela Brazil Realty conference call where we will discuss the fourth quarter of 2016 earnings results. (Operator Instructions)

As a reminder, this conference is being recorded and the audio will be available at the Company's website at www.cyrela.com.br/ri. This call is being simultaneously translated into English and is being broadcast over the Internet. Questions can also be asked by participants connected abroad.

The earnings release published yesterday, March 23, after the close of the BM&FBOVESPA's trading session is also available on the Company's website.

Before proceeding, we would like to mention that the forward-looking statements that may be made during this conference call relating to the Company's business prospects and projections, and operating targets related to its financial growth potential, are predictions based on management's expectations about the future of Cyrela. These expectations are highly dependent on domestic market conditions, the general economic performance of the country and international markets. Therefore they are subject to change.

Here is the list of attendees. Mr. Raphael Horn, co-CEO, Paulo Eduardo Goncalves, Chief Investor Relations Officer and Investor Relations Manager, and Miguel Mickelberg, Financial Director. I will now turn the conference over to Mr. Raphael Horn. You may now begin, Mr. Horn.

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Raphael Horn, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Co-CEO [2]

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Good morning, everyone. The late 2016 was marked by economic turmoil but a renewed trust on the economy of the country. The approval of recent economics and the prospective approving several matters have improved the economy. We expect these reforms are approved; that is the only way out for the country.

The economic activity and unemployment levels haven't reacted yet, but the results of the downturn dampened inflation and dropped interest rates. Lower interest rates and more economic activity are key to recover credit interest, two key pillars in our industry.

As a consequence of this crisis year, the Company had the largest volume of cancellations in its history and impacted net sales and net revenue and we had to use BRL37 million of our cash. This environment -- the Company proved it has access to banks and capital markets not only to collect resources but at lower cost.

The proof of that was the CRI issuing at 98% CDI rate. In 2016, the Company delivered a large volume, over 8 billion; all the deliveries in the Northeast Region have been concluded.

Savings contributed to maintain our gross margin for 2017. This more positive outlook will be reflected in the real economy. Of course, lower interest rates will provide more credit and less unemployment will bring trust. We are concentrated in improving our operational efficiency, reducing inventory, generating cash and to have greater return on capital.

Now over to our operational results, we will be talking -- on slide 5 we will address Cyrela's consolidated results. In the fourth quarter of 2016, we have BRL1.2 million, vis-a-vis -- or compared to BRL760 million in the fourth quarter 2015. Nine in Sao Paulo, three in other cities, two in the South and one in Rio.

We launched 32 products in the year. Excluding swaps, the volume launched in Cyrela's share was 2 billion down by 9% year on year. The Company's share of the volume launched in the fourth quarter was 81% compared to 87% year on year. In 2016, Cyrela's share in the launch project was 75%.

On slide 6 we highlight the launch of the Medplex Eixo Norte project in Porto Alegre, 51% of which have already been sold.

On slide 7 we will talk about our sales performance. In Q4 of 2016, pre-sales totaled BRL1.1 billion, 29% higher than the BRL840 million reached in the fourth quarter of 2015. In 2016, pre-sales reached BRL2.8 billion against BRL3.4 billion in 2015.

Excluding swaps, pre-sales amounted BRL2 billion in Cyrela's share, a 21% reduction year on year. The states of Sao Paulo and Rio jointly accounted for 75% of sales in the year.

On slide 8 we will address sales speed. The Company's annual SoS was 29%. Looking at sales speed by period, projects launched in the fourth quarter of 2016 have been 50% sold.

On slide 9 we will address Cyrela's total inventory. At the end of the quarter, inventory market (inaudible) totaled BRL6.5 billion up by 2% quarter on quarter. The change in our inventory can be seen in the chart on the right.

On slide 10 we have a breakdown of our finished units. In the quarter we sold 13% of the finished units at the beginning of the period. Adding the inventory of projects delivered along the quarter and pricing of units at market value, finished units inventory increased by 12% quarter on quarter. We are aware of how important this matter is to the Company and we will keep on focusing our efforts on these products. Rio and the Northeast Region accounted for 43% of the finished units.

On slide 11 we will talk about delivered units. In the fourth quarter, Cyrela delivered 24 projects totaling 7,300 units. In the quarter, delivered units account for a PSV of BRL2.4 billion, up by 74% quarter on quarter. In 2016, Cyrela delivered 21,300 units with a launch of PSV of BRL7.9 million (sic - see slide 11, "R$ 7,9 billions").

I will turn the floor over to Paulo who will present our financial results.

