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Edited Transcript of TCSA3.SA earnings conference call or presentation 15-May-20 3:00pm GMT

Q1 2020 Tecnisa SA Earnings Call

May 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Tecnisa SA earnings conference call or presentation Friday, May 15, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Flávio Vidigal de Capua

Tecnisa S.A. - CFO & IR Officer

* Joseph Meyer Nigri

Tecnisa S.A. - Vice-President of Executive Board & CEO

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Conference Call Participants

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* Elvis Credendio

Banco BTG Pactual S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for holding. Welcome to TECNISA's Results Call for the First Quarter of 2020. Today, we have Mr. Joseph Nigri, CEO; and Flávio Vidigal De Capua, CFO and Investor Relations. For this event, all participants will be connected online through TECNISA's Investor Relations website, tecnisa.com.br/ri (sic) [tecnisa.com.br/ir], where the presentation will be available for download. (Operator Instructions)

Before we continue, we'd like to clarify that any statements made during this conference call about the company's future business prospectives as well as projections, operational and financial goals are merely predictions based on the management's expectations based on current information. Future considerations are not a performance guarantee. They involve risks, uncertainties and assumptions, which relate to future events that depend on circumstances, which may or may not occur. Investors should understand that our industry's performance, Brazil's overall economic performance and other operational factors may lead to results that differ materially from the company's expectations.

I would now like to pass on the floor to Mr. Joseph Nigri, who will begin the presentation. Mr. Joseph, you may continue.

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Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [2]

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Good afternoon, everyone. I hope everyone is doing well.

So we're starting our presentation on Slide 4. I'd like to show you some of the measures that the company has taken during the pandemic. First, we put together a Crisis Committee. It's made up of members of the management, and the idea is to have agile decisions every day. You know that the scenario is changing very quickly. We started implementing home office for 100% of administrative employees. This has been going very well. People always respond positively to working from home.

Construction is still in progress full speed. They were considered essential activities, so they did not stop during the pandemic. They're still ongoing. Obviously, all prevention measures have been established there. So we are doing everything we can to avoid any dissemination of disease in construction.

We also had a diligent cash management. We delayed several cash expenses. Some land plots in negotiation, which I'll explain further on, were now phased and postponed. But in any case, the company is at a very good cash position to face the current crisis. And we still have the opportunity of seeing what can come up. In terms of online education, we created some lines so that employees could be updated during the quarantine.

And digital transformation is an important thing for us. TECNISA has always been very innovative in technology. And now we have a platform that allows for 100% digital sales for a piece of real estate. Of course, demonstration is always better, but as people want to, they can buy without stepping out of their homes. We're monitoring every guidance from public agencies and from the government.

So now let's talk about the company's strategy. Moving on to Slide 6. So our land bank strategy is lined out here. The idea is to recompose it. And now with the pandemic, we have chosen a exchange system. Or when we negotiate with cash, we usually pay an upfront payment or at least with one clause so that we can pay it in 120, 180 days. We believe the acquisitions need to be very careful, as they always have been, but now they need to be even more careful.

And we are focusing on residential projects. I think the commercial sector has a huge challenge in front of it. But residential real estate, in our opinion, will not be affected. So we just -- people will need to continue to live somewhere, right? They will want bigger apartments with 2 bedrooms, which was already a part of our focus. But we have been seeing with home office that this is something that came to stay. So people are going to want to live in bigger apartments that can be further away from downtown. We have great candidates to benefit from this new trend.

Increase the number of launches, this is something that we already mentioned last year. Of course, we're not sure how much we'll be able to be launched, because right now stands are closed. The approvals are slow. So everything is a bit more difficult depending on how long the situation lasts. We can launch more or less during the second half of the year. But anyway, the plots we acquired in the first half can be launched still this year.

And promoting measures to strengthen our cash. Although we have a robust cash position, we're following up on the market. And if we need any additional measures to reinforce cash, this will also be assessed.

So we're going to monitor how the pandemic develops. And we're going to continue our plan, which was to dispose of nonstrategic land. Of course, this is more challenging now, but our intention is still there.

