Even Construtora e Incorporadora S.A. (EVEN3) Earnings Call Transcript & Summary

Good morning. Welcome to Even Construtora e Incorporadora audio conference call regarding a material fact disclosed yesterday, December 21, 2020. Here with us are Mr. Carlos Wollenweber, CFO and Director of Investor Relations. This event is being recorded. [Operator Instructions] This call is also being broadcast via webcast and the Internet, and it can be accessed at www.even.com.br/ri, where the respective presentation will be available after its end. The replay will also be available after its end. Before proceeding, let me mention that forward-looking statements can be made during this conference call regarding the company's business perspectives, projections and operational and financial goals. Forward-looking statements are based on the beliefs and assumptions of Even's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, dependent 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 the company and could cause results to differ materially from those expressed in such forward-looking statements. Slides will be available for download at http://www.even.com.br/ri. I would now like to turn the conference over to Mr. Carlos Wollenweber, CFO. Please go ahead, sir.

Good morning, everyone. We are pleased to announce the sales of the ERCR11 real estate fund for about BRL 238 million. Before moving to the details of this offer, I would like to share the highlights of the year. We started 2020 with a net debt over equity of 20%, and also operating cash generation of BRL 304 million in this 9 months. We concluded the Q3 with a cash position of BRL 1.3 billion, and a net cash over equity. And we moved from a concluded inventory reduction of 40% in the beginning of the year to approximately 35%, very good improvement. We're still very [ clear ] in our administrative expenses that account for 6% of our volume of entries. Now moving to the next slide. We'd like to say that we have a very clear strategic planning for each one of our business units. In São Paulo since 2016, we changed our strategy in purchase of plots in a very pragmatic perspective related to the return of NPF -- NPV. So we are delivering great results that will be detailed in the next slides. And future launches account for 96% of the land bank. We launched BRL 30 billion in São Paulo in PSV, accounting for 18 projects, presented in Slide 5. Comparing with the investment committee where we demand a minimum IRR of 25% a year. We are delivering an SOS 20% higher than the forecast with a price gain of 6.2%. Since we are fulfilling the budget of the projects, we should return higher -- deliver return higher than forecast. The next slide, we highlight the exceptional quality of the land and the plots of land, very well-located in the southern and also western areas of São Paulo. We are being very successful in new real estate launches as we will present in the next new slides. Products like ARBO, 100% of them sold and also Fasano and Itaim neighborhood with a price gain of 21%. As to the operation in Rio Grande do Sul, in the third quarter, we've very proudly conducted the IPO of Melnick. Even as the largest investor and owns 43% of the company. Melnick is a leader company in the high income segment in that state and delivers exceptional return, an average of 21% in the past 10 years, as you can see on Slide 11. Now with the company's capitalized, we are taking this good market scenario with a reduction in the loan interest rates for individuals and also a low competitiveness in that region, and we are increasing the number of launches there. In Rio de Janeiro, our strategy is very clear. We want to sell our assets in Rio and close their operations there. We have anticipated the plan. We sold completed the -- concluded inventory to ERCR11 real estate fund, as you can see on Slide 14. This transaction involved the sale of 7 projects, 73% were residential units and 27% commercial rooms. The most relevant ones were Up Norte, Up Barra in Jacarepaguá, You Botafogo and Assembleia One commercial rooms in the downtown Rio. In the next slide, we can see the map where these shows that where these projects are located. On Slide 16, we show the offer structure. So [ created ] Melnick was a Even's subsidiary, and we had a drop-down of the 5 SBS. We sold [indiscernible] to -- by BRL 327 million cash plus 1 earn-out share, which will be paid if the shareholders achieve the indicative profit margin of the quota. There are 3 quotas, senior and 2 mezzanine, and indicative profit of the fund 7.7% a year. If this profit margin is achieved then 100% of the dividend flow be paid by Even. And this is a true sale, no recourse. Slide 18. In the left-hand side, you can see the equity of SBS in Rio before and after sales. Today, we only have assets of BRL 26 million there. BRL 8.5 million and 33% are units -- remaining units that have not been sold, and 67% accounts to be receivable. And then you see the impairment to be accounted for in Q4, and they have not been audited yet. The equity of these 7 SBS totaled BRL 347 million. Since IFRS does not allow us to record earn-out, our impairment totals BRL 109 million. Future expenses related to the sales of inventory units, such as marketing, taxes, expenses, service fees, real estate taxes, totaled BRL 42 million. Today, our sales price is lower than what was recorded in the inventory of SBS. Consider just adjusted equity by -- in expenses to be incurred, the received cash accounts for 75% of alienated equity. Slide 21 (sic) [ 20 ] shows the pro forma results, excluding the results from Rio. In Q3, the annualized ROI was 9%. But if you exclude the negative results in Rio, given the negative gross margin and commercial expenses, the annualized ROI of Even total 14%. Now separating Even and Melnick balance sheets, the ROI of Even, except for Rio de Janeiro, also excluding Melnick's participation, this totals 19%. It's important to understand that because the recent capitalization of Melnick distorts the results of ROI in the short term, it will take a while to invest in [indiscernible] capital and go back to the previous levels and find an increase in the net profit. But we are convinced that we are on the right path to deliver best results. On Slide 22, since we want to dispose of all assets in Rio, we are working on the sales of 2 remaining plots of land, 1 in Recreio, 1 in Jacarepaguá. They are part of a second phase of 2 projects that have been delivered and 100% sold: Luar and RG. The expected impairment because of the sales of these projects will total about BRL 60 million. On Q4, we will anticipate the write-off, as shown in the next slide. Once again, I would like to conclude by confirming that we are very pleased with the sales of those assets. And now I will open the Q&A session.