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Paulo Eduardo Goncalves, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Director of IR & Structured Finance [3]

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Thank you, Raphael. Good morning. On slide 13 we will present our financial results. Gross revenue was BRL948 million in the quarter up by 12% quarter on quarter and 10% lower year on year.

In 2016, gross revenue totaled BRL3.3 million down by 26% in the year-on-year comparison. Gross income in the quarter was BRL265 million up by 1% quarter on quarter and 24% lower in the year-on-year comparison. In 2016, gross income reached BRL1 billion, 29% lower year on year.

The Company's gross margin in the quarter was 28.8%, 2.9% lower than the 31.7% from the previous quarter. In the year, the Company's gross margin was 33.3%, 1.3% lower in the year-on-year comparison.

On the chart in the bottom left-hand corner, we analyze our EBITDA. EBITDA in the quarter was BRL95 million, 38% higher quarter on quarter and 34% down year on year. In 2016, our EBITDA totaled BRL343 million, 54% down year on year.

Net income in the quarter reached BRL31 million, up by 114% quarter on quarter and down by 68% year on year. In 2016, gross income reached BRL151 million, 66% lower in the year-on-year comparison. Thus, our net margin for the quarter was 3.4% compared with 1.1% margin quarter on quarter and 9.5% in the year-on-year comparison. In 2016, net margin was 4.7%.

Let's now go to slide 14 to talk about our profitability. In the fourth quarter of 2016, our return on equity, measured as the net income of the past 12 months over the average shareholders' equity, was 2.5% and our EPS was BRL0.08.

On slide 15 we will talk about our customers' financial solution. In this quarter, transfers, trust of deeds and payoffs amounted to BRL872 million, 26% higher quarter on quarter and 24% higher year on year. In 2016, transfer, trust of deed and payoffs amounted to BRL3 million down by 7% year on year.

Considering units, transfers, trust of deed and payouts totaled 3,800 units, 23% higher in the quarterly comparison and 18% higher year on year. In 2016, they totaled 13,600 units down by 10% year on year.

Slide 16 shows the Company's cash generation. In Q4 of 2016, our cash used reached BRL156 million versus BRL225 million quarter on quarter and BRL28 million year on year. In 2016, our cash used reached BRL111 million against BRL893 million quarter on quarter.

On slide 18 we will address our indebtedness. Gross debt at the end of the quarter was BRL3.4 billion. The cash position was BRL1.7 billion. Our net debt was BRL1.7 billion. Of the total gross debt, [62] relate to loans for construction and 67% is long-term. Our net debt over equity ratio was 25.1%, 2.3% lower quarter on quarter.

The low debt level confirms Cyrela's financial solidity and puts us in a privileged position to take advantage of the opportunities in the real estate market.

We will now begin the Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Gustavo Cambauva, BTG.

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Gustavo Cambauva, BTG Pactual - Analyst [2]

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Good morning. My question is about your view on the market. What are your expectations for 2017? Could you elaborate on the demand side? Do you think the worst is behind us or do you believe it's going to be a difficult year?

If you could talk about your delivered or finished units in the cities where you have more inventory; what's the demand like? Have you noticed any positive signs or is it too soon? Thank you.

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Raphael Horn, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Co-CEO [3]

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Good morning, Cambauva. This is Raphael. There are no two ways about it. After the economic downturn we've had, coming out of the downturn won't be easy. It's going to be a slow recovery.

We believe the second half of the year will be better. Just like [Morales] is saying, maybe later down the year it will be better. But today we have a good feeling. The outlook looks better but, in actual fact, it hasn't improved that much.

It was a very deep economic crisis. If you think everything is going to be wonderful in May, June, July -- I'm talking about the real estate market, of course -- it won't happen. It's going to be a slow recovery, but there is some hope in the year. We didn't have that last year.

As to the finished units inventory, I think we can sell that inventory at a good speed in several cities. The problem that the -- what we delivered in October, December is going to happen now. As to the different cities that you asked about, I would say that Rio is going to be more complicated for us. It's a very important region, but the situation is bleak.

Excluding Rio then and Curitiba. That's a very tough market for us; there's a lot of supply. But I think we are doing okay in the Northeast. Salvador we have no inventory, Recife we are done. [Delaine] Sao Luis, we are about to finish that maybe later down this year.

So these are the most important areas. I think we can do fine in Sao Paulo as well. Well, the problem is Rio in terms of the finished units inventory. I hope I have answered your question.

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Gustavo Cambauva, BTG Pactual - Analyst [4]

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That was very clear. Thank you. Good morning.

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Operator [5]

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Enrico Trotta, Itau.

