RNI Negócios Imobiliários S.A. (RDNI3) Earnings Call Transcript & Summary

Good morning, and welcome to RNI's audio conference relative to the results for the First Quarter 2020. Today with us, we have Mr. Carlos Bianconi, CEO and IRO; and Felipe Rodrigues, IR manager. We'd like to inform you that this event is being recorded and simultaneously translated. [Operator Instructions] This event is also being simultaneously broadcast over webcast and may be accessed at the following URL ri.rni.com.br, where you also find a respective presentation. I would like to make statements made here during the call concerning the company's business outlook, also operating financial projections and expectations are based on assumptions made by the company's management and also on information currently available. They involve risks, uncertainties and assumptions as they refer to future events, which depend on circumstances that may or may not materialize. Investors should have in mind that general economic conditions, industry conditions and other operating factors might affect the company's future performance and lead to results that will differ materially from these expressed in those forward-looking statements. I'd now like to turn the conference over to Mr. Carlos Bianconi, who'll start the presentation. Please, Mr. Bianconi, you may carry on.

Good morning, everyone, and welcome to our conference call. It's very important to be able to convey to you our message and details relative to the company's performance in the first quarter of 2020. Let's go to the highlights of the quarter. Well, the main highlights of the company, we have the MCMV sales growing on quarter-on-quarter comparison. So as it has been said in previous calls, our strategy to have a higher concentration on MCMV has shown results. So we saw significant growth on that front for that product. Our landbank has reached BRL 5 billion in PSV at the end of the first quarter. So we also grew along that entry. And the landbank is mainly geared towards MCMV 3 level, mainly in 2, 2.5. Another important highlight has to do with our financial results, which amounted to BRL 6.8 million, which was driven mainly by the IGP-M, the inflation index. We are talking about significant growth percentages when compared to previous months. The average cost of production debt -- dropped because we saw a drop in financial cost for production, especially, those concerning execution and that drop was up 2 percentage points when compared year-on-year. The backlog margin, we maintained at 30% for the company's strategy has been based on the projects, which stand to be around 28%, 30%, 31%. So we managed to remain for -- at the level of 30% for backlog margin, as we recover, resumed construction and sales, you'll see later in the presentation that there are several construction works still to be started, but that backlog margin is being put together as soon as we have the PoC we'll have results coming from that. I'll now give the floor over to Felipe so that he'll continue with the operating and financial results. Okay, Felipe, you have the floor, please.

Good morning. Let's move on to the operating results on Slide #6, where we talk launches. In the quarter, we had only 1 launch -- actually 2, High Redentora and the fifth phase of project in Goiânia. But specifically about High Redentora, it's located in the city of São José do Rio Preto. This project was launched in January at BRL 56 million in PSV. At the end of April, 35% of the units were already sold. We had 2 other projects to launch within the MCMV, 1 in Goiânia and the other in the city of São Paulo, but we suspended due to the coronavirus pandemic. Those projects have been explored virtually. So as soon as we have a better condition, we'll launch those projects. On Slide #7, we have a few pictures of the High Redentora project. The average ticket sits around BRL 340,000. On Slide #8 in terms of net sales, we saw a significant growth when compared to the last 3 quarters. BRL 76 million in the first quarter, we recovered [ ECF ] for -- to 10%. The highlights were the High Redentora, as I mentioned, and launches in the fourth quarter of 2019. An important highlight for those net sales from 2/3 of that have to do with products which were just launched or where construction has just started. And I'll break that down as we move through the presentation. The good news is that the launches that we made in 2019 have a good speed of sales, and that's why we see this level of growth. Moving on to Slide #9, our inventory. Moved sideways, when we look at the last year results, a drop of 12%, driven mainly by a 90% drop in the MCMV inventory and so the inventory dropped by [ 90% ] at MCMV. On the other hand, the Subdivision, inventory moved from 54% and went to 65%, a growth of 22%, driven by the launch that we're going to make in Goiânia but especially because of the net sales, which was negative for Subdivision. But when you look, the bottom line of -- bottom side of the slide, you see that's a very recent inventory. Half of that was launched from 2019 onwards and a good portion from 2018 onwards. So it's only 40% concluded, 70% will be delivered from 2022 onwards. So even though we moved sideways