Itaú CEO Conference
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Transcript of Itaú CEO Conference
CEO CONFERENCEITAÚ SECURITIES
19th and 20th May, 2010
Disclaimer
� This presentation may contain forward-looking statements. Such forward-looking statements are and will besubject to many risks and uncertainties relating to factors that are beyond the Direcional’s ability to control orestimate precisely, such as future market conditions, competitive environment, currency and inflationfluctuations, changes in governmental and regulatory policies and other factors relating to the operations ofDirecional, which may cause actual future results of Direcional to differ materially from those expressed orimplied in such forward-looking statements
� You are cautioned not to place undue reliance on these forward-looking statements, which speak only as ofthe date of this presentation. Such forward-looking statements shall not be construed as guarantee of futureperformance. Direcional does not undertake to publicly review or update these forward-looking statements inview of events or circumstances occurring after the date of this presentation
� This presentation does not constitute an offer, or invitation, or solicitation of an offer, to subscribe for orpurchase any securities. Neither this presentation nor anything contained herein shall form the basis of anycontract or commitment whatsoever
� This presentation and its contents are proprietary information and may not be reproduced or otherwisedisseminated in whole or in part without Direcional’s prior written consent.
2
Agenda
� Overview
� Business Model
� “Minha Casa, Minha Vida” Housing Program
� Operating and Financial Highlights
� Appendix
3
Company Overview
BackgroundTimeline
Shareholder’s StructureMain Executives
BackgroundTimeline
Shareholder’s StructureMain Executives
4
BackgroundFounded in 1981, based in Belo Horizonte, Direcional has consolidated itself as one of the most importantcompanies in the segment of development and construction of residential properties in Brazil
Experience as developer and homebuilder§ More than 130 projects launched§ In 2009: 19 projects (9,360 units lauched and a R$ 783 million PSV)
Focus on low-income segment§ Units below R$ 130 thousand represent 80% of the Land Bank§ Large scale projects (+1.000 units) represent 87% of the Land Bank
Strong footprint in underpenetrated markets with high growth potential§ Strong presence in the North and Center-West, which represented 87% of launches in 2009
Verticalized business model§ Own team of employees § Performance based compensation§ Standardized and industrialized processes
Operational Efficiency§ Management focused on value creation
5
Timeline
6
1973 - 1981
1973 -1981:Mr. Gontijo, Direcional’s founder, expertise in the low-income segment (more
than 36,000 units built under his management)
1981 - 2009
2000 2006 2007 200819921981 1986 2009
§ 1986 - 1992: Industrial projects, acting as contractor to third parties
§ 2000:Certification for ISO-9001
§ 2007: Operations expanded to ES and RO
§ 2009: “MinhaCasa, MinhaVida” Housing Program
§ IPO
§ 1992: Beginning of operations in Brasília (DF)
§ 1981: Start up
§ 1981 - 1986: Developments focused on low and mid income segments
§ 2006: Beginning of operations in Manaus (AM) focusing on large-size developments for low-income segment
§ 2008: Private equity partnership - Tarpon Real State Fund
Shareholder´s Structure
60.7% 23.7% 15.6%
Free float represents more than 39% of total capitalCompany listed on “Novo Mercado”, the highest level of Corporate GovernanceCapital is divided into 133.343.242 common shares
1. Holding owned by Mr. Ricardo Valadares Gontijo and his family2. Funds managed by Tarpon Investimentos S.A.
FiladélphiaParticipações 1 Tarpon 2 Other
7
Main Executives
Ricardo Valadares GontijoChairman of the Board
CEO
Ricardo Valadares GontijoChairman of the Board
CEO
Ricardo Ribeiro GontijoVP of the Board
COO | Commercial Officer
Ricardo Ribeiro GontijoVP of the Board
COO | Commercial Officer
Francelino MaranhãoAdministrative Officer
Francelino MaranhãoAdministrative Officer
Daniel AmaralCFO | Financial and IR Officer
Daniel AmaralCFO | Financial and IR Officer
Lucas RochaEngineering Officer
Lucas RochaEngineering Officer
• Founder, CEO and Chairman of the Board• 40 years of construction experience• Civil Engineer graduated by UFMG with Gold Medal Award.
