Edited Transcript of TCSA3.SA earnings conference call or presentation 19-Mar-20 3:00pm GMT

Slide 5, we can see — on Slide 5, we can see our strategy to recompose the land bank, so purchasing lots in São Paulo, primarily through exchange and always very careful. Concerning launches, we’ve always said that the company had been well structured to launch BRL 1 billion yearly. With that situation we are currently facing, we are going to put plans on hold, just managing on a daily basis, holding it for more, not launching anything right now until we have some changes in the situation.

There might be consequences in our goal for the end of the year and maybe the city administration will also change somewhat to obtain approval of permits and projects, et cetera. So this is about launches. And we are also going to manage our debt and debt cost, trying to reduce it further. We will have to analyze the credit market to decide and trying to sell our nonstrategic land. Of course, a major challenge, everything is going to get harder as situations evolve.

Slide 6 shows us about land. There was one acquired in Mooca, with a PSV of BRL 180 million, very advanced in terms of approval. It is a very interesting traditional family residential product. And some additional lands, part of our strategy. We have São Paulo and some neighborhood such as Brooklin, Vila Romana, Pinheiros, Saúde, some of them still under contract and others already coming to the conclusion. Always focusing on being careful in our initiatives, even when the market was getting more excited, we decided not to do some business because we thought the piece of land was too expensive. And now, once we are going through crisis, we can see we adopted the right strategy.

Slide 7 now shows us our renegotiation of debt. We had BRL 223 million in prepayment in debt at a cost of 12% per year. Another BRL 132 million, we renegotiated and has reduction of 3 percentage point in its final cost. We have an additional real estate receivables certificate issuance, the rate was CDI plus 2.3% per year, very different from what we had, had before the follow-on, whose main purpose was to improve the balance sheet of the company, and we’ve seen its consequence in the reduction in the capitalization cost. Our corporate rating was upgraded from brA to brAA minus, and our financial results have improved comparing the fourth quarter ’19 over fourth quarter ’18, a BRL 9 million gain or 55% increase.

Before I hand it over to Flávio, I would like to emphasize that we’ve been analyzing the impact of coronavirus on our operations. Our construction projects are ongoing. We’ve adopted a number of safety measures. So social distance, measuring body temperature before the staff starts working, using of alcohol gel. In our operations, we have 100% home office whenever it is the administration task and really waiting the recovery of the market. We are going to monitor closely all the instructions of the Ministry of Health and what is applicable to our line of business.

Let me now hand it over to Flávio, our CFO.

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

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Good afternoon, everyone. Now let’s move on to Slide 9. We can see some of the launches from 2019, all of them with a high rate of sales, 89% total: Santo Amaro, 67%; Santo Amaro 2, 76% of the units sold; and produced house in Pinheiros, 100% units sold. On average, 81% units sold of all the launches in 2019, with a high productivity rate.

Next slide, operating performance. We had significant sales in the fourth quarter. Gross sales, Tecnisa percentages was — went to BRL 174 million in the fourth quarter. Net sales, third quarter ’19, BRL 101 million to BRL 164 million in the fourth quarter, with an increase greater than 60% in the period.

Inventory levels, next slide. We can see that we had a decrease in inventory levels. In the third to fourth quarter ’19, there was 51% decrease in inventory level going from BRL 837 million to BRL 413 million.

Next slide, we can see all the inventory in terms of work progress. So 40%, state of São Paulo; 42% in Brasília; 18% in Paraná; and a smaller percentage in other states. In São Paulo, BRL 108 million in Jardim das Perdizes. In terms of work progress breakdown, 95% are completed units. That was the fourth quarter ’19.

Next slide, Slide 13. We can see our land bank, which totaled the year at BRL 4.1 billion, approximately. Out of the total, BRL 2.1 billion is Tecnisa’s share at Perdizes Project. We have already incorporated that plot in Mooca. And between January and February, there are 5 other areas, which amounted to BRL 571 million in PSV.

Next slide, Slide 14. I in addition to an increase in sales, we’ve also increased our PSV transferred, going — growing from BRL 65 million to BRL 86 million in the period. In the year, BRL 320 million, which is a figure that confirms our cash generation that you’re going to see in the next slide.

In terms of financial performance, there was an increase, and now I’m talking about Slide 16, growing over BRL 65 million to BRL 124 million in net revenue. Our adjusted gross income went from BRL 14 million to BRL 23 million for the fourth quarter ’18 and BRL 16 million as a total net income in the quarter.