in our inventory, it's a very new inventory. Most of that is underway as it were. So the completion is not a concern for us. Now I'll briefly go over the financial highlights for the quarter on Slide #11. We have a comparison for our income statement, for the first quarter of 2020, with the first quarter of 2019, a drop of the 29% in net operating revenue, and that's the main thing we have in this industry. The fact that I just mentioned that 66% of net sales have to do with products, which were just launched or which are still at the start of construction are in very low level of PoC. In other words, the revenue coming from those sales will only emerge in the backlog as our future results, they were -- which will emerge as those construction works go on. Of course, we had to shut down some construction works because of the pandemic. Some projects were halted in late March, early April a further effect, the advancement of construction, also projects that we launched late in 2019, we would start construction now in the first quarter of 2020, that didn't happen, of course. That also affected revenues. And lastly, only 6% of the sales are concluded in the first half of 2019, 33% had been concluded, delivered inventory, that when you have the revenue right there and then. On the other hand, 1.5, a drop of revenue by 29%, we saw a slightly growth of 2% in the gross profit. What does that mean? It means that the profitability of the products was positive, which goes to prove that, the new products have the expected level of profitability. When we look at the legacy going away and the new projects coming in, we'll see that margin grow as we move forward. The negative highlight in our statement, BRL 2.5 million in equity pickup. We're talking about a partner project that negative impact, whenever they had more cancellations than sales that -- and it will be affected and this happening is first quarter. But the financial results more than offset that because of the IGP-M. So the IGP-M for November and December were quite strong and that boosted our receivables portfolio. And that's why our financial results came out really, really good. All of that together led to a net loss of BRL 7.3 million, 25% below what we had in the first quarter of 2019. On Slide 12, we have that in more detail, how that drop in revenue can be measured by the sales mix. So products with low PoC will generate less revenue but more results in the backlog, as we update those. On Slide 13, interesting to see the green line, the adjusted gross margin and the backlog margin. Today, the adjusted gross margin is exactly what our backlog margin was back in 2019 first quarter. That means that the adjusted gross margin is a trend for future results. What we have in terms of backlog today will be our backlog margin next year, as we recognize those results. In other words, as we advance in gross margin, at the end of the quarter, it exceeded 30%. That's an indication that the results tends to exceed that margin or at least reach that level as we move along the construction front. And that can be seen on Slide 14, where we have the evolution of the backlog results and margin as developments are launched and we have backlog results coming in. And last, talking about cash and debt. Our net cash in the fourth quarter of 2019 -- from 2019 to 2020 saw a significant drop. And that has to do with 1 specific operation conducted in May. We would be doing mission, within a mission, but it didn't work. So the first lag occurred when the pandemic broke. And the second lag for the reimbursement was suspended because all banks became more restrictive, they're trying to understand, this matters for the second lag. It didn't happen. So that's why we closed the quarter at a very low cash position. But we now have EUR 40 million to come into our cash now in May, and so that cash level will normalize. We also funded CCB in April, BRL 50 million. We're trying to find financial hedge to go through the pandemic period. We do not know exactly how to measure, what kind of time line we're talking about. In the period, we have a cash consumption of BRL 50 million. This is only natural for the operation that we lack. We are -- all the cash to become more normal, we expect to strike a balance in 2020 despite this cash consumption in the first quarter. We have 3 deliveries for SBPE. One has just happened and 2 others throughout the year. So we expect a strong volume of inflow cash coming from the transfers, coming from those projects. As to our credit portfolio, we have been following that on a case-by-case basis. Of course, default problems will probably emerge, but the company has a crisis committee. We're trying to preserve our cash doing all that we can. So despite we're going through a very difficult period, nobody will come out of that as they run in before, we're trying to take the necessary cautions to that. And in closing, we'd like to recognize the support the company has been receiving from the Caixa Econômica Federal, the Federal bank that has helped the industry significantly. Those were the numbers. I'll give the floor back now to our CEO, Mr. Bianconi, for him to provide his final comments and results. Thank you, everyone.