The next slide shows our land plots. In the first quarter, we acquired 3 in São Paulo, 1 in Brooklin, 1 in Jardim Paulista and 1 in Vila Romana. So a part we acquired land in PSV of BRL 459 million. If we add the land we acquired last year during the fourth quarter, our total is BRL 459 million PSV post follow-on. And then if we add our potential, of course, it depends on the approval in (inaudible), but we believe that this will happen sooner or later. So when that happens, our land bank and operational capacity will be close to BRL 1 billion a year. So this is not guidance, but it would be possible if the pandemic had not begun.

So on Slide 7, we see the lands that we've optioned. There's 1 in Vila Olímpia, 1 in Vila Mariana, 1 each in Saúde, Chácara Santo Antônio and Jardim Prudência, so BRL 514 million optioned. And again, they are options that we will take if the market goes up. And if we see that our viability that was seen at the time doesn't come to pass, then we can let go of these options. So we're still very diligent on that.

The next slide, Page 8, shows our capital increase. As you can see, our shares had higher liquidity because of our inclusion in the BrX-100 index. So this increases the viability of our company. And we finished with a solid cash position of BRL 261 million. It was a growth of BRL 159 million.

And if you compare what we have in terms of debt coming to term, over the year, this is 4x higher. So we can see that the situation is very comfortable right now. We're very privileged not to face the pandemic and its challenges and maybe even capture some opportunities that come with it. Our total indebtedness dropped by BRL 248 million. And the cost of debt is at 7% per year, which is already a reduction of 5 percentage points year-on-year. This is reflected in our financial performance, which improved significantly and also led to the corporate rating being upgraded by S&P from brA to brAA- with a positive outlook.

So before I pass the floor to Flávio, I'd just like to say that we are still assessing the impacts of COVID-19, taking all measures to protect our employees and our clients. And overall, we believe that the real estate market will recover in sales. It's slowed down because of the entire situation, uncertainties. But when it does come back, and it will, people who have purchased real estate will still have the demand for it. They're only postponing it. So as I said before, people will still need to live somewhere.

With working from home, the fewer people need -- the less people need to go to the office, the further away they are willing to live. So these areas that are a bit further from downtown will tend to be -- will tend to benefit from the situation. So we're trying to understand how new habits will work for consumers, especially in terms of common areas and so on.

Now Flávio, our CFO, will speak, and we'll be open for questions later.

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Flávio Vidigal de Capua, Tecnisa S.A. - CFO & IR Officer [3]

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Thank you, Joseph. Good afternoon, everyone.

Moving on to the operating performance part. It starts on Slide 10. And here, we have our gross sales. So for this quarter, we had gross sales of BRL 79 million, which represents 19% in gross sales and up to BRL 70 million with an SOS of 19% (sic) [17%]. So here, it's much better than the previous quarter, which was 11%.

The next slide shows our inventory. Based on the volume of sales we've had in the last period, it's gone down significantly. Our inventory was BRL 336 million, and this is distributed 39% in São Paulo, 43% in the Federal District, 17% in the state of Paraná and 0.5% in other states. And in São Paulo, we have an absolute value of BRL 85 million inventory in Jardim das Perdizes. And our total is BRL 133 million. And here, we see our work progress breakdown. 96% of our inventory has been constructed and 4% is under construction.

Slide 12, as Joseph said, shows that we closed the quarter at BRL 4.2 billion in land bank, 71% acquired in cash and the rest by swaps or hybrid structures. Of this total, BRL 2.1 billion is in the Jardim das Perdizes project. And 3 land areas were acquired in the first quarter of 2020 in Brooklin, Jardins and Vila Romana, and they have a potential PSV of BRL 351 million.

The next slide shows our operating performance and the receivables transferred. So the volume was lower, but as a reminder, part of our sales are being carried out in the Federal District where we have our own portfolio. So BRL 20 million in our own portfolio higher this quarter. So naturally, there would be a reduction in our receivables transferred. And in terms of units transferred, we transferred 217 for the first quarter.

Now our financial performance. BRL 44 million in net revenue and adjusted gross income of BRL 1 million and a loss of BRL 58 million, which was the impact of 2 extraordinary events, which was BRL 11 million in remeasuring The Five Hotel and BRL 7 million in provisions for risks and legal obligations. But we see some future launches, and as they are launched, these results will come up because of the situation our industry is in. So we were expecting these losses right now. This is within our expectations.

