Conference Call Transcript EZTec (EZTC3 BZ) August 11th, 2017 Operator: Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to EZTEC s 2Q17 results conference call. Note that this event is being recorded and that all participants will be in listen-only mode during the Company s presentation. After the Company s remarks are completed, there will be a question-and-answer session, when further instructions will be given. Should any participant need assistance during this call, please dial *0 to reach the operator. Today s event is available through a live webcast that may be accessed through the EZTEC Investor Relations website at www.eztec.com.br/ir by clicking on the banner 2Q17 Webcast. The following presentation is also available for download on the webcast platform. The following information is stated in Brazilian real and in BR GAAP and IFRS applicable to real estate developers in Brazil, except where stated otherwise. Before proceeding, let me mention that any forward-looking statements made in today s conference call regarding the business outlook, forecasts and financial and operating targets is based on the beliefs and assumptions of EZTEC s management and the information currently available to the Company. Forwardlooking statements are no guarantee of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Company and could cause results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Mr. Emílio Fugazza, Chief Financial and Investor Relations Officer, who will begin the presentation. Please Mr. Emilio, you may begin the conference. Hugo Soares: Good morning, everyone, and welcome to our results presentation for the 2Q17. I am the Investor Relations Analyst of EZTec and with me I have Emílio Fugazza, Chief Financial and Investor Relations Officer, alongside Augusto Yokoyama, Controllership and Investor Relations Manager for the release of EZTec's operational and financial highlights. The period was marked by political turbulence by the middle of the quarter, which negatively impacted inventory sales speed. On the other hand, in April, we released our first launch of the year, the project Legítimo Vila Romana, located in São Paulo s west zone, which is 54% sold. Cancellation levels remained stable, and we closed the period with the best net sales figure of the last six quarters. In addition, the Company keeps working on further launches for the upcoming quarters, all of them located in the city of São Paulo and geared towards the mid-high and high income segments. In relation to deliveries, we concluded the third and fourth phases of Cidade Maia, the main project of the year. The construction process was completed in advance as well as with budget savings. Now, I would like to pass the word to Augusto, who willspeak about sales and cancellations. Augusto, please. Augusto Yokoyama: Thank you, Hugo. Hello. Good morning, everyone. Page 1 of 7
Please let us move to slide number four. We ended the 1H of the year with gross sales of R$263 million, with 74% from finished units and 15% coming from launches. The cancellations summed R$214 million during the period, totalizing R$49 million in net sales in the first six months of the year. In the chart below, we present the cumulative evolution of twelve months sales and cancellations. We can observe a tendency of decline in dissolutions. On slide 5, we have the delivery PSV forecast for coming quarters. Brown bars represent the parts sold and the white ones, the inventory portion. The red line indicated the PSV cancelled in each period. We can see that we should have an important reduction in cancellations from 2018 because we will have few deliveries from the 2015 harvest and with adequate prices and sales for higher income clients. Now I ask you to look at slide 6. We ended the 2Q17 with inventory of R$1.2 billion, with 67% of units completed and 18% in the commercial segment. It is important to note that only 28% of our inventory refers to the residential segments within the city of São Paulo, the focus of our next quarters launches. We expect to increase ready inventory sales as the clients settle or finance their debt. Nowadays, a strong media campaign reinforces our ability to provide direct financing to the clients. This funding has been very important to sell concluded units, representing a significant portion of our sales. Please, I ask you now to move to slide 7. In parallel to the sales efforts, we have worked in preparation for new launches for the coming quarters. As a subsequent event, we launched this week the project In Design Liberdade, in São Paulo, with a PSV of R$67 million and 114 units. The initial numbers indicate cumulative sales of 19%. The two upcoming launches should be in the south and west zone of São Paulo Verace Brooklyn with a PSV of R$82 million and 54 units and the Clima São Francisco, with a PSV of R$75 million and 121 units. These well-located projects, designed for the mid-high and high income segments, represent the profile of our next launches for the coming quarters. In addition, we will inaugurate soon a sales center for the projects of the southern area of São Paulo, which will contribute a lot to new sales in the region. Now, I would like to turn the word to Emílio, who will talk about the financial figures. Emílio, please. Emílio Fugazza: Thank you so much, Augusto. Hello, everyone. Good morning. I would like to say something about our financial performance on slide eight. First of all, net revenues on the slide s top left, which came to R$106 million in 2Q17, 9% increment compared to the 1Q17. It is important to bear in mind not just because of net revenues, but because of 2Q17 growth prospects which was R$50 million, 9% up on 1Q17, and gross margin of 47%. It is important to bear in mind that part of the results that we are having today are due to the fact that we have some post savings on construction being delivered for our clients in 2Q, especially two phases of a big project called Cidade Maia, in the city of Guarulhos, totaling 2,000 units. We delivered two phases of this project in the 2Q. Page 2 of 7