There were some issues, one from the plot in Fortaleza. This is something that we had already recognized in our balance sheet. So we didn’t contribute to any cash generation in the fourth quarter. There were some nonrecurrent events, such as inventory impairment of BRL 13 million; from indemnities to customers, BRL 10 million loss; and also a provision for loss with lower to BRL 10 million, leading to BRL 16 million positive. And in the year, they were 7% improved, went from BRL 277 million loss to BRL 258 million in loss.

Next slide. We have our SG&A. This is something that Joseph has always emphasized. Really, we have to have good control of our expenses. And as you can see, we’ve maintained that. We closed the year of 2019 using long-term incentives, comparing BRL 63 million as opposed to BRL 61 million in 2018 or a 3% decrease. It represented BRL 6 million in the nominal reduction in our long-term incentive.

Financial position, we can see our shareholders’ equity BRL 967 million (sic) [BRL 947 million]. And here, you can see, not getting prepared for the crisis, but really as a strength. It’s very important to emphasize that we have increased our portfolio of receivables, performed receivables increased by BRL 40 million, and we have BRL 113 million (sic) [BRL 103 million], approximately as our performed receivables, which is really important.

In the next slide, Slide 20 shows us our very comfortable position of cash, BRL 380 million, to deal with our BRL 348 million total indebtedness, BRL 31 million net cash. And if we observe our schedule, if we measure our cash reserve and what we have to pay throughout the year, we can see we have approximately 4x in cash, all the obligations that are due in 2020. It shows the robustness of our balance sheet for a period, which might be somewhat more complicated.

We also had a decrease in the cost of debt, which meant lower expenses. The average cost at the end of the fourth quarter ’19 was 9%. It is currently at 8%. And with the reduction of the interest rate by the government, which was announced yesterday, we probably will have even lower number. Our rating was increased by SGN (sic) [S&P]. So AA minus (sic) [brAA minus] with a positive perspective, which really emphasizes what we’ve been doing now in our structure of capital.

Now we have Slide 21, cash generation. Once again, we have delivered very significant cash generation, BRL 181 million, without IFRS effect. BRL 32 million would be in the first quarter, but we had everything which was cash disbursement, BRL 10 million; and our option to hold some receivables in a direct portfolio, BRL 24-additional million. Hadn’t it been for it, we would have BRL 66 million in cash generation in the period, which also places us at a very comfortable position of cash generation.

Next slide, financial position. We can see our operating and operational, better saying, leverage. Our operational leverage is close to 0, minus BRL 13 million. We have net cash of BRL 31 million in our holdings, BRL 7 million in Jardim Perdizes and in — only BRL 25 million for constructions to be completed. So minus BRL 13 million is our operational leverage, quite comfortable for the current period we are facing.

Last slide, we finished the year of net debt over shareholders’ equity with minus 3% and net corporate debt over shareholders’ equity of minus 3%. They are exactly the same because, in December, we paid the last debt of corporate level in our balance sheet. So we still — we have any new plans come into place, both of them — both ratios are the same. So now let’s open for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from Enrico Trotta.

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

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Joseph and Flávio, I have 2 questions. Considering the risks of the crisis that nobody thought would get that serious, what do you expect in terms of impact in supplier chain? We know there are developers, which end up not really being able to hold a 2-year working capital if everything goes out of business in São Paulo. So tell us what is your mitigation plan in terms of the construction providers and also the supply chain? Where do you see the main risks in the city of São Paulo?

My second question and talking to high- and middle-level developers — middle-level-income developers, we can see that smaller apartments focused more to investors have already experienced significant decrease in sales. How does it change your strategy in purchasing land plots and your pipeline for launches? I don’t know if you’ve already analyzed that, if this is going to change your strategy in purchasing new land plots, and the continuation of operations for the remaining portion of the year?

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

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This is Joseph speaking. First question. If the construction is suspended, we are not going to be able to pay the construction workers and the managers. We will inevitably have to cancel some units or fire staff. And different industries will be impacted, and we’ll have really laying offs and all that. This is going to be a problem to the whole economy, but I really don’t know what we can do to mitigate that.

The risk we used to have of not having a provision of service has changed. I mean if — now it’s quite the opposite. Once anything goes — if we have to come to a hold, when we resume work, probably people will be willing to work, and we’ll work within different levels of operations. I mean if we have to stop, we have to stop. This is going to be inevitable if everyone stops operating.

Now talking about smaller apartments. Well, we did use to have this kind of focus, just in some — whenever we have a set of a flat-like real estate. But we would tend to focus more

(technical difficulty)

on average. But if it’s just for investors, well, of course, this is going to have an impact. We are not going to prepare products to investors. We are going to focus on some of — but I would have to say that the last thing I have been considering is what are we doing? Do you think about in the end of the year? Or the products I’ll have to launch?