The next slide shows administrative expenses. We've had great austerity in our expenses. Excluding our long-term incentive plans, we had a reduction of about BRL 1 million in G&A from BRL 17 million to BRL 16 million. And considering the provision, the total would be BRL 16 million. We actually had a reduction from BRL 15 million to BRL 14 million.

Now moving on to the next slide, Slide 18. Here is our financial position. Our receivables is BRL 120 million. And we see that -- we had an increase of BRL 41 million since the first quarter of 2019. If we look at our pro forma receivables portfolio without IFRS effect, the volume is BRL 122 million. We'd like to highlight this figure, because in a moment of uncertainty, this is always an important asset that the company can use for liquidity.

The next slide on Page 19 shows our financial position and how solid it is. This is very important for the current moment, as was said by Joseph. We have BRL 261 million in cash, BRL 305 million in gross debt, which is a net debt of BRL 44 million. But it's important to highlight that we have a long debt schedule. If we look at 220 -- excuse me, 2020, it's BRL 60 million, and we have 4x that value in cash. So this is something to keep in mind.

The next slide shows our cash generation. With the necessary adjustments, we generated cash of BRL 15 million in the last quarter. And in the last 12 months, BRL 138 million was generated. So that's an expressive figure.

The next slide shows our operational leverage. We are continuing to reduce the company's financial risk. It was reduced by about BRL 1 billion over the last 3 years. In the last quarter, we had an operational leverage of BRL 58 million.

So to translate our indebtedness. Here, we see our net debt representing 5% of our shareholders' equity. And since we don't have any debt consolidated in our sheet, our corporate debt is at the same level, 5%.

And this is a slide in which we try to show the discount we have in the TECNISA shares and in comparison to peers. It's an opportunity. Our shares are at 0.51, while the average is 1.05, which shows it's an opportunity, because we also move towards the average. And that would be a great evolution in our share price. So it's always important to look at this and compare ourselves to the market.

Finally, before I conclude the presentation, would just like to talk about our reverse stock split. It was approved in the extraordinary assembly on May 5. It's a recommendation from B3. We have a link, if you would like to read it and see why it was recommended. But it mitigates volatility risk, and it's a way of attracting new investors and also to take part on in [indices] that we were not a part of before.

So this was approved in an assembly by shareholders on the 5th. So this split schedule is lined out here so that people can update their positions from May 6 to June 4. And it will be negotiated after the reverse split from June 5 onwards. So this doesn't change your shareholder position. We're basically having a reverse split into -- from 10 shares to 1. So it doesn't change the value that each shareholder owns.

So that concludes our presentation, and we're now open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Since this presentation is being translated to English, we will ask questions in Portuguese first, and then we'll open up for questions in English. So please ask your questions in English once without a follow-up. (Operator Instructions) The first question comes from Mr. Elvis.

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Elvis Credendio, Banco BTG Pactual S.A., Research Division - Research Analyst [2]

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I have 2 questions, first on sales. You said that sales as a whole has decelerated from the beginning of the quarantine and the pandemic. But we know that you have some projects in Brasília and that stores are still open there. So in comparison to the pre-coronavirus period, how has visitation done -- been doing, excuse me? How are sales moving forward in those areas? And based on that, based on what you have in Brasília, how do you expect to -- the demand in São Paulo to behave after visitation to store resume?

Also if you could tell us a bit about optioned land plots. If you can tell us the terms of those options, if prices were more attractive than what we were seeing before. And if you can buy land plots versus via swaps in better areas of the city, which was a condition that was not so favorable before. That's all.

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Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [3]

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This is Joseph. So regarding sales, it's true. I didn't mention this during my presentation, but during the interviews published in Valor in State of So Paulo, I mentioned that in Brasília, we have been selling. The stores are opened there. Of course, they have rules to avoid people -- having too many people. But the sales are going on almost at the same level as before the pandemic. So this represents an important part of our business. But our biggest inventory is still in São Paulo.

And in São Paulo with stores closed, things are still going slow. When it does reopen, as I said during my presentation, I imagine that we are going to have some repressed demand, because people postponed their intention to buy, but they still have a need to buy. Of course, they want, they need to be able to buy. But from the tax point of view, credit lines and so on, I don't see any problems.