• Board Member and responsible for Marketing, Sales and New Business• Civil Engineer graduated by UFMG with the Gold Medal Award• Joined Direcional in 2004.
• Chief Administrative Officer• From 2000 to 2007, CEO of BMB-Belgo Mineira Bekaert, a Belgo-Mineira division• From 1995 to 2000, Controller and IR Officer of Belgo-Mineira (Arcelor)• Former Board Member of Dedini S.A.• Holds a bachelor’s degree in accounting from UFMG and graduate degrees in Business from Harvard
Business School and Fundação Dom Cabral/INSEAD
• Chief Financial Officer appointed by Tarpon Investimentos since January/2009• Investor Relations since December/2009• Worked for Tarpon from 2006 to 2009. • Graduated with honors in Business Administration at Fundação Getúlio Vargas – SP
• Responsible for the engineering department with more than 30 years of experience in construction • Holds a bachelor’s degree in Civil Engineering• Joined Direcional in 1985
8
Business ModelPipeline of Projects
Presence in Underpenetrated MarketsLarge-Scale ProjectsOwn Building Team
Standardized ProcessesCash Flow Cycle
Pipeline of ProjectsPresence in Underpenetrated Markets
Large-Scale ProjectsOwn Building Team
Standardized ProcessesCash Flow Cycle
9
Pipeline of Projects§ Land Bank of R$ 7.5 billion (R$ 5.2 billion % Direcional) with 61,194 units§ Land Bank average cost of 7.7% of estimated PSV and 71.9% acquired through swap
“MINHA CASA, MINHA VIDA”47.731 units elegible program
78.0% of total land bank
Land Bank Composition Large Scale Projects
RO
94% of PSV
87,1% of the units comprise large scale projects17.614 units ready to be launched
PSV Breakdown per Segment
AM
MG
RO
PA
DF
Média-alta1.1%
Médio18.3%
Popular79.9%
Comercial0.8%
Project Status Total units Units to belaunched
PSV (R$ MN) to be launch
Manaus Total Ville AM Under Construction 3,576 2,136 249.1 Total Ville Bella Cittá PA Under Construction 4,049 3,177 357.3
Total Ville Marabá PA Under Construction 5,712 5,188 562.9 Allegro Residencial Club AM Under Construction 1,648 704 111.6
Setor Total Ville DF Under Construction 5,096 3,165 301.8 Total Ville Porto Velho RO Under Construction 2,428 1,938 175.8
Dream Park ES Under Construction 1,034 752 126.8Eliza Miranda AM Under Construction 2,112 128 19.7
Cachoeiras do Madeira RO Under Construction 1,278 426 75.4Águas Claras DF Launching in 1H11 1,148 1,148 400.2
Granjas Werneck MG Launching in 2H11 15,000 15,000 1.500.0 Floramar MG Launching in 1H11 1,261 1,261 211.9
Samambaia DF Launching in 1H12 14,614 14,614 1.584.0 Projeto Macaé RJ Launching in 2H10 1,182 1,182 95.7 Sítio São João MG Launching in 2H11 2,500 2,500 250.0
Total 62,638 53,319 6,022.2
Commercial
Upper Middle
Medium
10
Presence in Underpenetrated Markets with High Growth and High Barriers to Entry
Direcional focuses on markets where it would be able to have a clear leading position
Source: IBGE
Barriers to Entry
UnskilledLabor
§ Highly-trained workers § Standardized and fully-integrated
construction
ComplexLogistics
§ Detailed mapping of logistics and supply channels
§ Large and vertically integrated projects
Scarcity ofSuppliers
§ Industrialization of raw materials§ Vertically integrated model is rapidly
replicated
AdverseWeather
Conditions
§ Pre-manufactured building materials adapted to diverse climates
