Cyrela Brazil Rlty S/Adr

Good morning, ladies and gentlemen. Welcome to Cirela Brazil Realty SA's second quarter 2024 results conference call. Today with us are Mr. Rafael Horn, CEO, and Mr. Miguel Mikkelberg, CFO and IRO. This call is being recorded and simultaneously translated into English. You can listen to the translation by clicking the interpretation button. To those listening to the English translation, you can mute the original audio by clicking mute original audio. Also, you can find the slide deck in English on the company's investor relations website at www.ri.sirela.com.wr. During the company's presentation, all participants will be in a listen-only mode. After the presentation, we will hold a question and answer session. To ask a question, please click the Q&A button and enter your name and organization. When your name is called out, a request will pop up for you to unmute your microphone and ask your question. We would like to inform you that any statements that may be made during the conference call related to Cirella's business perspectives operating in financial targets are projections and forecasts made by the company's management that may or may not occur. Investors should understand that political, macroeconomic, and other operating factors may affect the company's future and lead to results that differ materially from those expressed in such forward-looking statements. To start Sorella's second quarter 2023 earnings call, I'd like to turn it over to Mr. Raphael Horne, our CEO. Mr. Horne, you may proceed. Good morning, everyone. The second quarter was characterized by a deterioration in the macroeconomic outlook on the global scale, which had an impact on Brazil. The persisting inflation in the United States changed agents' expectations around the possibility of an interest rate cut in the United States. That caused a depreciation of the exchange rate and in the future Brazilian interest rate, changing the previous scenario that predicted more interest rate cuts and a final select rate of one digit. Despite this iteration in the macro scenario, we saw resilience in the real estate market. Excluding swaps and based on the CBR percentage, we had pre-sales of 3.3 billion in the first half of the year. That's up 12% year on year. Our launches in the second quarter were below our expectations, but the strong sales performance and the success of the launches to the market makes us very confident for the second half of this year. The management expectations regarding launches for the year remain unchanged. Our financial results reflected how solid our operations have been in recent quarters. Our net revenue was 1.9 billion reals in the quarter and 3.4 billion year-to-date, an increase of 18% compared to the first six months of 2023, and a 0.6 percentage point improvement in a gross margin, amounting to 32.2% for the year. We remained disciplined in relation to the expenses, and including our operational leverage, we were able to generate a net income of $412 million in the quarter, with a net margin of 22.2%. Our year-to-date net income reached 679 million, an increase of 53% compared to 2023. Brazil is always a challenging context, and interest rates remain high, but we expect to continue to work to have good operating and financial results in the coming quarters. Let's now talk about our operating results. Thank you, Rafa, and good morning, everyone. On slide four, we'll address Cirela's launches. In the second quarter of 2023, we launched nine new products with a PSV of 1.5 billion reels, 58% lower year-on-year, and 14% lower quarter-on-quarter. The company's stake in the volume launched was 74%. Excluding swaps, we had 1 billion in launches this quarter. On slide four, we'd like to highlight the Escape Eden launch in Sao Paulo with a PSV of 313 million reels. On slide six, we'll talk about sales performance. Pre-sales were 2.5 billion in the quarter, 5% lower year on year, and 10% higher quarter on quarter. Serial stake in the volume sold was 74%, totaling 1.8 billion, totaling 1.8 billion. Excluding swaps, sales amounted to 1.7 billion reals in the serial stake. On slide seven, we'll talk about our sales speed. The company's SOS in the last 12 months was 52.6%. And looking at the speed by launch period, projects launched in the second quarter 2024 have been 51% sold. Talking about inventory on slide eight, We had inventory at market value totaling 8.7 billion reals, 9% lower quarter on quarter, and the total inventory totaled 6.5 billion in serial stick. We can see those changes on the chart to the left. On slide nine, we talk about the finished units. We sold 17% of the finished units at the beginning of the period. And adding up the inventory of projects delivered along the quarter and pricing of units at market value, finished units show a 7% drop quarter on quarter, totaling a 1.3 billion and 1 billion in Cirella's stake. On slide 10, we'll talk about the delivered units. Solarell delivered 10 projects with a PSV of 1.8 billion. Year to date, we delivered 16 projects with a PSV of 1.8 billion. On slide 12, we'll talk about our financial results. Net revenue was 1.9 billion in the quarter, 14% higher on higher, pardon me, higher quarter on quarter, and 18% higher year on year. Year to date, revenue was 2.4 billion, 18% higher year on year. The gross margin in the second quarter was 32.9% comparing to 32.3% in the second quarter 2023 and 31.4% in the first quarter 2024. Year to date, our gross margin was 32.2% comparing to 31.6% in the first quarter last year. On slide 13, we'll talk about our net income and profitability. Net income was $412 million compared to $279 million in the second quarter of 2023 and $267 million in the first quarter of 2024. Year-to-date, our profit stands at $679 million, 53% higher than in 2022. In the quarter, our return on equity which is net income of the last 12 months over the average shareholder's equity, was 15.5%. On slide 14, we'll talk about the debt. Gross debt at the end of the quarter was 5.2 billion rials, and the cash position was 4.4 billion. Our net debt was 799 million rials. 84% of the total gross debt is long-term. Our net debt over equity ratio was 9.1%. On slide 15, we see the cash generation. We had 61 million cash consumption at the start of the year compared to 22 million in the second quarter 2023, and a cash generation of 130 million in the first quarter this year. Year-to-date cash consumption was 60 or cash generation was 69 million below the cash burn of 13 million in 2023. And now we can start the Q&A session. Thank you. Thank you. We'll now start the question and answer session. To ask a question, you just need to click on the raise hand button. When your name is called out, a request will pop up for you to unmute your microphone and you can ask your question. Fanny Oring from Centendare has the first question.