My biggest risk would be unemployment. If someone is unemployed, they might not buy the apartment they want. But overall, people are getting married. They might be postponing their wedding parties, but people are having babies. People will not give up on these things. And over time, this demand rage right now is repressed. When things go back to normal, I think we're going to see a very good market.

Now about optioned land, the basis we have signed are that usually, we don't pay upfront, or if do, we pay at most BRL 100,000. And then we request 180 days for legal and environmental analysis, but we also have motivation there. People usually don't step away from these processes. And why is that important? When everything goes back to normal, we're going to have the land plot in our company studied and analyzed to be developed. And we can even start already going through the bureaucracy with the city. And if the market is not doing so well, if we think these acquisitions are not worth it, we can step away. So this is a good strategy. And we've been doing these with normal land prices. We haven't seen any price reductions in land plots. There are a few that might accept a condition that's more favorable to us, but this is not a rule. And these are not significant discounts yet. It may be that over time one or a few landowners, if they require more liquidity, may reduce their prices. But for now, we're not seeing that happen so much. And swaps, yes, we have been seeing more availability from salespeople to -- for swaps, and we've been negotiating that. All right. Does that answer your question?

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Elvis Credendio, Banco BTG Pactual S.A., Research Division - Research Analyst [4]

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Great. It's very clear.

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Operator [5]

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Our next question is from [Gabriela Morales].

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Unidentified Analyst, [6]

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I'd just like to understand a bit more about your online sales scenario. How did it do in April? And how is it doing now in May?

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Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [7]

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This is Joseph. We use DocuSign as a platform. It's a very well-known tool. It allows you to sign online, and it's integrated to our system. It's also linked to payments and so on. So the process takes place online completely. The volume is not very expressive so far, though. Again, people need to want to buy. They can buy online, but they need to want to buy it. In order for that to happen, usually they need to visit a store and see a decorative set. So people usually don't buy it if they want to live there without visiting a store. So again, I think people are postponing their decisions. Maybe an investor or someone from abroad who wants to buy a piece of real estate in Brazil, expats from Brazil might buy online. But for now, the platform works well, but results have not been so significant.

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Operator [8]

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Our next question comes from (inaudible), Santander Bank.

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Unidentified Analyst, [9]

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I'd just like to understand from the launch point of view, what guide-outs you're seeing now? What's imminent? Is it -- I'd just like to hear that from the demand point of view and also approvals by the city, if you could give us some color on that.

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Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [10]

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This is Joseph. No, the only thing that is preventing us from launching now is because projects -- the project is not approved yet and because stores are closed. Otherwise, we would definitely be launching even despite the economic situation. We have very good lands with very good projects, which is already drawing the interest of many people. We've been monitoring online. People are spending more time online, and they've been visiting website. Our website accesses have gone up. But the only thing preventing us from launching it is the project is not being launched -- excuse me, not being approved. Otherwise, we would be launching.

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Operator [11]

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(Operator Instructions) We received a question online from Guilherme. And he's asking about the main risks for 2020 after the COVID crisis. There are many different apartments in the company's website from previous years, and this is a huge part of your inventory. Do you think that will be seen as a loss in -- these are pieces of real estate with over 10 years?

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Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [12]

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Guilherme, to answer your question, the inventory you see to 2010 is the launch date. And that's our Taguá-like enterprise in Brasília, which had some challenges. So the construction was concluded in 2013, and then we needed 3 additional years. And that's when we started selling. But the product is very nice. It's modern. It has common areas, which are fantastic. And this is what is being sold now. So despite its apparent age, it's not a loss. It's selling, and we didn't have to provision any losses there. Actually, we did have a provision last quarter for this enterprise, but we've been able to sell it well and we're not going to have any problems in that sense. Okay? And now Flávio will read the next question.

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Flávio Vidigal de Capua, Tecnisa S.A. - CFO & IR Officer [13]

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The next question from [Anderson] line. My question is about the reverse split. Normally, this strategy leads to a reduction in the asset prices, which is not good for shareholders. Given the pandemic, shouldn't you wait for this to happen? Was it then too early?

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Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [14]

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Actually, what we want to say is that the reverse split doesn't influence the price -- the listed price for the share. There's no cause and effect there. What we wanted here was, as we presented in our call, the technical (inaudible) is still solid. Our asset position is still the same. And there's no event that can get in the way of the company's resolve in that sense. So we don't really see that relationship between the reverse split and drop in prices. There might be other factors there, but not the split in itself.

