Earnings Call: Q2 2023

Aug 11, 2023

Summary

Q2 gross sales reached BRL 219 million, with BRL 5 million net income and a 27% gross margin. Launch plans and higher-margin growth hinge partly on CEPAC auction timing, while high interest rates continue to weigh on buyers.

Good afternoon, everyone, and welcome to Tecnisa's second quarter of 2023 earnings conference call. Today with us, we have Mr. Fernando Tadeu Perez, Chief Executive Officer, Flavio Vidigal de Capua, CFO, Investor Relations Officer, Henrique Cerqueira, Commercial Director, Anderson Hiraoka, Investor Relations Manager. We inform you that the recording of this conference will be available on the company's IR website. As usual, we will start with a presentation by the executives and then we will move on to the Q&A session. If you need support, please send a message via chat box. Now, I would like to turn the floor over to Mr. Fernando Perez, who will start the presentation. Please, Mr. Perez, you can proceed. Good afternoon, everyone, and thank you very much for joining the call. We will be talking about our earnings, specifically about the second quarter of 2023. We have a presentation, some slides I will be sharing with you now. Okay, let's just move on. Today's presentation has the following agenda. Strategy, and this is my part. Then I will ask Flavio Vidigal de Capua, our CFO, to talk about our operating performance, economic finance, or financial performance, and our financial position. At the end, I will be here together with you to answer the questions that may arise. Okay, so our strategic guidelines. We have had very solid profits for our business plan for the next few years. We have a focus on our commercial and marketing strategy. Another crucial pillar is administrative expenses that should be under control, to increase our efficiency levels. Then another point is profitability of our operations and also value generation for our shareholders. Then a constant search for innovation. We know that Tecnisa is always pursuing innovations in its DNA. So, profitability. Our land bank is BRL 4.3 billion in potential sales. But our potential sales value. And we have over BRL 1 billion that have been approved and BRL 1 billion projects that are under approval. As you can see on the chart, most of our profits or development is in the west of São Paulo, in the Jardim das Perdizes, and then we will start to speed up our launches. In the south of São Paulo, we have about BRL 1 billion in PSV. In the east, we have a little less, and also in the city of Aquiraz and the state of Ceará. I would now like to share what is upcoming. We have three major developments that are expected to be launched this year. So we have 60 high-end units of 258 sq m each. So a high-end, high standards with BRL 204 million. That's the preliminary PSV, 60 apartments of 258 sq m in four suites. This is in the district of Chácara Flora in São Paulo, extremely high-end. A few years ago, we had a development across the street from this one. We had very good sales, and now we are offering this other building. Now, the next launches are Recanto Oliveiras in the master plan, extremely secure neighborhood in São Paulo, in the Jardim das Perdizes. And we have many cameras there to identify movements of people. So this made this neighborhood increasingly more secure. So it's a partnership with Hines, and our share is 57.5%, and the PSV, BRL 570 million. Then we have Bosque Cerejeiras, an additional development with 96 units from 222 to 293 sq m, and four duplex apartments from 435 to 568 sq m. This district, it grew a lot. There's really a high demand there, and we have a high demand for larger apartments there. People with good salary levels, and that's what they are now requesting. The preliminary PSV is BRL 430 million, and our share is 57.5%. This other slide is about our gross sales in this quarter, that are over BRL 121 million. 40% of them were in Jardim das Perdizes district. We launched two towers already, Pitangueiras and Figueiras. At the bottom, we see the second quarter of 2022 compared to the second quarter 2023, about sold units or the area that was sold in many of our developments. What is interesting to see here on this other slide is about our administrative expenses, G&A expenses. As you know, we are well known in the market in this respect. Our expenses and our net revenues, the ratio has been improving progressively. This quarter, 2023, quarter two, as compared to the second quarter of 2022, there was an improvement of 26 percentage points. Here, I'd like to highlight, and this was also shown on our release. I think things should've been made clearer there. As you can see, we have important information for analysts and shareholders. What everyone looks at, of course, is the adjusted gross profit, BRL 65 million, but the gross margin is also a very important indicator. On this slide, we have a gross margin of 27%. However, next please. What I'd like to emphasize is that the accounting system, as we saw in Perdizes and others, this margin, it's ready to go to 35%. That's the backlog gross margin. We are expecting to reach 35%, which is a very good margin, and that's what's