It is important to mention that the cost phasing was about R$10 million, but approximately 72.8% of the stake sold, it can represent around R$728 million, an impact over this gross profit. For the 2H17, we are going to have seven projects to be delivered. From these seven projects, two are outside São Paulo and the remaining five are in the city of São Paulo. All of them are very well sold, something around 70% sold. That is going to be the whole impact in revenues for the rest of the year. Talking a bit about G&A and selling expenses, I would like to start with G&A, on the bottom line, which was R$22 million, approximately 10% up on 1Q17. That means that this increment was an only event, hey were legal issues regarding workers who had to provide, specifically because in the side of economic issues we have been facing in our operation that, I would say, may provide some kind of legal issues regarding people that we have fired in the last two years. R$2 million was the impact in the 2Q. For a small and quick comparison, the whole year of 2016, we recorded around R$8 million with legal issues. Talking about selling expenses, which in 2Q17 totaled R$13 million, 19% down on 1Q17. The best explanation for this decrease is that it is normal in our operation when we have some new projects to be launched we prepare the stand of sales, which is a small place to get people over there to call clients to sign agreements the sales proposals. In this case, specifically, in 2Q we made the decision to use a very good piece of land called Marcas famosas that we have in the south zone of São Paulo, in our land bank, in order to build a kind of store, it is not a sales stand, but it is a kind of a store in which I can provide sort of an apartment model to sell let me say two, three, four projects to be launched in the next six months. So we are trying to use the same place, the same space without having to build every time sales stand in the piece of land we are going to see the project. So, in the end, this idea is a little different from the sales stand one, because in terms of accountancy matters in Brazil, the sales stand is classified as selling expenses. But when we make stores, build stores, it is a bit different from expenses we end up turning these stores in a kind of non-current assets in our balance sheet. And that is why we have R$3 million less of selling expenses compared to the 1Q17. Apart from that, obviously, we are much more cautious about using the money to provide sales. It is simply because it is one of the worse times ever in our economy and we know that it is almost impossible to improve sales speed only using or pushing with money new advertisement campaigns. So, that is why we tried to stop spending money with selling expenses and began investing money in the construction of a very special place to have the sales done. So, let us move on to slide nine to talk about the financial results, on the top left chart. That was the huge impact we had in our 2Q17 results. So compared to the 1Q, this increment was about 65%, from R$23 million to R$80 million. The explanation for this increment is due to the fact that the inflation in Brazil was negative for three months in a row. And all the assets and receivables we have, especially performed receivables so receivables coming from units ready to leave. And receivables mean that we finally got our clients to have the keys of those apartments. So, those receivables are adjusted monthly by IGP-M, which is inflation in Brazil, plus 10% or 12% yearly. So, all the receivables adjusted by IGP-M were impacted by negative inflation for three months in a row and even in 3Q, again, we will see the negative impacts of this inflation. So, negative impact means that all the amount of money owned by EZTEC and due by our clients faced the impacts of that, decreasing something around R$9 million to R$10 million in financial results. Apart from that, we obviously have all the units that we are passing or transferring to the banks, or we are delivering to our clients in order to negotiate to assure that our clients are going to keep those units, keep those sales, we obviously have to offer them some sort of discounts. And this sort of discounts impacted by R$3 million to R$4 million this quarter. So, making a long story short, one of the best trend of this Company which is the financial result coming in an average of R$20 million in the last four quarters, this quarter s impact was negative in our result. Page 3 of 7
Moving to equity income, which is the result coming from the projects we have with our partners. The control of the projects we are shared with our partners. Nowadays we are coming to an end on this project, which means that we are delivering the construction and the remaining units on inventory we have over there, are the units with potential to generate revenues and profit for this Company. So the results coming from this equity was only R$4 million and obviously the results are decreasing also because we are buying stakes from our partners on these projects, which means that the results are coming to approximately zero in the next quarters due to the fact that they are becoming projects 100% controlled by EZTec compared to the past projects controlled alongside with our partners. Finally, I would like to say something about our net income. Net income was R$22 million, or 21% of net margins, decreasing 21% mainly because of financial results impacts. Obviously part of the explanation is due to the fact that our revenues are coming down. And revenues coming down can be seen on the bottom line of this slide, results to be recognized or backlog. You can see backlog here, in 2Q, amounting to R$54 million, which means that all the units we have sold, an we have not delivered yet, the results coming from those top R$54 million and the gross margin is 44%, coming down from 49% in the previous quarter. I would like to something more about this specific topic, which is backlog results on