U.S. Markets closed

Edited Transcript of TCSA3.SA earnings conference call or presentation 11-Nov-19 3:00pm GMT

Q3 2019 Tecnisa SA Earnings Call

Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Tecnisa SA earnings conference call or presentation Monday, November 11, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Felipe Meira Dias

Tecnisa S.A. - IR Manager

* Flávio Vidigal de Capua

Tecnisa S.A. - CFO & IR Officer

* Joseph Meyer Nigri

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

================================================================================

Conference Call Participants

================================================================================

* Eduardo Figueiredo Mota Diniz Costa

Crédit Suisse AG, Research Division - Research Analyst

* Elvis Credendio

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

* Enrico Trotta

Itaú Corretora de Valores S.A., Research Division - VP of LatAm Real Estate

* Victor Tapia Migliorin

Banco Bradesco BBI S.A., Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen. Welcome to the conference call to release the results of the third quarter of 2019 of Tecnisa. Today, with us we have Mr. Joseph Nigri, CEO; Mr. Flávio Vidigal De Capua, CFO and IRO; and other executive officers of the company. All participants is being simultaneously transmitted on the Internet at Tecnisa's Investor Relations website, www.tecnisa.com.br/i, at the platform MZiQ where the presentation is available for you to download. (Operator Instructions)

Before continuing, we would like to explain that statements made during this conference call relative to the company's business prospects, operational and financial projections and goals are beliefs and assumptions of Tecnisa's management and are based on information currently available to the company. Forward-looking statements are not guarantee of performance because they involve risks, uncertainties and assumptions, as they refer to future events and, therefore, depend on circumstances that may or may not occur. Investors should understand that overall economic scenario, industry conditions and other operational factors may affect the future performance of the company and leads to results that will be materially different from those expressed in such forward-looking statements.

Now I would like to give the floor to Mr. Joseph Nigri, who is going to start the presentation. Mr. Nigri, please.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good afternoon to everyone. Welcome to our conference call. Starting on Slide #4 of the presentation. Although widely publicized, so in July, we raised BRL 446 million that was a follow-on. And of the funds raised, 50% are going to be used to promote our growth including the acquisition of land and the other 50% will be used to improve our -- the company's capital structure, to pay debt, to reinforce our working capital that we are going to explain further ahead.

After the follow-on, the company is already in a much more favorable situation than before where the net debt is practically 0. We're buying land again as we are going to show. And also in terms of amortization and sales of the inventory, we have been able to sell a project Taguá in Brasilia with more than 200 units sold, and this development was -- had a significant share of our inventory and we are going to explain more details about that in our next slide.

On Page 5, you can see our -- the land that we are buying, and the land that we are negotiating. Many of them with resolution causes and we call them options, but the likelihood of them turning into real sales is very high. We are only listing here the plans that is very much likely to turn into actual sales in many different regions of the city of São Paulo.

On Page 6, we reinforce the strategy of buying land. In São Paulo, we are not going to leave the state of São Paulo. The focus is 2- to 4-bedroom units starting at BRL 240,000 and from then up. We are not going to sell or to build anything much lower than that price or much above. So on average, BRL 100 million per project and there may be bigger projects, where we might try to find partners to do it with us, to develop with us. And the size of the company, we decide to launch BRL 1 billion per year. And so we will try to build a land bank to be able to dilute our costs.

On Page 7, a little bit more about debt negotiation -- renegotiation strategy. BRL 85 million of the debt have already been paid. They were high cost debts that had the cost of 13% per year. Another BRL 47 million have been renegotiated with 4 percentage points reduction in its cost. We reissue real estate receivables totaling BRL 117 million, with a 3 percentage points reduction in its cost. We upgraded our corporate rating from brA to brAA- with a positive outlook; of course, this means improvement in our financial expenses, not just this quarter but in future quarters too. So we have a gain of BRL 5.7 million in this line and the one in the second quarter. Obviously, our results, if you look at the bottom line was negative. And in spite of that, I would like to reinforce the company's confidence that we are at a very convenient situation financially, and also in terms of the land that we have and our launches and everything.

