PDG Realty SA Empreendimentos e Participacoes

BOVESPA:PDGR3

Earnings Call Transcript

[Operator]

Good morning, and welcome to PDG's conference call for the fourth quarter of 2017 and that of 2017. With us, we have Mr. Vladimir Ranevsky, Chief Executive Officer, Chief Financial Officer and Investor Relations Officer is with us today. We would like to remind you that this presentation is being recorded. [Operator Instructions]

We would like to inform you that questions can only be made through the telephone. If you are connected via webcast, your question should be sent directly to the IR team of PDG by the email [email protected]. The audio and slides from this conference call are being transmitted simultaneously over the Internet at www.pdg.com.br/ir and on the MZiQ platform, www.mziq.com. Here, you will find the respective presentation for download in the platform of the webcast.

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

Now we would like to hand it over to Mr. Vladimir Ranevsky, CEO, who will begin the presentation. Mr. Vladimir, you may proceed.

[Vladimir Ranevsky, executive]

Thank you very much. Thank you very much for your participation in our conference call today. Last year, 2017, was the most important and challenging period in PDG's reorganization process. As you remember, February 2017, requested recovery to advance in a reorganization process in an organized fashion and meeting deadline. After reorganization process was approved, the company, together with its advisers, initiated the -- through -- initiated a plan of meetings with creditors in order to receive the demands of the creditors and create balance and to give continuity to the company. So in November of 2017, 9 months after the request of legal reorganization, this was approved by the -- by a meeting of the creditors. The approved plan contemplates Reorganization Plan, and with this, we will be able to maintain normal our operations and to maintain and to continue with the building sites that had been paralyzed. The means to stabilize the recovery of the company, we have re-dimensioned the business, we have been restructuring our debt, we are -- we have new fundings and asset divestment according to the dynamic in our plan.

There is no doubt that the reorganization process for PDG represents a new landmark because we have developed deadlines and values with no precedents considering the following aspects. The plan developed, negotiated, approved took 9 months after we asked for the legal reorganization. We contemplate 512 companies of the PDG. This is high amount of companies. The plan was approved by creditors in all classes of credit. Over 20,000 creditors had their credit renegotiated, and restructured credit exceeded BRL 4.6 billion -- BRL 4.6 million (sic) [ BRL 4.6 billion ]. Therefore, we will initiate today's agenda with a summary of our highlights, then I will talk about the company's legal recovery, and we will talk about tax regularization program and I will talk about the financial and operational results at the end.

Now when we go to Slide 4, we see the main highlights of the semester. As I mentioned on November 30, PDG approved its Court-supervised Reorganization Plan at the creditors' meeting and restructured BRL 4.6 billion in debt. As a result of the approval of the Reorganization Plan, the company's gross debt decreased by approximately BRL 818 million, in addition to the debt rescheduled for up to 25 years. Considering the adjustment to fair value, the company's debt went down by BRL 3.1 billion. And we will talk about these figures in detail when we talk about Court-supervised reorganization. By joining the Tax Regularization Program, PERT, the company reduced its taxes payable by BRL 323 million. Now general and administrative expenses maintained their downward trajectory, closing quarter 35% down year-on-year. While in 2017, figure fell by 34% over 2016. Selling expenses fell 72% over the fourth quarter of 2016 and 79% when we compare between 2016 and 2017 in selling expenses.

On Slide 6, we see Court-supervised reorganization. We requested this in February 28, and we were approved on March 2. We initiated to reorganize the assembly of creditors. As a result of this assembly, since the filing of the CSR plan, it took slightly over 9 months to manage the approval of the plan at the creditors' meeting. Then we had over 20,000 creditors with their credits reorganized, and this exceeded BRL 4.6 billion.

On Slide 7, we have the new -- we have the debt structure of PDG. On the chart, you can see that the company's debt dropped BRL 3.1 billion between the third quarter and the fourth quarter of 2017. Out of this total -- of the total of BRL 4.6 billion in debts restructured subject to the Reorganization Plan, BRL 3.3 billion referred to bank debts that were being classified within the gross debt of the company. Therefore, not considering labor debts, suppliers and other nonbanking debts, the company's gross debt went down from BRL 5.8 billion in the third quarter to BRL 2.7 billion during the fourth quarter. The remaining debt, that is the portion that was not restructured subject to the Plan amounting to BRL 2.7 billion, is being individually negotiated with each creditor individually. Now we will talk about this in the upcoming slide.

On slide, we can see what the debt is like. If we see the first column, we can see the total amount of restructured debt, so the BRL 4.6 billion of the Court-supervised reorganization, the net debt structure. Now this amount encompasses banking debt of BRL 3.3 billion and the other debts amounted to BRL 1.3 billion like suppliers, contingencies and other matters.

Now interest rate was BRL 818.5 million, and this way, the total restructured debt was that of BRL 3.8 billion.

Now I will explain the BRL 2.9 billion. We reduced the company's debt significantly, and this impacted our results. As the CPC 38 regarding financial instrument, when there is a substantial change of financial liabilities, the company should account the extension of the original financial liability and recognize the new liability at fair value. The difference amongst those liabilities should be registered throughout the period of calculation. After calculating the fair value of the debt to present value, the result was BRL 2.9 billion. The methodology of calculation and the original balance of the debt and the debt balance at fair value are on Page 13 of our financial statement. After the adjustment of fair value of the debt, there were interest rates in the amount of BRL 12.9 million. Considering all the effects mentioned beforehand, the fair value of the debt were BRL 837.7 million at the end of December of 2017. I -- now we have BRL 74.8 million in equities have not been accounted, and it's not within our financial statements. The impact of the conversion will be after the approval of the increase of capital that will take place after the month of May.