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Enrico Trotta, Itau BBA - Analyst [6]

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Good morning, Raphael, Paulo, Miguel. I have a couple of questions actually. Let me just follow up on what Cambauva asked you.

We have seen some signs of improvement in sales in Q4, especially new launches, but I would like to better understand the sales context looking forward to 2017. What should take -- what are the expectations for gross sales for the year? We're now almost in April. What have you seen so far in Q1?

And what about cancellations? You were not delivering anything else in the Northeast but you still have Rio. What are your expectations for cancellations in 2017? Rio, it will be important, too.

Let me ask a second question. You were talking about Tecnisa; you now have a stake in Tecnisa. Could you elaborate on that situation with Tecnisa? Thank you.

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Raphael Horn, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Co-CEO [7]

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Good morning, Enrico. Your first question was about Q1, right? I'm going to answer just like I did to Cambauva. There are major differences between the months. It was a terrible economic crisis. It's too soon to tell.

The scenario for 2017 is still difficult, and I wish I were wrong. Second semester will be better than the first; that is the trend. That's not the right time to talk about Q1. We are not looking at the month of March only. We shouldn't be -- we shouldn't have high hopes on the short-term.

Paulo will be talking about cancellations. We like the capital of Tecnisa, but we still have a couple of issues to address, and as soon as we have addressed them, we will be talking about it. So here is Paulo.

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Paulo Eduardo Goncalves, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Director of IR & Structured Finance [8]

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As to the cancellations, or dissolutions, the outlook is very similar to that of last year. It's better than Q2, Q3, but the volume is relevant still. But when you look at the year, there are two important things we have to take into account as far as deliveries go.

In 2016, we delivered BRL7.9 billion; out of that, BRL1.6 billion was in the North and Northeastern Regions. In 2017, we will be delivering less. Just to give you an idea, last year, 71% of our cancellations came from products delivered by 2016. Just by the fact of delivering less, we are going to reduce the cancellations in absolute terms.

When you look at the regions we are delivering in 2016, you don't have North and Northeastern Regions, so we believe there will be a reduction in absolute terms.

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Enrico Trotta, Itau BBA - Analyst [9]

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That's perfect, Paulo. Thank you, thank you.

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Raphael Horn, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Co-CEO [10]

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So Paulo talked about cancellations, but I'm Raphael; I would like to comment on that. There won't be any magic tricks coming out of cancellations. We do not expect so many cancellation, just because we are delivering less, but the economic dynamics is still there. It won't change dramatically.

But 2018, things will be different, definitely. Then buyers won't be complaining about the price they pay. The economic dynamics and our regulations get in the way. We have been fighting the legislation as an industry. We are the worst country in the world in terms of dissolution regulations, and that gets in the way for all of us.

The government have been talking about reforms and the microeconomic reforms. There is a ministry to talk about it. We are talking about improving productivity, but our industry is very in-productive. We work for three to four years; we believe we have sold, but then you find out you didn't.

It's the -- we are all paying that price in this industry, but we have to look forward. We have to keep on working to try to improve the legislation. That's it. And we are going to have more -- reduced -- we have to try to reduce the number of cancellations.

And we believe that next year will be better, if these measures are actually approved. Otherwise, we are going to have a rough road ahead.

Paulo talked about the deliveries, right, in 2016? He's going to go down 2017. Of the deliveries of 2017, how much will come from Rio? In 2016, we delivered about BRL2 billion in Rio. In 2017, it's BRL1.6 billion.

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Enrico Trotta, Itau BBA - Analyst [11]

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All right, perfect. Thank you. Thank you, folks.

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Operator [12]

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Luis Stacchini, Credit Suisse.

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Luis Stacchini, Credit Suisse - Analyst [13]

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Good morning, everyone. I have two questions actually. First I would like to understand launches for 2017. Should we wait about for the low income JVs? What is your sales performance? Could that impact your cash flow throughout the year?

My second question is about moving out of nonstrategic cities. What's the lead time? What's the G&A reduction? What's the outlook? Thank you.

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Raphael Horn, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Co-CEO [14]

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Hi, this is Raphael, Luis; good morning. Again, 2017 I'm just going to harp on same thing. You are looking for good news when we haven't got any good news. You hope the economy is improving. We are saying no, no, no; that's not the case. It's a challenging year. If it gets better, wonderful. But launches for 2017 will be similar to that of 2016.

Our focus is to sell our inventory and try to monetize our high inventory levels. These are not expressive launches for this year. This is half-time launches, if I may.

In terms of JVs, that's different. It's an industry that is thriving. There is money from compensation funds. It's better than the projects for the middle class. Well, this is something that, thank God, is better than our industry for middle class and more expensive projects.