expected throughout the market. That's the backlog margin. Then our net income. We are in a cleaning process. As you know, in our release, you may have seen that the net income was BRL 5 million, and that means we are having profit, or we've been having profit for three quarters in a row. So four now, right? That's a total of BRL 26 million in profit. Now, this is information about innovation. Our company has been working, as we discussed here, we've always had this vocation of innovation. We've always worked with startups, and we are now having startups in one of the programs that we have here. This year, we are focusing on ESG solutions. As you can see, startups are now invited to present their projects to us, and then we can choose some of them. Since the launch of this project in 2011, more than 700 companies have already participated, and 46 solutions were put in place. This year, in the first round, the eight startup solutions were chosen and are being put into place. One of them is in governance, and there's one in carbon sequestration in concrete. Right. Now, I'd like to ask Flavio Vidigal de Capua to continue the presentation on operating performance and other aspects. Thank you, Fernando. Operating performance now. As we can see this quarter, we closed it with BRL 219 million in gross sales, and that's over 30% growth when you compare it to the previous quarter. Also, when you compare the second half, that's about 10% growth, and our SoS remained at about 10%. Our inventory. Sorry, can you go back? The inventory is low, and we have now finished units. We have many construction works that are underway, and this has contributed significantly to this reduction of G&A in terms of net sales. Our net sale was BRL 207 million, and that's again up about 30%. Inventory, as I mentioned before, we closed at BRL 914 million in inventory, and 6% of the inventory is for finished units, also hotel units. This 1% is very low, of course, and that's outside São Paulo. In technical terms, our inventory is mostly in São Paulo. In terms of construction projects, with a date of June 30, we had less, but on this date, we started in July. We started the Pitangueiras and Figueiras construction work. All our inventory is now under construction, except for this 6% that have been finished. That will, of course, contribute to our net revenue. Next slide, financial and economic performance. We see significant improvement when you compare the second quarter 2022 to the second quarter of 2023. We have, when you compare semester against semester, again, we go from BRL 88 million to BRL 242 million. This led to a decrease in our fixed cost. As Fernando mentioned, this gross margin is at 27%, but adjusted in BRL 65 million. In terms of G&A, as Fernando mentioned, we are constantly seeking to improve our G&A, so we closed at 21% this semester with BRL 21 million in G&A, which is really in line with our purposes. Net income, BRL 5 million in the second quarter and BRL 9 million in the first half of 2023, with a loss of BRL 16 million in the first semester of 2022. Next slide. This is a snapshot we wanted to show you. When you see the notes in our balance sheet, you see that we have BRL 64 million in our backlog profit. When you look at Jardim das Perdizes, which is in equity earnings, a good part of the company. If you look at the future as presented, most of our launches will be in Jardim das Perdizes. As we've been telling you, the gross margin is much higher than other Tecnisa projects or the market at large. The projects we have launched are now contributing with a gross profit of BRL 62 million and the gross margin of 45%. When you look at our balance sheets, by compiling these two figures, we have a backlog of gross profit of BRL 126 million and the gross margin 35%. In our pipeline, most launches in Jardim das Perdizes, we are expecting to have greater contributions at the top margins. As Fernando said, we might achieve this in a shorter period of time, not only in terms of gross profit, but also in terms of G&A, as part of our revenue will also be in Windsor's balance sheet. As this will be even higher in the near future. Next slide, financial position. Our net worth or our equity, BRL 631 million. This quarter, we again have a breakdown of our total receivables that is not shown on our consolidated balance sheet. We have about BRL 500 million in receivables and BRL 129 million in Jardim das Perdizes. At the bottom chart, you see the time of project completion. In the next two years, we have BRL 312 million in receivables that were hired until 2024. We're expecting to get about BRL 450 million in receivables. This, of course, has a lot to do with the following slide, with our debt schedule and our total indebtedness. We have BRL 163 million in debt at the end of the semester. As these construction works came closer to their completion, we would reach net results, like with 78 in production, 585 in corporate debt. Our cash is BRL 166 million, and that leads to an indebtedness margin of BRL 498 million. If you do not take production into account, that is BRL 420 million. That is our corporate profit in terms of our indebtedness. It is well