All right. Thank you, Felipe. Well, as a final message, I'd like to go over a few bullet points, which we understand, that the pillars for our management, for the way we run the business within the current context. Number one, we are -- we have put together a very effective type of monitoring area in the pandemic and we have been systematically following those plans on a weekly basis through our crisis committee. That's monitoring is as I said, quite effective to face the COVID-19 crisis. So we have this committee specifically, put together to tackle that. And at that level, we discuss business, we discuss cash issues or cash contingencies. Cash is a very important mandate that we have. We have to preserve that and create guidelines towards preserving cash as a main mandate we have and of course, we have to attend -- close attention to all front. We've been having virtual meetings, as you probably read in today's newspapers Valor Econômico. We now have virtual meetings done through our digital channel to try and get sales and we have reached a very interesting level of conversion. Because of course, we already had all that up and running in our digital platform. So we are operating as we did before, all the way from the lead through the final sale, the signature of the agreement of the contract, everything is done electronically. So that's something we are used to doing. And we are being supported by our digital channel, with all the safety procedures in place, to protect clients who are doing their businesses from their home. So they have a very interesting virtual experience. They are able to look at the other units, decorate the units through a smartphone, and then they can conduct the business and close the sales by smartphone. Along with that, we have 2, 3 launches. We are now assessing the market through presales and prelaunches. One here in São Paulo and in Goiânia. Now we are using those tools to do that, and we are doing really well. And the trend is to intensify the exploration of those digital channels, where we have a very interesting cost as we operate it, our digital capability to keep our sales team very motivated. We have in our own real estate brokerage firms, and we also work with our partners. And we have been able to conduct this digital transformation, if I may, in a very dynamic, expedited way. So the motivation of our sales team has been a driving force and has exceeded our expectations to be frank. We thought or we anticipated some resistance, but it's quite the opposite. They have really barged into the program. At the same time, we have received the support from the Federal Bank and from upper wing. They have really been helping the industry, the sector, important and interesting measures that we're taking for civil construction. So their support has been invaluable. And in our case, because of the MCMV and because of the areas where we operate, and that's linked to our strategy, as you know, which we started putting in place, back in 2019 in the macro regions where we operate, they are located close to the country side of Brazil. And the return for MCMV has been quite resilient. Performance has proven to be quite satisfactory so far. As for our competitive advantages for RNI, we are operating outside the big cities, big urban areas and capitals. As I said, MCMV and SBPE has proven to be very resilient and profitable. So we understand that we have a housing deficit in Brazil, which is mainly lying under the MCMV front, where we operate. So we're talking about units that cost around BRL 300,000, up until BRL 350,000. And the performance has been quite satisfactory in terms of sales and profitability, as I said. We have attractive multiples. We offer conditions and terms when compared to peers. And our [indiscernible] and impacted by everything that's been happening in the capital markets. We are now with a lever ratio of 0.4x, which is quite interesting. So we remain a very attractive company for those who want to invest. That's what I have to convey to share with you. Before I move on to the Q&A, can I read 2 questions that we received through webcast? Yes, please. Question [ Bazen ] is asking about the equity income for the Goiânia. It was 2 -- the negative BRL 2.5 million. He asked us to comment how RNI see that moving forward. And [ Marcello ], shareholder. Within the macro regions you operate and which have already started reopening the economy. Number one, from [ Chris ]. [ Chris ], thank you for the question. Yes, that Goiânia project, it is a low-income division or subdivision. And what led to that equity conversion? We have a cancellation in March of 100 subdivisions. So we sold practically nothing. So we -- March was a month where we repositioned our stand. Default levels increased, and we had cancellations. The margin is quite high. So when you have cancellations, and it was delivered ready, whatever the cancellations you have, if you do not have the equivalent level of sales, that will hinder the EBITDA. We