Miss Fanny?

Good morning. Good morning, Rafael and Miguel. Congratulations on the results. I've got two questions. I was quite surprised with the levels presented by the company that were higher than the company, the debt levels. I know you don't give guidance, but what could we expect in terms of that for the coming quarters? And my second question has to do with cash. We see that the banks are a bit more aggressive when it comes to home equity. So what do you expect from the competitive scenario and the sources for cash?

That's it. Thank you. Hi, Fanny.

Let me answer your first question, which was not about the debt, but about the revenue. Our revenue was substantial in the quarter. The construction works had an impact on that, the milling. We had 150 million higher than in the second half of last year, and that is due to the increase in the company's operations. And the second component and revenue was stocks or inventory sales. We had a good inventory sales and that increased our revenue too. And of course there's volatility there, but we have to say that this level of revenue in the quarter, if it were annualized, it would be close to 7.4 billion, which is very close to what we had in sales in the last 12 months. I can not acknowledge through consolidation, which is the compared compared proxy. So now to grow the stop line, we can only do it by growing the last 12 months sales. Maybe that will happen in the next quarter, but it will depend on the performance of sales and inventories, but our. Revenue had been below in the past months, and now we're back closer to the level. But to go beyond, we need to improve sales. And Cashment is a small market, right? So it's a small market. And it's a niche product. So Cirella is happy with Cashment, but it's a small business. I don't think that's what the banks are looking at. And there will always be competition. There's competition in map and cashment, and this is a capitalistic world, thank God. So that's it, without any somersaults. What about the sources for the coming quarters for cashment? I have 900 million in ordination, and this volume is quite stable. And that's quite stable. All right, thank you. Thank you, Miguel. Thank you, Rafael. Elvis from BTG Pac-12 has the next question. Rafael, Miguel, I've got two questions. First about launches. Can you talk a little bit more about the pipeline for the second half of the year, how confident you are? Do you expect similar performance to the previous projects? Any tower that should be sold to any fund? And land bank? What opportunities do you see in land bank right now? What is the competition like? Quality, pricing, possibilities. And what about your appetite for investing in land bank?

That's a tricky question, right?