§ Expertise to start construction phases at the right time
Shortage ofBrokers
§ Own and highly-trained sales force, experienced in the low-income segment
Direcional’s Approach
CAGR=94%
Housing Credit GrowthR$ million
CAGR=57%
CAGR=133%
Brazil CAGR =
80%
CAGR=166%
68 64
418 463
100 173
718
992
370 449
1,024
1,749
AM PA DF MG2006 2007 2008
Average Brazil =
2.9%
+203,708 domiciles
+734,799 domiciles
+262,499 domiciles
+97,892 domiciles
+543,792 domiciles
CAGR 03-07
14.4%
11.5%
9.0%
3.4%
2.3%MG
DF
AM
PA
RO
Domiciles Growth
11
Large-Scale Projects
� Buildings with 4 floors, garage floor, without elevator
� Complete leisure: swimming pools, barbecue area, parks, ballroom, walking track, soccer field, bike lanes
� Large projects, with more than 1,000 units, located in areas of severe housing shortage like Porto Velho (Rondônia) and Manaus (Amazonas)
� Apartments of 50 sq.m - 80 sq.m with selling price around R$ 1.900 / sq.m
� Green Area: balanced distribution of wide avenues, residential towers and other facilities
� Commercial area
� Prime Location: few minutes from downtown
� Easy access by major roads
� Public transportation available
� Safety: vehicle patrols
PLANNED NEIGHBORHOOD WITH SHOPPING CENTER
“Total Ville” concept: A large-scale product designed to offer housing, leisure, safety, functionality and convenience.Direcional is a pioneer in offering all these features in one place, close to urban centers and in accordance with theeconomic reality of the market.
12
Own Building TeamMore than 4,500 exclusive workers assuring quality, commitment, efficiency and cost control
A KEY COMPETITIVE ADVANTAGE
IndependenceDirecional does not depend on contractor´s workforce
Cost ReductionsLower labor risks and higher productivity
Higher QualityBetter quality control, reducing maintenance levels
All employes are booked in Direcional’s payroll§ Reduction of labor risks
Constant training programs/ Standardization§ Experienced workers = teachers§ Processes standardization
Constant performance evaluation§ Clear and objective task assessment§ Monitoring and training of low-productive workers§ Rework almost inexistent
Performance Based Compensation§ Linked to targets§ Lower turnover
13
Standardized Process
STANDARDIZED BUILDING PROCESS
Leads to:
§ Waste reduction§ Low rework levels§ Higher efficiency per worker
It also contributes to:
§ Higher building quality/control
§ Easy identification and correction of building problems
Embedded electric fittings that minimize the need of cutting walls
STANDARDIZATION EXAMPLES
Concrete blocks produced in jobsite pre-molding station
Standardized processes instead of standardized projects
� Direcional adopts similar procedures in all its construction sites
� Standardized processes diminishes wastes and post-sales issues
� Problems in previous projects can be avoided in the new ones and general solutions can be created and shared among teams
14
AgreBrookfield
CCDI
Cyrela
Even
Gafisa
Helbor
Inpar
MRVPDG
Rodobens
Rossi
Tecnisa
Trisul
0%
5%
10%
15%
20%
25%
30%
50 100 150 200 250 300 350
NET
MAR
GIN
1Q
10 (%
)AVERAGE UNIT SELLING PRICE (R$'000)
Cash Flow Cycle
Land Acquisition
Sales Speed
CashCollection
AustereBudget
ClientFinancing
ConstructionFinancing
Cash Flow Highest Results in the Sector
Direcional Direcional