page ten, where you can see a chart comparing 2Q17 to 4Q15. The 4Q15, the total amount of revenues we can see is about R$752 million and nowadays is about R$123 million due to the fact that there was a significant reduction in the number of launches in the last two years. And the reduction of launches means that we sold our last units which are under construction right now, thus we have less units under construction, less results to be recognized from those units and the projects launched in the last two years are coming with a margin, which is below the average recognized in the previous quarters. Again, when we see 2015, we can see better revenues and better margins to be recognized in this chart, of 51%. Nowadays, you can see 44%. So my point, here, is that we are coming to a specific trend which is that in the next couple quarters, we are going to see a significant shrinking in the amount of revenues in our projects and loss statements, specifically because we have less units under construction and finally you are going to see a new standard of gross margin coming from our operation. So, comparing the past standard, which is something around 50%, nowadays we are going to see something between 40% to 45%. My personal forecast, which is backlog, is about 44%. That is the trend, that is my message to understand that the volume of revenues to be recognized next quarters are coming down, with a margin that can be between 40% to 45%; nowadays above 44%. Moving on to slide 11, part of this information coming from this slide I have already told you before, so gross margins remain stable even with the discounts we have to provide to our clients even to a huge decrement in the operational volume at EZTEC this quarter. We can provide the same margins because all these contracts and provisions can be offset by the cost savings we can watch coming from the technical department of this Company. So, coming from the size of margins, we are safe. Coming from the side of net revenues and net income, we are impacted by the decrease of these operations. But it is important to compensate this idea, it is important to say something about the cash position. In the last four quarters, we have been generating cash specifically because we are delivering our inventory, we are passing the customers to the banks, we are trying to offer deals to our clients like offering discounts over 5% or 6% to clients that pay our units in advance. All in all, we can generate cash from that. And the cash generation could be even better if we are not trying to push our clients to buy units a little bit faster, offering them funding coming from EZTec shareholders equity. So, when you see in our balance, performed receivables, you can see something from EZTec shareholders we are providing the funding to our clients and this funding is provided at an interest rate of around 10% adjusted by Page 4 of 7
inflation, so 10% plus IGP-M, for the loan to value, it's about 80%-70% and the duration is about 240 months something around 20 years. And this is a kind of operation, so this is a kind of a side operation in our Company that can provide a compensation that can offset the worst results coming from the operational side, which can provide a bit of return on equity because it is better than the return on equity can provide from the projects that we have ongoing right now. Moving now to slide number 12, the last few slides of today s presentation on slide 12 starting on the left side, where you can see R$293 million of net cash, which means R$638 million of cash and R$245 million in debt. Let me remind you that 100% of this debt comes from project finance, so I have no debenture, I have no working capital. I have only in this Company project finance and also these project finances with on average interest rates over 9% plus TR. TR is over 1.50%-1.25% yearly. So, apart from that, I have a kind of a debt which is the approved dividends, which in the last general shareholders meeting was R$180 million due to our shareholders, so we're going to pay the 3Q or the 4Q17. Performed receivables, I have mentioned before, R$658 million. Half of this amount is with the agreements signed with our clients. So, we are providing funding to our clients indeed, and the other half is receivables in which we are in the middle of transfer process to the banks. On performed receivables are the receivables that are under construction right now in some points of this year or 2018; we are going to transfer those receivables to the banks, or provide funding to our clients. All the construction obligation we have in our operation, it's about R$190 million, which means that all the sites under construction right now, we have done those sites with R$190 million, which is not a problem. All the results coming from the projects we have with our partners is about R$255 million coming from the delivery of the construction and the selling of the inventory. So all in all, the balanced work can provide you an interesting idea which is: without selling any inventory, we can see R$1.2 billion of cash generation, or extra cash. Obviously, I am not counting on using this amount to buy new piece of land or buy new stakes, or the projects in which we have partnerships, so it is only to show you the potential we have in terms of cash in this Company without selling any extra units from our inventory. But selling extra units and inventory including the Tower B of our project called EZ Towers, we can see R$1.9 billion in potential cash generation. So, all the inventories, marked value of this inventory, including Tower B of EZ Towers can generate a potential cash of R$1.9 billion. So all in all, the balance was plus the inventory we can sell can generate, the moment we have this inventory sold can generate a potential R$3 billion in this Company. It is only to show you the strength of our cash generation, of our balance sheet. It is simply because the only debt we have this R$345 million we are net cash and we have the potential generation of R$3 billion