I’m just thinking about everyday management, really. But we might resume to previous levels quite quickly once the crisis is down, and we always design products and solutions according to market needs. But probably smaller units are not going to be very in demand, even if you have to be in quarantine, that wouldn’t be good, right?

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Operator [4]

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Our next question comes from Gustavo Cambauva.

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Gustavo Cambauva, Banco BTG Pactual S.A., Research Division – Research Analyst [5]

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I have 2 questions. Please tell us about the sales. I know it’s all brand new, but can you tell us about the last weekend or the 2 past weekends? What was the direct impact on sales compared to what you used to have before the carnival season?

My second question is the following. You have a very comfortable cash position compared to your debt level. But are you, to some extent, restricting your direct portfolio that you’ve started doing operating to customers or purchasing land plots? Are you going to discontinue ongoing negotiation for land plots? How are you getting your operation adapted to the moment of crisis?

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

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This is Joseph speaking. Concerning sales, there was a demand even during the weekend and during the previous weeks in Taguá, in Brasília, in Perdizes, but we saw a decrease in number of sales.

Also visiting our designs today, there — it was a no determination by the Governor of the State of São Paulo that all the commercial outlets should be closed, so that would include our showroom of projects. So this is going to you, of course, have impact. But well, real estate, it’s kind of basic. People will keep on buying food, clothes and housing. It does have an impact, but we know this is a kind of item that people tend to buy, no matter what.

Now about the so-called direct portfolio, we are going to maintain that. We normally ask for a down payment. The unit is there in inventory. There is no advantage in having it there not being negotiated. So there is a down payment and then additional payments. If it’s not paid, then we just get the units back. We are going to carry on with that. And I will just let Flávio complete.

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Flávio Vidigal de Capua, Tecnisa S.A. – CFO & IR Officer [7]

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Direct sales, we’ve done primarily in options of some — for the capitation that we did on the fourth quarter — capitalization, I mean. We paid a debt of PL plus 10, and we obtained CDI plus 2.3. So it’s better to have our own direct sales, and we are getting almost double than what we are paying for our debt levels. If we had no direct sales like that, we would have to end up paying our debt. So we’ve been monitoring it very closely, and we’ll keep on doing that. I think Joseph is going to add something about the land plots.

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

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Yes. We’ve been focusing on digital online sales as well, see what we can do about it, try not to stop selling. And so units — and we have just 1 booth or sales group in operations. Of course, it’s a moment of crisis. Concerning the land plots, our strategy of those contracts that have been signed and payment will only be made, if we understood, we can afford it because all agreements have one specific clause addressing that. And new land plots, we can even sign new agreements that we are only going to pay effectively if we can really feel confident in managing on a daily basis. Is there good news? Is there vaccination? Good. Let’s go back into business. If not, we’re going to keep on managing it carefully.

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Operator [9]

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Next question comes from [Paula].

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Unidentified Analyst, [10]

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I would like to know about the discussion about Jardim das Perdizes because it’s a very important project to you. What level of — in which level of revenue do you expect to 0 your debt over EBITDA in that?

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

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Paula, this is Joseph. Concerning Água Branca operations, we had an expectation that it would have been approved. The — I don’t know if it’s fortunately or unfortunately because, most probably, then we would have spent a lot in terms of CPAC in the decision that has to be made. Now we are on hold. It is there. There is nothing to be done if they decide to hold because it’s something subject to voting. I don’t think they are going to address it right now. If the market gets better, it might get approved. And in that case, we are just going to go there and purchase that. If they approve it and they would pass it and the market is not good, we are not going to buy it.

There was one question concern revenue and adjusted EBITDA. We don’t have any forecast. But usually, these are metrics associated with 2 metal sales of our copper concluded units and phase of launches, which is still under analysis. It will depend on these 2 factors.

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Unidentified Company Representative, [12]

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Well, let me read some questions that were asked through the webcast. Douglas Pereira. The question is the following: the debt is due very shortly 1.7 years, do you expect to prolong the deadline?

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Joseph Meyer Nigri, Tecnisa S.A. – Vice-President of Executive Board & CEO [13]

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If we look in the company indebtedness and like to show that in the slide, we have a cash position, which is smaller than the short-term debt. It’s not a concern. But in terms of extending that term, we always analyze that. We are thinking about our portfolio, thinking about capturing additional funds in the long term. So we think that right now, our indebtedness time line is appropriate. But should there be a similar longer structure, we might consider it. But so far, it’s in the market. The market is not offering any interesting alternatives.

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Unidentified Company Representative, [14]

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There is one more question here, just please hold. I apologize. There is a question asked by Walter. What is the expectations to revert the lost?