If you ask me if I'm excited about the coming quarter, I'm always going to say yes. And land bank, if there is something coming up, I mean, any quarter that you show the plan to me, I'm going to say I like it. We don't say we're very confident or not, because that doesn't really exist in Brazil. Maybe if we were American, they could say we're very confident. In Brazil, you can always be confident, but have some reservations too. We expect to sell well. The first half of the year was good, and hopefully the second half of the year is going to be good. When it's very high level or very high end, it's normally a lower SOS. So SOS blended, I don't do the calculations here, but if it's very high end, the SOS is a bit lower. If it's middle class or lower income, then SOS is a bit higher. But we like the plans for the next quarter and the next year as well. That doesn't mean it's going to work out, but we like it. But if you ask me that question next quarter, I'm going to answer the same thing. We don't have any expectation to sell any towers to any funds at this moment. Maybe it can happen, but we don't have any plans for it right now. Land buying competition is always fierce. We have a good program for 2025. And also good plan for 2026. With that, we can be more selective for what we need to buy till the end of 2026 and 2027. Competition is always fierce. We're always very selective. And about dividends in land bank. Well, I think we've shown that our growth was big and has been big, so it's difficult to increase dividend levels in the coming years. Not because we are going to increase the land bank levels, but because we need to sustain the company's current level, and that will keep us from paying out more dividends than we would We like paying dividends, of course, but we won't pay as much in the coming years so that we can sustain the growth that we have. That was clear. Thank you, Rafael. has the next question from UBS. You may ask your questions here. I'd like to follow up on the previous question by focusing more on 2025. If you look at the first six months in 2024, you're selling well, you're performing well, but the macro scenario at the beginning of the year was different to what we have now. There's been a bit of a worsening there. What are your expectations for sales and launches in 2025? Do you expect to have the same levels in 2024? How can we think about these two indicators for the future? And also when it comes to labor costs, is that the main concern that you have today? The NCC data just came out. There has been a new increase. So what can you do to mitigate this risk? And what are you doing to mitigate this risk? And could you have any impacts on margin because of that? Thank you. This is Miguel. As for your first question, as Rafael already said in the previous answer, we're quite confident in our program for next year. And of course there's a macro economic deterioration, but we haven't seen an impact on the micro level for the segment. And we have no reason to believe that there will be any drastic change. So we're excited and we're excited for the program for next year. And as for costs, well, Cost is, of course, one of the biggest concerns. We've been talking about the shortage and labor in Sao Paulo that has been difficult to navigate. But our engineering team has been doing a great job. And with the depreciation of the exchange rate, a lot of the inputs that are price and dollar had an increase. And that's going to have an impact on the INCC that hasn't been captured by the most recent Um, data and costs have been growing higher than, um, I NCC. So I don't think that will be an impact on our gross margin right now, but it's one of the subjects that we have to keep a weather eye on to make sure we have a good performance. And Cirela is confident about Cirela's future, not about the market. The macroeconomic scenario and the microeconomic scenario aren't good. Both of them are concerning. The current interest level and the tax scenario in Brazil are all concerning. So we are confident. Again, we're not extremely confident, but we're confident that we're doing a good job based on our products. I don't think the market is doing beautifully, no. especially with this inflation risk. So we're navigating and we're going to continue to navigate, but it's not like we believe a lot in the segment right now.

All right, thank you.

You may ask your question, sir. Hello, Rafael. Hello, Miguel. Thank you for your presentation. Thank you for taking my two questions. If you can talk a little bit about the sales in this quarter, if you can give us some color there. and the different performance in the different segments, lower end, higher end, and mid-income. We see some sales in the Sao Paulo region, but what are your plans for Rio Grande do Sul and Rio de Janeiro? Thank you.

Hello, Deb.

Sales at the start of the quarter have been good so far. We launched projects on the three levels, Casa Gabrielli in Campobello and the Cirella brand. We launched a vivace program in Barrafunda. It also performed well. And another one in July that also performed well. We're launching one in the south. After all of the tragedies, we're now launching and we have good indications that it's going to perform well. We launched a Vivace project in Rio de Janeiro in July, and we have a mid-high income project to be launched in August and September. And Rio de Janeiro has been performing really well. I think it's the biggest highlight and that was the latest project in Rio de Janeiro. And we're very excited about that.

Thank you very much. Have a good day.

Pedro Lobato from Bradesco BBI has a question. You may ask your question, sir. Thank you everyone for taking my question and good morning. How do you feel about Vivaz in general, be it the economics, gross margin, and the competition for land bank? I'd like to hear what your overview on the matter is. And I've got a second question. We see a higher level of compensation when we're looking into the details of your P&L. What can we expect on that front?

Hello, how are you?

