Conference Call Transcript 2Q07 Results Brascan August 13 th, 2007

Transcription

1 Operator: Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everybody to s 2Q07 results conference call. Today with us we have Mr. Marcos Levy, CEO, Mr. Cristiano Gaspar Machado, CFO and Investor Relations Officer, and Mr. Horácio Piedras, IR Manager of Residential Properties. We would like to inform you that this event is being recorded, and all participants will be in listen-only mode during the Company s presentation. After that, there will be a Q&A session for analysts and shareholders, followed immediately by another session for journalists. At that time, further instructions will be given. Should any participant need assistance during this call, please press *0 to reach the operator. Today, we have a simultaneous webcast that may be accessed through the website: The slide presentation may be downloaded from that website as well. There will be a replay facility for this call on the website for one week. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of s management, and on information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of, and could cause results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Mr. Marcos Levy, s CEO, who will begin the presentation. Mr. Levy, you may begin your conference: Marcos Levy: Good morning. Thank you, once again, for giving us the opportunity to share with you our vision about Residential Properties performance, in the 2Q07. We are pleased to announce that we successfully met our 2Q07 targets, and also that our results were well above those for the same period in During the quarter, we launched the Norte Village Residencial, a development in the northern region of Rio de Janeiro, with 435 units, which represented the start of our operations in a new region of the city, with great growth potential. This is a demonstration of our commitment towards the expansion of our activities in the middle-income segment. It is also worth mentioning that it was the first time that our clients were financed exclusively by a third party, reducing our working capital requirements and receivables. Moreover, Norte Village is a success, since we sold more than 70% of the units. 1

2 In relation to our launches, we are pleased to announce that we will launch, this week, the second phase of Santa Mônica Jardins Condominium Club, a four-bedroom project with 160 units, with a potential sales value of R$162 million. It is also important to highlight that last Friday our Board of Directors approved a share repurchase program, which will remain in effect for one year, with the total potential acquisition of 3 million shares. Having said that, I am happy to emphasize that with the positive economic fundamentals for the Brazilian real estate market expected to remain solid, we are sure that we are on the track to meet our 2007 annual targets. Now, I would like to turn the conference over to Cristiano Machado, our CFO and Investor Relation Officer, who will speak about the Company s financial highlights in greater detail. Please, Cristiano, you may go ahead. Thank you very much. Thanks, Marcos. Slide number three describes the Norte Village Residencial project, launched in the 2Q07, as already mentioned. This development is comprised of six buildings, with 967 units 435, our share of two and three bedrooms, in sizes ranging from 50 m 2 to 136 m 2. Our share in the potential sales value is R$600 million, and the average price per m 2 is R$ Norte Village is a special project for us because, first, it is our first project of the year targeted to the middle-income segment and second, it is the first project exclusively financed by a third party. This is a strategy that we will seek to apply to most of our projects, in order to continue reducing our working capital requirements. In the 1H07, we launched three projects with 627 units, and a potential sales value of R$205 million. The Company s next launch will be Santa Mônica Jardins Condominium Club second phase, which is described in slide four. The second phase has a potential sales value of R$162 million, and it is comprised of four buildings with 160 four-bedroom units, with sizes ranging from 206 m 2 to 260 m 2. This project is a good example of the Company s price strategy, since the first phase was very successful, and prices already increased by 10%. Including this launch, that will happen this week, totals R$367 million of new launches in the year. As we move on to slide number five of our presentation, I would like to highlight our excellent sales performance. In the 2Q07, contracted sales volume reached R$118 million, a 146% increase over the R$48 million recorded in the 2Q06. 2

