PDG Realty Empreend e Participacoes : 4Q15 Conference Call Transcription

Q2 2015 Earnings Call Operator:

Good morning, and welcome to PDG's audioconference relative to the results of the 4Q15. Here with us today we have Mr. Márcio Trigueiro, CEO, and Mr. Maurício Teixeira, CFO and IRO.

We would like to inform you that this present is being recorded and all participants are connected in listen-only mode during the Company's remarks. Later we will start a Q&A session for analysts, when further instructions will be provided. Should anyone need assistance during the call, please request the help of an operator by pressing *0.

We would like to inform you that questions will only be made over the telephone. If you are connected by webcast, your question will be sent directly to the IR team, by the e-mail ir@pdg.com.br.

The audio and the slides of this audioconference are being simultaneously transmitted by the Internet, at www.pdg.com.br/ri. In this URL you will find the slide presentation to be downloaded.

Before moving up we would like to state that possible forward-looking statements made during this call concerning the Company's business outlook, operating and financial projections and targets are based on beliefs and assumptions by the Company's management, as well as on information currently available. They involve risks, uncertainties and assumptions, because they refer to future events and depend on circumstances that may or may not materialize. Investors should have in mind that general economic conditions, industry conditions and other operating factors might affect the future performance of PDG and lead to results that might differ materially from those expressed in these forward looking statements.

I would like now to turn the conference over to Mr. Márcio Trigueiro, CEO, who will start the presentation. Please, Mr. Trigueiro, you have the floor.

Márcio Trigueiro:

Thank you. Good morning everyone. Thank you for participating in our results call. As we did last time, we will make a brief presentation to make room for questions and clarifications at the end.

Starting on page four, with the highlights of the 4Q15, the most important thing to underline is the cash generation of the Company, which was again very robust, reaching over R$1 billion, which is a record for PDG, and one of the higher levels of cash generation ever seen in the civil construction industry in Brazil, and corroborates our successful strategy of monetizing assets and speeding up cash generation.

With that, we managed to reduce the Company's total leveraging, including the costs to be incurred, by R$500 million in the 4Q alone, and by R$2.5 billion in the year for the expanded leveraging, because we consider the SFH, corporate debt, and costs to be incurred in projects.

In the quarter we had a very good sales performance, at R$550 million, and a total of R$2.5 billion in the year of 2015. Cash sales were the main highlight, totaling over R$400 million in 2015, almost doubling when compared to 2014.

In terms of cancelations, something we have been talking about in the last call, how we see cancelations, so we expect our performance in the resale of cancelations was even better than historically. In the 4Q, we sold 47% of our cancelations, the best performance in the year, and we continue to reduce aggressive the Company's G&A. We reduced it by 33% in nominal terms when compared to the previous year, and in the year the reduction sat at 29%.

As part of our annual auditing process, we did an accounting review and conducted adjustments at R$1.4 billion, with R$630 million impact on NAV, and only R$137 million with a possible cash impact to be seen throughout time (04:32) contingencies.

Moving on to page five, we highlight the operational cash generation. We repeated the performance of the first half, which was quite strong, and for the second year (04:45) PDG generating cash, last year we speed up the pace, generating over 4x what we did in 2014.

On page six we see the NAV situation of the Company. There was, of course, an impact on NAV from the adjustments we conducted, and we will break those down in a moment, but we still have an NAV of R$3.6 billion, way above the Company's market cap, which is about R$2 billion, and with considerable room to serve the Company's debt, suppliers, debts and costs to be incurred.

Looking at the asset management slide, number seven, we see a breakdown of our receivables. We had slightly lower receivables, there was a bank strike, but no major differences from what we have been presenting so far.

And we continue monetizing our assets and inventory. In total, we receive in the year R$4.4 billion, an expressive amount, thus reducing accounts receivable by R$3.5 billion.

Moving on to page nine, there is a breakdown of our sales performance. We will be talking about this in a moment, but the gross sales was at R$550 million. We continue to conduct cancelations (06:15) as possible. Cancelations are a reality, we need to face it, and we need to recycle that portfolio. We have been maintaining an expressive level of cancelations, which leads to a low net sales, but our gross sales reached a good level, R$550 million, similar to the 3Q.

There is some seasonality effect. For example, when we have sales campaign, we did it in the beginning of the year, and not so on the 2H, so there is some fluctuation throughout the year in the respect. Throughout the full year we made R$2.5 billion in sales, and net sales reached, as I said, R$550 million.

On page ten, we see a very interesting performance in terms of cash sales, over R$400 million, which is twice as much as what we saw in 2014.

And on page 11, in terms of speed of sales, we have a very consistent speed of sales. As I mentioned before, in the 2Q and the 4Q it is a little lower than the 1Q and 3Q, by 19%. I

am talking about gross sales. Net sales were slow because we were trying to clean our cancelation portfolio.