have 50% of that. And that portfolio, we believe, because of the moment we're going through right now, we believe that it tends to maintain a behavior, where we have some cancellations and some renegotiations, not at the same level, of course, but we will have something around that. But in April, we sold 24 units. So in April, we had a positive result for that division. So it is a characteristic of that product. It is very much linked to consumer behavior. And sometimes it suffers in terms of results. But we have been keeping a close eye on that. We are closely following up on that and trying to renegotiate different terms. We did that on a daily basis, right? As for the second question coming from [ Marcello Mathurano ] about the macro regions, where you already see a reopening of the economy. Okay. Thank you, [ Marcello ], for your question. Out of the macro regions where we operate, well, the ones we had already launched product, Midwest, Cuiabá, Londrina operates the Midwest of Brazil, and those macro regions are doing really well in terms of sales. In other words, what we expect to see is what we're saying. Those are very resilient regions because of the agri business operations they have there. For the city of Goiânia, we have the division, which is managed by our partner, but we are already testing that product in the market. So it is an MCMV product as well. And we see that there is a market for that. And we have noticed that by the level of interest, the level of new clients being filed, really having good results. Just as a reminder, we had no product there. We acquired the land last year, had the project approved, and we are ready to launch the first product. For the other areas, Rio Grande do Sul, Santa Catarina and São Paulo, the country side of São Paulo, the São Paulo state, we have products, specifically São José do Rio Preto, MCMV, Green Home, another project, as Felipe said, are the products that we're delivering now and SBPE, we're going to follow-up on the conversion of those sales and bank transfers. We also have Rondonópolis, which is also a vertical project. And we hope to convert now. And the Lacerda Franco and São Paulo. So as a whole, speaking of those macro regions, we are now trying to build a backlog with the exception of the products, which have been developed and built, constructed, we are quite confident that if no major -- other major impacts come from the pandemic, and if the markets reopened as fast as possible, we see a possibility of having good consistent results in the future. When you look at the sales curve in the past, 66% of sales are linked to products which -- for which construction has not even started. Palhoça and [indiscernible] Santa Catarina. We have Cuiabá under MCMV and Rondonópolis as I said. For all those products, we would be starting construction now. We have postponed the start of construction and the Caixa Econômica, and the Federal Bank provided a 6-month period for us to accommodate operations. So those construction works should start in mid-September. So then we will be able to see the PoC level for those products. So as a whole -- because we are, as I said, exploring the digital channels with very important conversion levels, we anticipate that the macro regions will sustain themselves and will contribute to global cash generation for the company. Okay. And a question from [ Regis ]. He is asking. When we have COVID, low interest rates, do you see real estate becoming an attractive investment? That's a very good question, because real estate or homes, if I may, for Brazilians, it is like a rock, and it's always been, but today, more than ever, the pandemic, people see their homes as a rock, as a safe haven for them to be. People are working from home. Of course, with all the necessary sanitary cautions. And we are -- we have only 1 suspended construction job. All the other construction works are going as expected with all the sanitary precautions. But let me talk about homes, which was the question. Our main product is low-income housing condos, MCMV level 3. Houses in themselves, the fact that people are working from home now, has intensified or has that need for housing. And clients are working from home. But they can also benefit from the common areas in our condos, which is quite important for them to decompress -- if we can take a walk around the block, which is different, of course, from a building -- from an apartment building, where you are more restricted, more limited to your square footage. So we are keeping that decompression collectively keeping in mind. And we are trying to create environments for that with more gardens and greens and where we can breathe more, and that will increase productivity, of course. So we're talking about smart housing units with a square footage, which are characteristic for those in which it's, around 50 square meters, and that provides a good level of wellbeing. There's a backyard, there's common area, as I said. So we have been thinking