3 During the quarter, we sold 325 units, representing more than three times the 91 units sold in the same period of The increase in sales registered in the 2Q07 was primarily due to the sales performance of Norte Village Residencial, Acquare Campo Belo, Santa Mônica Jardins Condominium Club, Santa Mônica Jardins Houses and Lots, Condominium Club East Side and Praia de Itaúna. In the 1H07, our contracted sales totaled R$201 million. Slide number six of our presentation shows our current land bank position. According to our strategy, our land bank is located in the two biggest markets of Brazil, which are São Paulo and Rio de Janeiro. We continue to pursue accretive acquisition opportunities to add to our already substantial inventory of short, medium and long-term land bank and, following this strategy, in the last 12 months, the Company increased its land bank position by more than R$1 billion of potential sales value, even with the launch of approximately R$600 million in the period. Moving on to slide number seven, we can see that our net revenues in the 2Q07 increased from R$66 million to R$101 million, a 54% growth over the same quarter of The good revenues performance was, once again, a factor directly related to the strong sales performance of projects such as Praia de Itaúna, Santa Mônica Jardins Condominium Club, Condominium Club East Side, Les Résidences de Monaco, and Santa Mônica Jardins Houses and Lots. In this quarter, operating costs increased 49% to R$ 48 million, due mainly to projects currently under construction and the increase in the unit sales. However, as percentage of net revenues, operating costs declined from 49% to 47% in the 2Q07. On slide number eight, we show that our gross profit for the three months ended on June 30, 2007 reached R$53 million, which represented an increase of R$19 million, or 59%, when compared to the gross profit of R$34 million in the same period of This increase in gross profit can be explained by the increase of R$35 million in net revenues, which, in turn, was due to the increase of R$70 million in contracted sales. At the same time, gross profit margin increased 1.7 p.p. to 52.8% from 51.1% mainly due to the mix of projects of which revenues were recognized during this quarter. On slide number nine, we show our financial performance for the period. In the 2Q07, recorded net financial revenue of R$5 million, compared with a net financial expense of R$15 million in the same period of the previous year. The difference is primarily a result of the increase in our financial revenues on cash balances in the 2Q07, totaling R$15 million, compared with R$3 million in the 2Q06. 3

4 The increase in financial revenues was mainly due to the increase in cash balances to R$461 million in June of 2007, compared to R$25 million in June of This increase in cash balances is principally due to the issue of shares through the IPO, completed by the Company in November On slide ten, we can see that our EBITDA for the 2Q07 totaled R$43 million, which represents an increase of 47% over the R$29 million registered in the same period of the previous year. This result reflects the strong increase in sales volumes and price increases. In the 2Q07, we also recorded a strong EBITDA margin, of 42.2%, which is mainly a result of the high margin projects for which revenues are being recognized in the quarter. For the first six months of 2007, we recorded an EBITDA of R$79 million and an EBITDA margin of 43.1%. We registered a net income of R$33 million in the 2Q07, almost three times the R$12 million of the same period of last year. The main driver for the net income increase was the R$19 million increase in gross profit, which in turn was again a consequence of the strong sales performance. In the 1H07, our net income reached R$58 million. This summarizes the Company s operational and financial performance, and we are now available to answer any questions. Thank you. Gordon Lee, UBS: Good morning. Just a quick question on the guidance for launches specifically. I wanted to understand, of the balances left after the launching of this week, how much of that would be in the 3Q, how much of that would be in the 4Q? And I wanted to know more or less how many projects that is divided into; whether we are looking at a series of smaller launches or whether it is one or two large launches. And if you see any risks associated with it on that front. Thank you. Hi. Our projections for the end of the year, it is going to be much more It is going to be split almost equally between the 3Q and the 2Q, that is our expectation. As you know, we have launches also scheduled for September, and may be that just can split to October, but it is going to be Our actual expectation is to be split between 3Q and 4Q. In terms of number of projects, you should see something around five projects, five new projects, at the end of the year. 4

5 Perfect. So, five new projects for 2007 altogether; or five new after what we have seen so far? Five, after what we saw. And on the permitting front, are you seeing any issues with that or you are generally comfortable with that? No, we are comfortable to approve and to go ahead with the projects, to fulfill all launching guidance for the year. Perfect. And just one final question, if I may. On the share buyback announcement, is there a set period of time during which you expect to use up that allowance from the Board? Or is it sort of an investment timeframe? We have a one year period to make the share repurchase program. Thank you very much. Lili Wang, Seneca Capital: Hi. I just have a question on your method of revenue, and sales recognition. Because, recently, some of your peers have converted from having a great period for sales, by having a percentage of the completion on the construction to having sales recognition upon the discretion of management. Can you talk about how you are looking at sales recognition going forward, and how you are expensing your land costs, in terms of Are you expensing the holding upfront, is it based on discretion, or is it based on any kind of a system? Our sales recognition is according to what is instructed by CVM; so it is on a percentage of completion basis. And we do not expect to change that. Just to summarize for you: when we sell a unit, we recognize the portion of the unit price according to the proportion of what we completed from the project. And we expect to continue doing that. 5