Sector’s AverageSector’s Average
ANNUALIZED ROE
22.2%
12.3%
29.7%
21.6%
EBITDA MARGIN
15
Efficient CashFlow
Management
26.3%
15.1%
NET MARGIN
Source: Companies Reports 1Q/2010
MCMV ProgramHigh Growth Potential
MCMV ProgramHigh Growth Potential
Minha Casa, Minha Vida“My Home, My Life”
16
“Minha Casa, Minha Vida” Program
Range of family wages(in minimum wages – MW)
Number ofhouses
0 to 3 400,000
3 to 4 200,000
4 to 5 100,000
5 to 6 100,000
6 to 10 200,000
Resources Distributionper Region
Southeast 37%
Northeast 34%
South 12%
North 10%
Center-west 7%
City Value
Cities with more than one million inhabitants or State Capitals R$ 130 thousand
Cities with more than 500,000 people R$ 100 thousand
Other cities R$ 80 thousand
The home to be financed can have the maximum price of:
In partnership with States, Cities and Private companies, the Brazilian Federal Goverment launched in 2009 aprogram aiming to built one million houses for low-income families (wages range up to 10 minimum Brazilianwages). Program’s fund reaches R$ 34 BN:
17
High Growth Potential with Low Competition
Direcional will Fully Benefit from the MCMV Program
DIRECIONAL IS WELL POSITIONED TO BENEFIT FROM THE PROGRAM’S DECENTRALIZED DECISION PROCESS
10.3%
34.3%
36.4%
7.0%
12.0%
MCMV Phase 1: One million houses to be built
% of units per region
Decentralized Process
Decentralized Process
Regional ApproachRegional Approach
Simplified ApprovalSimplified Approval
Limited Competition
Limited Competition
PipelinePipeline
§ Caixa Econômica Federal (“CEF”) has a decentralized approval process
§ Long lasting relationship with CEF
§ The MCMV program has regional quotas
§ Direcional’s has strong experience and knowledge of the approval process
§ Limited competition from well capitalized companies in these regions
§ 78% of the pipeline is eligible to MCMV, around 47.7 thousand units
18
§ In the 1Q10, the Federal Government announced its intention to continue with the program “My House, My Life”(Minha Casa, Minha Vida - MCMV), allocating an additional R$ 72 billion in subsidies to build two million housingunits by 2014.§ The announcement demonstrates a strong commitment to reducing the housing deficit in the country, especiallyfor the poorest portion of the population. About 60% of units constructed must be targeted to families withincomes of up to three minimum wages.
Subsidies: R$ 72 billion (up to 2014)Units: 2 million
MCMV – 1st PHASE MCMV – 2nd PHASE
Subsidies: R$ 34 billion Units: 1 million
00--3 mw3 mw60%60%
33--6 mw6 mw30%30%
66--10 mw10 mw10%10%
00--3 mw3 mw40%40%
33--6 mw6 mw40%40%
66--10 mw10 mw20%20%
BENEFITS BREAKDOWN BY INCOME BRACKETS
MCMV – 2nd Phase
19
O-3 Minimum Wage Projects
§ Direcional is currently analyzing projects for the construction of 28.0 thousand residential units in this segment,which is the focus of the second phase of “Minha Casa, Minha Vida“ Program.
§ To operate profitably in this income range of the program, we believe it is essential to have an integratedconstructive process with full control over activities, processes and costs. In the projects under construction, whichamounted to 3.6 thousand units in 1Q10, we are achieving very positive results:
OZIAS MONTEIRO PROJECT
2Q09
R$ 33.9 millions
R$ 42,345
R$ 1,086
800
Launch
Total PSV
Price (R$/unit)
Price (R$/sq.m).