distributed over time, BRL 120 million, BRL 130 million that is going more mature next year. We are really comfortable with the repayment of this debt. I would also like to highlight that after we finished the quarter and we were acknowledged by our achievements, our number, we issued debentures. We now have an expectations of good CEPAC numbers, and we have strengthened our cash with BRL 50 million in our cash position. On the next slide, before we discuss this Vigor. S&P also reaffirmed the company's corporate rating at brA, and that is very good news. Some companies have got even negative ratings, so our corporate rating is really good. Our total indebtedness is about 79%, corporate net indebtedness, 420 divided by net worth of 61%. Some receivables, when you add that to our cash and divide by the net or equity net equity, it is 61%, which is really healthy. In conclusion, I would also like to highlight that today our NAV is BRL 11.86 per share, which is, of course, all our assets take away our liabilities. I would like to highlight in our investment, we have Jardim das Perdizes. The backlog post-March and whenever I have a launch in Jardim das Perdizes, as Fernando mentioned, we are creating value for our shareholders. Whenever we launch a new project, we will no longer have the investment. That will mean high margins, and that means increase in our net assets with greater value created for our shareholders. This is the end of our presentation. We can now move on to the Q&A session. Fernando will. Over to you. All right. Thank you, everyone. We are now here waiting and ready to answer any questions you may have, okay? Right. Thank you. We will now start our Q&A session for investors and analysts. If you want to ask a question, please click on the raise hand button or write your question in the Q&A button. The first question is from BTG Pactual. Elvis, you can ask your question. Good afternoon, everyone. I have two questions. One about CEPACs in the Água Branca operation. Can you give us an update about your expectations in the CEPACs auctions? Then a second question about your launches in Jardim das Perdizes, too. They have very different typologies, right? But I need to understand what you believe can be launched in terms of PSV in that region. When you consider the futures, do you think you could make BRL 1 billion a year? These are my two questions. Thank you. Thank you for your questions. Let us start with the second question. We have a lot to talk about the first question, much more. The possibilities of the launches in the next four to five years, about 25 billion. We are really careful, and Ricky is our Development Director. He is really careful, and our strategy has been really careful to avoid products that might corrode our IBC to have a wide diversity. This is a consolidated district. People moved here. They were a little afraid of how things would be, but our purchasers are friends and relatives of the current inhabitants of this district, the citizens who live there. So there is the possibility, and that is a very concrete number. That is the number we are expecting. As we have the CEPAC there, we are expecting to launch about BRL 1 million a year. That is the first about launches. Now, about BRL 1 billion a year. Now, CEPAC, we are hostage, right, at Brazil's red tape, government red tape. Although there is a lot of effort put into improving this, there are many people that are whipped with this red tape. We have some projects, as you have seen in the previous presentation. Many projects have already been approved, and we have demand for them. So we could have been launching more, offering more jobs to people. But unfortunately, red tape just is a strict jacket. The projects are doing well, right? We are following them up every day. Currently, Banco do Brasil needs to do all the formal processes, make it all official. There is to Brazil CVM, that is expected to take at least 60 days, and then it goes to the stock exchange for the auction to take place finally. The information that we get there is that this call to the auction should take place at the end of this month or early September, and the auction at the end of late September or early October. So these are the dates we are expecting things to take place. Excellent. That was very clear. Thank you very much. Thank you, Elvis. Next question. Mateus Meloni from Banco Santander. Santander. I will just let you ask your question. Mateus Meloni, you have the floor. Mr. Meloni. Hello, everyone. Well, on my side, I need to understand this part about expenses and the cost of some of the expenses you had this quarter. Maybe you could give us some more color on this, and if you are expecting anything down the road. Then the master plan. What is this change in the master plan? What is its impact on your business from now on? These are my questions. Thank you. All right, Mateus. Good afternoon and thank you for your question. For the financial part, I will ask Flavio to help me answer this question. With regard to the master plan, as most of our land is in Jardim das Perdizes, we are covered by the Água Branca operation, and the master plan does not really