Tecnisa S.A. (TCSA3) Earnings Call Transcript & Summary

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 and Investor Relations Officer; Henrique Cerqueira, Commercial Director. I'm 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'll move on to the Q&A session. If you need support, please send a message via chatbox. 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'll be talking about our earnings, specifically about the second quarter of 2023. We have a presentation, some slides. I'll be sharing with you now, okay let's just move on. So today's presentation has the following agenda: strategy, and this is my part. Then I'll ask Flavio de Capua, our CFO, to talk about our operating performance, economic finance -- or financial performance and our financial position. And at the end I'll be here together with you to answer the questions that may arise. Okay. So our strategic guidelines. We 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 and then a constant search for innovation. We know that Tecnisa is always pursuing innovations in its DNA. So profitability. Our landbank is BRL 4.3 billion in potential sales, right? or 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 Sao Paulo in Perdizes and then we will start to speed up our launches. In the south of Sao 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 Ceara. I'd now like to share what is upcoming. We have 3 major developments that are expected to be launched this year. We have 60 high-end units of 258 square meters each. So high-end, high standards with BRL 204 million. That's the preliminary PSV, 60 apartments of 258 square meters in 4 stores. This is in the districted Chácara Flora in Sao 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're offering this other building. Now the next launches are Recanto Oliveiras in the modern, planned, extremely secure neighborhood in Sao Paulo in Jardim das Perdizes. We have many cameras there to identify movements of people. So this made this neighborhood increasingly more secure. So it's have a partnership with [indiscernible] and that's this -- our share is 57.5% and the PSV BRL 570 million. Then we have Bosque Cerejeiras in additional development with 96 units from 222 to 293 square meters and 4 Duplex apartments from 435 to 568 square meters. This district, it grew a lot. So there was -- 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. And 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 and 40% of them were in Jardim das Perdizes district. We launched 2 towers already, Pitangueiras and Figueiras. At the bottom, we see the second quarter of 2022 compared to the quarter 2 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 to our expenses and net revenues. The ratio has been improving progressively to this quarter, 2023, quarter 2 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 in our release. I think things should have 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 page. What I'd like to emphasize is that accounting system, as we saw in Perdizes and others, this margin, it's ready to go to 35%. That's the -- the backlog gross margin. So we are expecting to reach 35%, which is a very good margin, and that's what 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 3 quarters in a row so far now. So that's a total of BRL 26 million in profit. Now this is information about innovation. Our company has been working in our -- as we discussed here, we always had this vocation of innovation. So we've always worked with start-ups, and we are now having start-ups in one of the programs that we have here. So this year, we are focusing on ESG solutions. And as you can see, start-ups 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, 8 solutions -- start-up 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 de Capua to continue the presentation, on operating performance in other aspects.

Thank you Fernando. So operating performance now. As we can see this quarter, we closed with BRL 219 million in gross sales, and that's over 30% growth when you compare it to the previous quarter. And also when you compare the second half that's about 10% growth and our SoS remained at about 10%. Our inventory is low, and we have now finished units, and 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 with about 30% -- up about 30%. Now 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. And this 1% is very low, of course, and that's outside Sao Paulo. So in technical terms, our inventory is mostly in Sao Paulo in terms of construction projects with a date of June 30 we had less. But this -- on this date, we started in July. We started Pitangueiras and Figueiras works -- construction work. So all our inventory is now under construction, except for the 6% that are -- 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. So 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 costs. And as Fernando mentioned this, gross margin is 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, about BRL 21 million in G&A, which is really in line with our purposes and net income BRL 5 million in the second quarter and BRL 9 million 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 profit -- 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. So the projects we have launched are now contributing with a gross profit of BRL 62 million and the gross margin of 45%. And when you look at our balance sheets, by compiling these 2 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 have this -- achieved 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. And as this will be even higher in the near future. Now next slide, financial position. Our net worth or our equity, BRL 631 million. This quarter, we find again, have a breakdown of our total receivables that is not shown on our consolidated balance sheet. So we have about BRL 500 million in receivables and BRL 129 million in Jardim das Perdizes. The bottom chart you see the time of project completion. In the next 2 years, we have BRL 312 million in receivables that were hired for -- until 2024. We're expecting to get about BRL 450 million in receivables. And this, of course, has a lot to do with the following slide with our debt schedule in our total indebtedness. So we have BRL 163 million in debt at the end of the semester. And as these construction works came closer to their completion, we would reach the results like with BRL 78 million in production, BRL 585 million in corporate debt, cash is BRL 166 million and that leads to an indebtedness margin of BRL 498 million. Now if you don't take production into account, that's BRL 420 million. That's our corporate profit in terms of our indebtedness, it's well distributed over time, BRL 130 million that is growing mature next year. So we are comfortable with the repayment of this debt. I'd also like to highlight that after we finished the quarter and we were acknowledged by our achievements, our number, we have raised -- issued debentures. So we now have an expectations of good [indiscernible] numbers. And we have strengthened our cash with BRL 50 million in our cash position. On the next slide, before we discuss this figure, S&P also reaffirmed the company's corporate rating at brA and that's very good -- that's very good news. Some companies have got even negative ratings. So our corporate rating is really good. And our total indebtedness is about 79% corporate net indebtedness, BRL 420 million divided by net worth of 61% and some receivables when you add that to our cash and divide by the net or equity, net equity, it's 61%, but is really healthy. And in conclusion, I'd 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. So I'd like to highlight in our investment, we have Jardim das Perdizes. So the backlog gross margin [indiscernible] 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 investment, and that means high margins, and that means increase in our net assets with greater value created for our shareholders, and this is the end of our presentation. We can now move on to the Q&A session and Fernando will -- over to you.