6 Lili Wang: Thank you. Jonathan Miniman, ING Clarion: Hey guys, good quarter. I just wanted a follow up on the share repurchase, and try to understand a little better the Board s willingness to follow through on this. We ve obviously seen in the United States, when kind of their children Companies get overly cheap; you are pretty aggressive on buying back stock. Is this something that is just nice to say to the market; that you are going to buy back stock and we think the stock is cheap? Or are you prepared to act pretty aggressively, kind of given how the stock has so under performed in the last years since the IPO? Hi. We truly believe that, from time to time, the market value of our shares may not fully reflect the underlying value of the Company, actual and prospects, and that is the case, and that is why we are doing this program. Jonathan Miniman, ING Clarion: That is helpful but, again, how are you viewing the overall sector? You came public almost the same price than where you are trading now, when you see some of your peers getting 80% to 100%. So, what are you guys doing as a management team to, maybe, tell us a better job of doing the story; obviously the buyback helps to close some of that gap. But, just clearly something is getting lost in the numbers and fundamentals you are putting up versus people s attraction to the stock. How do you close that gap, as a management team? What are the things you are thinking about doing, besides the buyback? Since the beginning of the year Well, first of all, in each chance we have, we reemphasized that we will achieve the guidance that we have; our expectations for 2007 and And the second thing is that, since the beginning of the year, we have already been, in a number of non-deal road shows, both here, inside Brazil, and outside Brazil, basically, trying to educate and tell our story, and have people understand what is our strategy and how we follow that strategy, and how we really believe we can create value with that strategy. Gordon Lee, UBS: Just a quick follow up on a question on the Maricá piece of land. I saw, a couple of weeks ago, that another developer, who owns some land in Maricá, ran into some problems with environmental permits and issues, and as a result of that, a good part of 6

7 their holdings there are not going to be able to developed. Have you come up against similar issues; or are you, from the permit stand point, all squared up on the environmental front? Thanks. Our land is located in a different area; it is not located in the environmental protection area. And before finishing the acquisition, we also finished all our study, we had already finished everything. We know what we can in the land today, so no; we have no problems like the other company. Marcos Levy: Before our purchase, we consulted the Environmental Department and it was approved; it is outside of the preservation area. That is good news. Thank you very much. Alexander Tulko, Lusight Research: Hello. I have a question regarding average price per m 2. Since it went down by 26% compared to the 1Q, is it changing your strategy? Are going to be kind of middle market from premium, or is it kind of like general phenomena, that prices are going down because of competition? No, this is just basically because we launched the first project for middle-income. As we have been saying, we expect to expand our activities on the middle-income segment, and that is basically a function of our expansion of those activities on middle-income segment. As you can see also on the Santa Mônica Jardins Project, we have been successful on using our price strategy. So, we are seeing the other developments with price increases, as we usually do on our developments. Alexander Tulko: So, can I expect that your margins will go down in the medium term? Or is it staying at the same level? Our expectation is that our margins will continue to be the biggest margins in the industry. But we expect our margins, in the three to five years, to come down; our EBITDA margin to come down to a 30% level. Alexander Tulko: OK. Thank you. 7

8 Bruno Lima, Opus: Good morning. I do not know if you have already answered this question, but what were the sales bid regarding the Norte Village Residencial? We launched the project in the second half of June and, today, we already have 70% of the whole project sold. It was very well received. Your intention is to finish this project in two months. Bruno Lima: Great. And is not alone in this project, what is your partner, what are your partners, I do not know if there is more than one. Marcos Levy: Our partner is Cyrela. Cyrela has 55%, and, 45%. Bruno Lima: OK. Thank you. Operator: There appear to be no further questions at this time. I would now like to turn the floor back to management, for any closing remarks. Thank you all, once again, for attending our 2Q07 conference call. If you have any further questions, please feel free to contact our Investor Relation Department, or to access our Investor Relations site. We hope to see you again in our conference for the 3Q. Thank you again, and have a nice day. Operator: Thank you. This thus concludes today s s 2Q07 results conference call. You may disconnect your lines at this time, and have a wonderful day. 8