Our main focus in terms of commercial is on our sales team, which accounts for 60% of our sales. That is very good, because it is something we can control very closely, and we have flexibility in terms of management as well.

Looking at page 12 now, in terms of cancelations and resales, as I said, we experienced the best performance in the year in 4Q, when 40% of cancelations were resold within the same quarter, and we have a very good performance when we look in the longer run as well. In the year we had 80% of the cancelations already resold.

In terms of pricing for the resale of cancelations, we sat at 16% low (08:24), 40% above the cancelations amount, which is pretty much in line with what we do with our inventory, regardless of the fact that we are talking about cancelations or not.

Once again, our cancelations are final. In our case, in any event, we do not see a cancelation of the cancelation, which is understandable. People who are buying the canceled units come to us with an approved credit process, it is much easier to conclude the business.

On page 13 we have an evolution of the analysis we did last quarter. Instead of looking only at cancelations of one quarter, we looked at the year as whole in terms of cancelation.

This is a very interesting analysis. We canceled in 2015 R$1.9 billion. That implies a cash outflow of R$112 million. Within the same year we resold R$1.2 billion, 65% of the cancelation of the year, and the Company saw an inflow of R$550 million. So cancelations turned out to be very positive in terms of cash generation for the Company.

Unlike what people might think, cancelations do generate cash. So we will continue to do that as long we have cancelations in our portfolio, with a view to recycling our portfolio.

In terms of our inventory, we have a breakdown on page 14. A little above half of the Company's inventory is concluded, 51%, and 51% is residential, as you know, similar numbers to what we had before.

On page 15 there is a breakdown of our inventory, and the VSO, of both commercial and residential. The trend continues when we look at the quarterly VSO per region. We have a VSO, residential only, in São Paulo and Rio de Janeiro, of 22%, and outside of São Paulo and Rio de Janeiro it is even better, at 25%. So the residential VSO is something close to 23%, 24%, and the commercial, as I mentioned, is more challenging in terms of sales. They amount to a smaller percentage of our inventory.

On page 16, we had an interesting performance in terms of asset sale. We sold around R$90 million in the 1H, and R$270 million in the 2H15. In the 2H we sold the Jardim das Perdizes (11:13) land, and we continued to access opportunities to sell assets which are not fundamental for the Company's recovery.

We also signed a memorandum of understanding with the Votorantim Bank and BVEP for

the sale of another project. This was done in January, it is a ongoing process, we are still conducting the due diligence process, so this should be done and over with by the 2Q. That is our expectation.

On page 17 we have the breakdown of our land bank. It is worth mentioning another transaction we made last year, which was an adaptation of our land bank in the city of Salvador. We had a partner in Salvador, we had a PSV of around R$7 billion in potential figures, which was quite expensive for the Company in terms of maintenance, taxes, security and so on, and it also did not correspond to the feasible market reality in the short to mid run.

So we renegotiated that and we brought that cost down significantly, and we still have a PSV of R$1 billion, which for Salvador, and for the size of the Company, is much more interesting, much more adequate. It is a successful project, so we look at it with more optimistic eyes.

This is also, as I said, a breakdown of our land bank. It is important to notice that over 70% of our land bank is located in the Southeastern region of the Country, Rio de Janeiro and São Paulo - our presence in the State of Minas Gerais is not that relevant.

And we also have, within the Company, putting together the R$1 billion in Salvador, R$8.7 billion in terms of potential launch PSV for the Company going forward.

With that, the part of assets is covered. I will give the floor over to Maurício Teixeira, who will be talking about liabilities, maturities and the accounting adjustments we conducted in the 4Q.

Maurício Teixeira:

Good morning everyone. I will talk about liability management. On page 19 we see the evolution in the drop of the Company's net debt from 2012. In the year of 2015 we reduced the net debt in R$2.5 billion. In nominal terms, considering there was interest accrual and new funding. We monetized R$4.5 billion, as Márcio mentioned, in assets, when we include new interest, and we managed to reduce net debt by R$2.5 billion.

So we continue deleveraging the Company. Costs to be incurred will be more strongly reduced, and then SFH, and in the end the corporate debt. That is the order that we follow to deleverage the Company.

On the next page we can see that, besides reducing leverage, we are reducing costs and the size of the Company. With a view to achieve a more efficient and linear Company, we reduced the Company's G&A when we compare the 4Q14 and the 4Q15. That number was reduced by 32%. Our G&A now is in a level of R$59 million, and for 2016 we will continue to try to reduce that level.

Our workforce was significantly reduced, we have concluded most of our projects. We finish 2015 with fewer projects, and we will deliver more projects in 2016, which will bring that number further down.