PDG Realty SA Empreendimentos e Participacoes

BOVESPA:PDGR3

Earnings Call Transcript

[Operator]

Good morning. And at this time, we would like to welcome you to the PDG conference call to release earnings for the second quarter '18. We have with us, Mr. Vladimir Ranevsky, Chief Executive Officer, Financial and IR Officer. We would like to inform you that the presentation is being recorded. [Operator Instructions]

We would like to inform you that questions can only be done through the telephone. If you are connected through the webcast, your question will have to be sent directly to the IR team at PDG through the email [email protected]. The audio and the slides of this conference call are being simultaneously broadcast through Internet at the address www.pdg.com.br/ri. At this address, you can also find the respective presentation for download on the webcast platform.

Before proceeding, we would like to clarify that forward-looking statements made during this conference call pertaining to the business outlook for PDG, projections and operational and financial goals are based on beliefs and assumptions of the company management as well as information currently available. They involve risks, uncertainties and assumptions as they refer to future events and, therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could affect the future performance of PDG and lead to results that differ materially from those expressed in the forward-looking statements.

I would now like to give the floor to Mr. Ranevsky, the Chief Executive Officer, who will begin the presentation. Mr. Ranevsky, you can proceed, sir.

[Vladimir Ranevsky, executive]

Thank you, and a good day to all of you. I would like to thank all of you for participating in our earnings results conference call for the second quarter 2018.

The first half of 2018 was marked by the start of the implementation phase of the PDG Judicial Reorganization Plan. During this time, we have reviewed processes, controls and company structures and adjusting the company to the agreement and to the needs of the company to enable us to continue on with our activity in the most profitable and positive way possible. This means we have reduced cost considerably. We have increased efficiency, prioritizing the needs arising from the Recovery Plan.

It is important to highlight that this first year of the Judicial Reorganization Plan is one of the most important for the company as it contemplates relative payments to labor and unsecured creditors and suppliers. One of our great priorities is to conclude the unfinished works. And we are in continuous and complex negotiations with the banks as we would like to conclude the unfinished works and comply with the commitments we undertook with our customers. We believe that this will add more value to the company assets.

Despite all the difficulties, during the month of May, we delivered the Ville Solare project located in Belém, with a PSV of BRL 77 million and 518 units, which means that we deploy efforts to deliver our deployment. We will continue to direct all of our efforts to conclude and deliver all of the unfinished works so that the company can once again launch new products, as foreseen in the Recovery Plan.

I would like to now go on to Slide #4, where we have an executive summary and where we present the main highlights for the second quarter and the first half of 2018. During this period, we achieved very significant results. During the quarter, gross sales recorded a significant improvement reaching BRL 95 million, 93% increase over the first quarter of '18 and 51% over the second quarter 2017. And the semester gross sales amounted to 44 -- BRL 144 million, in line with what we had in the first half of 2017.

Due to better gross sales, net sales amounted to BRL 46 million in the second quarter '18, significantly higher when compared to the first quarter '18 and the second quarter 2017. During the semester, net sales totaled BRL 43 million.

We continue to reduce our SG&A, as I mentioned, with a decrease of 31% for the second quarter '18 vis-à-vis the second quarter '17. And for the semester, the drop was 52% over the first half of 2017.

We concluded in June the capital increase, which is part of the plan, converting part of the company debt into equity. In June, we paid the first installment that is part of the company's Recovery Plan. Further ahead, I will refer to this time using a slide. And we had a reduction of 36% in net loss for the quarter that went from BRL 532.4 million in the second quarter of 2017 to approximately BRL 340 million for the second quarter 2018. In the comparison between the semesters of 2017 and 2018, the net loss was 26% lower.

We go on to the next item of the agenda on Slide #6, where we present an update on our Recovery Plan. As all of you know, on June 15, we approved a capital increase of BRL 74 million, part of the debt based on company shares. More than 50 creditors had their credit converted into equity.

Another important point in complying with the obligations of the Recovery Plan was to begin paying creditors from Classes I, III and IV. In June, we carried out the first installment in an amount of BRL 13.2 million. We have also paid the second installment in July in an amount of BRL 14.6 million. And yesterday, we began the payment of the third installment. We would like to remind you that we have 6 installments, and they will end in December of 2018 -- in November, I apologize, November of 2018.

On Slide #7, we see the structure of the PDG debt. You can see that the debt of the company was reduced by BRL 67 million, 8%, for the first quarter of 2018 and the second -- first semester of this year. This is thanks to the conversion of debt into equity, a capital increase and the payment of the first installment to creditors of BRL 13.2 million.

We now go on to the operating and financial results on Slide #9, and we refer to our sales results. Beginning in the second quarter of this year, we changed our sales policy, resuming the sales of part of the encumbered units. The gross sales had an improvement reaching BRL 95 million, 93% above the first quarter of this year, 51% higher compared to the second quarter of 2017.

During the semester, sales amounted to BRL 144 million, in line to what was recorded in the first semester 2017. Cash sales totaled BRL 23.4 million in the second quarter of this year, representing 53% of our net sales. In the first semester of 2018, cash sales totaled BRL 40.8 million, equivalent to 28% of gross sales during the period.

We reached BRL 49 million in the second quarter of 2018, BRL 4 million below what was recorded in the first quarter and 7% less than what we had seen last year. During the semester, BRL 101 million were due to cancellations, 60% below the first semester of 2017. But our strategy is continue to prioritize the cancellation of units with a better liquidity and that are not encumbered. This gives us immediate cash inflow due to this resale.