[Operator Instructions] We will start with the first question from [ Tai Alonzo ] with Citi Bank.

First, congratulations on this operation. I would like to take the opportunity to ask about the expectations of the distribution of dividends. And if one of these expectations is to acquire more plots of land, just to understand how you plan to do that.

Thank you for your question, Tai. It's very relevant. Today, even has a very good capital structure. We make 3 very important moves to the company this year, Melnick's IPO. Now, the sales of Fasano. And finally, where we will complete the year with the disposal of assets in Rio. We plan to have dividend distribution. This will be decided in our regular assembly meeting that will take place in the end of March or beginning of April. So I cannot tell you what now -- what will be the size of dividend distribution right now. The company is capitalized to improve the capital allocation and a good part of its capital. They had to be done with concluded inventory of mobilized assets. And now they have more liquidity. So most of the equity of the company today is in cash. A part of that will probably be paid as dividends, and probably another part of it will be reinvested. We are looking for a reinvestment solutions that are good to maximize the return of the company. I cannot tell you how this is going to be because we are still in the stage of the strategic planning for the next 3 years. But this decision on dividend distribution is going to be made in our general assembly.

Our next question is from Marcelo Motta with JPMorgan.

I have a quick question. Can you please comment on the plots of land in Rio? I believe that you're probably putting this plot of land for sale and you're expecting the sales price to be lower. So when do you expect to complete the sales? And how much capital do you expect to get from the sales? Because with that, you probably end the business unit in Rio. Do you plan to move totally away from Rio? Or if you see any opportunities, do you believe that you could stay? So what are your plans for now on in that region?

Thank you for your question. There are 2 future steps of 2 projects that have already been delivered and 100% sold. There's even a picture on the slides regarding the project and the plot of land that we plan to sell. You can see that on Slide 23. We'll start talking to potential buyers. We don't have anything decided yet. But the company intends to sell those 2 plots of land or find a real estate developer that could take care of construction and development, and we will just be the financial part of this business. And this just get payment for that according to the flow of sales of the projects they launch. But we don't intend to work with real estate development in Rio. Even is a company that is mainly located in São Paulo. We want to see opportunities to increase our operations there, and we expect to deliver great products there with the square meter price at premium prices when compared to the competition. And this is part of our strategic plan. And also we have a significant participation on Melnick, which is a publicly traded company that dominates the market in Porto Alegre. So we are not looking for new investments in Rio right now. So either for financial trade or by selling those plots, that will be our only participation in Rio. The impairment should be anticipated for the first quarter. But that still depends on some discussions with auditors. We still need to get more appraisals of the potential sales prices. We have determined an amount that we felt comfortable with. And we hope that the impairment levels will be lower than what we have just disclosed. But we wanted to disclose a figure that we feel comfortable with. At the end of the day, we see some companies that are moving to Rio de Janeiro, and that could be indeed an opportunity for us trying to sell these plots of lands to these companies, but we are still in the initial discussions with them, so we don't have anything defined in the short term.

[Operator Instructions] This concludes our Q&A session. Now we will turn over to Mr. Carlos Wollenweber for his final remarks.

Thank you for your participation in this extraordinary conference call. We are very pleased with this transaction. And we are able to implement our strategic plan very quickly, and our focus is on the most profitable businesses in our sector. Thank you.

The Even conference call is now completed. We thank you for your participation, and wish you a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]