We are now here waiting and ready to answer any questions you may have, okay?

[Operator Instructions] So the first question is from [indiscernible]. You can ask your question.

Good afternoon, everyone. I have 2 questions. One about CEPAC in the Agua Branca Operation. Can you give us an update about your expectations in the CEPAC auction. And then second question about your launches in Jardim das Perdizes. 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, would you -- do you think it could make BRL 1 billion a year? So these are my 2 questions.

Thank you for your questions. Let's start with the second question. We have a lot to talk about the first question much more. So the possibilities launches in the next 4 to 5 years, about BRL 25 billion. We're really careful, Henrique is our Development Director, he is really careful and our strategy has been really careful to avoid products that might corrode IPC to have a wide diversity. This is a consolidated district. People moved here but we're 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's the possibility, and that's a very concrete number. That's the number we are expecting as we have this CEPAC there, we are expecting to launch about BRL 1 billion a year. So that's the first about launches, now about BRL 1 billion a year. Now CEPAC. We are hostage, right, of Brazil's redtape, government red tape, although there is lot of effort put into improving this. There's many people that are 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 straight jacket. The projects are doing well, right? We're following them up every day. And currently, Banco do Brasil needs to do all the formal processes, make it all official, there's 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, and 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.

Next question. Matheus Meloni from Banco Santander.

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're expecting anything down the road than the master plan. What is this change in the master plan? What's its impact on your business from now on? These are my questions.

Matheus, thank you for your question. Well, the financial part, I'll ask Flavio to help me answer this question. With regard to the master plan, as most of our land is in Jardim das Perdizes were covered by the Agua Branca operation. And the master plan doesn't really affect us much. If we have other land, other property in other places then the master plan has a greater impact. So there's a lot of discussion. Always the master plan has affected all developers but things have improved, but not that significantly. And our greatest profits come from the Agua Branca Operation. Flavio, over to you.

Right. We discussed with our team, and we realize that part of our engineering team could be allocated for costs coupled with support to engineering. We had about BRL 2 million in expenses for cost, and that was an isolated and one-off event and this was just a change of lines right from expenses to costs. But again, the order of magnitude there is about BRL 2 million, okay? This measure, Matheus, 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.

Our next question Bruno Mendonca, Bradesco BBI.

Hello, everyone. Good afternoon. Thank you for taking my question. I have 2 questions, in fact. You've shown a very interesting chart and you have that margin into Jardim das Perdizes. So we 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 are showing or will it be very different? Is there any possibility of launching anything else without a CEPAC? That's my first question. 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 let me know how healthy your portfolio is.

Well, thank you, Mauro. Flavio will help me too. The first question 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, we bought this land about 10, 12 years ago. So the cost was low. They're totally paid off. So this relation -- the ratio of the margins is much better. And 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. So 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 billion 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 that CEPAC, I don't really believe, to be honest with you, and I need to open a parenthesis here. I mean to some Secretary -- 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. So that's why I believe this is the right time. For about 6 months, this was in the councillor's assembly for it to be until it passed, right, 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, right? So this was being discussed in the town hall. Then next week, we thought it was okay. It was approved. We were happy, but in the following week, there was an attempt saying that this law was not constitutional and only -- and after 15 months, a year and 3 months, a very long time, there was this -- this was -- the case was examined by 25 [indiscernible] very special. So after 15 months, they decided like unanimously. So there was no question that this was wrong and this -- and that was on September 31, 2022. So that's 11 months ago, it should already -- could have already happened, but it hasn't. But I think we are -- this is almost done anyway. So I'm convinced that we'll have it. But as you know, as well as I do or even better, that we need a plan B, and we do have a plan B. What we're launching -- we already launched Pitangueiras. We had some -- with the CEPAC that we have and some that we have before. Now Figueiras. As there's no CEPAC there and you cannot wait, we used that notion of the total potential of the land at that property. Let me explain this as simply as I can. In a lot that you could build 4 towers, we use this potential to build 1 large tower, but we're now expecting we cannot build any other tower without the CEPAC. And we have similar situations in Jardim das Oliveiras. So if we don't have the CEPAC, we use the potential of the land and keep launching maybe at a lower rate than we'd like to. But for -- I mean there will be future launches. That's for sure. And 1 more -- any other comment?