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Operator [15]

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As we no longer have questions, we'd like to give the floor for the company's closing remarks.

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Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [16]

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Elvis can ask a question if he's there and if he wants to say something, please.

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Operator [17]

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(Operator Instructions) Elvis, your line is open. You may proceed?

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Elvis Credendio, Banco BTG Pactual S.A., Research Division - Research Analyst [18]

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I have a couple of questions. First, about the position that you had with hotels, if you could tell us a bit more about that. I'd just like to understand it better. And another open question here. You mentioned in your presentation a change in the demand profile. It's possible that many companies will choose to have their employees working from home. So you said that maybe this will benefit areas that are further away from downtown. So what do you think new launch will be like for the company in the future? And how do you look at the studio market, since it would be -- it would go against this possible change in demand?

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Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [19]

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Right. Thank you. Well, the hotel was something that was asked before. Someone asked what were the effects of COVID on our assets. Following a recommendation, which I'm not sure where it came from, we would reassess that due to the dynamic and looking at our assets, we told auditors that we really do have a hotel in Curitiba NH Five, which has been closed. It basically received business visitors. And we're not sure if people are still going to continue to travel with the pandemic and when this will continue.

So we studied this hotel to reevaluate it, and we got the amount we listed in our books. So the recommendation from our auditors was to reduce the valuation, and that's what we did. We also believe it's one-off. It's something that's related to a pandemic. And it's possible that after things go back to normal, its value will recover.

Regarding the change in the demand profile, people have been looking for apartments that are further away from the city. I do think home office is come to stay, but the matter is how much so. Are people going to be working from home every day? I don't think so. But will people go to work every day? I don't think that's so either. So I don't know if people will be working from home 1 or 2 days on average a week. But if you have 1 day at home, it's already 20% of your time.

If you look at everyone who works in downtown São Paulo and if you reduce that by 20%, that's a couple of million people. And they will want products that are better geared for home office. So they're going to want to have some space or a common area in the apartments. And this is going to be a new trend. Like I said, if you go less to the office, you're willing to live further away. So people will want to live in bigger apartments. Trade-off right now was either living closer to work in a smaller apartment or living further from work in a bigger apartment.

And studios were doing better because of this. We've never been great fans of studios. We've never bet so much on it. And I think that this is a product that will be harmed by the new trend. Because if people are working from home, they probably should -- they probably wouldn't want to live in a small apartment close to work. So that's my opinion, and we're going to continue enough to bet on these products.

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Flávio Vidigal de Capua, Tecnisa S.A. - CFO & IR Officer [20]

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We received a question from the webcast from Gustavo. A very good question, and we were talking about it here amongst ourselves. He said, congratulations on your presentation. And my question is about your cash. If the pandemic lasts for more than 1 year, for how long would your cash position be able to withstand it? Of course, this is a theoretical question, but it's very important, because it addresses the company's financial robustness, which was discussed by Joseph in his presentation.

So considering that our debt terms in 2021 and 2022 add up to BRL 135 million, we have about BRL 120 million in SG&A. So that's BRL 255 million, which would be BRL 20 million if we consider interest, so BRL 40 million. If nothing were to change, we would still have 1.5 to 2 years' runway with our cash. But considering the provisions we have, we have additional BRL 400 million. And of course if the situation were to come, we would be reducing other costs from the company in SG&A. We wouldn't keep the same structure.

I thought that was a good question, because it shows the robustness of the company's cash position right now, which is very important for the company.

And now the company will give its closing remarks. We have a couple of other questions, but I think they've been asked before. They're basically asking about the reverse split and trying to understand how much prices will go down.

But in my point of view, this reverse split will only benefit us. Prices will not go down, because they're going to have a smaller number of shares at a higher price, but the end amount is the same. We're not creating or destroying value, but it reduces volatility. We're seeing a few percent variation, which is a lot of volatility right now.

So to conclude, I'd like to thank you all for listening in. We're open for your questions, and we're still working hard to get the best returns we can for our shareholders. And if you have any questions, our Investor Relations department can answer them. Thank you, and have a good day.

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Operator [21]

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Thank you. This concludes TECNISA's conference call. Thank you for participating, and have a nice day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]