We are in love with this new project. Well, but again, I'm not going to talk about it yet. Another product, we are careful about it, we worked hard for it, and let's hope it's going to do well. We haven't got any numbers, results, gross margins, nothing. We will have to wait and we will see whether these expectations can be proven.

As to moving out of non-core areas, we have been moving out of these regions, as you know. You can't do that overnight. Our G&A salaries, more specifically, have been going down year on year. We are shrinking so that we can focus on more profitable areas, but it doesn't happen overnight. In fact, in G&A, can't be detected.

You may have seen it. You may not liked it, but salaries and their impact, we have been able to reduce them. There is some delay. When you move out, you have to keep on, you have to deliver, you have to be there, you have some technical assistance in engineering that has to be there. So it doesn't happen overnight.

But in 2018, 2019, our salaries will have lesser of an impact. And delays have been the bad guy in our balance sheet, and we hope this is going to stop soon and to have negative impacts.

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Luis Stacchini, Credit Suisse - Analyst [15]

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Thank you. Good morning.

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Operator [16]

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Jorel Guilloty, Morgan Stanley.

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Jorel Guilloty, Morgan Stanley - Analyst [17]

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Good morning. Let me talk about other things other than results. What's your take on the impact of the regulation on cancellations that is being discussed in Brazil? What effects you may find in short-term sales? Is it going to be neutral? Do you believe it is going to reduce sales because -- if they have higher penalties? If buyers are subject to higher penalties?

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Raphael Horn, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Co-CEO [18]

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Good morning, Jorel. Claudio will be answering that question. He is our legal director. He is working with [Abrainti] on these issues.

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Claudio Carvalho de Lima, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Corporate Legal Department Officer [19]

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Good morning, Jorel. This is a discussion that has been going on for quite some time. We have been discussing with the government and other agencies but, unfortunately, we haven't come to an agreement, which is very bad to the market because it's a systems risk.

Before we have a definition, companies will be having a hard time and results higher cancellation levels, almost 50%, compared to sales of last year. Our expectation is not to do away with everything all at once. We believe we can reach a consensus based on -- everything is based on jurisprudence.

The Law 4591 was simply destroyed; jurisprudence is very bad to us, in a nutshell. There should be some more balance so that we can have security and reliability. This lack of security no one launches, no one wants to buy land. Nobody wants to do anything. So it's a very serious situation.

And the government is backing down. We don't see it as a positive sign. They are just favoring a minority. They don't know anything about the business. It should be addressed quickly.

Let me just answer that question again. The government has been talking about productivity a lot. So we hope that the government sooner or later looks at us. We need productivity. The cancellation law is a joke when it comes to productivity or anything.

We are the worst country in that regard, and we hope the government will look at us. They are doing the right thing in terms of productivity towards favoring capitalism reforms, and we hope that sooner or later they look at us.

That's what we are rooting for. We haven't seen that happen. We still have the worst legislation in the world; great companies, good entrepreneurs, but there is no law.

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Jorel Guilloty, Morgan Stanley - Analyst [20]

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But what if the regulation is approved? What would be the impact on sales? Do you believe that it can go up?

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Claudio Carvalho de Lima, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Corporate Legal Department Officer [21]

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Well, if they approve -- what's the effect? It's going great. If there is a good law, it's going to be just great. But we are just daydreaming. Once they approve the law, we can talk about it. We have no laws whatsoever.

If they approve it, both reforms will be great; the welfare reform and the cancellation reforms. The way things are, the economy is going to be -- well, the cancellation law will get better because the economy is better, not because the legislation is helping us. It's not even helping; a legislation that is right for business people be them from any industry.

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Operator [22]

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(Operator Instructions) Luiz Garcia, Bradesco.

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Luiz Garcia, Bradesco Corretora de Valores - Analyst [23]

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Good morning. I have two questions. This is the first call of the year. I would like to talk about the Company's strategy.

You talked about moving out of non-core cities, the JVs. But looking forward, the Company will have a more diversified platform. Plano & Plano, after the JV dissolution, and when you look at the results, this strategy will remain for quite a long time once you have a contingency, for example.

And the management has to be involved with other companies, not only with the operations core. So what do you think about it? What is the positioning strategy? You have been trying to reduce and concentrate more on the core business, but the investment in Tecnisa gets in the way.

So what is your take of this strategy of adopting a more diversified platform, higher income projects, and you are now having to resort to lower income projects as well. What's your take on that?