No, Bruno. Receivables. We -- I think we're very fortunate when you look at our portfolio, most developed land, they pay about [ 45 ] after transfer and [ 55 ] with the keys. So they're more committed to the housing unit. And this was, again, a healthy cycle in terms of receivables. And what also helps us out, we haven't had any delivery in this high interest rate time. So most of our deliveries will be done in the second half of 2024. We're expecting much better interest rates than we have today. And this, I believe, will help these clients when you consider receivables, they're getting real estate funds, but that will be a lower rate later. So again, we approved this with a worse scenario, credit wise. So we will have clients that are more committed with it with lower interest rates, and that's really helpful again. With a drop in the interest paid by clients, 8% to 10% is the funding capacity. And we're expecting appreciation, again, in the value of real estate. And so this would decrease our LTV ratio. I think this will be a healthy delivery for our portfolio. Have I answered your question?

No, no, that was great. Perfect.

We now have [indiscernible].

Thank you very much for this presentation and for taking my question. I have 2 short points about the interest rates. We saw a first cut that was an interesting point, right? So it increases your related or client funding ability. Now what is the level? That's what I need to understand for us to see the market really thriving. I mean -- what do you need to get more heated -- to get more heated market conditions, just a small percentage is enough? Or what is this number? To get an increase in sales. And the second is about a master plan. You said there's not such a relevant impact on your activity. Have you seen greater competition for land or you're not really concerned

Mary Angela, thank you for your question. Interest rates are still very, very high. And whenever you have any signs. This might be even more positive than -- if then the reduction of prices or interest rate reduction itself, we're expecting interest rates to reduce significantly. Things seem to be a little at a standstill because of these high interest rates. And also, there's an expectation of decreasing rates. So investors and buyers might think, let's wait. If they really decrease, I'll pay less. That's what they think, that's what they're expecting. So 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, well, buying real estate in Sao Paulo is really very expensive, right? There's no more land in Sao Paulo. So what we see now is potential property and 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 -- I mean, there was just an increase of 100 meters. So we just -- 100 meters away from subway stations, before it was 600 or 700. So now competition is really fierce. Thank you. I hope that your question was answered.

We have 2 questions now on the chat. First, Victor [indiscernible].

Congratulations on the results, we have some questions about this. These launches for the Jardim das Perdizes this year depend on the CEPAC's option or you're expecting to make acquisitions in the secondary market. Number 2 was Tecnisa's Plan B, if the approval for the CEPAC auction is postponed again.

I think we've already answered this, Victor. You've asked this question before, right? But anyway, we do depend on CEPAC. We're expecting this to be really robust. I mean we're really expecting the auction to take place? Should it not happen, let me have a plan B indeed, because I don't think this event is up on the market anymore, right? If CEPAC is no longer there. I mean we can expect anything in this country, right? You always need to be suspicious. Anyway, you have to be careful. But I don't think it will happen anyway. But should it happen, we have this plan B of launching using the potential -- the highest potential of land, right? [indiscernible] if the company is successful in the acquisition of CEPAC, the gross margin and the PSV of JDP would that increase? Yes, it would increase. But 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, so the margins are really significant. About 45% as Flavio showed. The PSV likewise, we're expecting to exceed BRL 5 billion in the next, reaching BRL 5 billion in the next few years.

So this is the end of our questions. Thank you very much. And now I'll turn it over to Fernando Perez for his final remarks.

Let me tell our market analysts and shareholders that are listening in. We are happy that we no longer may -- are no longer making losses, the fourth semester with profits in a row, right? But we -- 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 the straight jacket because of the CEPAC action. I'd like to ensure however that company has done its homework. We are lean. We are prepared. So as soon as the CEPAC auctions are held, you'll see how much our earnings will improve. So please believe in us, believe in Tecnisa. We've been there for over 45 years with great results. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]