# Units
Manaus – AM Location
Accumulated Results up to 03/31/2010 - R$'000Revenues from Services 16,760 Deductions from Gross Revenues (549) Net Revenues 16,212 Cost of services (12,312)Gross Profit 3,899 % Gross Margin 24.1%Operating revenues (expenses): 14
Tax Expenses (5)Financial Expenses (13)Financial Revenues 32
EBT (Earnings Before Tax) 3,913 Income Tax Provision (26)Deferred Income Tax (IRPJ) (21)Deferred Social Contribution (CSLL) (11)
Net Income 3,855 % Net Margin 23.8%
20
Operating and Financial Highlights
Operating DataFinancial Performance
Operating DataFinancial Performance
21
Operating Highlights
4
25 23 19
2006 2007 2008 2009
Number of Projects
652 2,227
5,359
9,360
2006 2007 2008 2009
Launched Units
80.1 127.3
441.2
660.7
2006 2007 2008 2009
Contracted Sales
66.7 175.9
710.3 783.3
2006 2007 2008 2009
Launched PSV
CAGR=95%
CAGR=85%
CAGR=69%
R$ million R$ million
22
63,4 102,3
263,2
377,6
2006 2007 2008 2009
15,2 21,5
64,485,1
2006 2007 2008 2009
21,9 36,2
106,6127,3
2006 2007 2008 2009
16,7 27,3
78,3105,8
2006 2007 2008 2009
Financial Performance
R$ million R$ million
R$ million R$ million
Net Revenues Gross Profit
Net IncomeEBITDA
CAGR=55%
CAGR=56%
CAGR=54%
CAGR=59%
26.4% 26.7%
29.7%28,0%
34,6% 35,4%40,5% 33,7%
24,0%21,1%
24,5%22,5%
23
Appendix
Operating DataSales SpeedInventories
Financial HighlightsBalance Sheet
Operating DataSales SpeedInventories
Financial HighlightsBalance Sheet
24
Operating Data
§ 1,266 units were launched in 1Q10, totaling a PSV of R$ 168.4 million (R$ 141.1 million % Direcional)§ Launches were concentrated in popular projects, in the North and Midwest regions (97.8% of units)
25
1Q09 4Q09 1Q10 Chg. % Chg. %(a) (b) (c) (c/a) (c/b)
Launches
Launched PSV (R$'000) 100.594 89.712 168.429 67,4% 87,7%Launched PSV - % Direcional (R$'000) 91.991 80.922 141.114 53,4% 74,4%% Average Direcional 91,4% 90,2% 83,8% -7,7 p.p. -6,4 p.p.Units Launched 966 868 1.266 31,1% 45,9%Average Price (R$/unit) 104.135 103.354 133.040 27,8% 28,7%
Sales
Contratcted PSV (R$'000) 118.406 161.428 202.875 71,3% 25,7%Contracted PSV - % Direcional (R$'000) 90.068 137.264 163.886 82,0% 19,4%Units 724 1.106 1.309 80,8% 18,4%Average Price (R$/unit) 163.544 145.956 154.985 -5,2% 6,2%VSO (Sales over total supply) 21,0% 22,1% 32,2%
§ In 1Q10 we sold 1,309 units with total PSV of R$ 202.9 million (R$ 163.9 million % Direcional)§ Sales Over Total Supply of 32.2% in the 1Q10.
Sales Speed
VSO (Sales over total supply*)
* VSO = Sales / (initial stock + launches)
Sales Speed
26
20,7%
44,2% 45,1%
22,1%
32,2%
1Q09 2Q09 3Q09 4Q09 1Q10
17%
58%
59%
14%
17%
24%
13%
11%
38%
17%
7%
5%
10%
9%
7%1Q09
2Q09
3Q09
4Q09
1Q10
3M 6M 9M 12M 15M
52%
75%
86%
74%
§ Sales over total supply (VSO) reached 32.2% in the 1Q10:
Inventory
27
§ Direcional closed 1Q10 with 4,030 units in stock, whose market value totals R$ 712.9 million (R$ 549.1 million % Direcional) . Units from finished projects amounts 188 with a PSV of R$ 37.4 million.§ The projects under construction already have, on average, 76.0% of their units sold.