Now to continue on Page 8, I'm going to give the floor to Flávio.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Joseph. Good afternoon to everyone. I'll be talking about our operating performance, as Joseph said. I'll start with the launches of 2019. We are very happy with the results that we have been finding for our launches. Giving you an update. Vila Regente Feijó and -- with PSV BRL 118 million (sic) [BRL 116 million], 83% sold; São Paulo Santo Amaro with PSV BRL 33 million have been launched with 61% of the units sold; Jardim Bella Vista, PSV in Santo Amaro BRL 111 million, 67% sold; and then in Pinheiros, as we are telling you with PSV of BRL 84 million, and we have sold the full inventory in 48 hours, 100%. Of these 4 projects, Tecnisa holds 20% of the total. Tecnisa's share is 20%. So the performance is very good with everything that we are launching.

Now in terms of operating performance, contracted sales. We have a good pace of sales. In terms of gross sales, we have BRL 206 million in the period. In 9 months gross sales, comparing to the first 9 months of 2018, we went from BRL 402 million (sic) [BRL 502 million] to BRL 630 million. Tecnisa's share is more or less the same, BRL 360 million to BRL 353 million. And in the quarter, from the second quarter to the third quarter of 2019, we are more or less stable at BRL 122 million, as Joseph said. The highlight is the sale of Taguá project, where we had -- where we sold BRL 27 million, then it was relaunched on August 22.

In terms of net sales, Tecnisa's percentage has evolved BRL 175 million in the first 9 months of the year with BRL 258 million in the first 9 months of 2018 to BRL 563 million in the first 9 months of 2019.

Now moving to the next slide. It has been a while since we last looked at this long-term trends chart, and Tecnisa had high inventory and so on. And here, you can see the nice work that we conducted in order to reduce inventory, especially in the third quarter of 2018 onwards when we reduced the inventory more than 40% a year. In the 3Q '18, we had BRL 941 million, and at the end of 3Q '19, we had and BRL 569 million.

Now on next slide, you can see the breakdown of the inventory: 40% in São Paulo, 44% in Federal District, 14% in Paraná and 1% in other states. Also a highlight, the rate of complete inventory, most of the inventory is complete. Meaning that we ended the previous cycle of construction and now we start a new construction cycle with Araribá project that I mentioned in the beginning of the presentation. We have started the construction -- 1% construction, and 13% of the inventory with construction not yet started. In this inventory, we are not considering the BRL 111 million that we have for PSV that might mean an increase in inventory in the future.

Now on Slide #13, the land bank. Our land bank is at BRL 3.9 billion. As a reminder, the project represents BRL 2.1 billion in Tecnisa. This is Jardim das Perdizes project. And as we mentioned in the opening, we have bought land in the district of Mooca in São Paulo with a potential PSV of BRL 108 million.

On Slide #14, the volume transferred was from BRL 79 million in the second quarter to BRL 65 million in the third quarter. The highlight here is that now we are selling units that are not ready and BRL 27 million in a project where we have a large volume that will be transferred once we sell the portfolio. In terms of units transferred, we have transferred 312 units in this period.

Now on the next part, financial performance, Slide #16. You can see an increase in the company's net revenue because of the better sales performance from BRL 47 million to BRL 75 million. For the first 9 months of 2018, BRL 91 million to BRL 234 million in the first 9 months of 2019. Gross income was minus BRL 3 million, now it's positive in the third quarter of '19 BRL 4 million; in the first 9 months, BRL 49 million.

In terms of general admin expenses, we are controlling it strictly. So taking out effect of the long-term incentive BRL 14 million, adding BRL 2 million of the long-term incentive totaling BRL 16 million. And if we compare 9 months to 9 months and also taking out the long-term incentive: in the 9 months of '18, BRL 45 million; in the 9 months of '19, BRL 42 million, a drop of BRL 3 million considering that there was inflation in the period and also considering the long-term incentive of BRL 5 million, this number would be BRL 47 million.

In terms of net income, so we went from minus BRL 144 million to minus BRL 52 million. And in the first 9 months '18 against '19, going from BRL 213 million to BRL 198 million.

Now on the financial position on Slide #18. So our shareholders' equity is BRL 1 billion. The receivables went from BRL 69 million to BRL 77 million as a result of our own portfolio and this receivable schedule is on the chart at the bottom of the slide. You can see a higher concentration of receivables in the short term.