in cash for this Company. Moving to slide 13, which is a slide just to make sure, apart from the cash that I have told you before, just to make sure which kind of potential value we can provide to this Company within the next years. So, let's start talking about the Company s book value which amounts to around R$16.70 per share. And the share price nowadays is of around R$20 per share. So obviously, our Company s market value is a little bit more than 1x or 2x our book value simply because we have something that our shareholders can expect, for instance, selling is a little bit more our inventory, selling the Tower B of EZ Tower, or even, providing the result of our backlog, which is coming down. But when you see our landbank, this is kind of a priceless thing, because this is a landbank that more than 70% is located in the city of São Paulo and its remaining parts in the State of São Paulo, specifically on the shore, some cities in the metropolitan region of São Paulo. And we are talking about the majority Page 5 of 7
of the project, the majority of the piece of land dedicated to the middle income segment, the middle-high income segment or higher income segment. Apart from this landbank, we can see a piece of land which is something around 15% of our landbank, a piece of land located right in front of EZ Tower, right in front of the best projects, the one and only project we have made so far is EZ Towers. We have a piece of land right in front. The potential value of this project is over R$1 billion. It is a project of two corporate towers, Triple A towers, and I would say, in the best location to develop a new project of corporate towers in the city of São Paulo. And just to remind you, these EZ Towers projects the Tower B, which remains in our balance sheet is a Tower whose cost for EZTEC is about R$300 million and we are renting this tower, the cap rate to this company, the investment we made so far, the cap rate is over 15%. So, EZ Towers is approximately 70% rented. So we have 70% of this tower rented, only Triple A clients. These clients are good clients and good tenants. All the guarantee we need to assure that we are going to receive the money from our tenants. I am just saying that because that the piece of land that are in front of EZ Towers is a piece of land to provide a new project exactly like this one. A new project with the same quality and potential of EZ Towers. And each project is a project, we are going to stop the construction of this project by one year from now. All the projects, licenses, decontamination processes are underway in order to ensure that we are going to make this construction, we are going to start this construction one year from now. So, all in all, talking about the landbank, which includes these corporate projects and all residential projects, we can add in the next years, something around R$2.5 billion in new profits to our book value. With that said, I would like to deliver my final message. It is important to say something about what we are expecting at this moment in our country. Due to the political instability, the country is showing signs of slight economic improvements. It is very slight, but it is an economic improvement. Decrease in interest rates is very important to mention, all the private banks are funding EZTEC s clients in one single digit interest rates to real estate, which is good enough. Let me remind you one year ago, the interest rates coming from the private banks to fund our clients, was something about 11% to 12% plus TR. Now we are talking about something around 9% and 9.5% plus TR. So, it's a deep decrement we are facing. Apart from that, controlled inflation is a very important moment in our history. Since I was born and raised in São Paulo, Brazil, I have never seen three, four months of negative inflation in a row, which can show you the movement of the economic team in Brazil right now are turning I would say the operation of inflation in Brazil in a very good way. And that is impacting so deep the improvement over the unemployment rates. Obviously sectors of economy like the real estate development are going to face unemployment in the next 18 months. But other sectors of our society, especially the industry services are getting a little bit better. And obviously in terms of our real estate, we also just can see recovery in prices, specifically in the city of São Paulo. I am not talking about the metropolitan region of São Paulo. I am talking about the city of São Paulo. So compared to 2011, 2012, the prices of real estates in São Paulo, were in the top high, the highest points ever. Nowadays in 2017, we can see the prices coming to the same comparison recovering from the inflation. So, we are not getting gains or over 2011 and 2012, but following the inflation, we are in the same level, which is good enough to push and provide new launches as Mr. Augusto Yokoyama has mentioned before. The storm the sector is navigating through has been a learning process which certainly left the Company more prepared for adverse times. We are very well structured for this complex scenario and, at the same time, getting prepared for the resumption of new investments to push the Company back to growth, Page 6 of 7
always keeping the values that guide and support the Company in the long term: product quality and profitability and operating and financial health. So, now we are available to answer your questions from our listeners. And thank you all so much. Operator: This concludes the question and answer session at this time. I would like to turn the floor back to Mr. Emílio Fugazza for any closing remarks. Emílio Fugazza: Thank you very much, everyone, for participating in this call today. And apart from myself, Mr. Augusto Yokoyama, Mr. Hugo Soares and I are all available for any further questions. Thank you so much. See you next quarter. Operator: The conference has now concluded. Thank you for attending today s presentation. You may now disconnect your lines at this time. And have a nice day. Page 7 of 7