Vivas Sao Paulo is performing well, but it's a small company. We should have 1.5 with Vivas and the bigger players will have 3 or 4 billion. So there's a lot of competition there. Cost is a problem. Inflation, labor, they're all problems. There's not enough labor, so there are challenges left, right, and center, but we're doing well. There are players, partners of ours with much more robust operations. So if you want to know how low income is performing, you should ask our partners. So it's going well, but it's still a small part of the operation. And the second part of the answer comes from Miguel. Yeah, compensation was a negative surprise. We had some impacts on civil levels. And that had to do with the five-year term for the guarantee to end and also on the labor front. we had a higher number of suits filed by engineers and contractors. Both of them were higher than usual. It was higher than what we expected. We know for a company as big as us and with our history and all of the diversity that we have in many segments, Our contingencies are part of our business, but this quarter specifically was higher than expected, and we don't expect this level to be sustained in the coming quarters. Thank you, Rafael. Thank you, Miguel. Have a good day.

And Remanzini from Citibank has a question.

You may ask your question, sir. Hello, Rafa and Miguel. Thank you for taking my questions. My first question has to do with the tax reform. I think there was even some Abra Inky work group, so you may feel comfortable to give an update. The tax reform was meant to be more progressive with higher priced real estate Paying more than lower end real estate. Is that what you understand? Is that what's going to be happening? And what's the impact for Cirella there? Of course, that will depend on whether you're doing more low income with Vivas or maybe with your mix today. What will the impact be? And my second question. Query sales, did they go over 60 million in this quarter and is going to surpass 50 million next quarter? Query three seemed to be around that to us. Thank you for your questions. Good morning. As for the tax reform, I think If you think about the Brazilian context, the tax reform aims at simplifying. For our segment, it's not going to simplify at all. It's going to actually make it more complex. We have a rather simple model right now, and we're going to change to a model that was going to depend on a different calculation every month, and there will be all of the credit matters. So it's going to become a lot more complex, and it's even difficult to have a... an accurate expectation of the impact, considering all of the changes. To our mind, if the current bill is approved, there should be a negative impact, especially in the mid-high income. We don't see much impact on low income, and we see a more negative impact on mid-high income. But of course, we need to wait for the final approval. There are some important matters being discussed, especially the current bill text needs to be adjusted when it comes to the transition. And as for the social reduction matter, this progress matter, It is approved in the current text and it's maintained. And as there is this social reducing factor that should create the growing number. And I don't see a scenario where that wouldn't happen. So I think that climbing rate in our segment would have it. There are many other sectors where consumption can be low income or high income. and where we don't have this progressive factor. But in our segment, I understand that it's going to be maintained. And as for the CUTI stocks and shares, there is an effect here that confused investors a bit. Competencies were sold at 72 million. 60 million was the accounting profit generated, but out of the 72, 56 was for the cash effect in the quarter and we had sales in the two last trading sessions in June and the cash effect is in the third quarter. In the third quarter then, we're going to have this 16 million, 48 million in cash sales, And that was at the start of the quarter, so there is this cash effect of about 64 million. For the profit assessment, we look at the competence, and you should consider it as 48 million in sales with a specific margin there that is going to generate profit. But we treat them separately, cash and competence separately when there are these alienations. Eagle our title from XP has a question. You may ask your question, sir. I've got two questions. How is your appetite for this more macro scenario? Do you have to be more opportunistic? And how do you see The sales on this level with a more challenging macroeconomic scenario, has that had an impact? So how are your spirits? And on your financial results, they were better than expected, supported by cashmen. So is this going to be sustained or was this a one-off? This is Miguel. I'll