Now on Slide #19, you can see the cash comparing the second quarter to the third quarter. So our cash went from BRL 87 million to BRL 396 million. Our total debt drops considerably from BRL 528 million to BRL 389 million as a result of what Joseph mentioned in the beginning. The payment of our debt, the maturities and the debt amortization schedule is in the chart below and the average life of our debt is around 2 years.

Now on the next slide, where you can see cash generation. For another quarter, we had good cash generation, BRL 32 million without IFRS and BRL 22 million considering IFRS. And in the last 12 months, we had a cash generation of BRL 158 million without IFRS effect. As to our operational leverage in the third quarter, we had approximately BRL 1.4 billion. And in the third billion (sic) [quarter], we are negative by BRL 2 million, so we are ready to grow with a lot of safety.

Now on the next slide, where we see net debt over the shareholders' equity. So net debt over shareholders' equity minus 1%. And corporate net debt over shareholders' equity, excluding the debts of projects, is minus 9%.

So now we close the presentation of our operational aspects, and I'm going to give the floor to Joseph for his final remarks.

--------------------------------------------------------------------------------

Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [4]

--------------------------------------------------------------------------------

Thank you, Flávio. So we are very confident and, obviously, launches take a while before they start happening because we're still buying the land, and it takes a while for them to be booked in our financials in Jardim das Perdizes, where we also have a land bank of BRL 2 billion. It depends on the Água Branca Law passing and I'm optimistic. I think it's going to pass and it will be approved. And this is the message and now we are ready to answer your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

Now our first question comes from Mr. Enrico from Itaú BBA.

--------------------------------------------------------------------------------

Enrico Trotta, Itaú Corretora de Valores S.A., Research Division - VP of LatAm Real Estate [2]

--------------------------------------------------------------------------------

I have 2 questions. The first one about the land and what you bought in the district of Mooca in the city of São Paulo. Could you tell us more about the timing? And also for the other land that you're almost buying, what's the time line? When do you think you're going to complete the purchase? So the sale of inventory went very well, and why did it go very well? Could you give us more details about your sales in the south? These are my 2 questions.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Enrico, this is Joseph. About the land in Mooca, although it's large, 4,500 square meters, we are planning to launch it in the second quarter next year and everything that we are acquiring now, and this will come through this month. We are hoping to launch everything next year, maybe third or fourth quarter next year. Jardim das Perdizes, once the law is approved before the end of this year, we think we'll be launching next year maybe as early as in the second quarter. This is very important for us, the earlier the better, and we're really working very hard towards that. And as to sales, thank you very much. I'm very happy with the performance. We will continue with an effort and picked up sales contributed in the quarter with BRL 27 million. But to give you an update, we have already sold 216 units of that development that was launched in August. It totals about 800 something units. So if we keep the pace, we will be doing very well.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Our next question comes from Mr. Pedro from Bradesco BBI.

--------------------------------------------------------------------------------

Victor Tapia Migliorin, Banco Bradesco BBI S.A., Research Division - Research Analyst [5]

--------------------------------------------------------------------------------

This is Victor. Could you give us some more detail about the land that you have bought? How much do you expect in terms of PSV? What about cash? Are there any terms for payment? Is it limited by any contingency? And now regarding the contingencies more specifically, your provision for contingencies have gone up by BRL 14 million, do you have any novelty or any developments to tell us about this?

--------------------------------------------------------------------------------

Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [6]

--------------------------------------------------------------------------------

Victor, thank you. This is Joseph. That's still live, and the PSV percentage is between 15% and 20%, the price of the land over the PSV of each project. As to money swap, we have about 2/3 cash, 2/3 -- 1/3 swap. The market is dynamic. There is some competition that we are facing. So we need to use 2/3 of money. And in terms of evolution, each project is one project or one deal. Sometimes we need to buy many small houses for this land, and then we need to negotiate one by one. We can buy one and then not be able to buy the other one. It's -- they're like a package. Sometimes there are environmental issues. As to contingencies. What I have to say is that the company has lawsuits in court. And sometimes our lawyers reassess likelihood of coming to a favorable decision. Sometimes something that we thought we're going to lose, we win, and the other way around too. And this is very dynamic. It's in the hands of the lawyers and auditors in terms of classifying and making provisions. Sometimes there are some new lawsuits, something related to technical assistance. So every quarter, we reassess and adjust this number. And everything that has a high likelihood of us closing, we make provisions for.