Now when we go to Slide #9, we will talk about debts not subjected to the Reorganization Plan. If we consider all the effects arising from the approval of the company's Reorganization Plan, the company's debts not subject to the Reorganization Plan were BRL 2.672 million (sic) [ BRL 2,672 million ]. Negotiated with each creditor individualized, it is important to emphasize that the debts not subject to the Reorganization Plan have collateralized guaranties tied to them. As for example, fiduciary rights and mortgages at this type of debt will be amortized as the assets collateralized as guaranties monetize, and you can see it in the charts here.

Now going to Slide 10, I will talk about the impact of contingency provision. At the end of 2016, the provision for contingencies were BRL 1.57 million (sic) [ BRL 1.057 billion ]. After accounting for the adjustments due to the approval of the plan, BRL 735 million in probable contingencies provisions were reclassified to the payable obligations subject to the Reorganization Plan. The remaining amount totaled BRL 575 million by the end of 2017. From this total, BRL 328 million will be subject to the conditions stated in the plan, which encompasses payments up to 20 years in the future. The same logic also applies to possible contingencies, on the right-hand side of the table, which BRL 390 million are subject to the terms of the plan. And I will talk about our adoption to -- of the company to the tax regulation (sic) [ regularization ] program.

On Slide 12, we can see the pact. By joining the tax regularization program, the company reduced its tax payable by BRL 323 million. There has been a payment of BRL 19.5 million, and we have to pay BRL 235 million.

Now here, we see the results in sales. Since we are focused on sales in cash and units that resources could be used to pay within the FCF. Now gross sales reached BRL 94 million during the fourth quarter of 2017, 154% above the third quarter of 2017 and 72% lower than that of the fourth quarter of 2016. Accounting for 2017, gross sales came to BRL 275 million, an 81% reduction over 2016.

Now the gross sales during 2017 were due to the sales effort of our team. During the fourth quarter of 2017, there were BRL 14 million in cancellations, 82% that's below the third quarter of 2017 and 92% inferior to that of the fourth quarter of 2016. In 2017, cancellations amounted to BRL 344 million, 69% lower than that of 2016.

Now net sales totaled BRL 80 million during the fourth quarter of 2017, reverting the negative results from the 9 months of 2017. In 2017, net sales totaled negative BRL 69 million.

On Slide 15, talking about the G&A of the company. There was a drop of 35% between the fourth quarter of 2016 and the fourth quarter of 2017 and a 34% drop when we compare 2016 and 2017. During the fourth quarter of 2017, we dropped our total headcount by 28% over the previous quarter. And when compared to the fourth quarter of 2016, headcount fell 69%.

Throughout the fourth quarter of 2017, selling, general and administrative expenses, the SG&A expenses, fell by 56% over the fourth quarter of 2016. Now when you compare 2016 and 2017, the drop was 52%. To continue with the delevering process and structuring ourselves, we are working on costs and gains of productivity.

Now on Slide 16, we will talk about stock. We had a total stock in 2017 that was valued at BRL 2,214.5 million. Now 61% were in residential products, excluding MCMV, land plots and commercial. 44% of our total stock have been completed, and they're immediate cash generators. Now from our stock, 60% are in São Paulo and Rio de Janeiro, and 90% correspond to projects with more than 60% of units sold.

On Slide 17, we have our income statement where I highlight the main variation. Here, we have better sales during the fourth quarter of 2017, in addition to the results of sales of land plots throughout the year. Now positive financial result of BRL 3.4 billion shows the recovery that we -- of BRL 810 million, and there's adjustment of BRL 2.9 million (sic) [ BRL 2.9 billion ]. Income tax and social contribution shows the impact of how the company is complying with the reorganization program, and the result of the company considering all the impacts of reorganization program was BRL 1.3 billion and BRL 176 million throughout 2017.

I would like to highlight that our focus now is the rollout of the plan and also the Court-supervised reorganization and we want to go back to our normal activity.

I would like to thank all of you for participating in this conference call, and have a very good day.

[Operator]

[Operator Instructions] Our first question, from Marcelo Motta, JPMorgan.

[Marcelo Motta, analyst]

I have 2 questions. First one, could you talk about other operating expenses during the quarter? Here, we have BRL 1.1 billion, and here, we see -- I would like to know if there's impairment, intangibles because this value was -- these other properties. And number two, if you could talk about the outlook of cash generation. But although the debt has been renegotiated, your cash flow is still negative. I would like to know what you will do to speed up the cash generation of the company.

[Vladimir Ranevsky, executive]

Regarding your first question, basically, with the exclusion of [ PDD ], we had impairments that are part of this line. Now regarding cash generation, our focus now is once we are rolling on the plans to accelerate it, the sales of assets that have been authorized in order to be sold, and these are assets that belong to the banks. This is a process that established by us, but we need the approval from the institutions and sometimes the approval of plots of land. But this is our focus now. Therefore, today, things are clear to us. And I believe that we will accelerate our sales from PDG, reinforcing our cash flow. Parallelly, we are looking for some type of credit to accelerate the process of cash improvement, and I believe that we will achieve this in the near future. I hope I was able to answer your question. Thank you very much.

[Operator]

[Operator Instructions] The Q&A session has come to an end. I would like to hand it over to Mr. Vladimir Ranevsky for his final remarks.

[Vladimir Ranevsky, executive]

Once again, I would like to thank all of you for your participation. We are highly encouraged in the company. We are very satisfied with our achievements throughout 2017, and we are very positive and optimistic regarding our activities during 2018. Thank you very much, and have a very good day.

[Operator]

Thank you very much. The conference call of the fourth quarter and year 2017 of PDG has come to an end. Thank you very much.