take your questions. As for the living operations, we're much more bottom up than top down here. So we look at every project individually. And many of our projects focus on higher income audience. So we don't see much of an impact. The living inventory sales is meeting the targets by June. And differently to the Cirella brand, I mean, the living SOS is also quite good. So we don't see a change here. And we're looking at every piece of land bank individually. And there is no change in our strategy there. As for financial results, there are some non-recurring effects. There is some volatility in this line. So I don't think that you should annualize the financial results of this quarter. Our financial results should probably be closer to what we had on average of the two first quarters than just the second quarter specifically. But if you look back, And if you will see other quarters, you see there's some volatility there. All right. That's clear. Thank you. Rafael Hader from Safra has a question. Yes, sir. Rafael, you may ask your question. Good morning, thank you for taking my questions. My first question has to do with the approvals in Sao Paulo? How do they stand? And do you see any risk of any bottleneck that could delay launches in the second half of the year? And my second question has to do with cash generation. I know that a company has been growing, increasing launches, and you have a lot of construction works going on, but you also should be increasing the number of deliveries now. So with a stronger production volume and the construction works, how are they interacting there? Thank you for your questions, Rafael. Good morning. As for approvals in Sao Paulo, we don't expect any challenges. We have had a good number of launches in July and August. We have some approvals for the second half of the year. They're in line, or timely speaking. So we don't expect approvals to be an obstacle. As for your second question in cash generation, the fourth quarter conference call we did say that cash generation should be between zero and 200 million plus in the second quarter it was a bit higher than we expected and a bit lower than we expected in the second quarter in the second quarter we had to pay more in construction works and that's the most recurrent thing right the most recurring thing and that was not accompanied by an increase in revenue but We believe that we'll see that increase in revenue in the course of time. And the second item was an increased expenditure on land bank. And every deed in Sao Paulo could have 30 to 40 million payments and other locations as well. So this is a line item with a lot of volatility. So after the second quarter, looking forward, we sustain our expectations that we had at the start of the year with zero to 200 million cash generation. And for next year, we should have a more favorable setting, but it's too early to tell. We're very sensitive to land bank purchases and sales and We expect to have a more positive dynamics next year. Very clear, Miguel, thank you. Aline Caldera from Bank of America has a question. You may ask your question, ma'am. Good morning, everyone, and thank you for taking my question. I've got two questions, actually. You already mentioned in the conference call about INCC, the construction inflation rate and inflation general. And how much of the price increase are you passing on? You mentioned also competition, or if you could talk a little bit about how they have been performing different geographies. And I have another question, which is you have had the reversal of some provisions in this quarter and that helped the top line. Can you talk a little bit more about that? Let me talk to you about the provision or the allowance reversal. When we launch a project, we have a number of cancellation that will vary depending on the brand. And that is going to be saved up. It's going to have a provision for it. And we normally use our portfolio and the cancellation expectation project by project with a client analysis. So in the first quarter, we normally have an increase of this provision and in the coming quarters, this provision should stay stable. And then we have cancellations and these cancellations will consume up this provision and then there are reversals. So what happened this quarter is in line with our expectations. We had 30 million in total for this figure last year. And in the first quarter, we had 45 million addition and the reversal of about 17 in the second quarter. So we have a 30 million impact in the quarter and we expect less impact in the coming quarters And when we look at the annual review that can have it, that can take place the first, second quarter last year, and then we'll have more details about this line and Rafael will answer your question about the market dynamics and the competition.