--------------------------------------------------------------------------------

Victor Tapia Migliorin, Banco Bradesco BBI S.A., Research Division - Research Analyst [7]

--------------------------------------------------------------------------------

Just following the first question, the land that you are negotiating now, what about the clauses that you're negotiating? Are you going to spend -- disburse the cash in a short term soon as you close?

--------------------------------------------------------------------------------

Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [8]

--------------------------------------------------------------------------------

The sale for the pieces of land that we showed to you, all resolutions are related to documentation and environmental. So if everything is 90, 120 days, then cash will be out within that timing. It's not longer terms.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Next question from Mr. Elvis from BTG.

--------------------------------------------------------------------------------

Elvis Credendio, Banco BTG Pactual S.A., Research Division - Research Analyst [10]

--------------------------------------------------------------------------------

Mr. Flávio, I have one question about the launches. You are selling very well the launches of this second quarter. You have sold most of it, almost 80% in some cases. So what is the evolution of prices? And as demand, can you see the evolution in terms of balancing out the speed of sales? Or is it too early to say anything about that?

--------------------------------------------------------------------------------

Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [11]

--------------------------------------------------------------------------------

Elvis, this is Joseph. It's an interesting question. For in these projects, we prioritize the speed of our sales. Although we saw we were selling well, we decided not to change prices until -- let it be sold. But it's something for us to consider in future launches, especially if sales are very good. If it's very fast, we can raise prices. But it is a one-on-one strategy. For example, the (inaudible) development had a price cap. Because of the law, (inaudible) there is a limit of income of whom you can sell it to and you can't raise prices. There was a limit. So we didn't have -- we couldn't do much about it. There was a charter limit, and even so we sold everything. But for new development, we may use the strategy of raising prices. Also because we understand if we are selling very fast, maybe it could be more expensive and we could be making more money.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

(Operator Instructions)

Our next question comes from Mr. Eduardo Figueiredo from Crédit Suisse.

--------------------------------------------------------------------------------

Eduardo Figueiredo Mota Diniz Costa, Crédit Suisse AG, Research Division - Research Analyst [13]

--------------------------------------------------------------------------------

First a follow-on about the provisions for contingency. Was this quarter's provision related to one specific project? What's your schedule for prepayment and negotiating of the debt, the ones that are the most expensive? So what about the cost of your debt this quarter? Is there any reduction in the cost of the debt this quarter?

--------------------------------------------------------------------------------

Flávio Vidigal de Capua, Tecnisa S.A. - CFO & IR Officer [14]

--------------------------------------------------------------------------------

Eduardo, thank you for your question. As to contingency, no specific project. It's [pulverized] considering the actions that are going on, as Joseph mentioned. As the work we've been doing with debt, we've been accessing potential investors. We've seen that there was a considerable worsening in the capital markets more recently, and we are waiting for the best timing to go to access the market. Of course, some debts have a high component in terms of pre and we want to be more indexed by the CDI, especially considering that there may be a reduction. So we are working on that right now. And as Joseph mentioned in the opening of our conference call, so we had an improvement of financial results of about BRL 6 million. And we think they can get even better considering the work that we are doing in terms of improving the cost of the debt. As we pay it, they hold a smaller and smaller share in our financials, and we want to reduce our liabilities with cash generation. But there is not a specific landmark for us to reach.

--------------------------------------------------------------------------------

Felipe Meira Dias, Tecnisa S.A. - IR Manager [15]