Inventories at Market Value in 03/31/2010
PSV in Inventory (R$'000)Units in Inventory % Units in
InventoryTotal % Direcional
Under Construction Projects 675,519 533,237 3,842 24.0%Launches 1Q10 135,691 116,521 1,028 82.6%Launches 4Q09 44,743 40,596 416 47.9%Launches 3Q09 229,563 164,404 1,115 25.9%Launches 2Q09 57,958 52,536 418 14.1%Launches 1Q09 35,372 30,859 244 25.7%Launches 4Q08 94,142 69,320 365 29.8%Launches 3Q08 38,619 30,532 147 9.7%Launches 2Q08 12,506 9,217 50 4.0%Launches 1Q08 15,543 13,688 35 3.2%Previous launches 11,381 5,564 24 4.2%Finished Projects 37,400 15,835 188 5.0%Total Inventory 712,919 549,072 4,030
Financial DataIn 1Q10 net revenues reached R$ 142.7 million, an increase of 119.7% YOY:
28
1Q09 4Q09 1Q10 Chg. % Chg. %(a) (b) (c) (c/a) (c/b)
Financial Indicators
Net revenue (R$'000) 64.979 115.615 142.739 119,7% 23,5%Gross Income (R$'000) 21.902 40.445 50.049 128,5% 23,7%Gross Margin 33,7% 35,0% 35,1% 1,4 p.p. 0,1 p.p.Adjusted EBITDA (R$'000) 18.124 30.969 42.368 133,8% 36,8%Adjusted EBITDA Margin 27,9% 26,8% 29,7% 1,8 p.p. 2,9 p.p.Adjusted Net Income (R$'000) 14.713 25.102 37.469 154,7% 49,3%Adjusted net Margin 22,6% 21,7% 26,3% 3,7 p.p. 4,6 p.p.
Other Indicators
Annualized ROE 1 18,7% 19,2% 22,2%ROE LTM 2 24,7% 19,8% 20,6%Cash and Cash Equivalent (R$'000) 52.514 313.881 292.019Total Debt (R$'000) 64.018 123.298 142.672Net Debt (R$'000) 11.504 -190.583 -149.347Shareholder's Equity (R$'000) 322.251 656.413 694.609Net Debt / Shareholder's Equity 3,6% -29,0% -21,5%Net Debt / EBITDA last 12 months 0,1x -1,8x -1,1xRevenues to be Rocognized (R$'000) 369.396 579.201 623.125Results to be Recognized (R$'000) 164.226 238.816 250.202Margin to be Recognized 44,5% 41,2% 40,2%Inventories (R$'000) 566.665 686.810 712.919Total LandBank (R$'000) 6.888.900 6.949.611 7.485.173LandBank - % Direcional (R$'000) 4.600.000 4.697.450 5.188.112LandBank - Units 56.319 57.522 61.194
1. Annualized ROE: Annualized Net Income in the quarter / Average Equity2. ROE LTM: Last 12 months net income / Average Equity last 12 Months
Balance Sheet
Cash Position 1Q09 4Q09 1Q10 Chg. % Chg. %(R$ ‘000) (a) (b) (c) (c/a) (c/b)
Loans and Financing 64,018 123,298 142,672 122.9% 15.7%SFH 64,018 121,165 138,545 116.4% 14.3%FINAME and Others - 2,133 4,127 - 93.5%Cash and Cash Equivalents 52,514 313,881 292,019 456.1% -7.0%
Net debt 11,504 -190,583 -149,347 -1398.2% -21.6%Net Debt / Shareholder's Equity 3.6% -29.0% -21.5% -25.1 p.p. 7.5 p.p.
Amortization Schedule (R$ MN) Cash Burn (R$ MN)
12.9
44.7
28.2 26.6
14.5
25.3 22.5
32.7
41.2
1T08 2T08 3T08 4T08 1T09 2T09 3T09 4T09 1T10
67.2 58.9
16.6
2010 2011 + 2012 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10
29
Results To Be Recognized
30
Results to be Recognized (R$’000) 1Q09 4Q09 1Q10 Var. % Var. %(a) (b) (c) (c/a) c/b)
Deferred Revenues 369,397 579,201 623,125 68.7% 7.6%
Deferred Costs -205,171 -340,385 -372,923 81.8% 9.6%Deferred Results 164,226 238,816 250,202 52.4% 4.8%Margin 44.5% 41.2% 40.2% - 4.3 p.p. - 1.1 p.p.
57.0%
35.2%
7.8%
2010 2011 2012+
Recognition Schedule
31
Investor Relations Department
Daniel AmaralCFO | IR Officer
Paulo TropiaIR Analyst
Lucas BousasIR Analyst
Contact
(55 31) 3235-4607(55 31) 3241-1502