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Joseph Meyer Nigri, Tecnisa S.A. – Vice-President of Executive Board & CEO [15]

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I think he was asking about the short term — yes, the IPO, long-term incentive. Now let me talk about ILL — ILP. There are actions and options. They are below the strike level. And the payment is due within 2 years, and we may pay cash or in actions, long-term incentive plan. There is no cash disbursement. I am not going to do anything about it, really. It’s important for staff to know they are onboard. We sign agreement. This is a given. And we want to maintain it. We are talking about the ILP, long-term incentive plan.

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Unidentified Company Representative, [16]

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There is one more question here. It’s been asked by Roberto Nakamoto. When you have a follow-on, you said there were 10 land plots that were considered, but you’ve just acquired one. Did you really have the other 9 put in an option and analyzed?

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Joseph Meyer Nigri, Tecnisa S.A. – Vice-President of Executive Board & CEO [17]

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During the follow-on, we said there were 5 land plots in auction, 1 was the one in Mooca, which we ended up executing. Second one in Brooklin, which we also acquired. The third one was in Jardim, which we acquired partially. We are still negotiating additional plots.

This other one was in Chácara in Santo Antônio. We haven’t purchased yet. We are still under negotiation. There was still another one in Vila Olimpia. We still haven’t executed it due to document issues. There were some problems there. But we ended up replacing it with some business in Saúde, in Pinheiros. So we’ve kind of replaced that. But what we have promised is exactly what we delivered, and we have it all documented.

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Unidentified Company Representative, [18]

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Well, finally, we got these 3 additional questions about — with the clustering of 1 to 10, and why we are proposing that?

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

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It’s a simple answer. It doesn’t change the equities amount. The company is still valued exactly the same. There is no impact whatsoever to the company and how much it’s valued. But if we go below BRL 1, it’s recommended to have clustering, grouping. And it’s recommended to having multiples of 10 or 100, and we are just following the regulation of the stock market. That is what is being proposed, and it’s going to be just voted by our general shareholders’ meeting.

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Operator [20]

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Just a minute, there is 1 more question. Next question by Eduardo Figueiredo.

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Eduardo Figueiredo Mota Diniz Costa, Crédit Suisse AG, Research Division – Research Analyst [21]

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I apologize, I’m going back to a previous point concerning launches. According to what you said, it’s quite clear that the idea is to postpone. And as Joseph has had to have a daily management strategy. The plan today, do you know how it would be your schedule of launches? And what would be your trigger to decide when to start relaunching?

And then second question, going back to your own units being sold, and in your earnings, you talked about IPCA plus 8 — between 8 and 10. But what is the LPV of your current portfolio? And how big can we expect it to be?

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

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Eduardo, this is Joseph speaking. In terms of launches, we are just on a hold. We are not doing anything, no cash disbursement. There was one launch that was going to be opened shortly in Mooca. We decided to just put a stop to it. We don’t know what the triggers are. We just have to wait and see that we are confident. We make investments, get money from cash and make an investment and really perceive demand. Permits and approved that are of low cost. We are carrying on. But to make a launch effectively, we really have to be comfortable about it. Triggers, I don’t know. There is no answer to it. Yes, it’s really very subjective. We’ll have to wait and start negotiating, and we are going to do it every day. Flávio, can you talk about the direct sales, our direct portfolio?

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Flávio Vidigal de Capua, Tecnisa S.A. – CFO & IR Officer [23]

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In Brazil, when we go into direct portfolio, we can get up to 80% LPV, IPCA plus 8. In other geographies, it tends to be somewhat lower at the origin. On average, today, it’s approximately 70% on our overall portfolio, BRL 113 million.

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Operator [24]

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If there are no further questions, I would like to turn it over to the company for closing remarks.

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Joseph Meyer Nigri, Tecnisa S.A. – Vice-President of Executive Board & CEO [25]

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Thank you. I guess we’ve covered everything we wanted to address this afternoon. We hope the serious situation comes to an end shortly. And hopefully, Tecnisa, Brazil and the world will resume its previous levels of performance. Life will carry on, and I pray it to be as soon as possible. Should you have any additional questions, our Investors Relation is working remotely but actively. Have a nice afternoon. Hope to see you soon.

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Unidentified Company Representative, [26]

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I would just like to emphasize a point. During this period, where we’ve been working home office, we are going to communicate that today. But as we are not in the office, please submit your questions by e-mail, and we are going to have them answered as quickly as possible. Thank you very much. I thought it was important to emphasize that in terms of logistics. Thank you very much. Have a nice afternoon.

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Operator [27]

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Thank you. The conference call of Tecnisa is now closed. Please disconnect your line, and have a nice afternoon. Thank you.

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