--------------------------------------------------------------------------------

This is Felipe Dias. There are many questions that were asked through the webcast. The first, I'm not going to say all the names, and there are many questions about Água Branca development. What does the company expect for that project?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Luis, this is Joseph. [I convinced] everything related to Água Branca. While the bill for Água Branca is in a city council, it's gone through 2 public hearings, and it's ready to be voted. There might be some minor amendments, but it's ready to be voted. In our opinion, it's a good project for us, not just for Tecnisa, but for the market as a whole. And it's also good for the region for the people who live there because funds will be invested in the region. And it's also good for the city because strategic area will be developed with good transportation services, good employment, which might generate good employment and taxes. So it's a win-win-win situation. And according to the conversations that I have had with people in the city administration and some city councilors, I'm still optimistic. I think it is going to pass. But if it doesn't pass or if it takes too long, we haven't yet defined a strategy of what to do, but we have a few options: one option would be to develop a [GENF] that doesn't pay setback. And I don't think it would be good for the neighborhood to have this type of product there or we would need to pay the current setback if we want to launch. I think these are very strategic decisions that need to be approved by the Board. So for now, I prefer to wait for the bill to be voted.

--------------------------------------------------------------------------------

Felipe Meira Dias, Tecnisa S.A. - IR Manager [17]

--------------------------------------------------------------------------------

Very good. There's a question about your debt amortization schedule and you have talked about that. The next question, what are the next steps in terms of the control of fixed costs? How much longer are you going to see expenses greater than revenue?

--------------------------------------------------------------------------------

Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [18]

--------------------------------------------------------------------------------

You're talking about admin expenses in terms of financial expenses, we have talked a lot about that. What I have to say about admin expenses is that we cost as much as BRL 180 million per year. Today, we have BRL 150 million, BRL 160 million. Our structure is quite appropriate for what we want to do and, obviously, reducing expense is something that we always want to do. We always want to cut expenses. And -- but our main focus is to generate businesses, deals, services for our structure. And if we are able to reach the level that we've been saying in terms of relationship with this cost, if we don't increase it any further, I think that we have a very efficient structure.

--------------------------------------------------------------------------------

Felipe Meira Dias, Tecnisa S.A. - IR Manager [19]

--------------------------------------------------------------------------------

We have a question from (inaudible). The first one, what is the outlook in terms of inventory reduction? The second part for Flávio, what is the net income of the company? What should we expect in terms of that?

--------------------------------------------------------------------------------

Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [20]

--------------------------------------------------------------------------------

Well, in terms of inventory reduction, I think we talked about. We have as much as BRL 2 billion, now we have BRL 500 million something. And in terms of profit, we can't profit or give any guidances. We are forbidden to give any guidance with that big fund.

--------------------------------------------------------------------------------

Felipe Meira Dias, Tecnisa S.A. - IR Manager [21]

--------------------------------------------------------------------------------

Okay. Next question, Maria Julia.

Congratulations for completing the capital increase. I would like to hear more about launches in the corporate sector, and what about your operations in São Paulo -- in the interior of São Paulo?

--------------------------------------------------------------------------------

Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [22]

--------------------------------------------------------------------------------

Well, interior of São Paulo highly unlikely that we'll do anything, except if there's a very, very good business deal comes up. It's not part of our strategy. We are going to stick to what we defined in our strategy. As to corporate buildings, well, people who buy back are seeking income from rent. So our business model is related to develop and so we will develop and move to the next. We don't rent, but maybe we could have a corporate building in the future and seek a partner who have the strategies to carry those assets and explore them for income, and we might have a partnership or something like that. But we, Tecnisa, we are not going to explore assets for sale.

--------------------------------------------------------------------------------

Felipe Meira Dias, Tecnisa S.A. - IR Manager [23]

--------------------------------------------------------------------------------

Thank you, Joseph. The other questions in the webcast are always related to Água Branca setback.

So if there are no further questions, I'm going to turn it to Joseph for his final remarks.

--------------------------------------------------------------------------------

Joseph Meyer Nigri, Tecnisa S.A. - Vice-President of Executive Board & CEO [24]

--------------------------------------------------------------------------------

So thank you all very much for attending our conference call. I know it's a little bit repetitive, but what I'm thinking about is this confidence in the team and in the market. We've been seeing the market with good indications, the economy with good indicators, such as interest rate and unemployment going down, loans going up, everything is helping. So this makes us optimistic. Also the land that we are buying, good and long land. We'll be launching good products in the market. So we want to serve this way then to reach good growth. And Flávio and Felipe will be available and I'll be waiting for you in our next conference call. I wish you all a good afternoon.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Thank you. Tecnisa's conference call has now ended. Please disconnect your lines, and have a good afternoon. Thank you.

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