Hello.

As for inflation and if we're passing on the price increases, I think we have to talk about that differently. Well, you know what's going on with the inflation IPCA, right? With construction workers and with third parties, there is a bit of a risk. It's not like we have 10 or 15% inflation that we need to pass on. That's not what we're saying. But what we see is the current inflation can be passed on. But it's difficult to hire contractors at the price that we need. So it has been a challenge for engineering, not only for us, but for every player. And the scenario looks tough. So this is a risk, but we're not saying that inflation is going to be 15% here that we need to pass that on. Still under control, but if it's out of control and then there's a mismatch, then that's a bigger problem. We don't see any impact from the competition because of pricing. We shield ourselves with high quality premium products. So we know we have high quality products and we live in that setting. And objectively, we have had no impact from the competition. That doesn't mean it's going to stay like that, but we work so that it will stay like that.

Very clear. Thank you. Jarell Gillity from Goldman Sachs has a question. You may ask your question, sir. Good morning. I have a question. Not long ago, you said that That could be an impact on that.

The interpreter apologizes, but the quality of the audio of the speaker is too poor for the interpreter to translate.

What is your expectation on the ROE journey? Should it grow? And also, growth in sales? Hello, Jarrell.

A major bank. published an ROE of 23 this quarter, so we weren't very happy about it. We need to continue to improve ours. But we said the ROE is going to go up. And it's going up and we think it can still go further up. I hope the 15.5 from the previous months doesn't stay like that. I think we can do better. We don't give guidance, but we believe that the ROE is going to continue to grow. If banks went from 20 to 23, I think we can go from 50 to something better. Let's see, can't make a promise. What we can do is work very hard and I think we can get better numbers. I've spoken about dividends already. So we expect ROE to go up. That's our flight plan. And then we will need to pay extraordinary dividends because of the profit share or equity. And if you don't get to a volume on a scale that justifies our equity, then we have to pay extraordinary dividends. But that's plan B. Plan A is to have ROE getting to the level we expect it to, and we hope it can get to. All right, thank you. Alejandro Alberkin from Morgan Stanley has a question. You may ask your question, ma'am.

Hi, good morning, Cerela team. Thank you for taking my question. I guess mine is related to all the prior questions on the resiliency of the business, but I would like to approach it from the perspective of your client, the home buyer this time. So I was hoping if you can provide color on, first of all, what percentage of your transactions in the mid-high are financed with cash versus loan? And would you think that mix has changed over the last years? And more importantly, as you look at your typical client, would you say that you might be reaching this time around a much higher end of the bracket of the socioeconomic pyramid versus the past as of late? Has anything changed? Anything that can help us profile your typical client these days versus, you know, over time? Has that changed? That would be very helpful. Thank you.

Hello, Alejandro, Miguel here. Thank you for a question. So regarding our customers, I would say that in the median, especially in the CIDELA segment, around 45% of our customers rely on bank financing on a mortgage to acquire their homes. And more than half, around 55% of our customers, they pay with cash. And on our living segment, which would be our median segment, I would say around 70% of our customers rely on a mortgage. and 30% pay with cash. So I do think, especially for the living segment, we do reach a higher bracket, a higher income bracket than the average level. We have been changing our strategy in the living brand and operating in better neighborhoods and where prices per square meter are a bit higher. And also on the Sirela brand, we do target very high-end customers. On the Vivaz brand or Minha Casa Minha Tia operations, then almost 100% of our customers rely on a bank mortgage to acquire their homes. And in that segment, we do operate in price points that are a bit above the average for the segment, but it's not that much different from peers like CUNY, for example.

That was very clear. Thank you very much, Miguel.

Marcelo Mota from JP Morgan has a question.

You may ask your question, sir. Good morning. I've got two quick questions. On the margin matter, you talked about inflation and labour, and one of the questions you said it wouldn't change your outlook on the margin. Do you expect margin to continue at about 33%? And around real estate loans, the macro scenario has worsened more in sentiment than in foundations and fundaments. And when you look at the central bank, the rates for real estate loans haven't soared. So do you still see 10 to 11 with clients? Do you expect it to grow? Hello, Marta, this is Miguel. Thank you for your question. As for the gross margin, yes, I think it should be about 33%, 34%. The gross margin for the launches we had or have had this year is slightly over 34%, so we expect this is a level that's going to be close to what we had in the second half of 2023. And of course, there can be a lot of volatility there. It can go up or down, especially when we have big launches that go or move further from the average. I forgot what your second question was, sorry. Oh, sorry. Yeah. The loans, right? The bank loans. I was reminded here by the team. So we see some stability on rates. We have seen it since the start of 2023 when there was a last round of increases. In the last quarter, we even mentioned in the conference call that the average rate had gone down to 10.20 because public banks had been involved in the transfers. This quarter, the average was the same, 10.20%. And we don't see any changes in the rates practiced by private banks, which is also 10 to 11, basically depending on the rating, customer relation, then each bank will have their own internal policies. And public banks that have a high rate normally, but we haven't seen any major changes or any major changes rather. Thank you, Miguel. This is the end of the Q&A session, when I'll turn the call over to Mr. Horn for his final remarks. All the results this quarter were good. People congratulated me, so just two reservations, two caveats. When someone congratulates you on something, then things start to go south. So we're working hard and there's a lot to be done. And we're always... in a position of having reservations. And if you're congratulating me, then I need to congratulate all of the team because the leader doesn't do anything. We know who actually gets their hands dirty and get things done. So the results that we have here, thanks to the whole of the staff and Cirella and our partners that make our dreams come true. So congratulations to the whole of the team. Thank you very much. The game isn't won yet, but we're going to continue to work to deliver good results. Thank you very much. This is the end of Cirella's conference call. Should you have any questions, feel free to get in contact with our IR team with the email ri at Cirella.com. Thank you very much for joining our call, and have a good day.