about that. We have been thinking about this quality of life issue. Even for the MCMV. We're talking about an average land of 120 square meters, where people usually have a leisure area in the back. And then, of course, all condos have a common area. So that has been in our radar for some time. So the added value for clients is quite high when we talk about -- specifically, about the low-income client. And that's very important for the company, that clients can benefit as much and as they intelligently as possible from the unit they buy. Okay. One final question from [ Fernando ]. He asks, if RNI has sensed an increase in interest rates for financing line in the market? Well, as for construction works, just to ratify, our construction works, for that, we have 0 infections by COVID, 0. We measure the temperature of all employees, service providers, contractors every day. And if you have a new contractor coming in, before they even start, they go through a screening process, and we have also contact tracing, family members. So they are treated accordingly. So we offer 100% safety in terms of health protocols. We're following all of them. As to interest rates, your second question, I do not have the exact number. But based on the behavior we witnessed in terms of the selling rate dropping, and we expect to see further drop in the selling rate, I believe that interest rates, instead of going up, they tend to remain flat or even at some time, they might see some drop. I do not have that number, as I said, but that's the expectation that I have, the sentiment that I have. Costs or financing costs have been going down. We expected to see drop in the MCMV because of this mismatch with SBPE. Those rates were in place since 2009. So we expect them to reduce significantly, going forward as we are going through a moment, while we have this pandemic, and we have a different expectation every day. So I'd rather work with what we have in hand right now, which is the client's capacity today and the rates that we have today, especially, those practiced by the Caixa Econômica Federal, the Federal Bank. Thank you. We'll now start the Q&A for analysts and investors. [Operator Instructions]

Since there are no more questions, I'd like to turn the floor back over to Mr. Bianconi for his closing remarks. Please Mr. Bianconi, you may carry on with your final remarks.

Thank you. So I'd like to thank you all for participating in this call. I'd also to state that we, as a company, we remain dedicated to growing and expanding our products, increasing sales, increasing profitability, and we saw that in the numbers. Our income statement does not yet reflect the positive numbers, but it will state we'll emerge as of September. And we have ongoing sales, of course, and that's, of course, under our new strategy. We are now moving from 1, transitioning from 1 cycle to another. So our inventory of finished products today is relatively low, as we saw in the presentation, and that's what will represent costs. We're talking about 40% of inventory, BRL 93 million vis-à-vis, 86%. And the BRL 579 million in terms of units under production. So today, we are a company which is ready for digital. We are working towards digital and providing clients with more ease of access and ease of transactions. Of course, we are following all the procedures set forth by the bank, but we see a very strong evolution in that front, and we want to go even further, that's a path we knew as a Brazilian company, we knew we would have to track some time. But we were not expecting that we're going to be able to potentialize the use of that because it is pandemic, and we are quite happy, satisfied with the results we have been having. The feedbacks are quite positive. People are very satisfied with the company's performance on the digital front. Today, we are getting projects ready to be launched. Of course, we have to work around surveys and also that we can be sure, when we launch a product. Our sales booths are there. We also have, of course, the physical alternate, right? We can schedule appointments with specialists, also, of course, with an eye on health protocols. We can also provide service at our physical booths. We're also doing that upon by appointment. And we're also monitoring the behavior of people's income. As soon as we have reestablished conditions, at the post-COVID period, we hope to emerge even stronger. And of course, our main focus, which is to preserve cash. Our focus is geared towards preserving cash, to ensure the company's financial robustness so that we can continue on. Thank you, everyone. We'll be in touch. Our IR channels is always at your disposal for us to exchange ideas, clarify questions you may have. Have a nice day, everyone. Thank you.

Thank you. RNI's audio conference for the first quarter 2020 is now over. Please, you may disconnect your lines, and have a nice day, everyone. [Statements in English on this transcript were spoken by an interpreter present on the live call.]