affect us much. We have other land, other property in other places, then the master plan has a greater impact. So there is a lot of discussion, right? Always what the master plan has affected the all developers, but things have improved, but not that significantly. Our greatest profits come from the Água Branca operation. Can you, Flavio, over to you. Right. Good morning, Mateus. We discussed with our team, and we realized that part of our engineering team could be allocated for costs coupled with support to engineering. So we had about BRL 2 million in expenses for cost, and that was an isolated and one-off event. That was just a change of lines, right, from expenses to cost. But again, the order of magnitude there is about BRL 2 million, okay? This measure, Mateus, as you well know, this line from time to time, companies need to review their accounts and we had some adaptations in our administration and so things have been reallocated. Very clear. Thank you. Thank you, Mateus. Our next question. Bruno Mendonça, Bradesco BBI. Bruno Mendonça, over to you. Hello, everyone. Good afternoon. Thank you for taking my question. I have two questions, in fact. You've shown a very interesting chart, and you have that margin, Jardim das Perdizes. So you have some launches that are independent from CEPAC, but how do you expect these projects that haven't been launched yet, will margins be similar to the ones that you're showing or will it be very different? Is there any possibility of launching anything else without a CEPAC? That's my first question. Now, the second, the plan on receivables. Maybe you can, again, give us some color on your receivables portfolio and its health status. So how much will clients have to finance or fund so that we know how healthy your portfolio is? Well, thank you, Bruno. Flavio will help me too. The first question is, I'll give you a very basic answer. So what is the margin in Jardim das Perdizes? A good part, there's a good and a bad part to it. Everything that's bad has also a good part. Everything that's good has a bad part. So this lack of CEPAC might be seen as bad, but there's a good side to it. We bought this land about 10, 12 years ago, so the cost was low. They're totally paid off. So the ratio of the margins is much better. Everyone has been following up on this, I believe. You've been following up our management with continuous improvement. So we currently have new production techniques. We have been improving our expenses in all our projects or our margins for the following products, as said, should be at about 45%, and that's an exceptional margin. Without CEPAC, as we mentioned before. So our expectation is to launch BRL 1 million every year, only in Jardim das Perdizes. That's what we are planning to do in the future. Now we have a plan B. Just imagine the CEPAC, I don't really believe, to be honest with you, and I need to open a parenthesis here. I've been to some state secretary offices, showing them, or city secretary offices. So we know that you may lose money. We're losing money. We might have been getting much better results. That's why I believe this is the right time. For about six months, this was at the councilors assembly for it to be until it passed. When CEPAC was concerned. So the values that you had there, it was so high, that it was impossible to do anything with it. It was even a sad thing. So this was being discussed in the town hall. Then next week, we thought it was okay, it was approved, we were happy. But then the following week, there was an attempt at saying that this law was not constitutional. After 15 months, a year and three months, a very long time, the case was examined by 25 appellate judges, very special. So after 15 months, they decided unanimously, so there was no question that this was wrong, and that was on September 30th, 2022. So that's 11 months ago. It could have already happened, but it hasn't. I think this is almost done anyway. I am convinced that we will have it. As you know, as well as I do, or even better, we need a plan B, and we do have a plan B. What we are launching, we have already launched. Pitangueiras, we had some with the CEPAC that we have and some that we had before. Now Torre Figueiras, as there is no CEPAC there, and you cannot wait, we used that notion of the total potential of the land of that property. Let me explain this as simply as I can. In a lot that you could build four towers, we use this potential to build one large tower, but we cannot build any other tower without the CEPAC. We have similar situations in Recanto Oliveiras. If we do not have the CEPAC, we use the potential of the land and keep launching. Maybe at a lower rate than we like to, but there will be future launches, that is for sure. One more, any other comment? Now, Bruno, receivables. I think we are very fortunate. When you look at our portfolio, most developed land, they pay about 45% after transfer and 55% with the keys. They are more committed to the housing unit. This was, again, a healthy cycle in terms of receivables. What also helps us out, we have not had any delivery in this high interest rate time. Most of our deliveries will be done in the second half of 2024. We are expecting much better interest rates than we have today. This, I believe, will help these clients. When you consider receivables, they are getting real estate funds, but that will be at lower rate later. Again, we approved this with a worse scenario credit wise. We will have clients that are more committed with lower interest rates, and that is really helpful again, with a drop in the interest paid by clients. 