My second question is about contingencies. In the RPR, we have seen that possible contingencies have gone up; tax, civil and labor contingencies, over 300% year on year. These are non-provisioned. Can you elaborate on why has gone up so dramatically, especially in labor? Could that have future impact?

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Raphael Horn, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Co-CEO [24]

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Good morning, Luiz. This is Raphael. Well, in terms of strategy, we want to be compact, streamlined and very profitable. In 2005 -- between 2005 and 2015, that's what we did. That's the guidance at least.

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Luiz Garcia, Bradesco Corretora de Valores - Analyst [25]

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For middle class and higher income projects, you said that you have several JVs in higher income projects?

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Raphael Horn, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Co-CEO [26]

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Yes, that's true. But middle class and higher income is just for organic purposes. We have very good JVs, or all JVs that are very good. They yield good results. They remain there because they are compact, streamlined and profitable. If they follow those three criteria, be it organic or not, it doesn't matter; it fits.

But from now on, we are not going to resort to JV for organic purposes, for middle class and higher income projects because it doesn't make sense. But those that are within, that are good, they will remain, if they are streamlined, compact and profitable.

For lower income, we believe that that's a good moment. We have two excellent partners that can operate in that segment with -- they are more prone to that segment. So it makes sense to have a Plano & Plano, to have a Cury. It makes sense.

Companies that master that segment, and a segment that is doing much better than ours. And that's true. It takes time to get out of it, the expansion cycle, just like the one we had in the past.

It takes time to move away from those and there are impacts on expenses, compensation, delays in construction and -- but that's going to come to an end. And the strategy to reduce the Company size; yes, that's right, to have more profitable cash, more profitable inventory and pay dividends and work in the segment. We are competent to give good shareholder returns, 2% to 3% a year. If not, it doesn't make sense. Over to Miguel.

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Miguel Mickelberg, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Finance Director [27]

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Good morning, Luiz. As to labor contingencies, actually in 2016, we concluded several projects, record in deliveries and we moved out of non-core regions. Contingencies are classified, just like previous quarters. And the risk may be reclassified once you have an agreement, if you can settle the case.

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Luiz Garcia, Bradesco Corretora de Valores - Analyst [28]

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But you have no idea, because you are delivering a lot of units. Do you believe that this pressure will continue?

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Miguel Mickelberg, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Finance Director [29]

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Well, Luiz, we have reduced the number of deliveries in part because of the deliveries in the North and the Northeastern Regions. And in Sao Paulo, it's much smoother, because we have several other projects starting. So there's no major impact on the horizon.

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Luiz Garcia, Bradesco Corretora de Valores - Analyst [30]

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Thank you.

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Operator [31]

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Daniel Gasparete, Merrill Lynch.

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Daniel Gasparete, Merrill Lynch - Analyst [32]

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Good morning, everyone. Thank you for having the call. A very quick question about the P&L. My question is about the topline trends. Strong growth quarter on quarter. My question to you is about the possibility of reducing cancellations. Could you have a similar level?

My second question is about the user procedure of cash generation. There is a positive sign for the entire year. How are you going to use that cash? Are you going to invest in paying in the debt in the first semester?

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Paulo Eduardo Goncalves, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Director of IR & Structured Finance [33]

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Hi, Gasparete; this is Paulo. As to the topline, there is an issue here as to the backlog revenue. In late 2015, we were at BRL3.5 billion; we are now at BRL2.1 billion. There is an offset because our cancellations pocket increased 70% in late 2015; now it's at 75%.

Our topline maintenance must -- or depends on our net sales. That can be through higher gross sales or reduced cancellations. As to user procedure, we want to monetize the Company. We want to generate more cash. It's good to generate cash for two reasons. We reduce debt, which is no good for anyone, and you can pay dividends. Or you can buy land, if you have good land available.

We would be extremely happy if we could generate cash in the next three years and pay out dividends, reduce our debt [level] and buy some good land. But, of course, we believe we should streamline the Company and improve its profitability.

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Daniel Gasparete, Merrill Lynch - Analyst [34]

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Thank you.

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Operator [35]

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(Operator Instructions) There are no more questions. I would like to give the floor to Mr. Raphael Horn.

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Raphael Horn, Cyrela Brazil Realty S.A. Empreendimentos e Participacoes - Co-CEO [36]

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Thank you for attending this call. These aren't very positive news, but we are more helpful for the future. Every businessman is hopeful, and we are going -- we hope the economy can get back on track. We are hopeful, but still that's not the reality. Thank you for attending this call.

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Operator [37]

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That concludes Cyrela's conference call. Have a nice day. Thank you.

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Editor [38]

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Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.