Net sales reached BRL 46 million in the second quarter of 2018, a significant improvement vis-à-vis the first quarter of 2018 and the second quarter of 2017. In the first quarter of 2018, net sales reached BRL 43 million.

In Slide #10, we show you our SG&A. We have an important commitment as part of our plan, and we continue to direct our efforts towards reducing costs, readjust the company structure and gaining efficiency in our operation.

General and administrative expenses ended the second quarter 31% below the amount recorded in the second trimester of 2017. In the first semester, the reduction reached 52% compared to the first semester in 2017.

During the quarter, SG&A and the commercial expenses, SG&A once again, were reviewed and recorded a reduction of 27% vis-à-vis 2017. In the comparison of the first half of the year, the result was 43%.

We go on to Slide #11 to speak about the company inventory. For the end of the second quarter this year, the market value was BRL 1.964 billion, 5% below the value recorded in the first semester of 2017. The drop in stock -- inventory was at 15%.

The number of total units in inventory went from 5,454 units in the first quarter to 5,260 in the second quarter this year, a reduction of 4% vis-à-vis 2017. There was a decrease of 8% in the number of units still in inventory. In the states of São Paulo and Rio de Janeiro, we concentrated 56% of the company inventory at the end of this semester, 56% residential in units with a sale of 60%, which means a better liquidity.

Presently, the company inventory has the following characteristics: 43% of the total inventory, including commercial units, is in buildings with 60% of sold units; and the rest is concentrated on residential projects, excluding land and My Home, My Life.

In the total concluded inventory, BRL 726 million, 62% of PSV is located in São Paulo and Rio de Janeiro, and 94% concentrated in sales levels that are above 60% for the buildings. The total inventory referring to work in progress, BRL 1.2 billion approximately, 70% of the PSV located in São Paulo and Rio de Janeiro, and 12% concentrated in projects with sales of 61% to 99% of liquidity.

The increase recorded -- this is on Slide #12, to speak about our financial results. The increase in the second quarter of 2018 in interest rates and monetary restatement are due to a deceleration of IGP-M that took place in the first semester of this year. After the approval of this year, our debt was corrected by the TR. And this is the lowest rate of restatement, and there was an [ expressive ] decrease in our loan.

It is important to highlight a reduction of 54% in financial expenses that totaled BRL 130 million in the second quarter, and the drop in financial expenses for the semester was at 52%.

We're now going on to Slide #13, where I would like to speak about the debts that are part of our Recovery Plan. In the first quarter -- of this quarter, the company debt increased by BRL 10 million because of monetary restatement and interest rates already considering amortizations during the period. If we think of the positive variation availability, the net debt increased only BRL 5 million between the 2 first quarters of the year.

The debts that are part of our suspension of payments, we need to pay a great deal of attention. To also resolve these, they are being negotiated. The goal, of course, is to pay them off using the company cash as far as possible.

On Slide #14, we show you our statement of results. Real estate sales increased 13% in the second quarter of 2018 vis-à-vis the same period in 2017. As I mentioned formerly, the change in the commercial policy of PDG had a positive impact in sales. The increase in the number of units sold is due to the discounts offered during the period of sales to accelerate the amortization of assets and to reinforce our cash.

Other operating expenses had a drop of 63% vis-à-vis the second quarter of 2017 and the one of 2018. As we had relevant changes that were not very significant during this year, we observed relevant variations in this line item.

As a result of all of the measures that we have adopted at the company during this period, we were able to reduce our net loss by 36%, going from BRL 532 million in the second quarter of 2017 to BRL 339 million. For the first semester of 2018, we went from BRL 820 million to BRL 600 million in the first semester of 2018, a reduction of 26%. By analyzing all of the progress that we have achieved during this first semester, we believe that we're on the right path towards successfully restructuring PDG Realty.

I would like to briefly remark some general market aspects. At the beginning of this year, we had the belief that 2018 would be a good period for the sector. But as months went by, due to the truck drivers strike and the World Cup and the political insecurity in the country, we felt a negative impact in our sector. We also have a worsening in the situation of unemployment and the outlook for this year.

As a counterpart, there are efforts on the part of the federal government to help our sector. Some measures have been adopted recently. You'll now, through the unemployment fund, can purchase development of up to BRL 1 million, and all of this should give thrust to the sales of our sector.

And we do believe that through the elections, this scenario will change gradually and that in 2019, we can have a more active market and especially as we begin to see some changes and a better trend in terms of unemployment.

With this, I would like to conclude my formal presentation and offer you the floor for questions or doubts. Thank you.

[Operator]

[Operator Instructions] Thank you. The question-and-answer session ends here. We will now return the floor to Mr. Ranevsky for his final remarks.

[Vladimir Ranevsky, executive]

Thank you. And I would like to add a very important point regarding our Judicial Recovery Plan. PDG is closely following the plan. We're quite enthusiastic with the results that we have obtained, and we're quite satisfied with our ability to comply with the payment to our creditors, as I mentioned formerly. This process is advancing in a satisfactory way. We're all highly motivated not only to end our negotiations with the bank, but also considering a reduction of our business beginning in 2019.

Once again, we would like to thank you for your participation at our conference call. Thank you.

[Operator]

The earnings results conference call for PDG for the second quarter of 2018 ends here. You could now disconnect your phones.