8%-10% is the funding capacity. We are expecting appreciation, again, in the value of real estate. This would decrease our LTV Ratio. I think this will be a healthy delivery for our portfolio. Have I answered your question? No, that was great. Perfect. Thank you. Thank you, Bruno Mendonça. We now have Mariangela de Castro. She also wants to ask a question. Let me turn on her microphone. Mariangela, over to you. Good afternoon, everyone. Thank you very much for this presentation and for taking my question. I have two short points. About the interest rates, we saw a first cut. That was an interesting point, right? It increases your client's funding ability. Now, what is the level? That is what I need to understand. For us to see the market really thriving, what do you need to get more heated market conditions? Just a small percentage is enough? What is this number to get an increase in sales? The second is about a master plan. You said there is not such a relevant impact on your activity. Have you seen greater competition for land, or you are not really concerned? Thank you. Mariangela, thank you for your question. Interest rates are still very, very high. Whenever you have any signs, this might be even more positive than the reduction of prices or interest rate reduction itself. We are expecting interest rates to reduce significantly. Things seem to be a little at a standstill because of these high interest rates. Also, there is an expectation of decreasing rates. Investors and buyers might think, "Well, let's wait. If they really decrease, I'll pay less." That's what they think. That's what they're expecting. We really need the interest rates to decrease. I'm not saying exactly what's an ideal interest rate, but I think it's very high. We're expecting it to decrease significantly still. With regard to the master plan, buying real estate in São Paulo is really very expensive, right? There's no more land in São Paulo. What we see now is potential property. You buy 6 houses, 10 houses, or even more, and that makes it even harder. Now, with this change in the master plan, we shouldn't forget that one of the things that are, there was just an increase of 100 meters. It just can be 100 meters away from subway stations. Before it was 600 or 700. Now competition is really fierce. Thank you, Mariangela de Castro. Thank you. Thank you. I hope that your question was answered. We have 2 questions now in the chat. First, Victor Kitzman. Good afternoon. Congratulations on the results. We have some questions about this. These launches for the Jardim das Perdizes properties this year depend on the CEPACs auction, or you're expecting to make acquisitions in the secondary market. Number 2, what's Tecnisa's plan B if the approval for the CEPAC auction is postponed again? I think we've already answered this, right, Victor? You've asked this question before, right? Anyway, we do depend on CEPACs. We're expecting this to be really robust. We're really expecting the auction to take place. Should it not happen, then we have a plan B indeed, because I don't think there's even this offer on the market anymore, right? If CEPAC is no longer there, we can expect anything in this country, right? You always need to be suspicious. Anyway, you have to be careful. I don't think it will happen anyway. Should it happen, we have this plan B of launching, using the highest potential of land, right? Pedro Calixto, if the company is successful in the acquisition of CEPACs, the gross margin and the PSV of JDP, would that increase? Yes, it would increase. This property was purchased a long time ago, and we have now new engineering construction techniques. So many things our engineering director, he has discussed and told us all about them. The margins are really significant, about 45%, as Flavio showed. The PSV, likewise, we're expecting to exceed BRL 5 billion, reaching BRL 5 billion in the next few years. This is the end of our questions. Thank you very much. Now I'll turn it over to Fernando Perez for his final remarks. Well, I thought you were going to close. All right. Let me tell our market analysts and shareholders that are listening in. We are happy that we're no longer making losses. The fourth semester with profits in a row, right? I'd like to tell you that I'm convinced that we are still shy because we haven't launched for 6 months. The market is shy, but we are in this straight jacket because of the CEPAC auction. I'd like to ensure, however, that the company has done its homework. We are lean. We are prepared. As soon as the CEPAC auctions are held, you will see how much our earnings will improve. Please believe in us, believe in Tecnisa. We have been there for over 45 years with great results. Thank you very much.